OREANDA-NEWS. Fitch Ratings has affirmed Associated Electric Cooperative, Inc.'s (AECI) 'AA-' rating on its implied senior secured obligations. AECI's rating takes into account approximately $1.7 billion in outstanding secured debt obligations that are privately held.

The Rating Outlook is Stable.

SECURITY

AECI's senior secured obligations are secured by a lien on all of the owned tangible and certain of the intangible assets of the cooperative.

KEY RATING DRIVERS

WELL POSITIONED WHOLESALE POWER SUPPLIER: AECI is a nonprofit large generating and transmission (G&T) cooperative located in the Southwestern U. S. Associated maintains considerable and economic coal generation, and in recent years has diversified its power supply adding significant natural gas-fired facilities. Combined with an expansive transmission system, AECI can meet the long term energy needs of its six G&T members, with flexibility to market excess power.

SOUND FINANCIAL PROFILE: Financial metrics have moderated from historic levels (pre-2012) but remain sound. While cash on hand is somewhat low (40 days operating cash FYE2015), available lines of credit are substantial and provide adequate financial liquidity (199 days). Capital expenditures and related leverage is expected to decline over the next five years, as major generation additions have been completed.

COMPETITIVE ELECTRIC RATES: Rates to members have stabilized after a period of sizeable rate increases (2006-2009), used to fund new capital projects and pay for operating costs. Accumulated deferred revenues and cash reserves have been used for rate stabilization purposes. Rate increases are projected to remain moderate through at least 2020. Wholesale charges remain very competitive with other regional utilities and are among the lowest of the G&T cooperative sector.

SOLID MEMBER PERFORMANCE AND AECI SUPPORT: AECI's members have maintained stable financial performance, with debt service coverage ranging from an average of 1.48x -1.91x and times interest earned coverage in excess of 2.0x since FY2011. Positively, in 2015 the G&T members extended their all requirements contracts from 2050 to 2075, exhibiting their commitment to AECI as their long-term power provider.

RATING SENSITIVITIES

LEVERAGE AND LIQUIDITY: Associated Electric Cooperative's failure to reduce leverage coincidentally with lower projected capital expenditures through 2020 and maintain liquidity consistent with historical levels could result in downward rating pressure.

CREDIT PROFILE

AECI is part of a three-tiered electric system owned by six G&Ts. These six G&Ts are in turn owned by 51 local distribution cooperatives in Missouri, southeast Iowa and northeast Oklahoma and are responsible for providing electric service to 875,000 member consumers. AECI and its members have all-requirements contracts that were recently extended through May 2075.

AECI's load is largely residential, with the members' economies having some concentration in agriculture and agribusiness. For 2015, members contributed 80% of AECI's energy sales (84% of revenues) and nonmembers accounted for 20%. Average annual energy growth is forecasted at about 1% per year through 2025, which is below historical trends.

COAL-BASED SYSTEM WITH EXCESS CAPACITY

AECI has available capacity totaling 5,700 megawatts (MW), with more than 9,937 miles of transmission lines and 203 interconnections. In 2015, the fuel mix to serve member load consisted of: coal (68%); natural gas (12%); hydro (8%); wind (12%); and purchases (
Positively, over the past 10 years AECI has notably diversified its power supply portfolio. Its generating capacity has shifted from almost 80% coal-based in 1991 to less than 40% in 2015, as the company has added varied natural gas fired facilities to its resource mix. AECI's reliance on coal-fired resources has also declined from an energy perspective to 68%, although it remains the dominant source of energy. AECI has further focused on adding renewable resources to its power mix, mainly wind energy purchases (750 MW) accounting for a notable 12% of member energy requirements in 2015.

Surplus capacity remains considerable at approximately 600 MW as of 2015, including a 13% reserve margin. Management believes the excess capacity provides a hedge for unforeseen events and allows for excess power sales. Given the slower growth rate forecasted, management estimates current capacity will be adequate until 2033. Transmission assets are substantial. Interconnections to adjacent regions include MAPP, MISO, SPP and SERC, but at the present time AECI has not aligned itself with any single regional transmission organization.

ENVIRONMENTAL RISKS

AECI continues to evaluate potential risks and risk management strategies dealing with environmental compliance. According to the 2015 long range financial forecast (LRFF), management has no current plans for major modifications to its coal-fired plants over the next five years. AECI should be able to meet most emission reduction mandates (excluding carbon) with modest capital outlays through 2020.

Longer-term, environmental expenditures may escalate as AECI reviews the potential installation of scrubbers at its coal facilities. Positively, AECI is well-positioned from a rate and financial perspective going forward, and its recent additions of high efficiency gas generation should provide an important offset to the coal generation.

SOUND FINANCIAL PRACTICES

Current financial ratios are sound. Fitch calculated debt service coverage (DSC) for 2015, which excludes the recognition of deferred revenues, was 1.19x, and coverage of all obligations was 1.15x, up from 1.06x and 1.05x in the prior year, respectively. Management expects to maintain DSC at historic levels, without the reliance on deferred revenues, and leverage should decline helped by a moderation of capital expenditures and modest new debt needs through 2020.

While the cooperative could face cost pressures related to its coal concentrated generating portfolio longer-term, AECI should maintain its sound financial and rate position in preparation for the higher cost challenges down the road. AECI continues to pass-through rate increases as needed and diversify its asset mix.

Most of AECI's long-term debt is issued by the Rural Utilities Service and extends to 2046. Net debt outstanding is projected to decline to $1.5 billion by 2021, as scheduled debt retirements will outpace modest new debt needs.

AECI maintains adequate liquidity, consisting of both cash and unsecured lines of credit. While cash on hand tends to be low, equal to $97.5 million (or 40 days) for FYE2015, the utility has varied lines of credit from financial providers totaling $525 million at year end 2015. AECI had $340 million available under its bank lines at FYE2015, which boosts the days liquidity to 199, minimally adequate for the rating category.

Financial projections for the five-year horizon appear reasonable, and include: 1% member sales growth, manageable capital program, declining off-system sales margins and moderate wholesale rate increases (aggregate of 11% to 2020). Fitch expects to review the updated long range financial forecast later this year.