OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to Platte River Power Authority's (PRPA) $156.7 million series JJ power revenue bonds.

The series JJ bonds are scheduled to price via competitive sale on April 12, 2016. Bond proceeds will advance refund outstanding series HH power revenue bonds (approximately $104.6 million) and finance generation and transmission improvements ($52.1 million). The bonds are fixed rate, with a final maturity of June 1, 2036.

Fitch also affirms PRPA's $192.7 million outstanding parity lien power revenue bonds (series GG, HH and II) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a net revenue pledge, after payment of operating and maintenance expenses, of the wholesale electric system.

KEY RATING DRIVERS

LOW-COST POWER PROVIDER: PRPA is a joint action agency providing low-cost wholesale electricity to four municipal utility systems in Colorado. Average wholesale rates charged to the member utilities are very competitive for the region, enabling the members to have some of the lowest retail rates in the state.

STABLE FINANCIAL PERFORMANCE: PRPA and its member utilities have maintained sound and stable financial performance. Fitch-calculated debt service coverage (DSC) for PRPA has been at or above 1.6x since 2011, with the exception of fiscal 2015, and compares favorably to 'AA' medians. Financial performance is projected to notably strengthen over the five year horizon given planned annual rate increases and a considerable decline in debt service beginning in 2018.

STRONG LONG-TERM CONTRACTS: PRPA's stable financial position is supported by court-validated all requirements power supply contracts with its member systems. The contracts extend to 2050, well beyond final maturity of 2037 on outstanding debt.

POWER SUPPLY AND ENVIRONMENTAL EXPOSURE: Predominant coal-fired generation assets pose a challenge for PRPA, as environmental standards, particularly in regards to CO2 emissions, become more stringent. Positively, PRPA has been gradually diversifying power supply adding renewable and natural gas fired generation. PRPA is considering exiting Craig Unit #1, but nonetheless retains power supply through 2026.

VARIABLE OFF-SYSTEM SALES: A portion of PRPA's revenues are derived from off-system sales, which are subject to variability in demand and in market pricing. In recent years, low market prices have driven surplus sales revenue down considerably. However, PRPA has prudently raised average wholesale member rates to mitigate the loss in revenue.

STABLE SERVICE AREA: Member utilities benefit from a well-diversified retail customer base and a relatively stable service economy, with low unemployment and solid population growth.

RATING SENSITIVITIES

MANAGEMENT OF RATES: Management of Platte River Power Authority's wholesale rates to maintain sound financial performance is key to the rating given changing environmental standards that have the potential to be costly, and the variability in off-system sales.

MEMBER CREDIT QUALITY: A material change in the member systems' credit quality remains an important consideration for future ratings.

CREDIT PROFILE
PRPA is a joint action agency created in 1975 to provide wholesale generation and transmission service to the municipal utility systems of Fort Collins, Longmont, Loveland and Estes Park, located in northern Colorado. The member utilities maintain individual electric retail distribution systems and purchase power and transmission from PRPA pursuant to take-and-pay all requirements contracts that extend to Dec. 31, 2050.

PRPA's outstanding debt has a final maturity of 2037, well ahead of the power contracts' 2050 expiration. The members pay for PRPA purchased power as an operating expense of their respective systems, ahead of their own direct debt service. Only two of the members have direct debt outstanding (Fort Collins and Estes Park). Fort Collins is the largest PRPA member, with revenues accounting for 48% of PRPA's municipal revenues.

POWER SUPPY STRATEGY
PRPA's exposure to coal fired generation is significant at 71% of the authority's 2015 energy mix. Coal generation represents a more moderate 47% of total capacity. This reliance on coal-fired generation is typical for utilities in Colorado given the proximity to ample Powder River Basin coal.

Positively, PRPA's Rawhide coal unit is currently among the more reliable and cleanest facilities in the U.S.. However, meeting the Clean Power Plan CO2 emission reductions will be challenging. Based on PRPA's rate analysis, wholesale rate increases could approximate 3.5% annually between 2018 and 2030. PRPA's rate advantage would narrow, but the agency should remain among the lower cost power providers in the state.

The Craig coal-fired units will face greater cost impacts due to environmental emission compliance. A key change in PRPA's power supply strategy from prior years is the consideration to exit from at least one of the Craig Units' ownership. Favorably, PRPA has the capability to switch to greater natural gas generation in the event environmental constraints make utilization of the coal plant less economic.

Craig Unit 1 is the least economic of PRPA's coal resources and it is utilized primarily for surplus sales, which have been limited in this low priced wholesale electricity market. The PRPA board is expected to finalize its decision on Craig Unit 1 by the end of this year.

STABLE FINANCIAL PERFORMANCE
PRPA has a history of solid financial performance as guided by sound fiscal targets, including: minimum DSC of 1.5x; annual net income of at least $6 million; debt-to-total capitalization of 50% or less; and a minimum of 200 days operating cash. For fiscal years 2011-2014, PRPA's debt service coverage has ranged from 1.60x to 1.71x, solid for a 'AA' wholesale system. Fitch calculated coverage of full obligations has likewise been stable, ranging from 1.47x-1.59x. Liquidity has been ample, in excess of 200 days operating cash for the past five years, in-line with 'AA' rated wholesale peer systems.

In fiscal 2015, however, debt service coverage and coverage of full obligations fell to 1.33x and 1.25x, respectively. PRPA's financial performance was atypically below budget primarily due to more costly than anticipated scheduled outages at two coal facilities, and lower volume and pricing on surplus off-system sales. PRPA plans to increase wholesale rates 4.5% in 2016 and 2017 to restore financial coverages closer to historic levels.

Nonetheless, PRPA's debt service coverage remains solidly above the rate covenant of 1.10x, and management is planning to raise rates throughout the five-year forecast. PRPA's debt service declines by roughly 35% in 2018, but management and the board plan on implementing annual rate increases in 2018-2020 of approximately 3.5%. The rate increases are intended to build reserves to help offset impending environmental compliance costs related to the federal Clean Power Plan.

PRPA's financial coverage measures are projected to exceed historic levels at more than 2.0x beginning in 2018, assuming modest member sales growth (less than 1%), moderate annual rate increases, manageable capital expenditures and limited surplus power sales. From a financial perspective, PRPA's financial metrics should remain in line or better than peer medians for 'AA' rated wholesalers.

PRPA's financial position is supported by its members' historically stable credit quality. For the past five years, the city-member systems have exhibited healthy financial performance, with DSC in excess of 1.0x including off-balance sheet PRPA-related debt service. Economic indicators are on an upswing for the cities and their population and customer base continues to grow, albeit at a moderate pace.