NEW YORK, January 17, 2003 — Moody’s Investors Service has assigned a Aa3 rating and positive outlook to the Platte River Power Authority’s (PRPA) $35.895 million Power Revenue Bonds, Series FF.
Moody’s has also affirmed the Aa3 on the authority’s $265.375 million of outstanding power revenue bonds. Moody’s Aa3 is the highest rating Moody’s assigns to joint-power agencies (JPAs).
The rating and positive outlook reflect the following key credit factors: competitive wholesale rates; low debt levels; a strong cash position; a conservative, forward-looking management team; a trend of strong debt service coverage in excess of 1.5x; and an economically vibrant service area which has resulted in consistently greater-than-expected load growth.
Wholesale rates remain competitive; deregulation stalled
Moody’s feels the authority’s rates will remain competitive in the medium term given its low cost of production in addition to constraints on transmission into eastern Colorado.
PRPA was established in 1975 to provide wholesale power through take-and-pay contracts to the Colorado cities of Fort Collins (GO rating Aa1), Longmont (GO Aa3), Loveland (GO A1) and Estes Park. The contracts allow the authority to set rates and charges to meet its debt service and operating requirements.
PRPA’s wholesale power rate was a low 3.48 cents/kWh in 2001 and 3.55 cents/kWh through September 30, 2002. While the base rate that PRPA charges its member cities has remained unchanged since 1993, management believes a rate increase of between 4% and 6% over the next two years is warranted, given the settlement of a new five-year coal and rail contract (increasing costs approximately $2 million annually), increased purchased power costs and the authority’s plan to cash finance capital improvements over the next ten years.
Despite this planned increase, PRPA rates are expected to remain competitive, particularly given management’s strong oversight of operations and its successful debt reduction efforts.
Deregulation in Colorado
While deregulation is not an immediate concern, it is uncertain how rates would be affected in a deregulated environment. Moody’s believes that the potential concern of customer loss due to deregulation is mitigated by PRPA’s competitive cost structure, which enables it to market excess capacity in the regional power market.
The last significant discussion of deregulation resulted in a Colorado General Assembly advisory panel voting against opening the state’s electric market to competition in 1999.
The panel’s vote followed a number of studies, which led it to conclude that deregulation would likely result in lower tax revenues and large rate increases. It further recommended that any restructuring legislation adjust the tax laws to ensure a level playing field for both in- and out-of-state providers.
Finally, Moody’s believes that the performance of retail competition in Texas will be important to monitor and, if done successfully, may result in increased momentum for deregulation in Colorado.
Strong cash position
Moody’s expects PRPA to maintain its strong cash position due to its historically favorable financial performance, forward-looking management and low cost structure. The authority’s cash position is strong, with approximately $241 million available at fiscal year end (12/31) 2002.
Included in this amount is $84 million for debt management, which primarily serves to hedge the authority’s $77 million in subordinate lien variable debt and to finance capital expenditures, and a $83 million generation reserve, which will finance future resource requirements.
Favorable financial performance continues; debt service coverage remains strong
Revenues from electric sales to municipalities have increased on average 4.7% annually between 1996 and 2001, while total operating expenses have increased 1.3% annually over the same time period. Revenues from sales of electricity to member municipalities through the end of September 2002 were 5.6% over the same period in 2001.
Sales in 2001 increased 4.1% over 2000, due to a 3.2% increase in energy delivered and a 4.4% increase in the monthly billing demand.
The authority has consistently exceeded the covenanted 1.1 times (x) debt service coverage requirement, achieving 2.45x in 2001 (due largely to surplus power sales). Debt service coverage is expected to be approximately 1.8x for 2002.
Though Moody’s believes coverage will remain strong, it is expected to decrease to approximately 1.5x over the next five years. Moody’s notes that continued maintenance of high debt service coverage and a strong cash position is important because the debt service reserve, currently at $12.6 million reflecting maximum annual debt service on Series DD bonds issued in 1997, was not increased with last year’s Series EE issuance and will not increase with future bond sales.
Load growth continues to exceed expectations; resources identified to accommodate increased demand
Moody’s believes that the economic vibrancy of the member municipalities remains manageable but nonetheless is a challenge for the authority. Annual energy demand increased 4.6% between 1996 and 2001, while peak summer demand increased over 7% annually. Moody’s expects this trend to moderate but remain strong in the near term.
The authority’s existing resources are comprised primarily of coal-fired units (80%) and hydro (19%), with the Rawhide energy station comprising a significant portion (over 50%) of PRPA’s total resource capacity. Rawhide, which is wholly owned and operated by PRPA, is a 270 MW plant that underwent a scheduled major outage in the fall of 2002 costing $8 million in O&M repairs and capital expenditures.
While the authority faces the potential risk of unscheduled outages at Rawhide, the plant has had a very strong operating record and the authority has an adequate power reserve and the financial flexibility to meet unexpected costs. In addition, PRPA relies on its 18% undivided ownership interest (154MW) in the Yampa Project Craig Units 1 and 2, also coal fired, and a small amount of wind – generation.
To meet its summer and winter peaking needs, which PRPA projects to grow at 4.0% annually through 2006, the authority has purchased and installed three gas combustion turbines (Rawhide Units A, B, and C) with a total capacity of 195 MW (summer capacity) and 243 MW (winter).
The three units are on line and were used in 2002. Finally, PRPA has decided not to participate in the potential Colorado Generation Project, a proposed 1200-2200 mw, jointly owned, baseload coal-fired generation facility in that may be built in southeast Colorado. PRPA believes it will not need additional baseload capacity until approximately 2012 or later, and can rely on its three newly-installed combustion turbines as well as potentially adding a fourth if necessary until that time.
Capital improvement plan to be financed largely with cash
Relative to other joint power agencies, Moody’s believes the authority’s low pro forma debt ratio of 52% (including $77 million of subordinate lien debt; 40% if only the senior lien debt is considered) and expectation of no new debt are credit strengths, enabling PRPA to maintain competitive wholesale rates. The current issue, along with cash from the authority, will refund the outstanding Series BB and CC bonds.
Moody’s does not anticipate additional, new money borrowing by the authority in the near term, as it plans to pay for projects with cash. Near term projects are primarily environmental improvements at Craig Units 1 and 2 ($13 million) and Rawhide ($5.5 million) as well as a cooling system at the new combustion turbine units ($1 million) and various transmission projects to increase reliability and reduce annual transmission wheeling expense from WAPA.
Finally, PRPA also is contemplating securing its access to cooling water for Rawhide 1, through participation in a water reservoir, which could result in $26 million in expenditures during the 2007 or 2008 timeframe.
The outlook for the Platte River Power Authority’s power revenue bonds is positive, reflecting Moody’s expectation that the utility will continue to provide competitively priced wholesale power while maintaining large cash balances, low debt levels, satisfactory debt service coverage and successfully meeting the challenge of increasing loads.
Summer System Capacity – 765 MW: two coal fired plants – Rawhide One (270MW) and Yampa Project ‘s Craig Units 1 and 2 (154 MW), WAPA 146MW (in summer); Rawhide Peaking Units (195MW)
Peak Load: 533MW
Average Cost to Members: 3.48 cents/kWh
Debt Service Coverage, 2001: 2.45x
Debt Service Coverage, 2002 projected: 1.81x
Debt Ratio, pro forma 2003: 51.9% total debt; 39.8% (senior lien debt only)
Debt Outstanding, senior lien (with current issuance): $301.3 Million