DALLAS — The Tri-State Generation and Transmission Association, a Denver-based co-op serving a 250,000-square-mile region of the western United States, plans to take advantage of low interest rates with a $500 million issue of taxable debt for projects expected to begin in 2012.

Owned by the 44 electric cooperatives and public power districts, Tri-State’s service area includes Colorado, Nebraska, New Mexico, and Wyoming. The wholesaler expects to invest heavily in transmission as doubts linger over future carbon legislation.

“We have put a significant focus on transmission development because it is vital to ensuring the long-term viability of our power delivery system and meeting our goals and mission,” said Tri-State executive vice president Ken Anderson.

Though it has historically borrowed from the federal government’s Rural Utilities Service and cooperative lenders, Tri-State has begun issuing more bonds in the capital markets, analysts noted. It can also borrow under a secured revolving credit facility. Some proceeds from the upcoming $500 million will be used to retire revolving credit debt. Tri-State’s non-public debt includes $1.48 billion borrowed through other credit facilities.

The upcoming mortgage bonds are rated A by Standard & Poor’s and Fitch Ratings. The new bonds will have bullet maturities of 10 and 30 years rather than serial maturities. While bullet maturities are not unusual for power co-ops, analysts see some refinance risk.

“Following this transaction, nearly 20% of the utility’s debt will either have bullet maturities or limited amortization,” noted Standard & Poor’s analysts David Bodek and Theodore Chapman. “In our opinion, these debt structures could skew debt-service coverage ratios relative to cooperative utilities that use amortizing debt exclusively. We believe bullet maturities could also present refinancing risk.”

Another concern is the fact that five Tri-State member cooperatives in Nebraska, representing about 3.5% of 2009’s member energy sales, are suing the utility, claiming rates contain overcharges and that Tri-State has created barriers that preclude them from leaving.

“While still in its early stages, an unfavorable ruling on a lawsuit brought by five members contesting the application of the 'postage stamp’ average wholesale power rate could negatively impact Tri-State as it could set a precedent for challenging the cooperative’s structure and the contracts in place,” wrote Fitch analysts Lina Santoro and Kathryn Masterson.

Tri-State gets most of its power from six owned and leased, coal-fired plants. Other key plants include natural gas or oil-fueled peaking power plants, low-cost hydro- power purchases, and renewable resources, mostly wind turbines. The utility is also pursuing wind and solar capacity.

“A high dependence on coal exposes the utility and its customers to the costs of additional emissions controls,” Standard & Poor’s said. The utility had planned to build a coal plant in Kansas and purchase an interest in a second one. But due to potential carbon legislation, only a single unit is likely and even that one could fall off the boards, analysts said.

Tri-State’s assets under the mortgage indenture secure the new $500 million of first mortgage bonds as well as $1.9 billion of outstanding parity obligations. The Springerville Unit 3 coal plant in Arizona secures another $700 million of debt.

Tri-State expects to invest $1.1 billion in capital projects through 2014. Despite the program’s size, Tri-State expects to add less than $100 million of debt through 2014 after accounting for debt retirements.

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