Fitch Rates Southern Minnesota Muni Power Agency Electric Rev Bonds 'A+'; Outlook Stable
Fitch Ratings has assigned an 'A+' rating to Southern Minnesota
Municipal Power Agency's (SMMPA's) approximately $90.2 million Power
supply system revenue bonds, series 2015A.
The bonds are being issued to provide funds for (i) the refunding of a
portion of the utility's outstanding debt, (ii) payment of a portion of
outstanding commercial paper, and (ii) payment of certain costs of
acquisition and construction of the system.
The bonds are scheduled to sell the week of Oct. 5, 2015.
In addition, Fitch affirms the following ratings at 'A+':
--$68 million power supply system revenue bonds, series 2010A;
--$7 million power supply system revenue bonds, series 2010B.
The Rating Outlook is Stable
The bonds are payable from net revenues derived by SMMPA from the
operation of the power system, after payment of operating expenses. Net
revenues are derived primarily from payments under power sales contracts
(PSCs) with 18 participating municipal electric systems.
KEY RATING DRIVERS
MATURE JOINT ACTION AGENCY: SMMPA has provided wholesale power supply to
its 18 member cities since 1977. Power is principally supplied pursuant
to take-and-pay PSCs that were recently extended through April 1, 2050
by 15 members that represent 43.4% of the 2014 system load. The
remaining contracts with Rochester (rated 'AA-'/Outlook Stable), Austin
and Waseca, MN expire on April 1, 2030.
CONCENTRATION WITH LARGEST MEMBERS: The largest members are Rochester,
Owatonna, and Austin MN which account for 67% of energy sales. Each
exhibits healthy overall credit characteristics and has experienced
relatively stable retail electric sales in recent years. Rochester and
Austin's decision not to extend their PSCs beyond 2030 present
longer-term challenges to the agency.
COMPETITIVE AND STABLE ELECTRIC RATES: The agency maintains wholesale
power rates (7.1 cents/KWh in 2014) that are below neighboring
investor-owned utility, municipal and cooperative utilities.
Management's focus on long-term planning, cost efficiency and building
financial reserves has moderated the need for large rate increases in
recent years, but produced below average debt service coverage metrics.
ROBUST SERVICE AREA ECONOMICS: The city of Rochester and its surrounding
metropolitan area, which includes Owatonna and Austin, weathered the
last recession better than other regions across the nation. Unemployment
rates for each of the three largest members were lower than national and
state averages as of June 2015.
SINGLE UNIT GENERATION RISK: Sherbourne County Generating Unit No. 3
(Sherco 3) is SMMPA's principal generating asset. Although the unit
experienced a nearly two-year outage, the financial effects were largely
mitigated by ample low-cost replacement power. Since returning to
service in late 2013, the operating performance of Sherco 3 has been
BELOW-AVERAGE COVERAGE METRICS: Management's focus on maintaining low
and stable wholesale rates has produced debt service coverage metrics
that are somewhat weak relative to the proposed rating category.
However, significant cash reserves and above-average liquidity measures
somewhat offset lower coverage levels.
ASSET CONCENTRATION RISK: Dependence on the Sherbourne County Generating
Unit No. 3 generating unit for two-thirds of installed capacity exposes
the Southern Minnesota Municipal Power Agency to single unit risk. An
extended outage of this plant, particularly in a volatile wholesale
market environment, could pressure the financials of both SMMPA and its
REDUCED FINANCIAL RESERVES: SMMPA's robust cash reserves are a key
rating factor. Maintenance of solid liquidity levels, supported by
anticipated rate increases, is expected. Changes in financial and/or
rate-setting policies leading to sustained deterioration in liquidity
metrics would be viewed negatively by Fitch.
SMMPA provides wholesale power supply to 18 participating cities, all of
which own and operate municipal electric systems. SMMPA's load center is
concentrated in the southern portion of the state, including the city of
Rochester, MN (rated 'AA-'/Outlook Stable), the agency's largest member
representing 42.3% of 2014 energy sales. Collectively, the participating
systems serve approximately 113,000 largely residential and commercial
customers and a total population of approximately 244,500.
Power is supplied to the members primarily through a mix of agency and
member-owned resources with limited reliance on purchase power
agreements (PPAs). SMMPA's core generating asset is its 41% interest in
Sherco 3, a 910 MW coal-fired steam unit majority owned and operated by
an affiliate of Xcel Energy Inc. (XEL; 'BBB+'/Outlook Stable). The
remaining power and energy requirements of the participants are supplied
through agency-owned and controlled natural gas-fired capacity,
renewable facilities (wind and landfill gas), and PPAs with third
The agency is a participant in the Midcontinent Independent System
Operator, Inc. (MISO) market and sells the physical output of its power
supply resources in the MISO spot and day-ahead markets. The agency in
turn buys the power required by its members from MISO and is billed by
MISO on a net basis for physical power bought and sold.
TAKE-AND-PAY CONTRACTS WITH MEMBERS
SMMPA supplies power to its participating municipal systems through
separate, but substantially similar long-term PSCs. Each of the
contracts expire on April 1, 2050, with the exception of PSCs with
Rochester, MN, Austin, MN and Waseca, MN, which end on April 1, 2030.
Fitch does not view the shorter tenor of these PSCs as a near-term
concern, even though they represent 58% of 2014 energy sales. Given that
projected annual debt service post-2030 is substantially lower than
current levels, the residual effect on SMMPA's remaining members would
likely be manageable from a cost standpoint in the event the PSCs are
STABLE AGENCY FINANCIAL PERFORMANCE
Operating performance at the agency has been stable over the last five
years with funds available for debt service (FADS) averaging $73.2
million per annum over the period 2009-2014. Fitch notes the absence of
volatility in earnings and cash flow during the extended Sherco 3 outage
which persisted throughout 2012 and the majority of 2013. In particular,
a benign market for wholesale replacement power enabled SMMPA to replace
the lost generation at an only slightly higher cost.
Fitch-calculated debt service coverage of 1.07x in 2013 and 2014 is weak
relative to the 'A+' category median of 1.36x. The bond resolution
requires a coverage ratio of 1.10x -- a level which SMMPA has and is
expected to continue to manage to primarily through ongoing transfers
into and out of the rate stabilization (RSF).
Mitigating the sub-median DSC ratios and dependence on the RSF are
SMMPA's abundant cash reserves and strong liquidity metrics. SMMPA ended
2014 with 227 days cash on hand ($108.1 million cash and liquid
investments) outperforming the category median of 109 days. SMMPA
targets a general operating reserve balance of $64 million and a capital
reserve balance of $15-18 million. Projections show a decrease in these
accounts in 2015 and 2016, falling below target levels, but remaining
strong for the rating category. Balances are not anticipated to recover
until 2018, after implemented rate increases in 2016 and 2017. Continued
deterioration of reserves past 2016 could put downward pressure on the
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
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