Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 September 21, 2015 - 3:52 PM EDT
Print Email Article Font Down Font Up
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

SECURITY

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 sound.

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.

RATING SENSITIVITIES

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 members.

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.

CREDIT PROFILE

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 parties.

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 not extended.

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 rating.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991096

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991096

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Stacey Mawson
Director
+1-212-908-0678
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Alan Spen
Senior Director
+1-212-908-0594
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (September 21, 2015 - 3:52 PM EDT)

News by QuoteMedia
www.quotemedia.com