Fitch Affirms Great River Energy, MN First Mortgage Bonds at 'A-'; Outlook Stable
Fitch Ratings has affirmed the 'A-' rating on the following Great River
Energy (MN) (GRE) outstanding bonds:
--$1.48 billion first mortgage bonds, series 2007A, 2008A and 2010D;
--$73 million McLean County, ND solid waste facilities revenue bonds
(Great River Energy projects), series 2010A and 2010B.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien on substantially all of GRE's
tangible assets and certain intangible assets, including its generation
and transmission (G&T) facilities and its wholesale power and
transmission service contracts with its members.
KEY RATING DRIVERS
LARGE G&T POWER COOPERATIVE: GRE is the second-largest wholesale power
supplier in Minnesota, with its member systems serving a diverse and
primarily residential customer base that includes the suburbs of the
Twin Cities. Total population served is approximately 1.7 million people.
BALANCED RESOURCE MIX: GRE's power supply resources consist of a solidly
diverse mix of base load and peaking units. Coal-fired generation
accounted for a little less than half of GRE's capacity in 2015, but
most of GRE's energy production. While coal-fired generation will remain
an important component of GRE's portfolio, changes to the resource base
are underway.
PORTFOLIO UNDERGOING TRANSITION: GRE has taken steps to rebalance its
portfolio and reduce its exposure to coal, including a recent decision
to close Stanton Generating Station and the addition of significant
renewable resources over the past several years. Based on current
projections of load, no incremental generation is necessary for the
foreseeable future.
FINANCIAL RESULTS WEAKENED IN 2015: Financial performance weakened in
fiscal 2015, a result of weaker member and non-member sales due to mild
weather and slightly negative non-utility operating margins. Improved
fiscal 2016 year-to-date results suggest a return to stable finances
with metrics in line with historical results. Liquidity is solid at 111
days and is further supported by a $400 million credit facility.
FINANCIAL VARIABILITY FROM NON-UTILITY OPERATIONS: GRE's non-utility
business lines create some volatility in consolidated financial margins.
These fluctuations, which are captured in the current rating, are
mitigated by healthy cash levels, the recognition of deferred revenues
and conservative electric rate-setting that does not assume positive
income from non-utility businesses.
CONSISTENT CAPITAL PLAN: More than $900 million of capital projects have
been identified for the 2017-2021 period, including major transmission
projects and upgrades to existing generating assets. However, total
leverage is projected to decline over time, as an anticipated rise in
cash flows triggered by the accelerated depreciation of the
cooperative's coal plants will limit future debt needs.
RATING SENSITIVITIES
IMPROVEMENT IN FINANCIAL METRICS EXPECTED: Fitch anticipates Great River
Energy's financial results will improve from a low point in fiscal 2015
based on fiscal 2016 year-to-date results that indicate positive margins
from a small rate increase and more normalized weather. However, if
consolidated financial results remain weak, downward rating pressure may
result.
RELIANCE ON NON-UTILITY BUSINESSES: An increased reliance of GRE's
non-utility businesses to meet projected financial results would be
viewed negatively, and could result in downward rating pressure.
CREDIT PROFILE
GRE is a Minnesota G&T cooperative that provides wholesale electric
energy to 28 member distribution cooperatives, the majority of which are
all-requirements customers. GRE's members, in turn, serve more than
665,000 member consumers, 85% of which are residential. The member
customer agreements extend to Dec. 31, 2045 and the transmission
agreements run to Dec. 31, 2050.
BALANCED RESOURCE MIX UNDERGOING TRANSITION
GRE owns and maintains a resource mix that includes 12 power plants,
consisting of coal, refuse-derived fuel, natural gas, and fuel oil and
wind generation. GRE's power plants have more than 2,800 MW of capacity,
including its largest baseload facility, Coal Creek Station, a 1,146 MW
coal-fired plant. While coal generation provides the majority of member
energy and capacity, GRE has been adding renewable resources to its
portfolio (mainly wind contracts) while reducing exposure to coal
generation. Of the roughly 3,700 MW of total capacity resources, wind
and other renewables comprise approximately 20%.
In July 2016, the GRE board approved the decommissioning of GRE's
second-largest coal plant, Stanton Generating Station (Stanton, 189 MW),
by mid-2017. The decision to close Stanton is based on a combination of
factors including expected operating and capital costs savings and the
plant's relatively limited utilization given the low regional price for
energy over the past several years. In addition to the closing of
Stanton, GRE amended a power purchase contract (totaling 180 MW) with
Dairyland Power Cooperative's Genoa 3 coal-fired facility in 2015 to
reduce energy purchases. Together, these initiatives will lower the
cooperative's reliance on coal-fired generation.
Energy sales are forecast by GRE to stabilize in 2016 and 2017, assuming
more normalized weather patterns, before a decline in sales in 2019 due
to the anticipated loss of load from the city of Elk River. Despite
these changes to demand and resource mix, total capacity will remain
comfortably in excess of peak load, which was 2,524 MWs in 2015. No
incremental generation is expected to be added over the intermediate
term.
CONSISTENT CAPITAL PROGRAM
GRE has identified a total of $920 million of projected capital
expenditures for 2017-2021 that are focused on transmission and existing
generation. Environmental capital spending for Coal Creek Station will
include projects that will allow it to comply with regional haze
requirements, but should be limited to just $30 million over the next
several years. GRE anticipates the turbines for several of its existing
peaking units will undergo upgrade and renewal, and coupled with
approximately $400 million in spending for transmission, account for a
significant portion of the planned capital spending.
HIGHLY LEVERAGED UTILITY; DEBT TO DECLINE
With nearly $3 billion in total debt outstanding as of fiscal-end 2015,
GRE's leverage is high. Debt/FADS totaled 10.4x in 2015, which is high
relative to the medians for the 'A' category. Equity capitalization, at
18.6% in 2015, has been steadily improving since 2012, but is also
considered weak for the current rating. Fitch notes GRE's goal of
reaching 20% equity capitalization by 2020 is attainable.
While total debt increased by $200 million on a net basis from
2013-2015, total long-term debt is projected to steadily decline over
the next 10 years as an expected increase in annual cash flows is
directed toward capital investment. Additional debt is anticipated to be
needed to fund the capital plan totaling $600 million, but the pace of
issuance is expected to be lower than the rate of amortization of
existing bonds. By 2026, GRE projects its total debt outstanding to be
closer to $2 billion.
Nearly all of GRE's debt consists of long-term fixed-rate bonds. A $100
million term note with CoBank comprises virtually all of the
variable-rate debt outstanding.
FINANCIAL PERFORMANCE EXPECTED to STABILIZE in 2016
GRE's financial performance declined in fiscal 2015 from a combination
of factors including a decline in operating revenues and a slight
operating loss in non-utility operations. A decline in both member and
non-member sales has been attributed to milder weather in 2015, leading
to considerably lower consolidated net margins for 2015 of just $15.2
million, down significantly from those recorded in each of the prior two
years ($52 million and $43 million in 2013 and 2014, respectively). A
key component of stronger consolidated net margins in 2013 and 2014 was
a turnaround in non-utility operating income, which demonstrated a
slight loss in 2015. Margin for interest was still adequate at 1.11x in
2015, although Fitch-calculated debt service coverage (excluding the
realization of deferred revenue) was just 0.97x.
GRE has indicated that year-to-date results for 2016 are ahead of budget
due in large measure to improved energy sales through the early summer,
leading to an expected net margin comfortably in excess of 2015 results.
A five-year financial forecast provided by GRE assumes a cumulative 2.5%
decline in sales through 2019 followed by limited growth in energy in
2020 and 2021. Solidly positive net margins are targeted to produce debt
service coverage of approximately 1.2x, which is designed to meet
management's goal of reaching 20% equity capitalization by 2020 and
consistent with historical results. Fitch believes the assumptions to be
realistic and the results attainable.
Along with a decline in total debt, annual interest payments are also
projected to decline after peaking in 2018, leading to improved coverage
ratios over time. GRE projects margin for interest to reach 1.23x by
2022 and 1.45x by 2026. The improved margins are a direct result of
lower expected debt and associated interest payments over time, and the
improved cash flows, which are aided by accelerated depreciation on
GRE's larger coal plants.
Debt service coverage (principal and interest) is projected to remain
steady at 1.17x through GRE's forecast, assuming more normal weather
conditions and no profits or losses from the non-utility businesses.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012380
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012380
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: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or
retransmission in whole or in part is prohibited except by permission.
All rights reserved. In issuing and maintaining its ratings and in
making other reports (including forecast information), Fitch relies on
factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable
investigation of the factual information relied upon by it in accordance
with its ratings methodology, and obtains reasonable verification of
that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The
manner of Fitch's factual investigation and the scope of the third-party
verification it obtains will vary depending on the nature of the rated
security and its issuer, the requirements and practices in the
jurisdiction in which the rated security is offered and sold and/or the
issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers,
the availability of pre-existing third-party verifications such as audit
reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third
parties, the availability of independent and competent third- party
verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors.
Users of Fitch's ratings and reports should understand that neither an
enhanced factual investigation nor any third-party verification can
ensure that all of the information Fitch relies on in connection with a
rating or a report will be accurate and complete. Ultimately, the issuer
and its advisers are responsible for the accuracy of the information
they provide to Fitch and to the market in offering documents and other
reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to
financial statements and attorneys with respect to legal and tax
matters. Further, ratings and forecasts of financial and other
information are inherently forward-looking and embody assumptions and
predictions about future events that by their nature cannot be verified
as facts. As a result, despite any verification of current facts,
ratings and forecasts can be affected by future events or conditions
that were not anticipated at the time a rating or forecast was issued or
affirmed.
The information in this report is provided "as is" without any
representation or warranty of any kind, and Fitch does not represent or
warrant that the report or any of its contents will meet any of the
requirements of a recipient of the report. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion and reports made
by Fitch are based on established criteria and methodologies that Fitch
is continuously evaluating and updating. Therefore, ratings and reports
are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating or a report. The rating
does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the
offer or sale of any security. All Fitch reports have shared authorship.
Individuals identified in a Fitch report were involved in, but are not
solely responsible for, the opinions stated therein. The individuals are
named for contact purposes only. A report providing a Fitch rating is
neither a prospectus nor a substitute for the information assembled,
verified and presented to investors by the issuer and its agents in
connection with the sale of the securities. Ratings may be changed or
withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of
payments made in respect to any security. Fitch receives fees from
issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000
(or the applicable currency equivalent) per issue. In certain cases,
Fitch will rate all or a number of issues issued by a particular issuer,
or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment,
publication, or dissemination of a rating by Fitch shall not constitute
a consent by Fitch to use its name as an expert in connection with any
registration statement filed under the United States securities laws,
the Financial Services and Markets Act of 2000 of the United Kingdom, or
the securities laws of any particular jurisdiction. Due to the relative
efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to
print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia
Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale
clients only. Credit ratings information published by Fitch is not
intended to be used by persons who are retail clients within the meaning
of the Corporations Act 2001
View source version on businesswire.com: http://www.businesswire.com/news/home/20160929006063/en/
Copyright Business Wire 2016