News Column

Fitch Rates Western Minnesota Muni Power Agency's 2014 Series A Bonds 'AA-'; Outlook Stable

June 19, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the following Western Minnesota Municipal Power Agency (WMMPA) bonds:

--Approximately $320 million power supply revenue bonds 2014 series A.

WMMPA expects to price the bonds June 26, 2014. Proceeds will be used primarily to fund the construction of the Red Rock Hydroelectric Project (RRHP) and to complete WMMPA's share of certain CapX 2020 projects. In addition, a portion of the funds will be used for capital improvements for the Laramie River Station (LRS) and for cost of issuance.

Fitch also affirms the following outstanding bonds:

--$242.9 million of power supply revenue bonds, various series at 'AA-'.

The Rating Outlook for all bonds is Stable.

SECURITY

The bonds are secured by a pledge of all revenue derived by WMMPA from the operation of its power supply and transmission resources, including all of the revenue received from Missouri River Energy Services (MRES) under a long-term power sales contract (PSC).

KEY RATING DRIVERS

FINANCING AND POWER SUPPLY AGENCY: WMMPA is a municipal joint action agency that was principally created to finance and acquire power and transmission resources on behalf of MRES, a power supply joint action agency, which lacks joint financing authority. The agency has established financial targets that help support the 'AA-' rating.

STRONG CONTRACTUAL AFFILIATION: WMMPA has sold the entitlement to its resources to MRES via the PSC, which enables MRES to supply supplemental power to 60 of its 61 municipal members under long-term take-and-pay power sales agreements. The PSCs of all but one of the members extends to Jan. 1, 2046.

VALUABLE HYDROELECTRIC POWER SUPPLY: Nearly all of the MRES members benefit from a firm allocation of low-cost hydroelectric power from the Western Area Power Administration (WAPA), with contracts that extend through 2020 (in process of extending to 2050). The WAPA contracts represent an important low-cost and carbon-free source of power for the MRES members.

LOW-COST POWER RESOURCES: WMMPA's power resources provide lower cost power ($56.1/MWh in 2013) to MRES that supplements the member's supply from WAPA. However, significant reliance on one unit of the coal-fired LRS for more than 70% of MRES energy supply is a credit concern, particularly given the potential for costly environmental upgrades.

SUBSTANTIAL DEBT FOR NEW PROJECT: The anticipated debt issuance will fund the majority of costs associated with the construction of the RRHP. While the project will provide needed capacity for MRES' members and help diversify the generation mix, outstanding debt will more than double and leverage will be well above rating category medians, and members' rates will need to increase, albeit modestly.

RATING SENSITIVITIES

FAILURE TO MANAGE CONSTRUCTION PHASE: WMMPA's rating and Outlook are predicated on Fitch's view that the agency will manage rates and cash flow through the upcoming construction phase to support financial metrics at the levels observed in recent years. Failure to do so would likely lead to downward pressure on the rating or Outlook.

REDUCED COMPETITIVENESS: A significant increase in the cost of production due to environmental compliance or an unexpected outage at LRS that reduces the regional price competitiveness of the WMMPA/MRES power supply could also add rating pressure.

CREDIT PROFILE

WMMPA was created in 1976 to finance and own electric generation and transmission resources generally for the benefit of the MRES membership. WMMPA's current membership consists of 23 Minnesota municipalities, all of which are also MRES members.

MRES is comprised of 61 member communities located throughout Iowa, Minnesota, North Dakota and South Dakota, each of which operates a municipally-owned electric system. MRES provides wholesale power supply to 60 of its 61 members pursuant to long-term power supply contracts, including 57 members (S-1 members) that are required to purchase virtually all of their supplemental power requirements in excess of their allocations of WAPA hydroelectric capacity. WAPA contracts supplied 40% of the total power requirements of the S-1 members in 2013, with MRES providing the remainder.

DIVERSE, LOW COST POWER SUPPLY

WMMPA has acquired a portfolio of power supply resources with capacity totaling 486 MW, as well as transmission facilities necessary to deliver power supply to certain of the members. WMMPA's owned generation portfolio includes natural gas-fired capacity (140 MW) and some wind capacity, but roughly 70% of the agency's power supply is derived from its ownership interest in the LRS. In addition to owned resources, MRES has contracted for 132 MW of additional generating capacity from its members, 33 MW of nuclear capacity and 82 of wind capacity. This blended, lower cost resource mix has been one of the strengths of this agency.

LARGE CAPITAL PLAN

Capital expenditures are expected to increase meaningfully over the next five years as the agency moves forward with the RRHP and its continued participation in the CapX 2020 transmission planning effort. Capital expenditures are expected to total approximately $420 million for the period 2014 - 2018. Cash from operations and on hand will fund a portion of expenditures, but the large bond issuance will fund the majority. Outstanding debt will more than double, which will pressure leverage ratios. Implementation of planned rate increases and management of cash flows through the pending construction phase will be critical in ensuring that the operating and financial profile is consistent with the current rating.

The current capital plan does not include the cost of potential upgrades needed at the LRS, which may require additional debt financing. An EPA action plan released earlier this year calls for selective catalytic reduction systems (SCRs) to be installed at LRS. The action plan is currently being appealed. If not overturned, installation of the SCRs could increase the cost of power supplied from LRS, lessening its strong regional competitive position.

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

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835471

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, +1 212-908-0678

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Dennis Pidherny, +1 212-908-0738

Managing Director

or

Committee Chairperson

Dennis Pidherny, +1 212-908-0738

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com



Source: Fitch Ratings


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