Fitch Ratings has assigned an 'AA-' rating to the following Western Minnesota Municipal Power Agency (WMMPA) bonds:
--$48.65 million power supply revenue refunding bonds 2012 series A.
WMMPA expects to issue the bonds the week of Aug. 6, 2012. Proceeds will be used to refund WMMPA's outstanding 2003 series bonds.
In addition, Fitch affirms the following outstanding bonds:
--$264.3 million of power supply bonds, various series at 'AA-'.
The Rating Outlook for all bonds is Stable.
The 2012 series A bonds are principally 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.
STRONG CONTRACUAL AFFILIATION: WMMPA has sold the entitlement to its resources to MRES pursuant to the PSC, which enables MRES to meet its requirement to supply supplemental power to 60 of its 61 municipal members under long-term take-and-pay power sale agreements. The PSC and all but one of the member agreements extend to Jan. 1, 2046.
LOW COST HYDROELECTRIC POWER SUPPLY: Nearly all of the MRES members benefit from a firm allocation of low-cost hydroelectric power pursuant to contracts with the Western Area Power Administration (WAPA) that extend through 2020. 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 - principally its 16.47% indirect ownership interest in the 1,710-MW coal-fired Laramie River Station (LRS) - provide low cost wholesale power supply to MRES and its members ($56.1/MWh in 2011) above their WAPA resources.
IMPROVED AND STABLE FINANCIAL METRICS: WMMPA's consolidated financial metrics, including Fitch-calculated debt service coverage (DSC; 1.42x) and debt to funds available for debt service (5.8x), have improved and stabilized since 2008 to levels commensurate with its Fitch rating category. The improved performance follows a period during which the use of cash reserves to meet debt service resulted in DSC of below 1.0x. Cash on hand at year-end 2011 (316 days) was also very strong.
RELIANCE ON COAL UNIT: WMMPA's continued reliance on LRS's coal-fired production for over 70% of its energy supply remains a credit concern, particularly given more restrictive environmental regulations and despite its extremely low cost of production.
DIVERSE BUT SMALL MEMBERS: The geographical diversity and absence of concentration among the MRES and WMMPA members is somewhat offset by their economic dependence on agriculture and low population and small customer base.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO MANAGE CONSTRUCTION PROGRAM: WMMPA's failure to manage rates and cash flow to support its current operating and financial profile through the pending construction program could lead to downward pressure on the rating or Outlook.
REDUCED COMPETITIVENESS: A significant increase in the cost of production or a prolonged unexpected outage at LRS that reduces the regional price competitiveness of the WMMPA/MRES power supply could also pressure the rating or Outlook.
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 members of MRES.
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 hydroelectric capacity from WAPA. WAPA contracts supplied 46% of the total power requirements of the S-1 members in 2011; WMMPA/MRES provided the remainder.
DIVERSE, LOW COST POWER SUPPLY
WMMPA has acquired a portfolio of power supply resources, as well as transmission facilities necessary to deliver power supply to certain of the members. WMMPA's 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. MRES has contracted for 143 MW of additional generating capacity from its members and 82 MW of wind capacity.
INCREASING CAPITAL EXPENDITURES
Capital expenditures at WMMPA are forecast to total $365 million and average $73.1 million for the period 2012-2016, well above expenditures in recent years ($17 million in 2011). Expenditures will be centered on the development of the Red Rock hydroelectric project and the CapX 2020 transmission initiative. Cash form operations and on hand will be used to fund a portion of the expenditures, but debt financing is anticipated over the period, which will likely strain leverage ratios. Fitch expects that WMMPA will manage rates and cash flow through the pending construction phase to ensure an operating and financial profile consistent with the current rating.
SMALL RURAL MEMBERS
The MRES S-1 members are generally small and rural communities that collectively serve a total population and a customer base of approximately 292,000 and 153,000, respectively. Residential sales account for approximately 30% of total energy sales; commercial and industrial sales account for the balance.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
Dennis M. Pidherny, +1 212-908-0738
33 Whitehall Street
New York, NY 10004
Michale Mohammed Murad, +1 212-908-0757
Alan Spen, +1 212-908-0594
Elizabeth Fogerty, +1 212-908-0526 (New York)