NEW YORK--()--Fitch Ratings assigns a 'AA-' rating to Rochester Public Utilities (RPU) $4,140,000 million electric utility revenue refunding bonds, series 2013A. The bonds mature on Dec. 1, 2017. The proceeds will be used to refund the Dec. 1, 2013 through Dec. 1, 2017 maturities of the city's electric utility revenue bonds, series 2002A.
In addition, Fitch affirms the following ratings for RPU:
--$82.8 million electric revenue bonds series 2002A and 2007C at 'AA-';
The Rating Outlook is Stable.
The bonds are secured by a first lien on and payable solely from net revenues of the electric utility system and funds available in the designated electric system debt-service reserve account.
KEY RATING DRIVERS
INTEGRATED UTILITY SYSTEM: Rochester Public Utility (RPU or the utility) is an integrated electric utility system that meets the bulk of its power needs through a long-term take-and-pay contract (up to 216 MW) with Southern Minnesota Municipal Power Agency (SMMPA), 178 MW of owned generation, and market purchases.
ROBUST SERVICE AREA ECONOMICS: The city of Rochester, MN, and surrounding service areas were not immune to the economic slowdown. However, they weathered the economic crisis better than other counties around the nation. Rochester's unemployment rate of 4.5% was lower than the nation and state averages of 7.8% and 5.9%, respectively, at Oct. 31, 2012.
SOUND FINANCIAL METRICS: RPU's financial position remains robust, supported by metrics exceeding the medians for similarly rated utilities. The utility has withstood weaker wholesale market prices and SMMPA's cost increases with minimal effect because of timely rate increases. Fiscal 2011 debt service coverage (DSC) and liquidity measures were 3.66x and 135 days cash on hand (DCOH), respectively.
CONSERVATIVE BUDGETING AND MANAGEMENT: Management continues to employ a conservative and proactive approach to its finances, allowing the utility to moderate the effect of lower electric demand. Management's more conservative budgeting has helped maintain financial stability through the economic downturn as demand for wholesale sales has declined in recent years.
SINGLE-UNIT GENERATION RISK: RPU's exposure to the Sherco 3 coal-fired unit, which is SMMPA's principal asset and currently out of service, is somewhat mitigated by the agency's obligation to supply replacement power. Ample low-cost market power has moderated the effect of the Sherco outage.
CUSTOMER REVENUE CONCENTRATION: The utility's two largest customers, the Mayo Clinic and IBM, accounted for approximately 17% of fiscal 2011 total operating revenue and 22.2% of total energy consumption. The loss of either customer is not anticipated, but would meaningfully reduce electric demand and weaken service area economics.
WHAT COULD TRIGGER A RATING ACTION
FINANCIAL STRAIN: Weakened financial metrics as a result of SMMPA cost increases or lack of support for necessary rate increases could result in downward rating pressure.
Take-and-Pay Power Supply Agreement
RPU entered into an all-requirements sales agreement with SMMPA in 1981 that extends through 2030. The contract is take-and-pay in nature and was amended to meet the utility's partial requirements up to 216 MW. In 2011, the SMMPA contract supplied 98.8% of RPU's demand requirements. Peak demand in fiscal 2011 reached 292 MW.
RPU obtains all load requirements exceeding 216 MW from sources other than SMMPA including 178 MW of owned generation in: the Zumbro Hydroelectric Plant, coal-fired Silver Lake Plant, gas-fired Cascade Creek Plant, and from the MISO market through The Energy Authority (TEA). In August 2012, the RPU board passed a resolution to decommission the aging coal fired Silver Lake facility by December 2015. The decision was driven by the unfavorable economics of the plant and the regulatory environment surrounding coal fired generating facilities. The decommissioning of the plant is expected to save RPU $5.5 million annually, of which $2 million has already been achieved in fuel and operating costs, but will also increase power imports. To account for the anticipated increase in imported power, additional transmissions lines should be in service by the end of 2015 to address reliability concerns of having less generation within the utility's service area.
Sherco-3 Outage Extended
SMMPA's Sherco plant was being tested for restarting in November 2011 after routine maintenance when a malfunction occurred in the unit's steam turbine and generator causing a catastrophic failure and a fire at the site. It was originally anticipated that Sherco would be back on line by the end of the first quarter of 2013; however, the unit's return to service might not be until the second quarter of the year. Fitch does not expect the delay to impact RPU's power supply and power costs as SMMPA has secured capacity purchases for most of the projected 2013 outage. SMMPA continues to fulfill its contractual obligations to RPU with competitively priced replacement power, obviating the need for a rate increase due to the extended outage.
Stabilizing Yet Less Competitive Cost Structure
RPU's cost structure has stabilized after having steadily risen because of the diminishing off-system sales that once subsidized customer rates. Timely rate increases and cost control, however, have helped to stabilize financial performance, evidence of the benefit of RPU's sole rate-setting authority and the underlying support of City Council. RPU's residential (12.3 cents/kWh) electric rates were on par with peer utilities in fiscal 2011. Due to the competitively priced power supplied by SMMPA, RPU does not foresee a need to increase rates in 2013. RPU has not increased electric rates since fiscal 2009.
Solid Financial Metrics
The utility has consistently maintained debt service coverage above 3.0x for the last five years, despite the severe drop off in wholesale sales. Fiscal 2011 DSC was 3.66x. Preliminary fiscal 2012 financials point to another healthy year, with a projected coverage in excess of 3.0x.
The utility has planned for a modest five-year capital improvement program totaling $99.7 million over the period 2012 - 2016 of which 44.5% will be funded with debt issuances. The bulk of the expenditures relate to CAPX2020, a transmission project designed to bolster reliability of the existing electric grid, but also assure capacity for the system. RPU anticipates its portion of the project to total $42.2 million, and plans to fund it with a short term line of credit facility in 2013, which will then be paid out with long-term debt in 2014 - 2015.
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.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rochester Public Utilities, Minnesota' (April, 17, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Rochester Public Utilities, Minnesota (Revenue Bonds)