NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the following Municipal Energy Agency of Nebraska (MEAN, or the agency) revenue bonds:
--$30,750,000 power supply system revenue and refunding bonds, 2013 series A;
--$7,390,000 power supply system revenue bonds, 2013 series B (federally taxable).
The bonds are scheduled to price via negotiation on March 12, 2013. Proceeds will be used to refund MEAN's remaining series 2003A bonds for approximately 11.3% savings of the refunded par amount ($23.2 million); fund a $6.3 million settlement with Southwest Power Pool (SPP); and finance various capital projects.
In addition, Fitch affirms the 'A' rating on MEAN's approximately $164.3 million of outstanding power supply system revenue bonds, including the series 2003A bonds expected to be refunded.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the agency, which are principally derived from power supply contracts with 68 participants. The pledge of net revenues includes transfers from MEAN's rate stabilization fund (RSF).
KEY RATING DRIVERS
BROAD WHOLESALE ELECTRIC PROVIDER: MEAN provides wholesale electric power to 68 participants in a broad, stable service territory spanning four states.
INCREASED REVENUE PREDICTABILITY: A measurable increase in long-term, all-requirements (Schedule M) participants provides MEAN with greater revenue predictability over time. Such participants provided 56% of fiscal 2012 electric revenues, up from a recent low of 29% in fiscal 2008.
SATISFACTORY FINANCIAL METRICS: MEAN's financial metrics are in line with Fitch's 'A' rating category medians. However, its proportionate share of Public Power Generation Agency (PPGA, a joint action agency) debt more than doubles its fixed-cost obligations to above-average levels. MEAN's Fitch-calculated debt service coverage and cash on hand averaged 1.3x and 107 days, respectively, over the past three years, and the agency's ratio of equity to capitalization rose slightly to 25.3% (fiscal 2012).
DIVERSE POWER RESOURCES: MEAN's power supply is diverse by fuel type and number of units. The agency sets a target of no single generating unit contributing more than 15% of total capacity to limit the consequences of a plant outage. In addition, MEAN's newer coal-fired generating resources are equipped with environmental controls, which limits its capital needs.
CURRENTLY COMPETITIVE RATES: The largest participants' retail rates trend below regional averages due, in part, to MEAN's competitive wholesale cost of power. However, the agency conservatively forecasts upwards of 7% average annual rate increases through 2017, which could ultimately erode some cost competitiveness.
MIXED SERVICE TERRITORY: High customer concentration at the participant level reaches over 50% of revenues in certain instances. While the effect is more muted at the agency level, moderate regional income levels suggest some difficulty absorbing the loss of a large customer.
INCREASED LONG-TERM REVENUES: The continued trend of increasing long-term Schedule M revenues, coupled with active internal monitoring of participant financial metrics, would likely enhance MEAN's overall financial strength.
WEAKENED FINANCIAL RATIOS: Compressed financial margins - as an alternative to full and timely rate increases through the fiscal 2017 planning period - could weigh on the agency's financial position.
MIXED ECONOMIC INDICATORS
MEAN is a joint-action agency providing low-cost, wholesale electric power to 68 typically small participants (124,000 total retail customers) in a four-state region exhibiting mixed, but generally stable economic indicators. Median household income levels of the 10 largest Schedule M participants equal just 87% of the national average, but low unemployment rates underpin the stable economic conditions. The December 2012 unemployment rate was just 4.5%, down from the recessionary peak of an also low 6.5%.
Steady economic conditions are an important mitigant to customer concentration at the participant level. Three customers of Fort Morgan, CO - MEAN's largest participant at 10.1% of total participant revenues - compose nearly three-quarters of its operating revenues. The effect at the agency level is more muted, but notable: the 10 largest individual customers represent about 10% of MEAN's operating revenues.
GREATER PROPORTION OF LONG-TERM REVENUES
The near doubling of Schedule M participants over the past 10 years to 54 is a favorable trend. Schedule M participants have contracts that extend beyond the final maturity of MEAN's debt and provide the agency with longer-term revenue predictability. These all-requirements participants provided 56% of revenues in fiscal 2012, up from a low of 29% as recently as fiscal 2008.
Schedule M participants have grown through new additions to the agency, as well as conversions of existing participants with medium-term Schedule J and K contracts. The increase evidences the reliability of MEAN's assets, as well as the affordability of its wholesale rate.
COMPETITIVE RATES TRENDING UPWARD
MEAN's wholesale and participant retail rates compare favorably to regional providers. However, conservative estimates of 7% average annual increases through 2017 (to $73.94/MWh), in part to finance the agency's greater proportion of owned assets, could begin to erode some rate competitiveness. Rate increases may be lower if medium-term participants renew, as broadly expected.
MEAN and the participants have full rate-setting authority and there is no competition at the retail level, both of which further enhance the agency's revenue stability. In addition, Schedule M participants are subject to an unlimited step-up of payments in the event of a revenue shortfall.
SATISFACTORY FINANCIAL METRICS
MEAN's overall financial position is in line with Fitch's medians for 'A' rated wholesale systems. The partial use of healthy cash balances, including a $17.3 million RSF (targeted at 15% of operating expenses), has helped smooth annual debt service coverage, and a newly increased $20 million liquidity facility provides additional support.
Fiscal 2012 debt service coverage was under 1x by Fitch's calculation, which excludes transfers from the RSF and is not adjusted for certain legally defeased debt. Coverage was closer to 1.4x with these adjustments, which is consistent with MEAN's prior year results and rating category medians. The agency's conservative financial projections show coverage nearer 1.2x through fiscal 2017.
MEAN expects to enter into a $6.3 million settlement with SPP over an alleged violation of SPP's open access transmission tariff. Fitch views the settlement, which requires Federal Energy Regulatory Commission approval, as manageable to MEAN's overall financial position. The agency intends to recover the funds over five years beginning in fiscal 2015.
DIVERSE RESOURCE BASE
MEAN's resources are diverse by fuel type and number of units. Management targets no more than 15% of total capacity from one generating unit, which mitigates the risk of plant outages. In addition, none of MEAN's fossil fuel-based resources currently require environmental retrofits. MEAN's capital needs over the next five years total just $7 million, which should ultimately benefit its balance sheet ratios.
Management has shifted in recent years toward greater ownership of assets to provide for better rate predictability. MEAN has a 36.36% entitlement share in PPGA, a joint-action agency formed to finance and construct the 220MW coal-fired Whelan Energy Center Unit 2, which began commercial operation in 2011. MEAN's proportionate share of PPGA's outstanding debt effectively doubles its own debt load, thereby halving its equity ratio (25.3%). As such, the full and timely recovery of costs from MEAN's rate base will continue to be an important rating consideration.
MEAN meets the needs of Schedules J and K (medium term) participants with purchase power contracts that loosely tie to their contract duration. Consequently, MEAN is 'short' capacity, and will only consider adding additional generation as more participants convert to long-term Schedule M contracts.
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.
This action was informed by the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Dec. 18, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Municipal Energy Agency of Nebraska', Dec. 29, 2011.
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
Municipal Energy Agency of Nebraska
Revenue-Supported Rating Criteria