NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on the following Great River Energy (GRE) outstanding bonds:
--$1.618 billion first mortgage bonds, series 2007A, 2008A and 2010D;
--$106 million McLean County, ND solid waste facilities revenue bonds, series 2010A, B and C.
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 G&T facilities and its wholesale power and transmission service contracts with its members.
KEY RATING DRIVERS
SOUND ECONOMY: 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 approximates 1.7 million people.
BALANCED RESOURCE MIX: Power supply consists of 12 generating plants, an extensive transmission network, and a diverse mix of base load and peaking units. Coal generation is predominant, accounting for about 67% of power supply, but overall fuel and resource diversity is considered reasonable in light of its geographic location.
ACCELERATED DEPRECIATION OF COAL PLANTS: In light of business risks associated with pending environmental regulations, GRE's board, in July 2013, voted to accelerate the depreciation of its two major coal plants, which is designed to enhance cash flow and add to financial flexibility.
LARGE CAPITAL PROGRAM: More than $800 million of capital projects, with associated funding needs, have been identified for the 2015-2019 period, including major transmission projects designed to expand the region's power supply interconnections.
FINANCIAL RESULTS STEADY: The GRE board has targeted annual debt service coverage (DSC) at 1.17 times (x), which is designed to build equity to capitalization of 20% by 2020. Cash liquidity is ample at 148 days and is further supported by a $600 million credit facility.
RELIANT ON CAPITAL MARKETS: GRE utilizes a strategy of relying on its revolving credit facility to fund major projects, with periodic, longer-term financing used to pay down the revolver. While a cost-effective strategy, it does expose GRE to greater financing risk.
RATING SENSITIVITIES
FURTHER IMPROVEMENT IN FINANCIAL METRICS: A continuation of current positive financial trends, combined with a moderation of capital expenditures, could lead to a positive rating action.
OVERRELIANCE ON NONUTILITY BUSINESSES: Should GRE's financial results become overly reliant on performance of its noncore businesses (biofuels), this would be viewed negatively.
CREDIT PROFILE
GRE is a Minnesota generation and transmission (G&T) cooperative that provides wholesale electric energy to 28 member distribution cooperatives. GRE's members, in turn, serve more than 655,000 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.
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, and an extensive transmission network. In July 2013, the GRE board approved a plan to depreciate its two largest coal plants on an accelerated basis, due to pending environmental regulations. Growth in energy sales is forecasted to rise at a moderate pace and no new generation is expected before 2030.
WELL POSITIONED IN MISO
GRE generates revenues from dispatching power into the Midwest Independent Transmission System Operator (MISO) market. Based on MISO protocol, GRE generally sells the output of its resources to MISO and then buys back what is needed to serve its load. Fitch believes its resource prices, particularly Coal Creek Station, match up well with MISO generation costs.
MAJOR CAPITAL PROGRAM
GRE has identified a total of $800 million of projected capital expenditures for 2015-2019. Transmission projects account for roughly $400 million. Other components in this figure are anticipated environmental expenditures at the Stanton plant and upgrades of environmental compliance systems at Coal Creek. Separate expenditures for new mining equipment at the Falkirk mine are also planned.
COMPETITIVE WHOLESALE RATES
GRE's member billed rates were $70.4/MWH in 2013, compared with $68.5/MWH in 2012 and $60.3/MWH in 2009. For 2014 and 2015, GRE expects wholesale rates to approximate $71.3/MWH and $73.6/MWH, respectively. GRE believes that its wholesale rates are competitive for the region. Rate projections are assumed at around 3.5% a year for the next several years. This would raise rates to near $81.0/MWH by 2018. Member retail rates average around 11.8 cents per KWH.
NON-UTILITY BUSINESSES PERFORMING PARTICULARLY WELL
Calendar year 2013 consolidated financial results were very good. Electric revenues for 2013 increased 5.6% to $918 million, with revenue from member cooperatives contributing $835.7 million. The member revenue increase was supported by greater energy and demand unit sales of 3% and 1.8%, respectively. Electric revenue from non-members in 2013 increased 18.8%.
Even with accelerated plant depreciation charges, GRE's consolidated net margins for 2013 were a solid $42.8 million, which includes net income from Blue Flint Ethanol LLC. This compares with a 2013 budget of $32 million. The strong 2013 financial results are net of a $13.8 million deferral of member revenue. Without this deferral, net margins would have been even higher.
Besides good electric operations, a key component of the stronger net margins was a major turnaround in nonutility operating income, at Blue Flint, which increased by a sizeable $10.1 million, to a positive $10 million in 2013 versus $(0.1) million in 2012. This was due to a record production year and strong crush margins per gallon, as a result of tight ethanol supplies in the region and lower corn prices. For financial planning and budgeting purposes, GRE does not include Blue Flint results in its budget.
Through the first nine months 2014, utility operations, while still sufficient, were somewhat constrained by unusual weather patterns. However, nonutility results remained strong, generating surplus cash flow.
FINANCIAL RESULTS AND LIQUIDITY
For 2013, Fitch calculated DSC was 1.25x and equity to capitalization was 16.8%. The equity ratio continues to improve and is in line with the cooperative's target of achieving 20% by 2020. GRE's five-year forecast assumes annual DSC of 1.17x and retention of cash and short-term investments of $200 million (90 days operating expenses). GRE's unsecured credit facilities include a $600 million revolving credit agreement that was recently extended to June 2017.
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=888394
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