Fitch Rates Illinois Muni Electric Agency's Rev Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following Illinois Municipal Electric Agency (IMEA) power supply system revenue refunding bonds:

--Approximately $585,000,000 series 2015A.

The bonds are expected to price the week of March 30, 2015. Proceeds will be used to advance refund IMEA's series 2006 and 2007A power supply system revenue bonds for savings.

In addition, Fitch affirms the 'A+' rating assigned to IMEA's outstanding $1.17 billion power supply system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of the power supply system after payment of operating and maintenance expenses. Net revenues include payments pursuant to long-term take-and-pay all-requirements contracts expiring in 2035 with IMEA's 32 participants. The power sales contracts are viewed as having an implied unlimited step-up provision.

KEY RATING DRIVERS

STABLE JOINT ACTION AGENCY: IMEA supplies wholesale power to its 32 participating members - municipal electric systems who serve cities and villages located throughout the state of Illinois. The participants are obligated to pay IMEA's power supply costs, including debt service, as an operating expense of their respective systems, which is ahead of member's own debt service.

INCREASED OWNERSHIP OF POWER RESOURCES: IMEA's power resources have become more diverse as the agency has successfully executed its strategy to increase owned generation and reduce purchased power. With both units at the Prairie State Energy Campus (PSEC) and the Trimble County Unit #2 (TCU-2) now operating, IMEA has greater control and certainty of power supply and related costs, albeit at a higher initial price and debt burden.

WEAKENED MEMBER CREDIT QUALITY: The financial position of the Naperville, IL electric fund, IMEA's largest member (37% of energy sales), has weakened materially. In particular, the city's decision to delay needed rate increases to cover higher purchased power costs resulted in an operating loss and depletion of cash resources during fiscal 2014. The city council's approval of base rate increases for 2014 and 2015 should help restore the utility to sounder financial footing.

STABLE FINANCIALS AND IMPROVING LEVERAGE: IMEA's financial performance is stable with fiscal 2014 Fitch-calculated debt service coverage (DSC) at 1.19x and days cash on hand of 105 days. Including available line of credit capacity, liquidity improves to 175 days at April 30, 2014. Leverage as measured by debt to funds available for debt service (FADS) improved further to 10.0x during fiscal 2014 from 23.2x in fiscal 2012, reflecting rate increases related to PSEC's commercial operation.

RATING SENSITIVITIES

MEMBER CREDIT QUALITY: Naperville's inability to generate electric revenues in line with costs, restore cash reserves and strengthen debt service coverage metrics will result in downward pressure on IMEA's rating.

COMPROMISED PLANT OPERATIONS: Failure to operate PSEC and/or TCU-2 at a reasonable and healthy level of availability and capacity, to capture the project's increased capital costs, could result in negative rating pressure.

CREDIT PROFILE

IMEA supplies all-requirements power to its 32 members through strong take-and-pay contracts that expire in 2035. The cities of Red Bud (13 MW) and Naperville (387 MW) are IMEA's newest members who began receiving all-requirement supply on Jan. 1, 2011 and June 1, 2011, respectively. The addition of Naperville, an affluent suburb of Chicago, resulted in a 50% increase in the load served by IMEA. Positively, participating member customers are overwhelmingly residential with a small portion of commercial and industrial sales.

IMEA has significantly increased its percentage of owned generation affording the agency greater control over its power supply. With TCU-2 and PSEC now operating, IMEA has reduced its historical dependence on purchased power thereby providing cost stability to its members, albeit at a higher initial price. The share of purchased power reduced to about 43% of capacity during fiscal 2014 from nearly 80% in 2010. While IMEA and its members have increased rates to capture the costs of new generating resources, member retail rates remain below those of neighboring IOUs. Recent efforts by IMEA to lower third-party transmission expenses along with improved pricing mechanics under a long-term PPA with Dynegy, Inc. should moderate near-term increases in the agency's wholesale rate.

Stable Financial Performance and Reduced Leverage

Historical financial performance has been sound due in part to capitalized interest and a proactive rate policy. In order to avoid a spike in rates upon completion of the generation projects, IMEA gradually adjusted rates while the Trimble County/PSEC projects were under construction so that revenues would be sufficient to cover debt service during commercial operation. As a result average rates are not forecasted to increase substantially in the coming years. IMEA's wholesale rate is expected to reach $78.90/MWh by 2018, a level not viewed as material considering member retail rate flexibility.

Fiscal 2014 debt service coverage of 1.19x is weak relative to 'A+' medians and reflects the agency's current financial policies which emphasize the buildup of financial reserves. Importantly, IMEA has contributed to its rate stabilization fund (RSF) in four of the last five fiscal years (net increase of $10.2 million) and increased days cash on hand from 58 days in 2012 to approximately 130 days for the 12 month period ended Jan. 31, 2015. In addition, IMEA's leverage (Debt/FADS) now stands at 10.0x versus a construction period peak of 23.3x. This improvement was previously anticipated by Fitch and now is in alignment with 'A+' rating category medians.

Member Credit Quality Deteriorates

Naperville started receiving all-requirements service from IMEA in June 2011 through 2035. As an all-requirements member, Naperville is expected to account for nearly 37% of IMEA's ongoing peak demand and energy sales. The addition of Naperville increases single-member concentration at the IMEA level, a risk which has historically been mitigated by the financial strength of Naperville's utility system and the strong demographics of the city.

The standalone financial position of Naperville's electric utility fund weakened materially during fiscals 2013 and 2014. Specifically, the higher cost of purchased power from IMEA exceeded rate revenues by a significant margin resulting in the electric utility posting a negative cash balance of $13 million for fiscal 2014. The deficit was remedied on a short term basis through a loan advancement from Naperville's water utility fund. Over the next two years, the electric utility is targeting to restore its cash position by implementing two base rate increases approved by the city council of 6% effective May 1, 2014 and an additional 7% on May 1, 2015. Fitch will monitor the Naperville's progress in restoring electric fund liquidity and debt service coverage metrics to levels in line with historical results.

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

Applicable Criteria and Related Research:

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

--'Revenue-Supported Rating Criteria', dated June 16, 2014.

--'U.S. Public Power Rating Criteria', dated March 18, 2014.

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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981191

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Contacts

Fitch Ratings
Primary Analyst
Hugh Welton
Director
+1-212-908-0742
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis M. Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Hugh Welton
Director
+1-212-908-0742
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis M. Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com