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Fitch Rates WPPI Energy (WI) 2014A Power Revs 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following WPPI Energy (WPPI, or the agency) revenue bonds:

--$71,920,000 power supply system revenue bonds, series 2014 A.

The bonds are expected to price during the week of September 15, 2014. Bond proceeds along with a release of funds from the agency's construction fund will be used to refund WPPI's series 2005A bonds.

In addition, Fitch affirms the 'A+' rating on the following outstanding WPPI bonds (including amounts to be refunded):

--$91.9 million power supply revenue bonds, series 2005 A;

--$206.3 million power supply revenue bonds, series 2008 A;

--$179.8 million power supply revenue bonds, series 2013 A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of WPPI. The agency's 51 member systems have entered into long-term power supply contracts with WPPI to purchase all of their power requirements through Dec. 31, 2037.

KEY RATING DRIVERS

DIVERSE AND FLEXIBLE POWER SUPPLY: WPPI has a diversified mix of generation resources, purchased power contracts, and fuel sources. New owned and purchased resources are positioning WPPI to reduce its reliance on more expensive long-term purchase power agreements (PPAs) and provide more cost-effective energy prices to its members.

COMPETITIVE ELECTRIC RATES: WPPI's wholesale power costs and the members' electric rates are competitive for the region. The use of a 30-day purchase power adjustment clause at the member level provides timely pass-through of power costs to customers and mitigates concerns regarding Public Service Commission (PSCW) oversight of the Wisconsin members.

REPLENISHED RATE STABILIZATION FUND: WPPI continues to make meaningful progress towards restoring its rate stabilization fund (RSF), which was drawn down by $7.4 million in 2011 and 2012 to offset higher operating costs. The agency contributed $4 million to the RSF during 2013 and anticipates full replenishment by year-end 2015.

IMPROVED FINANCIAL PERFORMANCE: Fitch-calculated debt service coverage (excluding use of the RSF) strengthened in fiscal 2013 to a level more commensurate with the current rating. Previously instituted wholesale rate increases have yielded higher net revenues and coverage of 1.3x debt service during fiscal 2013 versus the 1.1x coverage measured in 2012.

HIGH PERCENTAGE OF INDUSTRIAL SALES: Although most of WPPI's customers fall into the residential class, a large amount of its sales and revenues come from large industrial users, many of which operate in the more cyclical paper products industries.

RATING SENSITIVITIES

LOSS OF MAJOR LOADS AND REVENUES: A sharp retrenchment of the economy could have a negative effect on major industrial customers and employment levels, pressuring the financial results of WPPI and its members.

CREDIT PROFILE

SERVICE TERRITORY

WPPI provides wholesale electric service to 50 member utilities and one nonmember utility, the majority of which are located throughout Wisconsin. The remaining members are in upper Michigan and northeastern Iowa. Each of the utilities has entered into a long-term power supply contract with WPPI, which extends through Dec. 31, 2037. Under these contracts, WPPI supplies all of the members' power requirements. Close to 200,000 homes and businesses are served, with an estimated population of around 345,000. Over the next few years, WPPI plans to begin discussion with members about extending these agreements.

Sales to large industrial users, including the economically sensitive paper industry, are substantial. However, the underlying products are somewhat diversified, varying from tissue paper to coated paper, and WPPI reports that energy use by its largest customers remains stable.

EXPANDED POWER SUPPLY PORTFOLIO

Historically, WPPI has relied significantly on long-term power purchases from Wisconsin investor owned utilities. With an ownership interest in a new coal fired plant and a power purchase agreement involving an operating nuclear plant, WPPI has reduced its reliance on higher cost long-term arrangements enabling it to provide more competitively priced power to its members. There is no current need for additional baseload resources through the foreseeable future.

MANAGEABLE MEMBER LEVEL REGULATION

Under Wisconsin law, retail rates of state municipal utilities are regulated by the Public Service Commission of Wisconsin (PSCW). In mitigation, each of WPPI's 41 Wisconsin based members utilize a purchased power adjustment clause, automatically permitting a true-up in wholesale power costs from WPPI each 30 days without seeking prior approval from the PSCW. Moreover, PSCW oversight of WPPI's Wisconsin members focuses on the distribution component of base rates and does not extend to jurisdiction over wholesale costs. Fitch notes that the members' regulatory relationship with PSCW, on balance, has been amicable with individual distribution rate requests typically processed by the PSCW within 12 months.

ENVIRONMENTAL PROJECT ON TRACK

Construction on a major environmental retrofit project at the Boswell 4 coal generating unit commenced in June 2013. WPPI previously funded its $82.6 million share of the estimated costs plans with proceeds of the series 2013A bonds. Positively, construction is below original budget and is on schedule for completion by year-end 2015 which puts Boswell in environmental compliance ahead of the EPA's April 2016 deadline for the Mercury and Air Toxics Standard.

STRENGTHENED FINANCIAL PROFLE

WPPI's financial performance continues to stabilize following a period of variability in 2009 and 2010, when coverage ratios fell below target levels (1.20x-1.25x) due to the recessionary impact on industrial load, higher costs (including capitalized interest expense) for new projects, and lower off-system sales. Board-approved wholesale rates for 2014 are expected to yield net revenues of 1.44x debt service (with no use of the RSF); a level that is commensurate with WPPI's current rating. WPPI has targeted a recurring RSF of approximately $40 million to bolster financial protection.

Liquidity remains reasonably strong and in line with comparable wholesale systems rated in the 'A' category, with metrics for cash and total liquidity on hand improving to 76 days and 104 days, respectively, during 2013. WPPI has a $35 million revolving line of credit agreement with JPMorgan Chase Bank. The agreement extends through November 2016 and there was no outstanding balance on the revolving line of credit at Dec. 31, 2013.

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 Rating Criteria' (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

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=865134

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Contacts

Fitch Ratings
Primary Analyst
Hugh Welton
Director
+1-212-908-0742
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Alan Spen
Senior Director
+1-212-908-0594
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com