Fitch Rates Alexandria's (MN) Electric Utility Rev Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an initial 'A+' rating to the following Alexandria, MN bonds:

--Approximately $5,385,000 electric utility revenue bonds, series 2015A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a net revenues of the city's electric utility. The bonds will also carry a debt service reserve fund funded with proceeds from the current offering.

KEY RATING DRIVERS

LOW-RISK DISTRIBUTION SYSTEM: Alexandria Light and Power (ALP) is a low-risk distribution provider serving a small but stable service territory located approximately 130 miles northwest of the Minneapolis metropolitan area. The utility ranks among the largest members of Western Minnesota Municipal Power Agency (WMMPA; power supply revenue bonds rated 'AA-'/Outlook Stable), which, together with the Western Area Power Administration (WAPA), provide ALP with a low-cost, long-term power supply.

CONSISTENT FINANCIAL OPERATIONS: Sound cash flow metrics compare well to Fitch's median ratios with Fitch calculated debt service coverage staying comfortably above 4.0x over the prior five fiscals and coverage of full obligations averaging about 1.25x. Coverage levels will diminish somewhat with additional debt plans, but should remain consistent with the current rating. Fitch expects liquidity will continue to approximate management's prudent target of no less than 120 days of cash on hand.

LOW RETAIL RATES: Retail rates are competitive with area providers and noticeably lower compared to statewide averages for residential and industrial end-users. Rates are not subject to regulatory or political oversight and can be adjusted in a timely manner to recover changes in wholesale power costs.

FAVORABLE DEBT PROFILE: Leverage ratios, including debt-to-funds available for debt service (FADS) and debt on a per customer basis, have steadily declined following a prolonged period of deleveraging, providing significant capacity to absorb the current offering as well as an additional financing included in the current financial forecast. Capital needs through 2024 appear manageable.

CUSTOMER CONCENTRATION: Concentration among ALP's 10 largest end-users coupled with its above-average reliance on revenue derived from industrial customers poses some concern, although the take-and-pay nature of ALP's power supply contracts and the proven economic stability of the service area lessen these risks.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Sustained strong financial performance by Alexandria Light and Power that is supported by continued system growth, constructive rate setting and robust liquidity, and offsets plans for higher direct and indirect debt issuance, could ultimately lead to positive rating action.

WEAKENING OF REGIONAL ECONOMY: Sustained weakening throughout ALP's service area and regional economy that challenges the utility's industrial and commercial customer base and employment base, reduces rate flexibility and strains financial metrics could result in downward rating pressure.

CREDIT PROFILE

ALP is a relatively small city-owned utility providing electric distribution, water treatment and conveyance and communication services to a stable service territory located approximately 130 miles northwest of the Minneapolis metropolitan area. Outstanding electric utility revenue bonds issued by ALP are secured only by net revenues of the electric system. Accordingly, each of ALP's three utility systems is accounted for separately. Electric revenues comprise approximately 91% of ALP's total revenue base on a consolidated basis.

The utility serves a modestly growing, largely stable service territory that includes the city of Alexandria (the city) as well as smaller areas immediately east, north and west of the city. The city, which serves as a tourism, retail and industrial center for the broader region, accounts for about half of the total service area, but includes slightly more than 80% of the total customer base. Below average wealth levels are well balanced by the region's exceptionally low unemployment, resulting in consistently strong revenue collection for the utility.

The utility's ten largest customers account for a fairly sizeable 27% and 32% of electric system sales and revenue, respectively, However, all are reportedly stable and well rooted with all but two having been a customer of ALP since at least 1984. Residential and commercial users dominate the entire customer base, but compose just 26% of the electric system's aggregate revenue and energy sales. Industrial end-users account for the balance.

WMMPA CUSTOMER

Multiple long-term contracts with stable wholesale power suppliers provide ALP with a diverse, low cost power supply sufficient to meet its longer term needs. ALP meets its load requirements first with low-cost hydroelectric power purchased from WAPA under a long-term take-and-pay contract ($31/MWh in 2014) that extends through 2051.

The WAPA allocation provides nearly one-third of ALP's power requirements while the balance is satisfied with supplemental purchases from Missouri River Energy Services (MRES), a power supply joint action agency that lacks financing authority. Power supplied by MRES is generated and/or procured by WMMPA, a municipal joint action agency created to finance and acquire resources on behalf of MRES.

WMMPA maintains a sizeable portfolio of competitively priced power ($59/MWh in 2014) as well as extensive transmission facilities sufficient to meet the power supply needs of its members. Owned generation is heavily weighted towards coal-fired capacity, although additional ownership of wind, nuclear and natural-gas fired capacity provides some diversity. Completion of the ongoing Red Rock Hydro Project will further diversify the resource mix.

WMMPA's coal-fired capacity is derived entirely from its 16.47% ownership interest in the Missouri Basin Power Project (MBPP) and its principal asset, Laramie River Station (Unit No. 1). Energy from WMMPA's share of LRS has accounted for approximately 80% of energy supplied by MRES to its members since 2005.

Project owners have benefited historically from the unit's consistently strong operating performance and low production costs, which have averaged approximately 2.5 cents/kWh. However, significant costs to comply with environmental regulations by further limiting emissions pursuant to the EPA's final ruling on Regional Haze are likely to result in a substantial increase in LRS's future production costs. WMMPA's expects its portion of the costs to comply will approximate $125 million and increase LRS's production costs to a still fairly competitive.

SOUND FINANCIAL PROFILE

Financial metrics currently compare well to Fitch's median ratios and should remain strong over the current forecast period given plans to raise electric rates. Fitch calculated debt service coverage remained well above 4.0x over the prior five fiscal years while coverage of full obligations, including a modest annual transfer to the city's general fund, averaged about 1.25. Median ratios for the 'A+' rating category were 2.39x and 1.37, respectively.

ALP's capital improvement plan through fiscal 2024 appears manageable with modest spending levels. Low debt levels and ample rate flexibility position the utility well to absorb additional leverage programmed into the current capital plan.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

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Contacts

Fitch Ratings
Primary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson:
Alan Spen, +1-212-908-0594
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson:
Alan Spen, +1-212-908-0594
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com