NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following Great River Energy (MN) (GRE) outstanding bonds:
--$1.48 billion first mortgage bonds, series 2007A, 2008A and 2010D;
--$73 million McLean County, ND solid waste facilities revenue bonds (Great River Energy projects), series 2010A and 2010B.
The Rating Outlook is Stable.
The bonds are secured by a first lien on substantially all of GRE's tangible assets and certain intangible assets, including its generation and transmission (G&T) facilities and its wholesale power and transmission service contracts with its members.
KEY RATING DRIVERS
LARGE G&T POWER COOPERATIVE: 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 is approximately 1.7 million people.
BALANCED RESOURCE MIX: GRE's power supply resources consist of a solidly diverse mix of base load and peaking units. Coal-fired generation accounted for a little less than half of GRE's capacity in 2015, but most of GRE's energy production. While coal-fired generation will remain an important component of GRE's portfolio, changes to the resource base are underway.
PORTFOLIO UNDERGOING TRANSITION: GRE has taken steps to rebalance its portfolio and reduce its exposure to coal, including a recent decision to close Stanton Generating Station and the addition of significant renewable resources over the past several years. Based on current projections of load, no incremental generation is necessary for the foreseeable future.
FINANCIAL RESULTS WEAKENED IN 2015: Financial performance weakened in fiscal 2015, a result of weaker member and non-member sales due to mild weather and slightly negative non-utility operating margins. Improved fiscal 2016 year-to-date results suggest a return to stable finances with metrics in line with historical results. Liquidity is solid at 111 days and is further supported by a $400 million credit facility.
FINANCIAL VARIABILITY FROM NON-UTILITY OPERATIONS: GRE's non-utility business lines create some volatility in consolidated financial margins. These fluctuations, which are captured in the current rating, are mitigated by healthy cash levels, the recognition of deferred revenues and conservative electric rate-setting that does not assume positive income from non-utility businesses.
CONSISTENT CAPITAL PLAN: More than $900 million of capital projects have been identified for the 2017-2021 period, including major transmission projects and upgrades to existing generating assets. However, total leverage is projected to decline over time, as an anticipated rise in cash flows triggered by the accelerated depreciation of the cooperative's coal plants will limit future debt needs.
IMPROVEMENT IN FINANCIAL METRICS EXPECTED: Fitch anticipates Great River Energy's financial results will improve from a low point in fiscal 2015 based on fiscal 2016 year-to-date results that indicate positive margins from a small rate increase and more normalized weather. However, if consolidated financial results remain weak, downward rating pressure may result.
RELIANCE ON NON-UTILITY BUSINESSES: An increased reliance of GRE's non-utility businesses to meet projected financial results would be viewed negatively, and could result in downward rating pressure.
GRE is a Minnesota G&T cooperative that provides wholesale electric energy to 28 member distribution cooperatives, the majority of which are all-requirements customers. GRE's members, in turn, serve more than 665,000 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.
BALANCED RESOURCE MIX UNDERGOING TRANSITION
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. GRE's power plants have more than 2,800 MW of capacity, including its largest baseload facility, Coal Creek Station, a 1,146 MW coal-fired plant. While coal generation provides the majority of member energy and capacity, GRE has been adding renewable resources to its portfolio (mainly wind contracts) while reducing exposure to coal generation. Of the roughly 3,700 MW of total capacity resources, wind and other renewables comprise approximately 20%.
In July 2016, the GRE board approved the decommissioning of GRE's second-largest coal plant, Stanton Generating Station (Stanton, 189 MW), by mid-2017. The decision to close Stanton is based on a combination of factors including expected operating and capital costs savings and the plant's relatively limited utilization given the low regional price for energy over the past several years. In addition to the closing of Stanton, GRE amended a power purchase contract (totaling 180 MW) with Dairyland Power Cooperative's Genoa 3 coal-fired facility in 2015 to reduce energy purchases. Together, these initiatives will lower the cooperative's reliance on coal-fired generation.
Energy sales are forecast by GRE to stabilize in 2016 and 2017, assuming more normalized weather patterns, before a decline in sales in 2019 due to the anticipated loss of load from the city of Elk River. Despite these changes to demand and resource mix, total capacity will remain comfortably in excess of peak load, which was 2,524 MWs in 2015. No incremental generation is expected to be added over the intermediate term.
CONSISTENT CAPITAL PROGRAM
GRE has identified a total of $920 million of projected capital expenditures for 2017-2021 that are focused on transmission and existing generation. Environmental capital spending for Coal Creek Station will include projects that will allow it to comply with regional haze requirements, but should be limited to just $30 million over the next several years. GRE anticipates the turbines for several of its existing peaking units will undergo upgrade and renewal, and coupled with approximately $400 million in spending for transmission, account for a significant portion of the planned capital spending.
HIGHLY LEVERAGED UTILITY; DEBT TO DECLINE
With nearly $3 billion in total debt outstanding as of fiscal-end 2015, GRE's leverage is high. Debt/FADS totaled 10.4x in 2015, which is high relative to the medians for the 'A' category. Equity capitalization, at 18.6% in 2015, has been steadily improving since 2012, but is also considered weak for the current rating. Fitch notes GRE's goal of reaching 20% equity capitalization by 2020 is attainable.
While total debt increased by $200 million on a net basis from 2013-2015, total long-term debt is projected to steadily decline over the next 10 years as an expected increase in annual cash flows is directed toward capital investment. Additional debt is anticipated to be needed to fund the capital plan totaling $600 million, but the pace of issuance is expected to be lower than the rate of amortization of existing bonds. By 2026, GRE projects its total debt outstanding to be closer to $2 billion.
Nearly all of GRE's debt consists of long-term fixed-rate bonds. A $100 million term note with CoBank comprises virtually all of the variable-rate debt outstanding.
FINANCIAL PERFORMANCE EXPECTED to STABILIZE in 2016
GRE's financial performance declined in fiscal 2015 from a combination of factors including a decline in operating revenues and a slight operating loss in non-utility operations. A decline in both member and non-member sales has been attributed to milder weather in 2015, leading to considerably lower consolidated net margins for 2015 of just $15.2 million, down significantly from those recorded in each of the prior two years ($52 million and $43 million in 2013 and 2014, respectively). A key component of stronger consolidated net margins in 2013 and 2014 was a turnaround in non-utility operating income, which demonstrated a slight loss in 2015. Margin for interest was still adequate at 1.11x in 2015, although Fitch-calculated debt service coverage (excluding the realization of deferred revenue) was just 0.97x.
GRE has indicated that year-to-date results for 2016 are ahead of budget due in large measure to improved energy sales through the early summer, leading to an expected net margin comfortably in excess of 2015 results. A five-year financial forecast provided by GRE assumes a cumulative 2.5% decline in sales through 2019 followed by limited growth in energy in 2020 and 2021. Solidly positive net margins are targeted to produce debt service coverage of approximately 1.2x, which is designed to meet management's goal of reaching 20% equity capitalization by 2020 and consistent with historical results. Fitch believes the assumptions to be realistic and the results attainable.
Along with a decline in total debt, annual interest payments are also projected to decline after peaking in 2018, leading to improved coverage ratios over time. GRE projects margin for interest to reach 1.23x by 2022 and 1.45x by 2026. The improved margins are a direct result of lower expected debt and associated interest payments over time, and the improved cash flows, which are aided by accelerated depreciation on GRE's larger coal plants.
Debt service coverage (principal and interest) is projected to remain steady at 1.17x through GRE's forecast, assuming more normal weather conditions and no profits or losses from the non-utility businesses.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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