TEXT-Fitch affirms Illinois Municipal Electric Agency revs at 'A+'
Nov 8 - Fitch Ratings affirms the 'A+' rating on the following Illinois Municipal Electric Agency (IMEA) outstanding bonds: --$131.9 million power supply revenue bonds series 2006; --$571.3 million power supply revenue bonds series 2007A; --$29.6 million power supply revenue bonds series 2007B; --$38.2 million power supply revenue refunding bonds series 2007C; --$10 million power supply revenues bonds series 2009A; --$16.9 million power supply revenue bonds taxable series 2009B; --$294.7 million power supply revenues bonds (BABS) series 2009C; --$140.2 million power supply revenue bonds (BABS) series 2010A. Fitch has withdrawn the 'A+' rating on the Illinois Municipal Electric Agency (IL) power supply system revenue bonds series 2010B as the bond was not sold. 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 are becoming increasingly diverse as the agency implements a strategy to increase owned generation and reduce purchased power. Following the recent commercial operation of both units at the Prairie State Energy Campus (PSEC) and the Trimble County Unit #2, IMEA has achieved greater control and certainty of power supply and related costs, albeit at a higher initial price and debt burden. SOUND FINANCIALS BUT HIGH LEVERAGE: IMEA's financial performance remains sound with fiscal 2012 Fitch-calculated debt service coverage (DSC) at 1.49x and days cash on hand of 58 days. Including available line of credit capacity, liquidity improves to 80 days at April 30, 2012. Leverage as measured by debt to funds available for debt service (FADS) however remains significantly above the 'A+' rating category median, but is expected to decline over time. STRONGER EXPANDED MEMBERSHIP: IMEA began providing all-requirements power supply to two new members in 2011, the cities of Red Bud and Naperville. Fitch views the increased diversification of the membership positively and believes that the recent additions strengthen credit quality. IMEA's other members continue to exhibit stable performance in a moderate to slow growing service territory. WHAT COULD TRIGGER A RATING ACTION CHANGE IN IMEA FINANCIAL PERFORMANCE: Achieving performance metrics commensurate with the 'A+' category is critical to maintaining its rating given the higher debt burden associated with the agency's ownership of new generation assets. COMPROMISED PLANT OPERATIONS: Failure to operate PSEC 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 Transitioning from Purchased Power to Owned Generation IMEA continues to implement its strategy to increase owned generation. With Trimble County Unit #2 and the PSEC projects now completed and online, IMEA plans to reduce the amount of power it purchases to meet participating members' energy needs from nearly 82% in 2010 to approximately 33% in 2013. Although the increased asset ownership will provide greater control and cost stability for the agency's members, it comes at a higher initial price. Consistent rate increases by IMEA and its members have been necessary in anticipation of project completion, but member retail rates to customers remain below those of neighboring systems. Sound Financial Performance but High Leverage Historical financial performance has been sound due in part to management's favorable rate-setting policy. In anticipation of project completion, IMEA has proactively adjusted rates during construction to avoid a sudden spike after completion. As a result IMEA's wholesale rate has risen from $58/MWh in 2009 to $68/MWh in 2012. Further rate actions are expected to increase the wholesale rate to $75/MWh by 2016, but the impact should not be material. IMEA's fiscal 2012 Fitch-calculated DSC of 1.49x (excluding capitalized interest) and cash liquidity of 58 days are adequate for the rating category. The recent increase in borrowing capacity of IMEA's credit line to $50 million should provide additional short term flexibility. However, IMEA's ratio of debt to FADS at 23.3x is currently higher than the 'A+' rating median and characterizes the agency's higher leverage. Fitch expects the ratio to improve over time as scheduled rate increases and reductions in purchased power help improve FADS. Fitch will continue to monitor the agency's ability to achieve and maintain financial metrics commensurate with the 'A+' rating level. Addition of Naperville to IMEA Membership Positive Naperville started receiving all-requirements service from IMEA in June 2011. As an all-requirements member, Naperville accounts for nearly 37% of peak demand and energy usage of IMEA. While the addition of Naperville increases single-member concentration at the IMEA level, Fitch believes that this risk is substantially mitigated by the solid financial strength of Naperville's utility system and the strong demographics of the city. The addition of Naperville essentially strengthens the weighted average credit quality of the underlying members. Naperville is primarily a residential and commercial load based community with a moderate and diverse industrial base. Fiscal 2011 energy sales for residential, commercial, and industrial customers were 39.4%, 43.1%, and 17.5%, respectively. Naperville is less dependent on revenue from industrial customers compared to the largest five participants, accounting for only 14.7% of total operating revenue. There is moderate customer concentration with the top 10 customers accounting for nearly 17.9% of revenue in fiscal 2012 but no customer concentration with any one customer. The largest customer, Lucent Technology, accounted for 6.14% of Naperville's total operating revenue in 2012 and 7.01% of energy sales. Naperville's electric utility also benefits from a strong financial position. DSC has consistently been higher than 4.0x in the last two years. The city has a solid track record of establishing rates in line with costs and, yet, still be competitive with neighboring electric systems. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', dated June 20, 2011; --'U.S. Public Power Rating Criteria', dated March 28, 2011. For information on Build America Bonds, visit www.fitchratings.com/BABs. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. Public Power Rating Criteria