TEXT - Fitch rates Muni Energy Agency of Nebraska power revs

Mon Feb 25, 2013 2:09pm EST

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Feb 25 - Fitch Ratings has assigned an 'A' rating to the following Municipal
Energy Agency of Nebraska (MEAN, or the agency) revenue 
bonds:

--$30,750,000 power supply system revenue and refunding bonds, 2013 series A;
--$7,390,000 power supply system revenue bonds, 2013 series B (federally 
taxable).

The bonds are scheduled to price via negotiation on March 12, 2013. Proceeds 
will be used to refund MEAN's remaining series 2003A bonds for approximately 
11.3% savings of the refunded par amount ($23.2 million); fund a $6.3 million 
settlement with Southwest Power Pool (SPP); and finance various capital 
projects.

In addition, Fitch affirms the 'A' rating on MEAN's approximately $164.3 million
of outstanding power supply system revenue bonds, including the series 2003A 
bonds expected to be refunded.

The Rating Outlook is Stable.

SECURITY 

The bonds are secured by net revenues of the agency, which are principally 
derived from power supply contracts with 68 participants. The pledge of net 
revenues includes transfers from MEAN's rate stabilization fund (RSF).

KEY RATING DRIVERS

BROAD WHOLESALE ELECTRIC PROVIDER: MEAN provides wholesale electric power to 68 
participants in a broad, stable service territory spanning four states.

INCREASED REVENUE PREDICTABILITY: A measurable increase in long-term, 
all-requirements (Schedule M) participants provides MEAN with greater revenue 
predictability over time. Such participants provided 56% of fiscal 2012 electric
revenues, up from a recent low of 29% in fiscal 2008.

SATISFACTORY FINANCIAL METRICS: MEAN's financial metrics are in line with 
Fitch's 'A' rating category medians. However, its proportionate share of Public 
Power Generation Agency (PPGA, a joint action agency) debt more than doubles its
fixed-cost obligations to above-average levels. MEAN's Fitch-calculated debt 
service coverage and cash on hand averaged 1.3x and 107 days, respectively, over
the past three years, and the agency's ratio of equity to capitalization rose 
slightly to 25.3% (fiscal 2012). 

DIVERSE POWER RESOURCES: MEAN's power supply is diverse by fuel type and number 
of units. The agency sets a target of no single generating unit contributing 
more than 15% of total capacity to limit the consequences of a plant outage. In 
addition, MEAN's newer coal-fired generating resources are equipped with 
environmental controls, which limits its capital needs.

CURRENTLY COMPETITIVE RATES: The largest participants' retail rates trend below 
regional averages due, in part, to MEAN's competitive wholesale cost of power. 
However, the agency conservatively forecasts upwards of 7% average annual rate 
increases through 2017, which could ultimately erode some cost competitiveness.

MIXED SERVICE TERRITORY: High customer concentration at the participant level 
reaches over 50% of revenues in certain instances. While the effect is more 
muted at the agency level, moderate regional income levels suggest some 
difficulty absorbing the loss of a large customer.

RATING SENSITIVITIES

INCREASED LONG-TERM REVENUES: The continued trend of increasing long-term 
Schedule M revenues, coupled with active internal monitoring of participant 
financial metrics, would likely enhance MEAN's overall financial strength.

WEAKENED FINANCIAL RATIOS: Compressed financial margins - as an alternative to 
full and timely rate increases through the fiscal 2017 planning period - could 
weigh on the agency's financial position.

CREDIT PROFILE

MIXED ECONOMIC INDICATORS

MEAN is a joint-action agency providing low-cost, wholesale electric power to 68
typically small participants (124,000 total retail customers) in a four-state 
region exhibiting mixed, but generally stable economic indicators. Median 
household income levels of the 10 largest Schedule M participants equal just 87%
of the national average, but low unemployment rates underpin the stable economic
conditions. The December 2012 unemployment rate was just 4.5%, down from the 
recessionary peak of an also low 6.5%.

Steady economic conditions are an important mitigant to customer concentration 
at the participant level. Three customers of Fort Morgan, CO - MEAN's largest 
participant at 10.1% of total participant revenues - compose nearly 
three-quarters of its operating revenues. The effect at the agency level is more
muted, but notable: the 10 largest individual customers represent about 10% of 
MEAN's operating revenues. 

GREATER PROPORTION OF LONG-TERM REVENUES

The near doubling of Schedule M participants over the past 10 years to 54 is a 
favorable trend. Schedule M participants have contracts that extend beyond the 
final maturity of MEAN's debt and provide the agency with longer-term revenue 
predictability. These all-requirements participants provided 56% of revenues in 
fiscal 2012, up from a low of 29% as recently as fiscal 2008.

Schedule M participants have grown through new additions to the agency, as well 
as conversions of existing participants with medium-term Schedule J and K 
contracts. The increase evidencesthe reliability of MEAN's assets, as well as 
the affordability of its wholesale rate.

COMPETITIVE RATES TRENDING UPWARD

MEAN's wholesale and participant retail rates compare favorably to regional 
providers. However, conservative estimates of 7% average annual increases 
through 2017 (to $73.94/MWh), in part to finance the agency's greater proportion
of owned assets, could begin to erode some rate competitiveness. Rate increases 
may be lower if medium-term participants renew, as broadly expected.

MEAN and the participants have full rate-setting authority and there is no 
competition at the retail level, both of which further enhance the agency's 
revenue stability. In addition, Schedule M participants are subject to an 
unlimited step-up of payments in the event of a revenue shortfall.

SATISFACTORY FINANCIAL METRICS

MEAN's overall financial position is in line with Fitch's medians for 'A' rated 
wholesale systems. The partial use of healthy cash balances, including a $17.3 
million RSF (targeted at 15% of operating expenses), has helped smooth annual 
debt service coverage, and a newly increased $20 million liquidity facility 
provides additional support. 

Fiscal 2012 debt service coverage was under 1x by Fitch's calculation, which 
excludes transfers from the RSF and is not adjusted for certain legally defeased
debt. Coverage was closer to 1.4x with these adjustments, which is consistent 
with MEAN's prior year results and rating category medians. The agency's 
conservative financial projections show coverage nearer 1.2x through fiscal 
2017.

SPP SETTLEMENT

MEAN expects to enter into a $6.3 million settlement with SPP over an alleged 
violation of SPP's open access transmission tariff. Fitch views the settlement, 
which requires Federal Energy Regulatory Commission approval, as manageable to 
MEAN's overall financial position. The agency intends to recover the funds over 
five years beginning in fiscal 2015.

DIVERSE RESOURCE BASE

MEAN's resources are diverse by fuel type and number of units. Management 
targets no more than 15% of total capacity from one generating unit, which 
mitigates the risk of plant outages. In addition, none of MEAN's fossil 
fuel-based resources currently require environmental retrofits. MEAN's capital 
needs over the next five years total just $7 million, which should ultimately 
benefit its balance sheet ratios.

Management has shifted in recent years toward greater ownership of assets to 
provide for better rate predictability. MEAN has a 36.36% entitlement share in 
PPGA, a joint-action agency formed to finance and construct the 220MW coal-fired
Whelan Energy Center Unit 2, which began commercial operation in 2011. MEAN's 
proportionate share of PPGA's outstanding debt effectively doubles its own debt 
load, thereby halving its equity ratio (25.3%). As such, the full and timely 
recovery of costs from MEAN's rate base will continue to be an important rating 
consideration.

MEAN meets the needs of Schedules J and K (medium term) participants with 
purchase power contracts that loosely tie to their contract duration. 
Consequently, MEAN is 'short' capacity, and will only consider adding additional
generation as more participants convert to long-term Schedule M contracts.
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