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Fitch has withdrawn the 'A+' rating on the Illinois Municipal Electric Agency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.
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.
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
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
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