Jan 18 - Fitch Ratings assigns a 'AA-' rating to Rochester Public Utilities
(RPU) $4,140,000 million electric utility revenue refunding bonds, series 2013A.
The bonds mature on Dec. 1, 2017. The proceeds will be used to refund the Dec.
1, 2013 through Dec. 1, 2017 maturities of the city's electric utility revenue
bonds, series 2002A.
In addition, Fitch affirms the following ratings for RPU:
--$82.8 million electric revenue bonds series 2002A and 2007C at 'AA-';
The Rating Outlook is Stable.
The bonds are secured by a first lien on and payable solely from net revenues of
the electric utility system and funds available in the designated electric
system debt-service reserve account.
KEY RATING DRIVERS
INTEGRATED UTILITY SYSTEM: Rochester Public Utility (RPU or the utility) is an
integrated electric utility system that meets the bulk of its power needs
through a long-term take-and-pay contract (up to 216 MW) with Southern Minnesota
Municipal Power Agency (SMMPA), 178 MW of owned generation, and market
ROBUST SERVICE AREA ECONOMICS: The city of Rochester, MN, and surrounding
service areas were not immune to the economic slowdown. However, they weathered
the economic crisis better than other counties around the nation. Rochester's
unemployment rate of 4.5% was lower than the nation and state averages of 7.8%
and 5.9%, respectively, at Oct. 31, 2012.
SOUND FINANCIAL METRICS: RPU's financial position remains robust, supported by
metrics exceeding the medians for similarly rated utilities. The utility has
withstood weaker wholesale market prices and SMMPA's cost increases with minimal
effect because of timely rate increases. Fiscal 2011 debt service coverage (DSC)
and liquidity measures were 3.66x and 135 days cash on hand (DCOH),
CONSERVATIVE BUDGETING AND MANAGEMENT: Management continues to employ a
conservative and proactive approach to its finances, allowing the utility to
moderate the effect of lower electric demand. Management's more conservative
budgeting has helped maintain financial stability through the economic downturn
as demand for wholesale sales has declined in recent years.
SINGLE-UNIT GENERATION RISK: RPU's exposure to the Sherco 3 coal-fired unit,
which is SMMPA's principal asset and currently out of service, is somewhat
mitigated by the agency's obligation to supply replacement power. Ample low-cost
market power has moderated the effect of the Sherco outage.
CUSTOMER REVENUE CONCENTRATION: The utility's two largest customers, the Mayo
Clinic and IBM, accounted for approximately 17% of fiscal 2011 total operating
revenue and 22.2% of total energy consumption. The loss of either customer is
not anticipated, but would meaningfully reduce electric demand and weaken
service area economics.
WHAT COULD TRIGGER A RATING ACTION
FINANCIAL STRAIN: Weakened financial metrics as a result of SMMPA cost increases
or lack of support for necessary rate increases could result in downward rating
Take-and-Pay Power Supply Agreement
RPU entered into an all-requirements sales agreement with SMMPA in 1981 that
extends through 2030. The contract is take-and-pay in nature and was amended to
meet the utility's partial requirements up to 216 MW. In 2011, the SMMPA
contract supplied 98.8% of RPU's demand requirements. Peak demand in fiscal 2011
reached 292 MW.
RPU obtains all load requirements exceeding 216 MW from sources other than SMMPA
including 178 MW of owned generation in: the Zumbro Hydroelectric Plant,
coal-fired Silver Lake Plant, gas-fired Cascade Creek Plant, and from the MISO
market through The Energy Authority (TEA). In August 2012, the RPU board passed
a resolution to decommission the aging coal fired Silver Lake facility by
December 2015. The decision was driven by the unfavorable economics of the plant
and the regulatory environment surrounding coal fired generating facilities. The
decommissioning of the plant is expected to save RPU $5.5 million annually, of
which $2 million has already been achieved in fuel and operating costs, but will
also increase power imports. To account for the anticipated increase in imported
power, additional transmissions lines should be in service by the end of 2015 to
address reliability concerns of having less generation within the utility's
Sherco-3 Outage Extended
SMMPA's Sherco plant was being tested for restarting in November 2011 after
routine maintenance when a malfunction occurred in the unit's steam turbine and
generator causing a catastrophic failure and a fire at the site. It was
originally anticipated that Sherco would be back on line by the end of the first
quarter of 2013; however, the unit's return to service might not be until the
second quarter of the year. Fitch does not expect the delay to impact RPU's
power supply and power costs as SMMPA has secured capacity purchases for most of
the projected 2013 outage. SMMPA continues to fulfill its contractual
obligations to RPU with competitively priced replacement power, obviating the
need for a rate increase due to the extended outage.
Stabilizing Yet Less Competitive Cost Structure
RPU's cost structure has stabilized after having steadily risen because of the
diminishing off-system sales that once subsidized customer rates. Timely rate
increases and cost control, however, have helped to stabilize financial
performance, evidence of the benefit of RPU's sole rate-setting authority and
the underlying support of City Council. RPU's residential (12.3 cents/kWh)
electric rates were on par with peer utilities in fiscal 2011. Due to the
competitively priced power supplied by SMMPA, RPU does not foresee a need to
increase rates in 2013. RPU has not increased electric rates since fiscal 2009.
Solid Financial Metrics
The utility has consistently maintained debt service coverage above 3.0x for the
last five years, despite the severe drop off in wholesale sales. Fiscal 2011 DSC
was 3.66x. Preliminary fiscal 2012 financials point to another healthy year,
with a projected coverage in excess of 3.0x.
The utility has planned for a modest five-year capital improvement program
totaling $99.7 million over the period 2012 - 2016 of which 44.5% will be funded
with debt issuances. The bulk of the expenditures relate to CAPX2020, a
transmission project designed to bolster reliability of the existing electric
grid, but also assure capacity for the system. RPU anticipates its portion of
the project to total $42.2 million, and plans to fund it with a short term line
of credit facility in 2013, which will then be paid out with long-term debt in
2014 - 2015.
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:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rochester Public Utilities, Minnesota' (April, 17, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Rochester Public Utilities, Minnesota (Revenue Bonds)