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