NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the Municipal Energy Agency of Nebraska's (MEAN) $177 million of outstanding power supply revenue bonds, series 2002A (senior lien), 2003A, and 2009A. The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of MEAN's net revenues,
which include transfers from its rate stabilization fund.
KEY RATING DRIVERS
Good Financial Metrics: MEAN's generally sound
financial metrics are in line with Fitch's 'A' rating category medians.
Debt service coverage and cash on hand equaled 1.41 times (x) and 101
days, respectively, in fiscal 2011, and system equity equaled 24.2%.
Diverse Revenues: A broad group of 67 participants throughout four states provides MEAN with revenue diversity.
Increased Revenue Stability: An increase in participants with long-term take-and-pay contracts (schedule M) offers greater predictability of revenues.
Control Over Rates: There is no competition at the retail level and participants have full rate-setting authority, both of which ultimately enhance MEAN's revenue stability. In addition, a majority of participants are subject to an unlimited step-up of purchases to cover a revenue shortfall.
Diverse Power Resources: MEAN's power supply comes from diverse owned and purchased sources, with no single generating unit contributing more than 16% of capacity.
High Debt Burden: MEAN's representative portion of Public Power Generation Agency (PPGA) debt more than doubles its fixed cost obligations to high levels.
Good Service Territory: Service area income levels are below average. However, unemployment rates remained stable and low through broader economic recession.
Weak Legal Provisions: Generally weak legal provisions on the bonds include a sum sufficient rate convent, including the use of rate stabilization funds.
WHAT COULD TRIGGER A RATING ACTION
Increasing Long-Term Revenues: A
continued trend toward more schedule M revenues, which would enhance
revenue stability over time, could move the rating upwards.
Weakened Financial Ratios: The failure to maintain financial ratios in line with rating category medians, which may require above-average rate increases through the fiscal 2016 planning period, could move the rating downwards.
CREDIT PROFILE
MEAN's financial metrics are sound and in line with
Fitch's 'A' rated medians for wholesale providers. Debt service coverage
and cash on hand equaled 1.41x and 101 days, respectively, in fiscal
2011 versus Fitch's medians of 1.30x and 81 days (fiscal 2010). The
agency's equity to capitalization was likewise in line with rating
category medians at 24%. MEAN benefits from a diverse customer base of
67 participants, each with full rate-setting authority and none of which
face retail competition.
More Long-Term Customers
An increase in the number of schedule M
participants should enhance the predictability of MEAN's revenues over
the long term. Power supply contracts for schedule M participants extend
through 2041, which is two years beyond the final maturity of the
agency's currently outstanding bonds. Schedule J and K participants have
up to 10-year contracts. The remaining participants purchase power for
varying terms.
Six participants converted to schedule M contacts and two new participants joined since Fitch's last review of MEAN in October 2008, bringing the total number to 52. Three additional participants are in various phases of conversion to schedule M contracts from schedules J and K, each currently with 5 participants. Management reports that MEAN's competitive wholesale rates and membership structure continue to draw participants to the agency.
Diverse Power Supply
MEAN's diverse power resources mitigate the
risk of a plant outage, as no single generating unit contributes more
than 16% of total capacity. Approximately 46% of resources are
coal-fired, followed by oil and gas (22%), and hydroelectric (20%). In
recent years, MEAN has shifted toward owning more generation reportedly
to help stabilize rates.
MEAN has a 36.36% entitlement share in PPGA, a joint action agency formed in 2007 to finance and construct Whelan Energy Center Unit 2. The 220MW coal-fired unit began commercial operations earlier this year. MEAN's representative share of PPGA's $718 million outstanding debt more than doubles its own debt load, essentially halving equity levels. As such, the adequate and timely recovery of costs from MEAN's rate base will continue to be an important rating consideration.
Options for Revenues
MEAN's financial projections show coverage of
debt service at 1.15x - 1.35x through fiscal 2016. Projections include
an 8.5% rate increase in fiscal 2013, followed by 5% annual increases
through 2016. MEAN expects that its rates will remain competitive for
the region even with above-average annual increases through the planning
period. The agency's $19 million rate stabilization fund and pooled
energy adjustment provide it with additional tools to ensure the
adequacy of its financial operations.
Good Service Territory
MEAN is a joint-action agency providing
wholesale electric power and energy to its participants' distribution
systems. The agency currently serves 67 participants in a stable service
territory exhibiting modest income levels and consistently low
unemployment rates. The participants serve over 122,000 retail customers
across the states of Nebraska, Colorado, Iowa, and Wyoming.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'U.S.
Public Power Rating Criteria' (March 28, 2011).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs.'
Applicable Criteria and Related Research:
Revenue-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S.
Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613065
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