OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following Minnesota Municipal Power Agency (MMPA, or the agency) revenue bonds:

--Approximately $75 million electric revenue bonds series 2016.

The bonds are expected to price via negotiation during the week of July 25, 2016. Proceeds will be used to reimburse MMPA for funds previously expended to fund initial project costs associated with a new gas-fired plant, fund the remaining construction costs of the new plant, repay MMPA's bank line of credit, and pay issuance costs.

In addition, Fitch affirms the following ratings:

--Approximately $135.2 million electric revenue and refunding bonds, series 2013, 2014 and 2104A at 'A'.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The bonds are secured by the net revenues of MMPA, derived primarily from payments under long-term power sales agreements (PSAs) with 11 participating municipal electric systems. The bonds are further secured by certain personal property and contract rights covering the system.

KEY RATING DRIVERS

MATURE AND STABLE JOINT ACTION AGENCY: MMPA is a joint action agency that has provided wholesale power supply to its 11 member cities since 1995. A 12th member will begin receiving power in October 2018. Power and energy are principally supplied pursuant to take-and-pay power sales agreements (PSA) that were recently extended through 2050 by 10 members representing 94% of system load. The remaining contracts expire in 2040.

POWER RESOURCE STRATEGY INFORMS POSITIVE OUTLOOK: The Positive Outlook reflects, in part, MMPA's strategy of shifting resources from short-term market purchases to more locally-owned generation. The construction of quick-start natural gas-fired units will result in higher debt levels for MMPA, but allows the agency to avoid market volatility while lowering transmission costs. MMPA has no exposure to coal-fired generation.

DEBT AND LIQUIDITY MANAGEMENT: The Positive Outlook also reflects Fitch's expectation that MMPA will successfully manage its higher debt levels by implementing rate increases sufficient to moderate leverage metrics and improve cash on hand to more robust levels.

CONCENTRATION WITH THE LARGEST MEMBERS: The largest members are Shakopee Public Utilities Commission, City of Chaska, and City of Anoka which account for a sizeable 71.3% of the Agency's energy sales. Each member exhibits healthy overall credit characteristics and has been experiencing continued growth in retail electric sales in recent years.

COMPETITIVE AND STABLE ELECTRIC RATES: The agency maintains wholesale power rates (6.98 cents/KWh in 2015) that are below neighboring investor-owned, municipal, and cooperative utilities. Continued focus on long-term planning, cost containment and resource efficiency should help offset anticipated rate increases and preserve the competitive profile of the agency and its members.

MANAGEMENT FUNCTIONS OUTSOURCED: MMPA relies on Avant Energy, Inc., a provider of energy management services, to manage all functions of the agency including accounting, operations, and power and fuel market management. MMPA has no direct employees. Avant's track record in managing MMPA has been favorable and the Board's oversight practices appear robust. However, the outsourcing of all business functions is unusual and introduces a degree of service provider risk.

RATING SENSITIVITIES

PRO FORMA DEBT AND LIQUIDITY: The Minnesota Municipal Power Agency's rating could be upgraded if the agency is able to successfully manage the increased debt levels that will finance local generation assets, through supportive rate setting and the accumulation of more robust cash reserves.

OPERATING RISK: MMPA's rating is also sensitive to operating risks highlighted by its atypical dependence on Avant Energy for management and operational services and related agency risks. Potential operating disruptions, while not expected, that result in higher costs and/or financial pressures could result in downward pressure.

CREDIT PROFILE

MMPA provides wholesale power supply to 11 participating cities, all of which own and operate municipal electric systems. A 12th member, Elk River, MN, will begin purchasing power from MMPA on Oct. 1, 2018. MMPA's load center is concentrated in the northern and southwestern suburbs of the Minneapolis-St. Paul metropolitan area. Collectively, the participating systems (excluding Elk River) serve approximately 61,000 largely residential and commercial customers and a total population of approximately 129,000.

MMPA supplies virtually all power requirements of the participating municipal systems on a take-and-pay basis through separate, but substantially similar long-term power sales agreements (PSAs). Each of the contracts expires on Dec. 31, 2050, with the exception of two small participants whose contracts expire on Oct. 31, 2040.

WELL POSITIONED POWER SUPPLY PORTFOLIO; CONSTRUCTION ONGOING

Power is currently supplied to the members through a mix of agency-owned resources and purchase power agreements (PPAs). MMPA's primary asset is the Faribault Energy Park (FEP), a 256 MW natural gas/oil-fired combined cycle plant. The remaining power and energy requirements of the participants are supplied through agency-owned renewable facilities (wind and bioenergy), member-owned resources and a portfolio of short-term PPAs with third parties.

Peak demand from all members was 297 MW in 2015, down 3.9% from the prior year and down 8% in aggregate since 2011. However, energy sales have steadily grown by an average annual rate of 1.8% from 2009 - 2015 reflecting the resiliency of the Minneapolis-St. Paul economy and the lack of significant customer concentration at the member level.

To address future energy and capacity needs from member growth and expiring short-term PPAs, the agency will use bond proceeds to complete the construction of a new 46 MW natural gas facility currently under construction in the city of Shakopee, MN. The new plant, known as Shakopee Energy Park (SEP), is expected to be commercially available by April 2017 and includes five 9.3 MW reciprocating natural gas-fired units manufactured by Wartsila.

In addition to SEP, the Agency expects to construct up to 138 MW of similar additional natural gas-fired, peaking generation over the next several years.

RATES ARE COMPETITIVE BUT INCREASES ARE PROJECTED

Wholesale rates for power charged by MMPA are reviewed monthly by the board and management and are not subject to the approval of any federal or state authority including the Minnesota Public Utilities Commission (MPUC). MMPA reserves the right to adjust rates at any time pursuant to the terms of the PSA. Management's authority to determine MMPA's forward-looking monthly energy adjustment clause (EAC) ensures adequate recovery of fuel costs.

Members are required under the terms of the PSA to set retail rates sufficient to meet their obligations under the agreement, and are free to do so without regulatory oversight. Payments under each PSA constitute an operating expense of each member and are derived solely from the revenues of each member's electric system.

Lower gas prices led to a significant drop in rates from $73.00/MWh in 2008 to $58.77/MWh in 2009. Since then, MMPA's wholesale rates have been on the rise reflecting increasing debt service requirements, higher transmission rates and the transfer of funds to the rate stabilization fund.

MMPA's long-range forecast project's wholesale rates to increase 20.2% to $87.19/MWh by 2022 from $72.50/MWh in 2016. Projected rate increases are driven primarily by higher transmission costs and costs related to new generating resources including debt service for a proposed 2017 bond issuance of approximately $98 million to finance an additional 46 MW of local natural gas-fired generation in the city of Chaska, MN.

FINANCIAL PERFORMANCE HAS STRENGTHENED

Operating performance at the agency has strengthened over the last five years with funds available for debt service (FADS) growing to $29.6 million in 2015, a nearly 80% increase since 2009. Fitch-calculated debt service coverage, which improved over that span, totaled 1.31x in fiscal 2015 and matches well with the 'A' category median of 1.33x for wholesale systems. Adjusted coverage of full obligations of 1.20x is also aligned with Fitch's median for the rating category (1.14x). The bond indenture requires a coverage ratio of 1.15x.

MMPA's liquidity is sound. While cash on hand declined by roughly one-half in fiscal 2015 after recording improved metrics over the three years prior, the decrease stemmed from early retirement of outstanding debt and initial funding of SEP construction costs from cash. A sizable portion of these costs will be reimbursed to MMPA from bond proceeds.

MMPA ended 2015 with 101 days cash on hand ($22 million cash and cash equivalents), which is still in line with the median for similarly rated wholesale systems. The agency also benefits from an unused credit facility, which was recently increased to $20 million and extended to 2019, strengthening liquidity to approximately 200 days.

Liquidity is expected to roughly double in fiscal 2016 from the aforementioned reimbursement for capital expenses from bond proceeds and receipt of an approximately $9 million payment from the city of Elk River.

A pro forma financial forecast provided by the agency indicates a systematic increase in FADS to meet the growing debt service requirements from the 2016 bonds and anticipated future debt. Debt service coverage is projected to remain stable and within a range of 1.20x - 1.30x (slightly lower on a Fitch-adjusted basis) through the forecast while cash is projected to continue to grow. Liquidity at the levels projected would be well in excess of rating category medians and, if achieved, would be viewed favorably by Fitch.