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Fitch Rates Western Minnesota Municipal Power Agency $50MM 2006 Revs 'AA-'

Posted on: Thursday, 14 September 2006, 15:01 CDT

Fitch Ratings assigns a 'AA-' rating to Western Minnesota Municipal Power Agency's (Western Minnesota) $50 million power supply revenue bonds, 2006 series A. In addition, Fitch affirms the 'AA-' on the agency's outstanding power supply revenue bonds. The Rating Outlook is Stable. Proceeds of the 2006 bonds will be used to fund various generation and pre-construction costs of Western Minnesota's 25% undivided ownership interest in the Big Stone II coal-fired plant. The bonds are scheduled to price the week of September 18, 2006 with Citigroup as sole manager.

Western Minnesota was created to finance and hold title to generation and transmission resources on behalf of Missouri River Energy Services (MRES). MRES has contractually purchased the power and energy and transmission capability associated with these projects, and in turn has agreed to sell power and energy to member municipalities in Iowa, Minnesota, North Dakota and South Dakota under contracts currently extending to January 1, 2030. Effective January 1, 2007, an amended contract will extend these sales agreements to January 1, 2046. The electric power and energy sold to the 57 MRES S-1 members is being purchased to supplement their allocations of relatively low-cost electric power and energy from the Western Area Power Administration (WAPA).

Western Minnesota's rating is supported by:

-- Low-cost power resources;

-- Strong financial position;

-- Long-term power sales contracts;

-- Good risk management practices and ;

-- Solid management and supportive boards.

Historically, almost all of Western Minnesota's energy was derived from an interest in the coal-fired Laramie River Station (LRS), which has a record of producing reliable and low-cost electricity. When viewed together with MRES members WAPA allocations, the combined price of power to the member systems has been quite low, at a cost of about 2.7 cents per kilowatt-hour (kwh) in 2005, including transmission. While extended drought conditions in the region has resulted in higher priced replacement power from WAPA, in addition to high power costs at MRES, the members' all in wholesale power rate increases have been in line with regional cost movements and has not impacted the systems competitive advantage. This low priced power and management's prudent risk management practices (mitigating most of LRS' single unit risk issues) are important components of the Fitch rating.

Concerns center on Western Minnesota's participation (approximately 158 megawatts) in the new 630 megawatt (mw) Big Stone II coal-fired plant, which is scheduled to be operational in 2012. The estimated cost of the unit has increased substantially, to between $1.6 billion to $1.8 billion in 2006 versus $1.2 billion in 2004, which is likely to further add to an increase in wholesale power prices to the member systems. While the combined cost of power to the member systems should still be very competitive (estimated at 3.5 cents per kwh in 2010) and there is a need for the power, additional cost increases that narrow Western Minnesota's cost advantage potentially could raise concerns that have a negative effect on Western Minnesota's 'AA-' rating. Fitch will continue to monitor future events and the agency's estimated cost of power, as the Big Stone II project is developed. It is important to note that, when this issue is evaluated against the numerous credit strengths of Western Minnesota and MRES, Fitch still looks favorably on the overall credit worthiness and stability of the agency's bonds.

Financial Profile:

A positive rating factor is Western Minnesota's solid financial position, which includes debt service coverage of 1.14 times (x), not including use of cash reserves. In addition, the agency has cash reserves of about $37 million as of June 30, 2006 (This amount is expected to increase to $62 million by the end of the year). Western Minnesota's and MRES' cash reserves were established as part of a strategic plan started in 2001 to mitigate risks such as forced outages and fuel volatility. Fitch also looks favorably on system liquidity.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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