OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Western Minnesota Municipal Power Agency (WMMPA) bonds:

--Approximately $35.14 million power supply revenue refunding bonds 2015 series A.

WMMPA expects to price the bonds July 7, 2015. Proceeds will be used to refund a portion of the outstanding power supply revenue bonds, 2006 series A and pay cost of issuance

Fitch also affirms the following outstanding bonds:

--$580.03 million of power supply revenue bonds, various series at 'AA-'.

The Rating Outlook for all bonds is Stable.

SECURITY

The bonds are secured by a pledge of all revenue derived by WMMPA from the operation of its power supply and transmission resources, including all of the revenue received from Missouri River Energy Services (MRES) under a long-term power supply contract (PSC).

KEY RATING DRIVERS

FINANCING AND POWER SUPPLY AGENCY: WMMPA is a municipal joint action agency, created to finance and acquire resources on behalf of MRES, a power supply joint action agency that lacks financing authority. WMMPA has financial targets that help support the 'AA-' rating.

STRONG CONTRACTUAL AFFILIATION: WMMPA has sold the entitlement to its resources to MRES via the PSC, which enables MRES to supply supplemental power to 60 of its 61 municipal members under long-term take-and-pay power sales agreements. The power sales agreements of all but one of the members extend to Jan. 1, 2046 and have unlimited implied step-up provisions.

VALUABLE HYDROELECTRIC POWER SUPPLY: Nearly all of the MRES members benefit from a low-cost, carbon-free allocation of hydroelectric power from the Western Area Power Administration (WAPA), with contracts that extend through 2020. Contract extension to 2050 has been approved for 52 members, pending for remaining.

LOW-COST POWER RESOURCES: WMMPA's power resources provide competitively priced power ($59/MWh in 2014) to MRES that supplements the members' beneficial power supply from WAPA. However, significant reliance on one unit of the coal-fired Laramie River Station (LRS) for almost 60% of MRES energy supply is a credit concern, particularly given the potential for costly environmental upgrades.

ABOVE-AVERAGE LEVERAGE: The substantial 2014 debt issuance to fund costs associated with the construction of the Red Rock Hydro Project (RRHP) more than doubled outstanding debt and brought WMMPA's leverage position well above that of peers. Positively, the project provides needed capacity for MRES's members and debt obligations should be manageable, given recently enacted rate increases.

RATING SENSITIVITIES

FAILURE TO MANAGE CONSTRUCTION PHASE: Western Minnesota Municipal Power Agency's rating is predicated on Fitch's view that the agency will manage rates and cash flow through the upcoming construction phase to support financial metrics at the levels observed in recent years. Failure to do so, would likely lead to downward pressure on the rating or Outlook.

REDUCED COMPETITIVENESS: A significant increase in the cost of production due to environmental compliance or an unexpected outage at Laramie River Station that reduces the regional price competitiveness of the WMMPA/Missouri River Energy Services power supply could also add rating pressure.

CREDIT PROFILE

WMMPA was created in 1976 to finance and own electric generation and transmission resources generally for the benefit of the MRES membership. WMMPA's current membership consists of 23 Minnesota municipalities, all of which are also MRES members.

MRES is comprised of 61 member communities located throughout Iowa, Minnesota, North Dakota and South Dakota, each of which operates a municipally-owned electric system. MRES provides wholesale power supply to 60 of its 61 members pursuant to long-term power supply contracts, including 57 members (S-1 members) that are required to purchase virtually all of their supplemental power requirements in excess of their allocations of WAPA hydroelectric capacity. WAPA contracts supplied 41% of the total power requirements of the S-1 members in 2014, with MRES providing the remainder.

DIVERSE, LOW COST POWER SUPPLY

WMMPA has acquired a portfolio of power supply resources with capacity totaling 473 MW, as well as transmission facilities necessary to deliver power supply to certain of the members. WMMPA's owned generation portfolio includes natural gas-fired capacity (140 MW) and some wind capacity, but roughly 70% of the agency's power supply is derived from its ownership interest in the LRS (282 MW). In addition to owned resources, MRES has contracted for 123.5 MW of additional generating capacity from its members, 33 MW of nuclear capacity and 82 of wind capacity. This blended, lower cost resource mix has been one of the strengths of this agency.

LARGE CAPITAL PLAN, ABOVE-AVERAGE DEBT LEVELS

Capital expenditures have increase meaningfully in 2014 and will remain elevated over the next four years as the agency moves forward with the RRHP and its continued participation in the CapX 2020 transmission planning effort. Capital expenditures are expected to total approximately $469 million for the period 2015 - 2020, including anticipated costs for environmental upgrades at LRS. Cash from operations and reserves will fund a portion of expenditures, but proceeds of the large 2014 bond issuance together with additional debt expected in 2017 and 2018 will fund the majority.

As a result of RRHP funding, outstanding debt has more than doubled, driving debt/funds available for debt service up from 5.7x in 2013 to 16.2x in 2014. However, leverage is expected to moderate and remain manageable given the implementation of rate increases in 2014 and 2015. The continued management of cash flows through the construction phase and implementation of additional planned rate increases are needed to ensure an operating and financial profile that is consistent with the current rating.

The current capital plan includes the cost of potential upgrades needed at the LRS and planned debt financing of the upgrades. An EPA action plan released in 2014 calls for selective catalytic reduction systems (SCRs) to be installed at LRS. The action plan is currently being appealed. If not overturned, installation of the SCRs could moderately increase the cost of power supplied from LRS, lessening its strong regional competitive position.