Fitch Affirms Missouri Joint Muni Electric Utility Comm.'s Power Supply Revs at 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the following Missouri Joint Municipal Electric Utility Commission (MJMEUC) revenue bonds:
--$16,124,791 power supply system revenue bonds (MoPEP facilities) series 2011;
--$33,318,859 power supply system revenue bonds (MoPEP facilities) series 2012.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the Missouri Public Energy Pool #1 (MoPEP 1, or the pool). Such revenues are principally derived from pool power purchase agreements (PPPAs) with each of the 35 MoPEP 1 members.
Net revenues exclude non-pool revenues, or those revenues received by MJMEUC pursuant to the PPPAs but pledged to projects under separate indentures, i.e. MJMEUC's interests in the Plum Point, Iatan 2, and Prairie State projects.
KEY RATING DRIVERS
GROWING JOINT ACTION AGENCY: MJMEUC is a joint action agency comprised of 67 municipally-owned retail electric systems located across the state of Missouri. Advisory, non-voting membership has been extended to four Arkansas systems. MoPEP 1 provides full-requirements power supply to 35 members, pursuant to unconditional, long-term pool power purchase agreements (PPPAs).
SOLID MEMBER FUNDAMENTALS: The credit characteristics of the MoPEP 1 members support the 'A' rating on the bonds. The five largest members, representing nearly half of the pool, maintain favorable leverage and liquidity metrics, as well as good cash flows. Sales trends of these generally smaller service territories are positive but some concentration of largest customers exists. All of the members own and operate electric distribution systems that enjoy self-regulation of rates.
UNLIMITED STEP UP PROVISION: The PPPAs limit bondholder exposure to individual systems through an unlimited step-up of member obligations. If a member defaults, the others incur the redistributed costs, including debt service.
ABOVE MARKET, STABLE COST: The pool provides power at above market prices, but benefits from price stability derived through a diverse resource base. Forecasted rates are expected to remain around $64/MWh through 2017.
MEMBER METRICS DRIVE RATING: Fitch expects the credit quality of the Missouri Joint Municipal Electric Utility Commission Missouri Public Energy Pool #1 members to remain the principal rating consideration over time. A change in the financial position of these members would likely lead to rating action on the MJMEUC bonds.
STABLE AND DIVERSE POWER POOL PARTICIPANTS
In a positive indication of MoPEP 1's competitiveness, membership has grown from 19 participants at inception to 35 today. MoPEP 1 added its most recent member, the city of Waynesville, in March 2013 (12MW load).
The pool is well diversified by member; the largest member accounts for just 10.9% of 2014 coincident peak demand. There is some concentration of the top payers at each of the five largest members. Nevertheless, member financial metrics remain solid and delinquencies have not been a concern.
The five largest members each exhibit solid balance sheets and liquidity metrics, as well as good cash flows that comfortably exceed Fitch's comparable 'A' retail rating medians. The members' 2014 consolidated coverage of full obligations and cash on hand equaled 1.3x and 209 days, respectively, versus the medians of 1.2x and 92 days. The members' consolidated ratio of equity to capitalization approached a high 90%, which is well above the rating median level of 51%.
FORECASTED RATE STABILITY
Rates are forecasted to remain relatively stable over the next several years. MJMEUC's strategy of pursuing ownership interests in various facilities to meet the pool's increasing load requirements has prompted rate increases. However, rates remain stable and competitive in the $65-$70/MWh range through 2017.
The pool committee establishes annual rates and makes monthly adjustments to reflect differences between actual and budgeted costs. In addition, the PPPAs provide an unlimited step-up of the pool's 35 members. This helps ensure full and timely revenue collection and limits bondholder exposure to any single member. Rates are not subject to review by any state or federal regulatory authorities.
The MoPEP 1 resource base includes entitlements in MJMEUC's Prairie State (82W), Plum Point (20MW), and Iatan 2 (30MW) coal-fired generating projects. The facilities are expected to underpin MoPEP 1's long-term rate stability, as all were recently placed into service and are equipped with the latest environmental control technologies. Moreover, the Dogwood Energy Center (52MW) and new Fredericktown Energy Center facility (28MW); as well as planned solar, landfill gas, and wind projects; diversify MoPEP 1's fuel sources and number of physical assets.
SOLID OPERATING PERFORMANCES
MoPEP 1's financial performance is typical of many joint action agencies that operate with modest cash flows. However, an indenture requirement to generate at least 1.1x coverage of debt service provides momentum to build pool equity, which has increased to $29.3 million at the end of 2014 from $17.4 million in 2011. MoPEP 1's ratio of equity to capitalization (35%) is in line with Fitch's 'A' wholesale median (21.4%).
Liquidity levels are sufficient at the pool level with 40 days cash on hand at the end of 2014. Additional liquidity is also provided by MJMEUC's $48 million revolving line of credit, which is available to support all MJMEUC activities, including project and pool funds. Additionally, MJMEUC's practice of billing one month in advance helps to ensure sufficient liquidity.