The rating action reflects the lower credit metrics over the last few years, which is at least partly due to the fact that there have been no rate increases in the last few years and none are expected in 2013. There have also been declining sales of off-system power.
The rating action also reflects the heavy reliance on one generation or fuel source; namely, Southern Minnesota Municipal Power Agency's (SMMPA, rated A1) 41% ownership of the Sherco 3 coal-fired plant, which remains out of service due to a failure during re-start in November 2011 following a routine shut down for maintenance.
Having said that, the Aa3 rating reflects the benefits of a long-term take and pay contract with SMMPA under which SMMPA has agreed to sell and deliver electric power to Rochester, and Rochester has agreed to take and pay for electric power as needed for the operation of its system up to 216MWs. The contract expires in 2030.
The rating also reflects Rochester's local rate setting authority without state oversight. Rates are set at levels necessary to cover operating and maintenance costs and 120% of debt service. Rochester also benefits from a strong service area economy.
On the flip side, Moody's sees a lot of positives at RPU.
*RPU is a well-established enterprise with a long, stable operating history and good liquidity.
*RPU's service area is economically sound with a highly educated workforce and low unemployment.
*The likelihood of deregulation in Minnesota is diminished. RPU has exclusive control over its service territory.
*RPU has local rate-setting autonomy (City Council approval is required), with no state oversight.
RPU also has a few challenges, according to Moody's.
*RPU's take-and-pay contract with Southern Minnesota Municipal Power Agency (SMMPA, rated A1) accounts for majority of its supply and limits its overall fuel diversity. There are other sources of power in RPU's owned generation: the 105MW coal-fired Silver Lake Plant (set for decommissioning in late 2015), the 80MW gas-fired Cascade Creek Plant and two hydro units as well as diesel generation for peaking purposes. However, most of the power source comes from the SMMPA contract for 216MWs.
* Although RPU as local rate-setting authority, RPU has not raised rates its rates for several years, at least partly due to concerns about competitiveness. This has resulted in some decline in the credit metrics over the last few years.
*RPU has concentration risk; its top 10 customers represent 35.1% of the total kWh sales in 2011 and 32.2% of revenues in 2011.
*Transmission constraints are forecast for 2014 and beyond, which RPU plans to address through participation in CapX 2020, a regional effort to build transmission lines in Minnesota.