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Rating Action:

Moody's assigns A1 to Southern Minnesota Municipal Power's Badger Coulee Project Revenue Bonds, Series 2019A; outlook stable

18 Sep 2019

New York, September 18, 2019 -- Moody's Investors Service ("Moody's") has assigned an A1 rating to Southern Minnesota Municipal Power Agency's ("SMMPA" or "Agency") approximately $24.9 million Badger Coulee Project Revenue Bonds, Series 2019 A (BC Project Bonds). Concurrently, Moody's affirmed the A1 rating on SMMPA's approximately $605 million of outstanding Power Supply System Revenue Bonds (Power System Revenue Bonds). The outlook for the BC Project Bonds and the Power System Revenue Bonds is stable.

RATINGS RATIONALE

The A1 rating reflects the sound security provisions provided under all-requirements power purchase agreements with creditworthy participants, the weighted average credit quality of the participants in the A rating category, its diverse and growing economic service area in Minnesota (Aa1 stable), SMMPA's essentiality to the municipal electric utilities, and high levels of liquidity. The rating also considers the Agency's generation concentration risk through its 41% ownership interest in the Sherco 3 coal-fired unit, SMMPA's principal generating resource through 2030, but also acknowledges a well-defined carbon transition plan as it exits its reliance on coal-fired resources by 2030. This position is fortified by Xcel Energy Inc.'s (Baa1 stable), the remaining 59% owner and operator, decision to close the plant in 2030. In the meantime, SMMPA continues to diversity its resource mix with more natural gas fired and renewable generation.

Moody's notes that two of SMMPA' largest members, Rochester and Austin, have indicated their plans not to extend their power supply contracts beyond 2030. In that regard, the Agency agreed to Rochester's Contract Rate of Delivery (CROD) at 216 MW while Austin established a CROD at its 2015 peak load of 70 MWs. Any needs above the amount SMMPA provides under the CRODs are expected to be self-generated. The remaining sixteen members have agreed to extend their all-requirements power sales contracts to 2050. Importantly, even with the cities of Rochester and Austin exiting their power supply contacts in 2030, the resulting debt profile for SMMPA is manageable after 2030 as most debt has been amortized by 2030, all of which aligns with the departure of Rochester and Austin and with the announced 2030 closure of Sherco 3. These factors provide flexibility to SMMPA to manage its capacity needs and carbon transition risk in a credit neutral way without needing to materially raise rates.

The A1 rating assigned to the BC Project Bonds considers the Agency's 6.5% ownership in the 161 mile 345 KV Badger Coulee transmission project (BC Project) in Wisconsin that runs from La Crosse, WI to Madison, WI, which is an extension of the CapX 2020 initiative of transmission projects. Revenue provided by the Mid-Continent Independent System Operator (MISO: A1 stable) under a Federal Energy Regulatory Commission (FERC) regulated tariff provides a source of revenue and cash flow for the BC Project Bonds. Net revenues provided from the MISO tariff will be used to lower the revenue requirements of the power supply contracts for the members through 2030. Rochester and Austin have signed separate Badger Coulee Project Agreements (BC Project Agreements) that allow them to participate in the benefits of the transmission project beyond 2030, when their power sales agreements expire, and until then, they will participate, along with the other sixteen members, as part of the SMMPA system pursuant to the power sales agreements. Because of the BC Project Agreements with Rochester and Austin starting in 2030, the new bonds will be issued under a new bond resolution - the Badger Coulee Project Resolution (BC Project Resolution) - which is separate from the System Bond Resolution.

RATING OUTLOOK

The stable outlook for the BC Project Bonds and the Power System Revenue Bonds reflects SMMPA's consistent financial performance that includes a strong liquidity profile. The stable outlook also incorporates our view that SMMPA will implement periodic rate increases, if needed, to maintain its credit metrics while managing to maintain their rate competitiveness. The stable outlook further reflects the expectation that SMMPA will be able to manage its carbon transition risk in a credit neutral manner, and will continue to de-lever thereby reducing stranded asset risk.

FACTORS THAT COULD LEAD TO AN UPGRADE

- The rating could be revised upward if there were to be a significant improvement in the participants' credit quality.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- The rating could face downward pressure if there is deterioration in the credit quality of participants and/or if the Agency incurs higher costs that make SMMPA less competitive and test the members' willingness and ability to pay. In addition, failure to maintain credit metrics at current levels on a sustained basis could also put negative pressure on the rating. The rating could also face pressure if SMMPA fails to manage its carbon transition risk effectively.

LEGAL SECURITY

The new Badger Coulee Project Revenue Bonds to be issued under the BC Project Resolution are secured by three different revenue streams: (1) the revenues from the Power Sales Contracts, which are an all-requirements contracts that require SMMPA's 18 members to pay the rates set by SMMPA that are sufficient to recover the Agency's full operating and debt service costs and to meet SMMPA's revenue requirement of 1.10x; (2) the revenues from the BC Project Agreements, which are take-or-pay contracts that begin on April 1, 2030 with the cities of Rochester and Austin to make payments to SMMPA for their share of BC Project costs whether or not the transmission line is operating; and (3) the revenues from SMMPA's entitlement to the rights and benefits of its 6.5% ownership interest in the BC Project, including revenues from MISO's FERC-approved tariff paid by users of the transmission line. The Badger Coulee Revenue Bonds will have a six-month debt service reserve.

The Power System Revenue Bonds issued under the System Bond Resolution are secured by revenues from the Power Sales Contracts, which are all-requirement contracts with SMMPA's members, whose weighted average credit quality is in the A rating category. The Power System Revenue Bonds have a 12-month required debt service reserve.

USE OF PROCEEDS

Proceeds of the Badger Coulee Project Revenue Bonds, Series 2019A will be used to refinance debt, which was taken on to provide payment for the costs of acquisition and construction of SMMPA's 6.5% Badger Coulee interest, and the cost of issuance.

PROFILE

Southern Minnesota Municipal Power Agency (SMMPA or Agency) was created as a municipal corporation and political subdivision of the State of Minnesota by an agency agreement recorded with the Secretary of State of Minnesota on June 2, 1977. The Agency's purpose is to secure an adequate, economical and reliable supply of electric energy for its member municipalities. The Agency is made up of 18 Minnesota municipalities that purchase power from the Agency under power sales contracts. Under the terms of these contracts, the Agency is obligated to furnish, and each member is obligated to take and pay for, the total power and energy required by the member through the term of the contract. The city of Rochester and the city of Austin have opted to exit the system beginning April 1, 2030. However, they are Badger Coulee Project Participants and are bound to SMMPA by take-or-pay Badger Coulee Project Agreements for the same percentage share beginning April 1, 2030 through the term of the contract.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Joint Action Agencies published in August 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rick Donner
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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