Fitch Affirms Southern Minnesota Municipal Power Agency's Bond Ratings

by Paul Ciampoli
APPA News Director
July 16, 2022

Fitch Ratings affirmed its ratings on Southern Minnesota Municipal Power Agency (SMMPA) power supply system revenue bonds. The rating outlook is Stable.

Fitch affirmed the ratings on approximately $520 million power supply system revenue bonds at “AA-“ and an Issuer Default Rating (IDR) at “AA-.”

The ‘AA-‘ rating and IDR “reflects the agency’s very strong revenue defensibility, which is supported by the intermediate- and long-term wholesale customer contracts and the very strong credit quality of the largest purchasers, strong operating risk profile and trend of stable financial results with very low financial leverage,” Fitch said.

The agency’s “consistently low operating cost burden and diversifying portfolio of mainly owned-generation assets drive its strong operating risk profile.”

Fitch said SMMPA’s resource mix is diverse and includes ownership interest in a large baseload coal plant, Sherbourne County Generating Unit 3 (Sherco 3), which is set to be retired in 2030. “The cost burden is expected to rise in 2022 with higher fuel-related costs and higher MISO market pricing, but the cost burden should remain low,” the rating agency said.

The future retirement of Sherco 3 is expected to coincide with the expiration of the power supply contracts of its two largest members, resulting in a re-balancing of resources with expected future customer load, and no meaningful change in SMMPA’s operating profile, it said.

SMMPA’s leverage ratio, as measured by net adjusted debt to adjusted funds available for debt service, has been on a steady decline over the past five years. In fiscal 2021, the leverage ratio declined to 4.6x, reflecting a trend of declining debt, stable financial margins, and ample liquidity.

The agency will amortize $320 million in existing debt through 2026, allowing leverage to remain very low even through a Fitch’s stress scenario.

SMMPA provides wholesale power supply to 18 participating cities, all of which own and operate municipal electric utility systems.

The agency’s load center is concentrated in the southern portion of the state, with the largest member, Rochester Public Utilities representing roughly 40% of energy sales.

Collectively, the participating systems serve approximately 129,000 largely residential and commercial customers and a total population of over 250,000. Power is supplied to the members primarily through a mix of agency and member-owned generation resources and a growing renewable portfolio.