CHICAGO - The Western Minnesota Municipal Power Agency is touting its strong financial profile and solid ratings as it prepares to double its debt load with a $320 million issue Thursday to finance a new hydroelectric plant that will bolster its renewable energy generating sources.
Proceeds will go toward the $379 million Red Rock Hydroelectric generating facility plant to be built at the existing Red Rock dam site operated on the Des Moines River near Pella, Iowa. WMMPA Chief executive officer Tom Heller said board decided the plant was "the right project for us," after considering the need for additional base load power resources, its qualification as a renewable resource with no emissions, and the additional diversification of power it provided.
The new hydroelectric facility will both "add to our members' renewable resource portfolio, and will help meet the growing energy needs of our members and their customers," the agency said in its description of the project.
The agency's commitment to increased hydroelectrical power is part of national push to boost the nation's renewable energy sources and use bond financing to achieve the goal, a task that's easier for a joint power agency with bonding authority and power contracts.
The Council of Development Finance Agencies and the Clean Energy Group has launched Clean Energy and Bond Finance Initiative to research and develop project finance models to raise capital for clean energy projects. "Bond finance holds tremendous potential for future clean energy investment, perhaps at levels in the tens of billions of dollars in the next several years," according to a recent paper released by the Brookings-Rockefeller Project on State and Metropolitan Innovation.
The joint power agency also is touting its diverse generating sources that include coal, natural gas, hydroelectricity, wind and nuclear power with at least 50% non-carbon emitting.
The bonds are structured to mature serially between 2018 and 2023 and through 2031 and 2034 with a $70 million term bond in 2039 and a $180 million term bond in 2046.
Citi is the senior manager and four other firms — JPMorgan, Barclays, Wells Fargo Securities, and US Bancorp — round out the syndicate. Dougherty & Co. served as financial adviser and Orrick Herrington & Sutcliffe LLP is bond counsel.
The bonds are secured by a pledge of all revenue WMMPA receives from the operation of its power supply and transmission resources, including all revenue received from its related entity Missouri River Energy Services under a long-term power sales contract.
The project will provide power for customers of the MRES. The WMMPA provides the financing and ownership of assets that benefit MRES customers. The two, which operate as single entity, have a power supply agreement that entitles MRES to the energy generated from WMMPA-owned facilities. MRE is based in North Dakota and serves 61 communities in Minnesota, North Dakota, South Dakota, and Iowa.
The finance team is promoting the agency's double-A level ratings, which are considered strong for a joint power agency. Fitch Ratings assigned an AA-minus and Moody's Investors Service rates the bonds Aa3. Both assign a stable outlook. The ratings also apply to an existing $230 million of debt.
"Missouri River Energy Services is well positioned for the future," said chief executive officer Tom Heller in a roadshow comment attached to the deal's offering statement. The agency benefits from low power costs for its customers, substantial reserves, strong debt service coverage, and lengthy contract terms on MRES power contracts with municipal power agencies.
Debt service coverage has an average annual ratio of 1.5 times over the last five years and the agency has enough cash on hand to cover 300 days of operations, said chief financial officer Merlin Sawyer.
"The power supply agreement is really the core of the security of these bonds," Heller said. Rate increases have been approved in the coming years to cover the higher debt service from the new money issuance.
The Red Rock project will facilitate flood control in the region in addition to providing energy. The dam is operated by Army Corps of Engineers with the energy plan being constructed and operated by MRES and financed and owned by WMMPA.
The project, which is expected to be completed in early 2018, will provide 36 megawatts of power with peak generation during high water marks of 55 megawatts. That's enough to serve about 18,000 homes, Heller said.
The agency said hydropower ranks as the most common source of renewable energy used to generate electricity, accounting for 6% of total U.S. supply.
The project will help the agency meet Minnesota renewable energy standards and offered low operating costs, although financing costs will rise because of the additional debt load.
Proceeds from the sale will also finance the completion of the WMMPA's share of its costs tied to CapX 2020 transmission projects, and capital improvements at the existing coal-fired Laramie River Station power plant. The borrowing will cover about 80% of the agency's planned capital projects through 2018.
Sawyer said that the agency doesn't plan to borrow to cover interest during the Red Rock construction phase and is funding its debt service reserve with internal equity to keep costs down. The finance team also crafted a structure that allows for flexibility with future issuance to be sold on the shorter end of the yield curve to tap lower rates.
Moody's said its rating is based on the MRES' profile and "considers the agency's sound financial policies which have resulted in ample liquidity and strong debt service coverage for the Western Minnesota Municipal Power Agency bond holders."
It is supported by the low cost of power for member participants and the diversity and overall credit quality of the utility systems which are the source of the revenues pledged to service the bonds.
Fitch noted the sharp increase in the agency's debt load. "While the project will provide needed capacity for MRES' members and help diversify the generation mix, outstanding debt will more than double and leverage will be well above rating category medians, and members' rates will need to increase, albeit modestly," Fitch said.
Its rating and stable outlook are based on analysts' 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."
Fitch also noted that the agency's current capital plan does not include the cost of potential upgrades needed at the coal-fired Laramie River Station, which may require additional debt financing. The EPA action plan released earlier this year calls for the installation of selective catalytic reduction systems. The action plan is currently under appeal.
Moody's expressed the same concerns in its list of credit challenges in addition to Red Rock construction risks.
