Moody's Investors Service said it has downgraded to Aa3 from Aa2 the rating on the city of Rochester, Minn.'s electric utility revenue bonds.

The outlook is stable.

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 exposure to the outage at Sherco 3, which is expected to be back on line in the 1st quarter of 2013, is mitigated by SMMPA's obligation to provide replacement power, which it has done so at the currently low and competitive prices in the MISO market.

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.

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