Moody's Investors Service downgraded Rochester, Minn.'s electric utility revenue bonds by one notch to Aa3 because a lack of rate increases in recent years have made a dent in the utility's credit quality.

The action impacts $81 million of outstanding debt. No rate increases are also expected next year as the utility seeks to remain competitive. The utility also has seen a decline in the 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 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," Moody's wrote.

The rating still benefits from the 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 216 megawatts. The contract expires in 2030.

The utility's exposure to the outage at Sherco 3 is offset by SMMPA's obligation to provide replacement power, which it has done so at the currently low and competitive prices. The plant is expected to return to operation early next year.

Moody's said the rating further 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.

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