Fitch affirms WPPI Energy power supply system bonds

Fitch Ratings has affirmed the rating on WPPI Energy’s, WI $384.5 million power supply system revenue bonds at ‘A+’.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of WPPI. The agency’s member systems have entered into long-term power supply contracts with WPPI to purchase all of their power requirements through Dec. 31, 2037.

KEY RATING DRIVERS

DIVERSE AND FLEXIBLE POWER SUPPLY: WPPI has a diversified mix of generation resources, purchased power contracts and fuel sources. Historical reliance on purchased power has been reduced with the recent ownership interest in a new coal-fired plant and a purchase power agreement involving an operating nuclear plant. WPPI expects stable and cost-effective energy prices to its customers as a result.

COMPETITIVE ELECTRIC RATES: WPPI’s wholesale power costs and the members’ electric rates are competitive for the region. The use of a purchase power adjustment clause (30 day) at the member level provides timely pass through of power costs to customers and mitigates concerns regarding Public Service Commission oversight of the Wisconsin members.

FINANCIAL PERFORMANCE VARIABLE: Debt service coverage (DSC) has shown above average variability in recent years. In 2011, financial coverage improved and met WPPI’s target of 1.20x-1.25x, which is numerically in line with other ‘A+’ rates wholesale power systems. Balance sheet and liquidity metrics are sound.

RELIANCE ON RATE STABILIZATION FUNDS: While part of WPPI’s financial plan to help pay for higher operating and fixed costs, increased use of rate stabilization funds to meet targeted DSC ratios is of some concern. The agency expects to replenish the fund to previous levels beginning in 2015. Fitch views WPPI’s ability to meet this plan is an important element to maintaining the rating.

HIGH PERCENTAGE OF INDUSTRIAL SALES: Although most of WPPI’s customers fall into the residential class, a large amount of its sales and revenues come from large industrial users, many of which are in the cyclical paper products industries.

WHAT COULD TRIGGER A RATING ACTION

OVER RELIANCE ON RATE STABILIZATION FUNDS: WPPI’s continued reliance on Rate Stabilization funds to meet coverage targets, rather than raising rates on a timely basis, could result in a downward credit adjustment.

 

LOSS OF MAJOR LOADS AND REVENUES: A sharp retrenchment in the economy could have a negative effect on major industrial customers and employees, which could adversely impact financial results of WPPI and its members.

CREDIT PROFILE

WPPI provides wholesale electric service to 50 member utilities and one non-member utility, the majority of which are located throughout Wisconsin, with the remainder in Upper Michigan and northeastern Iowa. Each of the utilities has entered into a long-term power supply contract with WPPI. Over 195,000 homes and businesses are served, with an estimated population or around 340,000. Sales to large industrial users, including the paper industry, are substantial. WPPI serves these customers through a combination of diverse energy resources: self generating, purchase power and member/customer generation. Future growth requirements are estimated at about 1% per year.

NEW PROJECTS

Major developments in 2011 included Unit 2 of the new coal-fired Elm Road Generating Station going into commercial operation in January 2011 and completion of an agreement to purchase 162 megawatts (Mw) from the Point Beach Nuclear Plant in May 2011. These base-load plants are intended to help provide WPPI members with reliable and affordable power for the long term. WPPI believes that with the addition of these resources, it now has one of the cleanest and most modern fleet of generators in Wisconsin, which should help reduce costs associated with environmental regulation compliance.