CHICAGO -- The Southern Minnesota Municipal Power Agency could make its rates more competitive by restructuring outstanding debt and expanding its commercial paper program, among other measures, an agency analysis says.
Pierre J. Heroux, executive director and chief executive officer of the power agency, said that the analysis, which lists recommendations on how to cut electric power rates by 10% to 15% over a two-year period, was drafted in response to changes in the power industry. The analysis was released this week by the agency, which serves 18 communities in southern Minnesota.
"Last year we began to look at the next decade and it became obvious to us that the business is changing and that the competitive atmosphere is changing," Heroux said.
In general, the electric power industry faces uncertainty on a variety of fronts, including potentially tighter federal and state regulation and technological advances that could change the way electricity is generated, according to the executive summary of the analysis.
Heroux said that the agency's rates, which are on average 28% higher than its competitors', are "out of line." He said that the agency's goal is to set its rates within five percentage points of its competitors' rates.
Henry Bucci, the agency's director of finance, said the debt restructuring portion of the analysis would extend the payment of debt service by seven years.
The analysis calls for replacing $150 million of long-term debt expected to mature in 2018 with $376 million of capital appreciation bonds, which would all mature by 2025. The agency has $750 million of tax-exempt outstanding revenue bonds.
As a result of the restructuring, annual debt service payments would fall between $4 million to $6 million each year until 2018. The agency currently pays about $60 million in debt service each year, Bucci said.
After 2018, the agency would pay about $55 million a year for debt service until the capital appreciation bonds mature, Bucci said.
The analysis also suggests expanding the agency's tax-exempt commercial paper authority to $70 million from the current $26 million. The agency has about $14 million of outstanding commercial paper.
Bucci said the expansion of the commercial paper program would contribute to a 1.5% reduction in the average power rates.
Non-debt-related measures in the analysis include renegotiating a transmission system agreement with an Iowa utility and developing special rates for certain classes of customers, according to the agency.
Heroux said he expects the agency's seven-member board to approve the recommendations in the analysis "in pieces" over the next three to four months.
Rating agency officials praised Southern Minnesota Municipal Power for taking the initiative to improve its competitive position.
Dan Aschenbach, a vice president and manager of the public power group at Moody's Investors Service, said the rating agency expects to meet with officials of the Minnesota agency in the next month to discuss the proposal.
"This is a very favorable development for the agency," Aschenbach said.
Mary Colby, an associate director at Standard & Poor's Corp., said the rating agency is pleased that the power agency is taking a "proactive" approach to its future operating environment.
She said Standard & Poor's is withholding judgment on the analysis until after it is considered by the board. However, she said that "we're not anticipating that they will do anything that will have a negative effect."
A Duff& Phelps Credit Rating Co. official who covers the agency could not be reached for comment.
The agency's long-term debt is rated A-plus with a stable outlook by Standard & Poor's, A-1 by Moody's, and A-plus by Duff & Phelps.