CHICAGO -- Southern Minnesota Municipal Power Agency's plan to restructure some outstanding debt as part of a program to make its rates more competitive led Moody's Investors Service yesterday to downgrade the power agency's rating.
Also yesterday, Standard & Poor's Corp. placed a negative outlook on the agency's rating.
Moody's downgraded the rating to A from A1, affecting $821 million of the power agency's outstanding debt.
Moody's cited the restructuring of $68 million of power system supply revenue bonds that is scheduled to be sold today. The bonds will probably be insured by Municipal Bond Investors Assurance Corp., according to William Watt, a senior vice president at Lazard Freres & Co., the power agency's financial adviser.
In a credit comment, Moody's said the bond issue "weakens debt structure with principal deferred to future years to be retired amidst a more competitive electricity market."
Dan Aschenbach, a vice president and manager of the public power group at Moody's, said the issue extends maturity on the capital appreciation bonds to 2026 from 2018, allowing the power agency to reduce its annual debt service payments. The expectation is that the lower debt service will allow the power agency to reduce its wholesale electricity rates to its 18 southern Minnesota municipal customers, who in turn will reduce their retail rates, he said.
The debt restructuring is one of several steps developed by the power agency in an attempt to cut its power rates by 13% over the next 10 years. Power agency officials have said the current rates are on average 28% higher than rates charged by competitors.
What's fueling the rate cuts is the possibility of deregulation in Minnesota of the power industry that was made possible by the National Energy Act of 1992, according to Aschenbach. He said the act allows states to determine how retail customers purchase power, which could lead to increased competition among utilities.
While Moody's believes Southern Minnesota Municipal Power Agency's program to reduce its rates is a "good step," the agency will "still be in a vulnerable position," Aschenbach said. That is because its competitors are probably also implementing plans to cut their costs to take advantage of future deregulation, he said.
Standard & Poor's, meanwhile, affirmed an A-plus rating for the power agency's bond issue yesterday, but revised the rating outlook to negative from stable. In a press release, the rating agency said that the change in outlook reflects "increasing competitive pressures in Minnesota" and the power agency's need to have its rates "parallel more closely" the rates charged by investor-owned utilities.
Mary Colby, an associate director at Standard & Poor's, said that while the power agency's cost reduction program is "definitely a step in the right direction," more may need to be done.
"They have to accomplish the plan they laid out," Colby said. "If that's not enough, they will have to take other steps."