Fitch Affirms Western Minnesota Muni Power Agency at 'AA-'.

NEW YORK -- Fitch Ratings affirms the rating of Western Minnesota Municipal Power Agency's (WMMPA's) $220 million power supply revenue bonds at 'AA-'. The Rating Outlook is Stable.

WMMPA is a municipal corporation created to finance and own generation and transmission resources on behalf of Missouri River Energy Services (MRES). MRES has purchased ownership interest in the WMMPA's generation and transmission assets and sells the output and capacity of these facilities to 57 members under separate take-and-pay all-requirement power sales agreements over and above power allocated from the Western Administration Power Administration (WAPA). MRES recently added two new members. MRES' members are distribution systems located throughout Iowa, Minnesota, North Dakota, and South Dakota.

WMMPA's rating, as well as MRES', is supported by the following:

-- Low-cost power resources;

-- Strong financial position;

-- Long-term contracts;

-- Good risk management practices;

-- Solid management with supportive boards of directors.

In 2004, over 92% of WMMPA's energy derived from its 16% interest in the coal-fired Laramie River Station (LRS), which has historically produced reliable and below market priced electricity. For year-to-date 2004, MRES' average wholesale rate to members was a competitive 3.9 cents per kilowatt-hour (including transmission charges). When combined with WAPA power purchases, MRES' members purchase wholesale power at an all-in average cost of 2.7 cents per kwh (including transmission). This low-cost power is an integral part of members' retail rates being below regional averages.

Another positive factor is WMMPA's financial profile, which includes 2004 debt service coverage of 1.3 times (x). In addition, WMMPA has cash reserves of over $39 million (six months of annual operating expenses). MRES has an additional $33 million in unencumbered reserves (for the benefit of its members), which also supports the system's financial profile. WMMPA's and MRES' cash reserves were established as part of a strategic plan implemented in 2001 to mitigate risks such as forced outages and fuel volatility. In aggregate, Fitch looks favorably on MRES' liquidity, especially given the stability of its cost structure. As part of its strategy to meet increasing load requirements, WMMPA is planning to expand its power supply generation by adding 110 mw ownership interest in a new coal-fired unit. WMMPA is currently working with other regional utilities to develop a 600 mw coal-fired unit expected to be operational in 2011.

The primary credit risk involves the operational risk of a single project responsible for much of MRES' energy. This risk is partially mitigated by the coal project's long history of strong operating performance and the sharing of extended outage expenses among the other LRS owners. In addition, Fitch is comforted by WMMPA and MRES' cash reserves and the ability of the MRES members to manage potential replacement power costs. MRES and WMMPA also procure outage insurance or execute financial hedges to further mitigate outage risk during peak months.

Fitch is also monitoring certain developing factors, including rising coal transportation costs and reduced water levels at LRS' water cooling reservoir. Fitch believes these events could place pressure on MRES' future cost structure. Rising transportation costs have already caused LRS' variable costs to increase 50% (about 0.3 cents/kwh) in the past year. While management is developing strategies to reduce those costs, further increases are expected in the near future.

The water levels at Grey Reservoir, the primary cooling source for LRS, are currently at 27% of full as a result of the continued and unprecedented drought in the region. If the drought continues for another few years, LRS operations may be compromised, causing MRES to purchase higher cost power from alternative sources while remaining responsible for its portion of the fixed costs of LRS.

Partially mitigating the impact of these developments are MRES' competitive wholesale rates (providing flexibility to raise rates if necessary), ample cash reserves, and potential alternatives (constructing new railways and cooling towers) that would require initial capital outlays. While MRES' wholesale rates would increase slightly as a result of these factors developing negatively, Fitch expects MRES' and its members' rates should remain competitive with those of its neighboring utilities.