New York, November 08, 2016 -- Summary Rating Rationale
Moody's Investors Service has affirmed the A1 rating on the American Municipal Power Inc. (AMP) outstanding $1,576,845,000 Prairie State Energy Campus Project Revenue Bonds. The outlook is stable. The main consideration in the assignment of the A1 credit rating is the strong bond security which includes the unconditional take-or-pay obligation of 68 municipal project participants (cities) in Ohio and Virginia in the AMP Inc. Prairie State project to pay O&M and debt service on the revenue bonds. The obligation of the AMP participants is an unconditional obligation and is payable by participants regardless whether the project operates or not. The Prairie State Project represents AMP's 23.26% ownership interest in the 1629 MW coal-fired generation facility and also financed the adjacent coal mine that has 30 years or more of Illinois Basin fuel supply. Prairie State is a supercritical, coal-fired, mine mouth generating facility. Eight other utilities including five other municipal joint action agencies are the other owners of Prairie State and their debt is separately secured from AMP's revenue bonds.
The average weighted credit quality of the AMP participants is in the A2 range but Moody's also weighs heavily that the numerous participants are spread across a large geographic area which narrows concentration risk. Also, AMP has a strong fiscal oversight program to monitor participant finances and contract compliance. Another strength is no one participant's obligation represents a major portion of the total AMP Prairie State revenue bond obligation and Prairie State coal fired generation represents about 17% of any individual participant's power supply mix. Such diversity reduces the risk of any one participant from creating broader fiscal problems for the agency if there is ever noncompliance with contracts.
The rating further considers the important role AMP Inc. (A1 issuer rating, stable outlook) plays in power supply planning and procurement for the AMP participants including the successful implementation of its fuel diversification strategy, including Prairie State , and for its provision of other energy services to municipal participants. AMP is bringing on line over 300 MWs of new hydro-electric generation further diversifying member power supply. AMP's participants have a competitive advantage with their retail rates being lower than neighboring utilities largely due to the overall competitive wholesale power rates charged by AMP that includes the Prairie State produced energy.
Prairie State's operational performance has improved permitting the competitive dispatch of the energy into the regional wholesale energy markets. This is evidenced by the generation units above average capacity factors. The capacity factor for both units averaged 78% in 2015 and was in the same range at 76% through September 30, 2016. Capacity factor, heat rate and O&M costs were among the best performing in Illinois for peer base load coal-fired generation units.
Moody's believes the value of Prairie State as a long term asset remains favorable as a source of long-term stable electrical base load capacity for the participants. The plant enjoys a very competitive on-site 30-year supply of coal reserves with no transportation costs and level debt service which equates to a stable capacity price for an extended period. This could be a particular advantage as energy and capacity markets change as a result of industry developments such as sustained lower natural gas prices; the shutdown of older nuclear and coal-generation units; pricing of carbon through regulation; and stronger economic trends.
Prairie State represents the most advanced coal-fired generation technology; already meets the most stringent environmental standards on coal-fired generation units and is among the newest units constructed. AMP reports that Prairie State is fully compliant with the Mercury and Air Toxics rule.
Without new advancements in carbon capture and control technology, further plant specific carbon reductions are not possible given the state and cost of such technology. Although the two unit facility due to its low heat rate already has reduced carbon emissions compared to peer units of similar size. Absent carbon pricing, the worst case could be EPA regulation that would reduce output of coal-fired generating units. This risk rises as carbon reduction regulation is defined given Prairie State's young life and expected useful life of at least 45 years. This could present challenges for Prairie State owners as well as for the other coal-fired unit owners in the Midwest. Trading of carbon credits could add sooner to the cost of Prairie State complicating its current economics.
The proposed EPA Clean Power Plan has been stayed by the Supreme Court and it is uncertain when it will be finalized; reportedly a court decision at earliest would be in 2018. With November 2016 Presidential election, uncertainty exists about direction, although some form of carbon reduction is expected to remain a policy objective.
The rating outlook is stable given that both units are commercial and participants are expected to remain in full compliance with the strong take-or-pay contracts that lend credit stability.
Factors that Could Lead to an Upgrade
*Moody's does not believe there is the potential of a higher rating given the expectation of additional regulation of coal-fired generation facilities including new carbon rules.
Factors that Could Lead to a Downgrade
*If any participant successfully challenges through litigation their take-or-pay Prairie State power supply contract that are the underpinning of the revenue bond credit quality.
*Should AMP Prairie State participant credit quality weaken
*Should the Prairie State production cost or overall cost due to regulation and or carbon pricing rise significantly and impact retail electricity prices significantly or should the capacity factors decline for an extended period.
Under the master trust indenture, AMP pledges its net revenues, derived from take-or-pay power sales contracts with 68 municipal participants, payable regardless of whether the project is completed, operating, or operable.
The take-or-pay contracts have a 25% step-up provision. The master indenture includes a 1.10x rate covenant and a 1.10x additional bonds test after commercial operation. There is a fully funded maximum annual debt service reserve.
The member payments are payable as O&M expenses of their respective electric systems. All participants are current on the payment of AMP billings.
Legal opinions have been issued that the take-or-pay contracts are valid and enforceable. On December 7, 2007, the Franklin County, Ohio Court of Common Pleas issued a non-appealable order validating the power sales contract relating to a hydroelectric project (Meldahl) between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions that are exactly similar to the provisions securing these bonds. Most of the participants in this project are located in Ohio. Several of the participants are located in Michigan, Virginia and West Virginia. Michigan and Virginia have passed specific legislation authorizing take-or-pay contracts, including step-up provisions with out-of-state corporations. The power sales contract also has a "fall back provision-if the take-or-pay provision is invalidated by any court of competent jurisdiction, the obligation becomes a take and pay obligation not subject to reduction, whether by set-off to counterclaim and is not conditioned on performance of either party.
If there is a payment default of any participant, AMP has the power to suspend delivery. Should such a default occur, AMP would first offer the power to other project participants, other AMP members, other entities that are not AMP members (to the extent that doing so won't impact the tax advantaged status of AMP and/or its bonds) and then exercise the 25% step-up provision that requires non-defaulting participants to be legally responsible for any defaulted costs for up to 25% of their original entitlement. AMP would also enforce the contract on the defaulting party. Payment compliance is aided by a credit monitoring program that AMP manages which produces early warning signs should a member be in fiscal distress. This includes a well-regarded monthly evaluation program of participant credit by AMP monitoring a credit scorecard that includes financial metrics.
Importantly, an Ohio state statute provides further bondholder protection as most of participants are located in Ohio. The Ohio state auditor has fiscal emergency powers to place a city on Fiscal Watch or Emergency to correct a fiscal stress problem. Moody's believes this structured process to catch any potential non-compliance with the take-or-pay contracts is a positive consideration in the rating. Local governments also cannot be forced into bankruptcy. Only the Ohio tax commissioner can recommend that an Ohio local government file for Chapter 9 bankruptcy. In Chapter 9 bankruptcy, the fiscal affairs of the local government are reorganized and debts can be adjusted but not reduced.
Use of Proceeds
AMP was established pursuant to state statute (Ohio Revised Code Chapter 1702) as a nonprofit corporation in 1971 to provide its members, which are municipal electric utilities, a reliable and competitive power supply.
The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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