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Rating Action:

Moody's Affirms A1 on American Municipal Power Prairie State Revenue Bonds; Outlook Stable

05 Dec 2013

Rating Action Affects Outstanding $1.7 Billion Revenue Bonds

New York, December 05, 2013 -- Moody's Investors Service has affirmed the A1 rating on the American Municipal Power Inc. (AMP) outstanding $1,696,800,000 Prairie State Energy Campus Project Revenue Bonds, Series 2008 A, 2009 A, B and C and Series 2010 A. The outlook is stable.

Rating Rationale:

The A1 credit rating rests on the strong bond security which includes the unconditional take-or-pay obligation of 68 municipal project participants in the Prairie State project to pay O&M and debt service on the bonds. The Prairie State Project is a 1629 MW coal-fired generation facility that went commercial in 2012. The obligation of the AMP participants is an unconditional obligation provided for in state statutes regardless whether the project operates or not. AMP's Prairie State municipal utility participants were compliant with their legal obligations in 2012-2013.

The average weighted credit quality of the participants is A2 with the numerous participants spread across a large geographic area. The service area economy of the participants has generally rebounded since the recession, yet demand growth is slower than what had been projected. Electric loads are back to 2007 levels with energy efficiency programs also having an impact on demand growth. The rating also considers the important role AMP Inc. (A1 issuer rating , stable) plays in power supply including the successful implementation of its fuel diversification strategy and for its provision of other energy services to municipal participants.

Both units of Prairie State went commercial in 2012, at a lower capacity factor than had been originally projected due to a mechanical issue impacting Unit 2. The delay in commercial start up sparked some customer criticisms since debt service was being paid prior to any energy being received. Since the units went into commercial operation, they have subsequently operated at a lower capacity factor of about 66% ,as start-up issues such as tube leaks and boiler issues are being worked out. This "shake-out period" is typical for a major new power plant in the first year of operation and the capacity factor is close to industry experience for first year of a coal plant's operation. The impact of less generation versus budget on current retail rates of participants was minimized by use of available unspent funds applied to participant billings in 2013. The AMP Inc. board also approved a Rate Stabilization Plan for FY 2013 -2014.

Should Prairie State not meet its objective of higher than an 80% capacity factor after the planned Spring 2014 outage, this would be a significant credit pressure. Moody's believes, however, that Prairie State management has a defined proactive plan to improve plant performance and progress is being made towards that end. A slag issue and a boiler improvement project to fine tune the combustion, air flow, pressures and temperatures are being resolved and have recorded progress. Management projects an 81.7% capacity factor in 2014.

A negative development also has been the impact of changes in the Midwest ISO market since Prairie State was under construction. Locational congestion pricing in the Midwest ISO market has added new costs to the Prairie State generation output. As performance of the two coal-fired generation units improve, projected congestion pricing will add additional costs to the transmission of the energy into the Midwest ISO market. The estimated impact is about a $5/Mwh higher price of energy. AMP Inc. and the other Prairie State project owners are looking at various alternatives to mitigate this new pricing issue.

Moody's believes that the value of the long term asset remains favorable as a source of long-term stable capacity for the participants. The plant enjoys a very competitive onsite 30-year supply of coal reserves 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 the shutdown of older coal-generation; pricing of carbon through regulation; and stronger economic trends. See Moody's special comment "Prairie State Coal-Fired Generation Project: An Economic Asset Which Should Support Owner's Willingness to Meet Obligation to Bondholders" published December 2012.

The participants have a diverse power supply mix with Prairie State coal generation representing on average about 16% of their peak load requirement. Some participants have higher percentages in the 20% range. AMP's coal-fired generation is well below the region's average reliance on coal and Prairie State represents the most advanced technology; has the most stringent environmental standards and is among the newest units constructed. AMP reports that Prairie State is fully compliant with the MACT rule and will be considered as an existing plant for the Mercury and Air Toxics rule. The EPA is expected to introduce a greenhouse gas emissions output restriction for existing coal-fired generating units in 2014. Without advancements in carbon capture and control technology, at this point it is unlikely that plant specific restrictions are possible given the state and cost of the technology. Absent carbon pricing the worst case could be EPA regulation that would reduce output of coal-fired generating units which could present challenges for Prairie State as well as other coal-fired units in the Midwest.

AMP supplies most participants with a broad set of power supply sources including through owned hydro and gas fired generation and through power market purchases. This power resource diversity is a positive credit consideration. 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.

OUTLOOK

The rating outlook is stable given that both units are commercial and participants are being billed for their respective shares of O&M and debt service. The strong take-or-pay contracts also lend credit stability. Failure to improve the two coal-fired generating units capacity factors after the Spring 2014 outage to average above 80% would result in downward rating pressure.

What Could Change the Rating UP:

The rating could be upgraded should the all-in costs of Prairie State improve relative to regional comparable energy prices, and project participant credit quality improves.

What Could Change the Rating DOWN:

The rating could be downgraded if any participant successfully challenges through litigation their take-or-pay Prairie State supply contract that are the underpinning of credit quality. The rating could also be downgraded should AMP Prairie State participant credit quality weaken. Also downward rating pressure would develop should the Prairie State production cost rise significantly and impact retail electricity prices or should the two units not reach a capacity factor above 80% in 2014.

CREDIT STRENGTHS:

*Take-or-pay contracts with municipalities with a weighted average credit quality of A2

*Power supply contract for 50-years by members to join the Prairie State Project indicates strong support for AMP's role as a regional power supplier

*Several Prairie State enhancements not originally incorporated in the budget are estimated to have substantial long term savings including power plant output improving to above nameplate capacity; reduction in transportation costs due to ash disposal site being located closer to plant; and larger permitted cuts in mine which improves mining efficiency.

*The Prairie State Project has several unique advantages including a prepaid coal supply that should be relatively stable in price; adjacent location of coal reserve and mine near coal-fired generation facility which eliminates rail transportation risk; and advanced environmental controls which meet current standards for pollution control and are designed to emit less carbon

*Competitive current and projected member retail rates

*AMP has a well-regarded fiscal monitoring system to provide ongoing assessment of members' credit profiles including evaluation of financial metrics

*Coal as % of AMP energy mix is about 25% versus about 75% in Ohio

*Limited deregulation risk at retail level for municipal electric utilities

CREDIT CHALLENGES:

*No assurances that environmental regulation will remain the same. Any federal legislation that addresses greenhouse gas emissions could have an adverse impact on the cost of coal-fired generation

*Some of the smaller participants have questioned the higher than projected cost per Mwh of Prairie State. Requests for an Ohio State Attorney General investigation has not resulted in any review of the power sales contracts those participants entered into prior to project construction

*Regional energy prices have fallen due to the decline in natural gas prices. To the extent natural gas prices remain low and drive the regional energy price, this is a pressure.

*Federal regulation of carbon as a greenhouse gas and under the Clean Air Act subjects all coal-fired generation facilities with the specter of future regulations that could reduce the economics of this generation. While Prairie State is in a favorable position due to the strong environmental attributes for the facility, it remains subject to potential further regulation.

*First year of operation capacity factors ranged well below forecast in the 60% range due to boiler issues.

*Changes in the Midwest ISO market since Prairie State was under construction include locational congestion pricing. As performance of the two coal-fired generation units improves, projected congestion pricing will add additional costs to the transmission of the energy into the Midwest ISO market. The estimated cost is about a $5/Mwh higher price of power.

RATING METHODOLOGY

The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dan Aschenbach
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael G Haggarty
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms A1 on American Municipal Power Prairie State Revenue Bonds; Outlook Stable
No Related Data.
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