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Rating Action:

Moody's affirms A1 on American Municipal Power Greenup Hydro Project, OH; outlook stable

05 Sep 2018

$125.3 million debt affected

New York, September 05, 2018 -- Moody's Investors Service has affirmed the A1 rating on the American Municipal Power, Inc. (AMP) Greenup Hydroelectric Project Revenue Bonds - Series 2016A. The rating outlook is stable.

RATINGS RATIONALE

The A1 rating reflects the established 35-year sound operating record of the 70.2 MW Greenup run-of-the-river hydroelectric facility; the strong take-or-pay contract between AMP Inc. and 47 municipal participants that have a weighted average credit quality in the "A" rating category and are located throughout the four states with no dominant participant; a fully funded debt service reserve and the role that American Municipal Power, Inc. (issuer rating A1 stable) plays in financial oversight and in joint services. The rating also considers the competitive all-in-cost of the Greenup generation with well-below market energy production costs which reflects a very competitive, long-term "green" resource.

The bonds issued in 2016 financed AMP's acquisition of 48.6% of the hydroelectric facility from the City of Hamilton (OH) Electric Enterprise (rated A3 stable). Hamilton owns the balance of Greenup (51.4%) and continues to operate the facility. A strength of the transaction is the fact that the hydroelectric facility has been in operation since 1982 and has registered an average capacity factor since then of 44%. An important factor is the view that the forecasted capacity factor should continue to remain steady as the facility is located on the Ohio River and the lock and dam system requires river flows that are adequate for water transportation and commerce which also produces consistently reliable electric generation capacity factors.

The bond security is derived from AMP's take-or-pay power sales agreements that extend to the final maturity of the debt. The bond security provisions include a 25% step-up and a fully funded maximum annual debt service reserve. No participant has a major portion of the project obligation nor does their share of the hydroelectric generation project represent a material portion of their own power supply mix.

An important consideration in the rating is the benefits provided by AMP, whose issuer rating is A1. The Greenup Project remains a part of AMP's overall strategy of increasing environmental attributes such as non-carbon sources of energy and the diversification of power resources for its participants and reducing regional energy market exposure.

RATING OUTLOOK

The stable outlook is based on our expectation that the Greenup Hydroelectric Project will continue to have steady capacity factors; strong take-or-pay contractual relationship between AMP and its participants will remain and the favorable economic and environmental attributes of the project will persist.

FACTORS THAT COULD LEAD TO AN UPGRADE

- The rating could be upgraded if the participant credit quality improves.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- The rating could be downgraded if project costs rise to a level that participants consider unsupportable and then challenge their take-or-pay power supply contracts with AMP.

- The rating could also be pressured if the average weighted credit quality of participants should erode.

LEGAL SECURITY

The Greenup Project bond security includes AMP's pledge of the revenues in the Trust Estate derived from take-or-pay power sales contracts with municipal electric utility participants payable monthly 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 net revenue covenant and a 1.10x additional bonds test after commercial operation. The parity common reserve account contains a municipal bond debt service reserve insurance policy issued by Build America Mutual Assurance Company in the principal amount equal to maximum annual debt service on the bonds. The participant payments are payable as an O&M expense of their respective electric systems. However, for the Michigan participants (Coldwater (3.45%; Wyandotte (3.39%); Hillsdale (1.40%) and Marshall (1.14%) who pledge is a subordinate lien to O&M and their direct debt.

Legal opinions have been issued that the take-or-pay contracts are valid and enforceable. Also, as an important data point, on December 7, 2007, the Franklin County, Ohio Court of Common Pleas issued a non-appealable order validating the power sales contract relating to the AMP's combined hydro between AMP and the Ohio participants. The power sales contract include step-up provisions which are in all material respects identical to the Greenup provisions.

Several of the participants are located in Michigan, Kentucky and Virginia. Michigan and Virginia have passed specific legislation authorizing take-or-pay contracts, including step-up provisions with out-of-state corporations. Kentucky does not have specific statutory authority for electric plant boards to enter into long-term take-or-pay contracts but the Kentucky State Counsel has opined that KRS Chapter 96 provides sufficient authority for such contracts. There are two Kentucky participants (Princeton and Paducah) that represent 10.56% of AMP's share of the project.

If there is a payment default of any participant, AMP has the power to suspend delivery, which in Moody's opinion creates a significant incentive for the municipal participant to pay given the essential nature of the service. 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.

PROFILE

The Greenup Project is a 70.2 MW run-of-the-river hydroelectric generating facility located on the Ohio River. The Greenup facility entered commercial operation in 1982. The City of Hamilton owned and operated the facility since 1988. AMP and Hamilton are co-licensees under the FERC license through February 28, 2026. As part of the transaction for Hamilton to participate with AMP, Inc. in the development of the 105 MW Meldahl Hydroelectric Project which Hamilton is a 51.4% participant, AMP and Hamilton agreed that AMP would acquire 48.6% of Greenup, with the balance remaining with Hamilton and the city will still operate Greenup.

METHODOLOGY

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.

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 credit rating action on the support provider and in relation to each particular credit 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.

Daniel Aschenbach
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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