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Rating Action:

Moody's affirms A3 American Municipal Power, Inc. Meldahl Hydro Project Revenue Bonds; outlook stable

18 Jun 2015

Approximately $685 million of debt securities affected

New York, June 18, 2015 -- Moody's Investors Service has affirmed the A3 rating on the outstanding $685,100,000 Meldahl Hydro Project (Meldahl) Series 2010 A to E Revenue Bonds. The bonds financed the construction of the 105 MW hydro-electric facility on the Ohio River. The rating outlook is stable.

SUMMARY RATING RATIONALE

The A3 rating considers the strong bond security which includes the unconditional take-or-pay obligation of the 48 participants in the project to pay O&M and debt service on the bonds. Of note is the 51% obligation share from the City of Hamilton, Ohio, whose electric revenue bonds are rated A3 with a stable outlook, which bears significant weight in the rating. The obligation of the 48 participants is absolute and unconditional regardless whether the project is constructed, completed, operating or operable. Interest on the debt during construction is capitalized until the project is commercial. The project has a fully funded maximum annual debt service reserve.

While construction has advanced and we understand that the first of the Project's three units will be in service in the third quarter of 2015 and the second and third units are expected to be in service the fourth quarter of 2015, our maintenance of an A3 rating with a stable outlook is recognition that the project still needs to be completed and related costs need to be incorporated into participant utility rates. Moreover, the Meldahl project is one of four AMP hydro projects under construction and is expected to be completed In 2015, commissioning risk for the project has increased. While Meldahl's costs remain close to budget, there have been project delays related to flooding along with permit related delays at the project. AMP Inc. has used its line of credit to manage the additional capitalized interest.

The rating assigned also considers the expected environmental attributes of the hydro facility and the long-term economic value of the project, as well as American Municipal Power, Inc.'s (AMP) A1 Issuer Rating who has been an effective power supply agency to its members.

The levelized cost of energy and power from Meldahl is projected to be in the $80/MWh range given the forecasted capacity factor. According to projections, the all-in cost is flat at least through 2038 due to level debt service and minor operating expense changes. While the all-in cost is above today's regional energy market price, the energy and capacity is a long term source of carbon neutral electricity which makes up a small percentage of each municipal participant's power supply mix. The US Army Corps of Engineers Ohio River lock and dams are required for commercial river transportation which is key to the expectation for favorable capacity factors in the 50% range. We understand that the Meldahl Project has the highest projected capacity factor of any of the new hydroelectric projects AMP is undertaking.

The Meldahl project is part of AMP's power resource diversity strategy to lessen the exposure of the participating municipal utilities to the regional wholesale energy markets. AMP has participated in the financing of a portion of the Prairie State coal-fired generation facility and the Fremont Energy Center natural gas fired units. AMP has also issued revenue bonds (Combined Hydroelectric Project rated A3) to finance three new hydroelectric facilities along the Ohio River Cannelton (88MW); Smithland (76MW); and Willow Island (44MW).

The Meldahl Project will be operated by Hamilton (electric revenue rated A3), who has a 51.4% ownership interest in the project and share of the output. A management committee has been established with AMP and Hamilton representation. The AMP-Hamilton agreement also provides that AMP will acquire 48.6% (34MW) of Hamilton-owned Greenup hydro facility. This transaction is expected to take place 60 days after the Meldahl project is commercial. AMP expects to coordinate the production capabilities of the six hydro facilities (the four under construction) and two existing units Greenup and AMP member owned Belleville.

OUTLOOK

The rating outlook is stable given the Meldahl Project is near commercial operation along with the recognition of strong bond security provisions.

What Could Change the Rating UP:

The rating could be upgraded if Hamilton's credit position improves post construction when Meldahl is in commercial operation.

What Could Change Rating DOWN:

The rating could be downgraded if the project costs rose further to a level that participants considered unsupportable and they challenged their power supply contracts with AMP; or the project got significantly delayed , or if credit quality of the participants eroded.

OBLIGOR PROFILE

AMP operates like a joint powers agency and most of its members have home rule charters which permit retail rates to be set by the local governing boards with no external regulation. The Meldahl Project is a generation project secured by take-or-pay contracts with 48 member participants.

BOND SECURITY

Under the Master Trust Indenture, AMP pledges its net revenues, derived from long-term project take-or-pay power sales contract with the Meldahl Project's 48 municipal participants, payable monthly regardless of whether the project is completed, operating, or operable. The contracts are payable from the revenues of municipal utility enterprises, the funds of which are accounted for separately from city general government funds. Member payments are payable as O&M expenses of their respective electric systems.

The take-or-pay contracts have a 106% step-up provision. The master trust indenture includes a 1.10x rate covenant, 1.10x additional bonds test after commercial operation, and a fully funded maximum annual debt service reserve. There is also a six-month BABs and CREBs interest rate subsidy reserve. Should the federal government reduce the interest rate subsidy on BABs, AMP participants are required to pay their allocated share of cost increase.

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 another hydroelectric project between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions exactly similar to the Meldahl 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 6% of the project (which is why step-up is sized at 106%).

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 106% step-up provision that requires non-defaulting participants to be legally responsible for any defaulted costs for up to 106% of their original entitlement.

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 monthly evaluations of participant credit by monitoring a credit scorecard that includes financial metrics.

USE OF PROCEEDS

Not applicable

PRINCIPAL 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

Chee Mee Hu
MD - Project Finance
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 A3 American Municipal Power, Inc. Meldahl Hydro Project Revenue Bonds; outlook stable
No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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