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Rating Action:

Moody's assigns A1 rating to AMP Inc. Prairie State's Series 2015 A and B;

16 Dec 2014

Affirms ratings and the outlook is stable

New York, December 16, 2014 --

Moody's Rating

Issue: Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2015A; Rating: A1; Sale Amount: $524,925,000; Expected Sale Date: 12-24-2014; Rating Description: Revenue: Government Enterprise

Issue: Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2015B; Rating: A1; Sale Amount: $138,755,000; Expected Sale Date: 12-24-2014; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has assigned the rating of A1 on the American Municipal Power Inc. $524,925,000 Prairie State Energy Campus Project Revenue Bonds Refunding Series 2015 A and $138,755,000 Refunding Series 2015 B. AMP Inc. may issue direct purchase bonds on an unrated basis. At the same time, Moody's affirmed the A1 rating on the portions of the American Municipal Power Inc. (AMP) outstanding Prairie State Energy Campus Project Revenue Bonds, Series 2008 A, Series 2009 A bonds that are not refunded as well as Series 2009 B and C and Series 2010 A. The rating outlook is stable. The bonds are expected to be sold in late December 2014.

Rating Rationale:

The main consideration in the assignment and affirmation of the A1 rating is the strong bond security which includes the unconditional take-or-pay obligation of 68 municipal project participants in the AMP Inc. Prairie State project to pay O&M and debt service on the revenue bonds. The Prairie State Project represents AMP's 23.26% ownership interest in the 1628 MW coal-fired generation facility and adjacent coal mine that has 32 years of Illinois Basin fuel supply. 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 revenue bonds.

The two-unit coal-fired generation facility went into commercial operation in 2012. The obligation of the AMP participants is an unconditional obligation provided for in state statutes and is payable by participants regardless whether the project operates or not. AMP's Prairie State municipal utility participants were fully compliant with their legal obligations in 2014.

The average weighted credit quality of the participants is in the mid "A" rating range but Moody's weights heavily that the numerous participants are spread across a large geographic area which reduces concentration risk. Also no one participant's obligation represents a major portion of the total AMP Prairie State revenue bond obligation and Prairie State coal fired generation overall represents on average 16% of AMP's power supply mix.

The service area economy of the participants continues to rebound from the recession, yet demand growth is slower than what had been projected. Electric loads are back to 2007 levels with energy efficiency programs having an impact on demand growth.

The rating further considers the important role American Municipal Power Inc. (A1 issuer rating, stable outlook) plays in power supply planning and procurement 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 much 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. In 2014, the units operated at a somewhat lower capacity factor than budgeted at nearly 70% in 2014. The impact of less generation versus budget on current retail rates of participants was minimized by the use of available unspent funds being applied to participant billings in 2013 and the use of a rate stabilization fund to ease higher costs in 2014.

The current offering provides for a restructuring of principal with principal repayment now beginning in five years leading to debt service savings of about 4% through a soft put on the Series 2015 B bonds. AMP Inc. will take the cash flow savings in excess of $10 million annually in the first five years from the new debt service schedule to provide additional cushion to ease impact of higher Prairie State costs on ratepayer bills. While all AMP participants have met their contractual obligations to date, the debt restructuring gives more headroom to absorb the weight of the related fixed costs. Overall AMP's wholesale rates that incorporate Prairie State and other owned generation costs and market purchases are now competitive and improve further with the debt service savings. This also helps to mitigate the phase-in of AMP's new hydro-electric generation projects expected to be commercial in 2015.

With respect to operational performance, should Prairie State not meet its objective of operating at 80% capacity factor over the long-run, rating pressure could surface as a lower capacity factor would likely raise participant's costs. This is particularly the case if we believed that a substantially lower than expected capacity factor would be sustained. 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. Forecasted capacity factors for Prairie State generation were not achieved in 2014 due to longer than expected outages to make repairs and changes to improve performance. AMP management again expects improvement in 2015 to a capacity factor in the 80% range and the trend over the past several months indicates progress towards that objective. Newly appointed Prairie State management and the uncovering of several performance issues could result in a better performance record.

Moody's believes however that the value of Prairie State as a long term asset remains favorable as a source of long-term stable electrical capacity for the participants. The plant enjoys a very competitive onsite 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 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. AMP's coal-fired generation is well below the region's average reliance on coal and Prairie State represents the most advanced technology; already meeting the most stringent environmental standards and being among the newest units constructed. AMP reports that Prairie State is fully compliant with the MACT being considered as an existing plant for the Mercury and Air Toxics rule.

Moreover, we understand that Prairie State's existing technology already surpasses the EPA's new proposed Carbon Rule for existing coal-fired generating units. Without advancements in carbon capture and control technology, it is unlikely that further plant specific restrictions are possible given the state and cost of such technology. In the extreme case and in the absence of carbon pricing, EPA regulation could be implemented that would require reduced output of coal-fired generating units which, in the unlikely event that it was adopted, would present challenges for Prairie State along with many other coal-fired units.

The proposed EPA carbon rule is not expected to be finalized until June 2015. AMP supplies most of its participants with a broad set of power supply sources including 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 expected to remain in full compliance with the strong take-or-pay contracts that lend credit stability.

What Could Change the Rating UP:

In light of the environmental challenging facing coal-fired generation and the single plant concentration risk that exist, limited prospects exist for the rating to be upgraded in the near to intermediate term. Longer term, the rating could be upgraded should the all-in costs of Prairie State improve relative to regional comparable energy prices on a sustained basis, and should project participant credit quality across the pool of participants improve.

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 is 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 unit's capacity factors decline to below 65% on a sustained basis.

Credit Strengths:

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

*Strong and broad diversity is a positive one notch rating factor.

*Power supply contract for 50-years by participants in the AMP Inc. Prairie State Project indicating strong support for AMP's role as a regional power supplier

*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 AMP 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

*Ample access to internal and external liquidity sources

Credit Challenges

*Some of the smaller participants have questioned the higher than projected cost per Mwh of Prairie State. Anti-coal activists have been attempting to get smaller cities to bring litigation against the project. However, 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 will become a pressure for AMP.

*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 current position due to the strong environmental attributes for the facility, it remains subject to potential further regulation.

*First two years of operational capacity factors ranged well below expectation in the 60% range due to management and mechanical issues such as slag and boiler issues.

*Prairie State is now sold into the PJM market. 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 PJM market. The estimated cost is about a $5/Mwh added to the price of power.

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 assigns A1 rating to AMP Inc. Prairie State's Series 2015 A and B;
No Related Data.
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