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;
