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Rating Action:

Moody's assigns A1 rating to the AMP Inc. Fremont Energy Center Proj Rev Bds Ref; outlook stable

07 Dec 2017

New York, December 07, 2017 -- Issue: Revenue Bonds, Refunding Series 2017A; Rating: A1; Rating Type: Underlying LT; Sale Amount: $93,000,000; Expected Sale Date: 12/11/2017; Rating Description: Revenue: Government Enterprise;

Summary Rating Rationale

Moody's Investors Service has assigned an A1 rating to the $93 million American Municipal Power Inc. - Fremont Energy Center Project Revenue Bonds, Refunding Series 2017A. The upcoming transaction is an advance refunding of a portion of the Series 2012 B bonds for present value savings. Moody's maintains the A1 rating on the outstanding $511,710,000 Fremont Energy Center Project Revenue Bonds. The rating outlook is stable.

Proceeds from the upcoming transaction is intended to advance refund Series 2012 B bonds for present value and level savings.

The A1 rating takes into consideration the average weighted credit quality in the A2 to A3 range on the 86 Fremont Energy Center Project (AFEC) participants who represent unregulated municipal electric utilities serving customers in a broad geographic area; the degree of participant diversity; the strong take-or-pay power sales contracts and the fully funded maximum annual debt service reserve; the sound monitored cost recovery process; AFEC's competitive operating performance; AMP's sound liquidity profile and its effective power supply management for its members. Delaware Municipal Electric Corporation (DEMEC), (A2 stable) is the largest participant at 15.07% of the total AFEC obligation. DEMEC also has a take-or-pay contract with its members for its participant share. Please refer to Moody's AMP's issuer rating report dated November 1, 2017 detailed the A1 rating assigned.

AMP's operation of Fremont, a two unit 675 MW natural gas fired combined cycle facility, has provided power resource diversity for AMP's members from this highly efficient plant that went into commercial operation in January 2012. Fremont has demonstrated strong operating performance record as measured by availability and capacity factors since its commercial date. Through September 2017, AFEC recorded sound operating performance with a 90.3% availability factor; net capacity factor of 48.06%; and an average heat rate of 7,433/Btu/kwh. FY 2016 performance was affected by 2 forced outages consisting of a combustion turbine row 4 blade event and a failed steam turbine turning gear motor. Both mechanical issues were resolved. Fremont generation supplies on average of about 15% of the AFEC participants' peak load requirements in 2017. On average due to low natural gas prices, AFEC provides a competitive resource for its participants.

The AFEC Project Revenue bonds are payable from and secured solely by the Trust Estate; the indenture includes a net revenue pledge by AMP. Each AFEC participant has a fixed participant share. The payments are to be made as an O&M expense of the participant's electric system. The obligation to make payments is incorporated in the long-term take-or-pay contract such that the payments are not subject to any reduction, whether by offset, counterclaim, or for any other reason, nor shall they be conditioned on the performance of AMP, or any participant, and the payment shall be made whether the project is completed, operable, operating, or for any other reason. There is a 25% step-up provision.

Rating Outlook

The stable credit outlook reflects continued expectations of solid operating performance and AFEC's value to AMP participants with a competitive power supply including fuel diversity. While the restructured wholesale energy marketplace presents challenges, the stable rating outlook factors in AMP's strong track record in managing generation risk for its members. Strong take-or-pay contracts that are monitored by AMP for compliance, Fremont's continued strong operating performance and AMP's favorable liquidity position are additional factors underlying our stable outlook.

Factors that Could Lead to an Upgrade

Significant improvement in participant credit quality

Factors that Could Lead to a Downgrade

Significant and extended deterioration in the generation asset performance or in the credit quality of participants could lead in a downgrade

Any noncompliance with the take-or-pay contracts would cause the rating to be downgraded.

Legal Security

The AFEC Project Revenue bonds are payable from and secured solely by the Trust Estate pledged under the Indenture that includes a net revenue pledge by AMP. Each AFEC participant has a fixed participant share and the participant is required to pay AMP on a monthly basis an amount equal to its proportionate share of AMP's revenue requirement. The payments are to be made as an O&M expense of the participant's electric system. The obligation to make payments are incorporated in the long-term take-or-pay contract agreement such that the payments are not subject to any reduction, whether by offset, counterclaim, or for any other reason, nor shall they be conditioned on the performance of AMP, or any participant, and the payment shall be made whether the project is completed, operable, operating, or for any other reason. Niles and Galion, Ohio, with a combined 5.23% share of AFEC's take-or-pay obligation have been determined by Ohio State Auditor to be in Fiscal Emergency. Both cities are current on all their obligations payable to AMP. There is a 25% step-up provision which means if it had to be exercised, the other project utilities obligated for the AFEC revenue bonds would have to step-up to 25% of their original share taking over any defaulted share. Delaware Municipal Electric Corporation (DEMEC), (A2/ stable) also has a take-or-pay contract for its participant share and a 25% step-up provision.The bond security covenants include a 1.10 x additional bonds test and 1.10x rate covenant. The debt service reserve is equal to the least of maximum annual debts service, 125% of average annual debt service or 10% of original principal of parity obligations.Flow of Funds:AMP transfers monthly payments received from the participants to the Trustee and funds the waterfall under the Master Indenture Operating Account in the following way: the Fuel Reserve Account; Working Capital Account(estimated $12.5 million) ; Derivatives Receipts Account, General Account; Fuel Hedge Reserve Account; Fuel Hedge Reserve Account; Capitalized Interest Account; Interest Account; Derivatives Payment Account; Principal Account; Sinking Fund Account; Redemption Account; Parity Common Reserve Account (estimated at $34.5 million funded from bond proceeds); Subordinate Obligations Account; Reserve and Contingency Account; the Renewal and Replacement Account; the Overhaul Account; the Capital Improvement Account; the Rate Stabilization Account; the Environmental Improvement Account; and the Self-Insurance Account. AMP's municipal utility members purchase non-project capacity and energy from AMP pursuant to take-and-pay contracts. The contracts are not secured by the full faith and credit of the respective cities. AMP members by their choice also participate on a take-or- pay basis in AMP-sponsored generation projects such as AMP's share of the financing of AFEC. If there is a payment default, AMP has the power to suspend delivery, which we believe creates a significant incentive for the members to pay given the essential nature of the electric service. If nonpayment persists, AMP could bring litigation against the member and seek a judgment but AMP also has additional remedies which would be pursued prior to litigation. AMP has never experienced a payment default by a member. Payment compliance is aided by AMP's credit monitoring program which produces early warning reports should a member be in fiscal distress.

Use of Proceeds

The upcoming transaction is an advance refunding of a portion of Series 2012 B bonds for present value and level savings.

Obligor Profile

AFEC project is a two-unit natural gas fired, combined cycle, electric power generation plant with capacity of 512 MW (unfired) 675 (duct fired) consisting of two Siemens-Westinghouse combustion turbines, two heat recovery steam generators and one steam turbine and condenser. Fremont went into commercial operation in January 2012 and has had a good operating record.

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.
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U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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