AMP Inc. sells Prairie State refunding bonds
New York, October 20, 2017 -- Issue: Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2017A; Rating: A1; Rating Type: Underlying LT; Sale Amount: $67,000,000; Expected Sale Date: 10/27/2017; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service has assigned an A1 to the $67 million American Municipal Power Inc. Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2017A. Moody's also maintains the A1 rating on the American Municipal Power Inc. (AMP) outstanding $1,562,250,000 Prairie State Energy Campus Project Revenue Bonds. The Series 2017 A bonds are scheduled to sell in late October 2017 and the proceeds will be used to refund certain maturities of outstanding Series 2008A and 2009A. The outlook is stable.
The main consideration in the assignment of the A1 credit rating is the strong bond security which includes the unconditional take-or-pay obligation of 68 Midwestern municipal project participants (cities) in the AMP Inc. Prairie State project to pay O&M and debt service on the revenue bonds. The obligation pursuant to the power sales contract through December 31, 2057 of the AMP municipal participants is an unconditional obligation and is payable by participants regardless whether the project operates or not.
The Prairie State Project represents AMP's 23.26% ownership interest in the 1628 MW coal-fired generation facility and also financed the adjacent coal mine that has 27 years of Illinois Basin coal supply. Prairie State is a supercritical, coal-fired, mine mouth electric generating facility and utilizes the most advanced coal-fired generation technology. It already meets the most stringent environmental standards on coal-fired generation units and is among the newest units constructed. AMP reports that Prairie State is fully compliant with the Mercury and Air Toxic rule. Prairie State coal-fired generation units averaged a 75% net capacity factor between 2014 through August 2017, with the plant management's objective to get into the 80% range. Operating at this capacity factor indicates the plant is being consistently competitively dispatched into the regional energy markets. The heat rate and O&M costs were among the lowest in Illinois for peer base load coal-fired generation units.
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's revenue bonds.
The average weighted credit quality of the AMP participants is A2 but Moody's also weighs heavily that the 68 participants are spread across a large geographic area which narrows concentration risk. Another strength is no one participant's obligation (Danville, Virginia (GO-Aa3) has the highest ownership at 13.5%) represents a major portion of the total AMP Prairie State revenue bond obligation. Prairie State coal fired generation represents no more than 16% of 2018 total energy of AMP membership. Such diversity reduces the risk of any one city from creating broader fiscal problems for the agency if there is ever noncompliance with the Prairie State take-or-pay contracts. Also, an important strength is that AMP has a strong fiscal oversight program to monitor participant finances and contract compliance.
The rating further considers the important role AMP plays (A1 issuer rating, stable outlook). AMP is involved with power supply planning and procurement for the AMP participants including the successful implementation of its fuel diversification strategy, including Prairie State, and for its provision of other energy services to municipal participants. AMP has just brought on line during 2016-2017 over 300 MWs of new hydro-electric generation further diversifying member power supply. 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. AMP's strong liquidity is also important to the financial position of the project.
Moody's believes the value of Prairie State as a long term asset remains favorable as a source of long-term stable electrical base load capacity for the participants. The plant enjoys a very competitive on site 27-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 sustained lower natural gas prices; the shutdown of older nuclear and coal-fired generation units; potential pricing of carbon through regulation; and stronger economic trends.
Without advancements in carbon capture and control technology, further plant specific carbon restrictions are not possible given the state and cost of such technology. Absent carbon pricing, the worst case could be EPA regulation in the future that would reduce output of coal-fired generating units. This could present challenges for Prairie State as well as for the other coal-fired units in the Midwest. Trading of carbon credits if enacted in the future could add to the cost of Prairie State complicating its economic position in the longer-term.
The proposed Trump Administration EPA revision of the Clean Power Plan represents a reduction in immediate regulatory risk for Prairie State and it doesn't appear Illinois will further regulate carbon unless there is national plan.
Rating Outlook
The rating outlook is stable given that both units are commercial and operating at strong capacity factors and participants are expected to remain in full compliance with the strong take-or-pay contracts that lend credit stability.
Factors that Could Lead to an Upgrade
All-in costs of Prairie State improve relative to regional comparable energy prices.
Project participant credit quality improves.
Factors that Could Lead to a Downgrade
Any participant successfully challenges through litigation their take-or-pay Prairie State contract that are the underpinning of credit quality.
AMP Prairie State participant credit quality weakens
The Prairie State production cost rises significantly and impacts participant retail electricity prices or should the two units net capacity factors decline significantly in the next year.
Legal Security
Under the master trust indenture, AMP pledges its net revenues, derived from take-or-pay power sales contracts with 68 municipal participants, payable 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 rate covenant and a 1.10x additional bonds test after commercial operation. There is a fully funded maximum annual debt service reserve.
The member payments are payable as O&M expenses of their respective electric systems. All participants are current on the payment of AMP billings.
The power sales contract also has a "fall back provision-if the take-or-pay provision is invalidated by any court of competent jurisdiction, the obligation becomes a take and pay obligation not subject to reduction, whether by set-off, counterclaim and is not conditioned on performance of either party.
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 a hydroelectric project (Meldahl) between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions that are exactly similar to the provisions securing these bonds. Most of the participants in this project are located in Ohio. Several of the participants are located in Michigan, Virginia and West Virginia. Michigan and Virginia have passed specific legislation authorizing take-or-pay contracts, including step-up provisions with out-of-state corporations.
If there is a payment default of any participant, AMP has the power to suspend delivery. 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 step-up provision that requires non-defaulting participants to be legally responsible for any defaulted costs for up to 25% of their original entitlement. AMP would also enforce the contract on the defaulting party. 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 a well-regarded monthly evaluation program of participant credit by AMP monitoring a credit scorecard that includes financial metrics.
Importantly, an Ohio state statute provides further bondholder protection as most of participants are located in Ohio. The Ohio state auditor has fiscal emergency powers to place a city on Fiscal Watch or Emergency to correct a fiscal stress problem. Moody's believes this structured process to catch any potential non-compliance with the take-or-pay contracts is a positive consideration in the rating. Local governments also cannot be forced into bankruptcy. Only the Ohio tax commissioner can recommend that an Ohio local government file for Chapter 9 bankruptcy. In Chapter 9 bankruptcy, the fiscal affairs of the local government are reorganized and debts can be adjusted but not reduced. AMP is not authorized to file for bankruptcy and cannot be forced into bankruptcy.
Use of Proceeds
The current offering is an advanced refunding of portions of outstanding bonds. The refunding is being done to maximize interest cost savings to lower debt service over the next five years to better position the project cost structure in relation to participant billings. The final maturity of the AMP debt will not be extended.
Obligor Profile
AMP was established by state statute (Ohio Revised Code Chapter 1702) as a non-profit corporation in 1971 to provide its members, which are municipal electric utilities, a reliable and competitive power supply. AMP is governed by a 21-member Board of Trustees made up of officials from 20 member municipalities and Delaware Electric Municipal Electric Corporation (DEMEC). 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.
Methodology
The principal methodology used in this rating was US Public Power Electric Utilities with Generation Ownership Exposure published March 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
