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Rating Action:

Moody's assigns A2 to AMP, Inc - Combined Hydroelec. Proj. (OH) Series 2020A; affirms existing A2; outlook stable

22 Jan 2020

New York, January 22, 2020 -- Moody's Investors Service ("Moody's") has assigned an A2 rating to American Municipal Power (AMP), Inc. - Combined Hydroelectric Projects Revenue Bonds, Refunding Series 2020A. The approximately $130 million in refunding bonds are being issued for interest cost savings. Concurrent with this action, Moody's affirmed the A2 rating on AMP, Inc. - Combined Hydroelectric Project's approximate $2.0 billion of outstanding unrefunded parity revenue bonds. The rating outlook is stable.

RATINGS RATIONALE

AMP, Inc - Combined Hydroelec. Proj.'s A2 rating considers the project's strong bond security, which is anchored by the unconditional take-or-pay obligation of a diverse group of 79 municipal project participants to pay all O&M and debt service costs. The participants' take-or-pay obligation is pursuant to the power sales contract through at least December 31, 2057, which extends 7 years after the longest-dated debt maturity in 2050. During the length of the contract, all costs are payable by the project participants, irrespective of if the three Ohio River hydroelectric plants, Cannelton (88 MW), Smithland (76 MW) and Willow Island (44 MW) generate power or not. The project also benefits from a maximum annual debt service reserve fund, a 25% step-up provision and access to AMP's $600 million revolving credit loan facility.

The A2 rating also considers the non-carbon emitting attributes of the hydro project, in addition to the long-term economic value to the participants, given the project is expected to generate power for decades after debt maturity. However, the project's expected levelized all-in cost of energy and capacity of roughly $145/MWh in 2020 is high relative to current market prices for energy and capacity, owing to the large capital costs to construct the hydroelectric plants. Finally, given the commercial use of the Ohio River and regulation by the US Army Corps of Engineers, the project benefits from a favorable long-term historical and expected average capacity factor around 50%.

RATING OUTLOOK

The rating outlook is stable given the hydro generation units are all operational and our expectation that the participants will remain in full compliance with the strong take-or-pay contract that underpins the credit profile.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Project participant credit quality improves

- Adjusted debt ratio declines to below 75% on a sustained basis

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Any participant successfully challenges, through litigation, the take-or-pay contract

- Participant credit quality weakens

- Production cost rises significantly and impacts participant retail electricity prices

LEGAL SECURITY

Under the master trust indenture, AMP pledges its net revenues, derived from the take-or-pay power sales contract with municipal electric utility participants, payable monthly regardless of whether the project is operating or operable. The take-or-pay contract has a 25% step-up provision. The master indenture includes a 1.10x rate covenant; 1.10x additional bonds test after commercial operation; and a fully funded maximum annual debt service reserve. The participant payments are payable as an O&M expense of their respective electric systems.

Legal opinions have been issued that the take-or-pay contract is valid and enforceable. On December 7, 2007, the Franklin County, Ohio Court of Common Pleas issued a non-appealable order validating the master trust indenture and the power sales contract between AMP and the Ohio participants, including the take-or-pay and step-up 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 4.3% of the project. 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 25% step-up provision that requires participants to be legally responsible for any defaulted costs for up to 25% of their original entitlement. Payment compliance is aided by a credit monitoring program that AMP manages which identifies 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

Bond proceeds of the Series 2020A bonds will be used to refund certain outstanding Series 2009B (BABs) and pay the cost of issuance.

PROFILE

AMP operates like a joint powers agency and its Ohio members have home rule charters which permit retail rates to be set by the local governing boards with no external regulation. AMP's non-Ohio members generally have broad statutory authority to set retail rates. The AMP, Inc - Combined Hydroelec. Proj.is a generation project secured by a take-or-pay contract with 79 member participants.

The project consists of three separate, run-of-the-river hydroelectric generating facilities on the Ohio River. Each facility utilizes substantially the same design elements and entails the diversion of water from an existing Army Corps dam through bulb turbines to generate electricity. The facilities have an aggregate net rated capacity of 208 MW (88 MW from the Cannelton Project, 44 MW from the Willow Island Project and 76 MW from the Smithland Project).

METHODOLOGY

The principal methodology used in these ratings was US Municipal Joint Action Agencies Methodology published in August 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Thomas Brigandi
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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