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Rating Action:

Moody's assigns A2 to American Municipal Power Solar Electricity Prepayment Project Revenue Bonds; outlook stable

19 Dec 2018

Initial Rating of Solar Prepayment Financing

New York, December 19, 2018 -- Moody's Investors Service has assigned a rating of A2 to the $56 million American Municipal Power, Inc. (AMP) Solar Electricity Prepayment Project Revenue Bonds, Series 2019A (Green Bonds) scheduled to sell in January 2019. The outlook is stable.

RATINGS RATIONALE

The A2 rating considers the strength of the bond security pledge between the 22 AMP participants with an average A2 credit quality and AMP, Inc. (AMP: A1 stable) under a Power Sales Contract (PSC) obligating the participants to pay their share of a demand charge sufficient to provide cash flow equal to 110% of aggregate annual debt service (after taking into account amounts deposited to the Rate Stabilization Fund created under the Indenture) providing a high degree of cash flow predictability over the term of the debt. The A2 rating also considers the existence of a Power Purchase Agreement (PPA) between AMP and DG AMP Solar, LLC (the Seller), a subsidiary of NextEra Energy, Inc. (NextEra: Baa1 stable) wherein AMP has prepaid for twenty-five years of output following COD of each site for solar facilities located behind the meters of the AMP members. For more information on AMP, please refer to the most recent Credit Opinion which can be found on AMP's landing page on moodys.com.

A key credit attribute in the financing is the provision in the PSC which provides that so long as "any" energy is delivered from "any" System to "any" delivery point in a calendar month, AMP bills the participants and the participants are obligated to pay all of the revenue requirements for such month, including the demand charge that fully pays AMP O&M expenses and debt service. While the PSC is a take-and-pay contract, we think this provision makes participant non-payment highly unlikely and mitigates solar related resource risk given the very low probability there would be no solar output produced at any one of the 13 locations for any day in a calendar month. The solar sites are located in 13 different communities in AMP's footprint in Delaware, Ohio, Michigan, Pennsylvania and Virginia. Moreover, historical operating performance indicates that electric production, while lower in the winter months, has occurred at all of the sites for every month of operation. Importantly, the resource provides positive economic value to the participants, which increases their long-term contract compliance as it provides a competitive renewable peaking resource at an expected price of $38 per megawatt hour with no delivery cost or risk since the output is produced behind the meter.

The assets will be owned and operated by the NextEra subsidiary, DG AMP Solar, LLC, whose parent has a deep and extensive track record owning and operating renewable resources. Under the 25 year PPA with DG AMP Solar, LLC, AMP takes 100% of the solar output from the already constructed solar facilities that are located throughout AMP's service footprint. The energy is delivered behind the meters to the host participants minimizing delivery risk. The initial solar output prepayment made by AMP to DG AMP Solar, LLC was calculated based on the number of megawatt hours expected to be generated at a P90 distribution probability and assumed a 0.5% degradation factor. The expected generation is then multiplied by a uniform rate per MWh to reach the prepayment amount. Over the term of the PPA, the prepayment balance is reduced by the value of the actual output credit until the prepay balance is $0. Stronger solar output above the agreed upon prepaid amount would mean that AMP would incur greater costs but also receive more energy and AMP has covenanted to pay for any incremental energy over the life of the PPA. Also, if the solar generation is less than the value of the initial prepayment, the seller is obligated to reimburse AMP the value for the undelivered energy or can apply the value to an acquisition price should AMP agree to acquire the solar asset or extend the life of the contract such that the power obligation is met. Moreover, there is also a minimum performance requirement in which the seller is obligated to meet. Should the seller not meet the requirement, which we believe is set an achievable threshold, AMP can exercise its rights under the PPA that would include replacing the NextEra subsidiary with another operator.

The obligated AMP participants have an A2 weighted average credit quality, as calculated by Moody's. Our assessment of the participant credit quality considers both the initial facilities allocation of the participant shares and also after completion of the full-buildout. Participants pay their obligation as an operating expense of the member's electric system, all of which are self-regulated with local control over the service area. The largest participant is Bowling Green, Ohio (Aa2) who represents 37.3% of the initial systems (36.825 MW) and 22.7% of the expected project shares of all the systems once constructed (60.518 MW). Bowling Green's electric system is a full-requirements customer of AMP, and the City of Bowling Green, anchored by the activities at Bowling Green University, has a strong general financial position, and a satisfactory tax and economic base.

The bonds being issued will refinance the AMP line of credit financing which was used to prepay for the projected solar output from the facilities already in operation. The current solar prepayment long-term bond financing is for the initial solar development phase and additional parity bonds could be issued for an additional 23 MW now under development or study. The revenue bonds are fixed rate (level debt service) revenue bonds with a final maturity of 2043 which is 25 years from the commercial operation date of the last solar system that is completed. The bond covenants include a 110% rate covenant (after Rate Stabilization Funds are considered) ; a 25% step-up provision and a debt service reserve funded at 25% maximum annual debt service, which we view as weak relative to other municipal utility finance structures. This weakness is mitigated by the existence of a Rate Stabilization account; a General Reserve, and is tempered by AMP's strong liquidity position.

Other rating considerations include the solar project's diverse array of already constructed solar facilities (except for the Brewster, Ohio facility expected ito enter commercial operation in January 2019) located in several states that are at a 99-100% availability factor and have operated historically at an average 20-25% capacity factor. An additional consideration is the involvement by AMP that features a strong management team, a proven track record around providing a diverse and cost effective generation resource mix for its participants, and a willingness to support its participants from a liquidity perspective.

The credit strengths for AMP are as follows:

- The 22 AMP participant credit quality is estimated at A2 with the local municipal electric utilities having self-regulation over rates which fund their contract payments

- The provision in the PSC that requires AMP participants to pay the revenue requirement if any energy is delivered from any of the 13 solar facility sites and delivered to any delivery points during any one month period.

- AMP has strong financial liquidity

- AMP has had a strong management record of power supply and strategy and is responsible for contract enforcement

- 12 of 13 solar facilities have achieved in a short operating record the project's P90 assumptions with an average rated capacity factor in the 20-25% range and an estimated budgeted price of $38.00/MWh. The solar facilities have had a 99 - 100% availability factor to date.

- Initial solar systems are located in 13 different locations throughout AMP's footprint in 5 different states providing geographic diversity.

- Limited transmission cost since solar facilities are located behind the meter.

The credit weaknesses for AMP are as follows:

- Transaction structure is new and there is no track record of being tested

- Execution risk of the potential cure should the seller, the project operator, default. In this case, AMP has step-in-rights to engage an experienced operator. (AMP would still then receive energy from systems and charge the demand charge sufficient to pay debt service)

- Remaining 23MW of new solar in the solar prepayment project could experience construction risk for the seller

- Weak debt service reserve

RATING OUTLOOK

The stable outlook rests on the importance of the solar project to AMP's 22 members due to its renewable content; the power sales contract which establishes the terms and conditions we expect the participants to adhere to and the strong joint action agency role AMP plays in liquidity, power supply management and contract enforceability.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Should AMP participants in the solar prepay project credit quality improve

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Should the credit quality of the AMP participants in the solar prepay project deteriorate

- Should a default by the owner and operator result in protracted litigation over power purchase contract provisions

LEGAL SECURITY

The AMP Solar Electricity Prepayment Project Revenue Bonds, Series 2019A (Green Bonds) Bond Security:

The Series 2019A bonds are special and limited obligations of AMP payable solely from and secured by the revenues pledged under the indenture dated January 1, 2019 including revenues from the take and pay Power Sales Contracts with 22 AMP participants based on predetermined allocation shares of the solar output. The participant payments are paid as an O&M expense of each respective city's electric system.

Bond security provisions include a rate covenant that requires demand charges to be sufficient to generate an amount equal to 110% of aggregate annual debt service subject to Rate Stabilization Fund use. The parity common reserve fund is required to equal 25% of the maximum annual debt service and is available to fund any deficit in the Debt Service Fund. Additional bonds can be issued as long as required accounts such as common reserve fund and Rate Stabilization Fund are at their required amounts. AMP can redeem the 2019A bonds should there be a declaration of an Early Termination Event and AMP has covenanted to pay the shortfall amount should the outstanding prepayment balance amortize more quickly than the bonds that were issued. Seller will pay AMP should there be a prepayment balance which will be subtracted from the cost of acquisition should AMP make the decision to purchase solar assets. at the end of the term of the PPA.

USE OF PROCEEDS

The Series 2019A bonds issued by AMP will fund the repayment of draws on the AMP line of credit that had been used for the specified supply of prepaid electric output to be generated from the 13 solar facilities.

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 135 municipal electric utilities, a reliable and competitive power supply. The 22 AMP participants in the Solar Elecrticity Prepayment Project are members of AMP located in a 4 state area. AMP is governed by a 21-member Board of Trustees made up of officials from 20 member municipalities and DEMEC. AMP operates like a joint action agency and most of its members have home rule powers 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 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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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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