American Municipal Power Inc.
New York, June 29, 2016 -- Issue: Meldahl Hydroelectric Project Revenue Bonds Series 2016A; Rating: A3; Rating Type: Underlying LT; Sale Amount: $88,000,000; Expected Sale Date: 07/07/2016; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service has assigned an A3 rating to the American Municipal Power Inc. (AMP) sale of $88 million Meldahl Hydroelectric Project Revenue Bonds, Series 2016A expected to be sold in July 2016. The outlook was revised from stable to positive to reflect the beginning commercial operation of the Meldahl Hydroelectric facility and our expectation of a sound operating record. The current offering will fund capital expenditures and repay a draw on the AMP line of credit used on the Meldahl project construction.
Moody's has also affirmed the A3 rating on the outstanding $622.3 million Meldahl Hydroelectric Project Revenue Bonds Series 2010 A to E Revenue Bonds.
The A3 rating considers the strong bond security which includes the unconditional take-or-pay obligation of the 48 participants (weighted average credit quality of A3) in the project to pay O&M and debt service on the bonds. The 51% obligation share of the city of Hamilton, Ohio Electric Enterprise (Electric Revenue bonds rated A3/stable) represents an important factor in the rating. The obligation of the 48 participants is absolute and unconditional regardless whether the project is constructed, completed, operating or operable. The project has a fully funded maximum annual debt service reserve.
The positive outlook is due to the elimination of construction risk and that the Meldahl hydroelectric units began commercial operation on April 12, 2016. The hydro units still need to have an established operating record and there be a record of payment of debt service incorporated into participant utility rates (in particular Hamilton since they are 51% of the obligation) before the current rating level is reconsidered. Meldahl is expensive generation capacity but the rating assigned considers the environmental attributes of the hydro facility and the long-term economic value of the project, as well as the A1, stable outlook issuer rating assigned to AMP, Inc who has been an effective power supply agency to its members.
The levelized cost of energy and power from Meldahl is projected to be in the $80/MWh range given the forecasted sound capacity factor. According to projections, the all-in cost is flat at least through 2038 due to level debt service and minor operating expense changes. While the all-in cost is above today's regional energy market price, the energy and capacity is a long term source of carbon neutral electricity which makes up a small percentage of most of the municipal participant's power supply mix. The US Army Corps of Engineers Ohio River lock and dams are required for commercial river transportation which is key to the expected certainty of favorable capacity factors above the 50% range. The Meldahl Project has the highest expected capacity factor of any of the new hydroelectric projects AMP Inc. is undertaking.
The Meldahl Project is part of AMP Inc's power resource diversity strategy to lessen the exposure of the participating municipal utilities to the regional wholesale energy markets. AMP has issued revenue bonds (Combined Hydroelectric Project rated A3) to finance three new hydroelectric facilities along the Ohio River ( Cannelton (88MW); Smithland (76MW); and Willow Island (44MW))
The Meldahl Project will be operated by Hamilton, OH Electric Enterprise (rated A3/stable), who has a 51.4% share interest in the project and share of the output. A management committee has been established with AMP and Hamilton representation. The AMP-Hamilton agreement also provided that AMP Inc. acquire 48.6% (34MW) of Hamilton-owned Greenup hydro facility. This transaction took place in April 2016. Moody's has an A1 rating on the AMP Inc. Greenup Hydroelectric Project Revenue Bonds, Series 2016 A. Hamilton used the proceeds it received from AMP to retire its related debt on the Greenup facility and also to build up its rate stabilization and capital improvement fund. Both actions were credit positive.
The outlook was revised to positive from stable to reflect the elimination of construction risk and the expected successful commercial operation of the Meldahl Hydroelectric facility.
Factors that Could Lead to an Upgrade
Hamilton credit position improves
Meldahl has a sound operating record
Participants successfully incorporate the new debt service into their retail rates
Factors that Could Lead to a Downgrade
Increased project costs to a level that participants considered unsupportable and they challenged their contracts
Credit quality of participants erodes
Under the Master Trust Indenture, AMP pledges its net revenues, derived from a long-term project take-or-pay power sales contract with the Project's 48 municipal participants, payable monthly regardless of whether the project is completed, operating, or operable. The contracts are payable from the revenues of municipal utility enterprises, the funds of which are accounted for separately from city general government funds. Member payments are payable as O&M expenses of their respective electric systems.
The take-or-pay contracts have a 106% step-up provision. The master trust indenture includes a 1.10x rate covenant, 1.10x additional bonds test two years after commercial operation, and a fully funded maximum annual debt service reserve. There is also a six-month BABs and CREBs interest rate subsidy reserve. Should the federal government reduce the interest rate subsidy on BABs, AMP participants are required to pay their allocated share of cost increase.
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 another hydroelectric project between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions exactly similar to the Meldahl 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 5.14% of the project (which is why step-up is sized at 106%).
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 and then exercise the 106% step-up provision that requires non-defaulting participants to be legally responsible for any defaulted costs for up to 106% of their original entitlement.
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 monthly evaluations of participant credit by monitoring a credit scorecard that includes financial metrics.
Use of Proceeds
The current offering finances remaining capital improvements at the Meldahl Hydroelectric facility and to repay the AMP line of credit.
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. The Meldahl Project is a generation project secured by take-or-pay contracts with 48 member participants.
The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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Moody's assigns A3 to AMP Inc.'s Series 2016A Meldahl Hydro Revenue Bonds and revises outlook to positive
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007