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Rating Action:

Moody's assigns Baa1 to Kentucky Municipal Power Agency's Power System Revenue Refunding Bonds, Series 2019A and Series 2020A; outlook stable

13 Aug 2019

New York, August 13, 2019 -- Moody's Investors Service ("Moody's") has assigned a Baa1 rating to Kentucky Municipal Power Agency's (KMPA) $114.89 million Power System Revenue Refunding Bonds (Prairie State Project), Series 2019A and $20.43 million Series 2020A (Forward Delivery). The Series 2020A Bonds are expected to be delivered in June 2020. The rating outlook is stable.

RATINGS RATIONALE

The Baa1 rating is based on strong take-or-pay power sales contracts with municipal electric utilities with a weighted average credit quality of Baa1, including Electric Plant Board of the City of Paducah, KY (Paducah (City of) KY Electric Enterprise: 83.9% share) and Electric Plant Board of the City of Princeton, KY (Princeton Electric Plant Board: 16.1% share), both rated Baa1/stable. Paducah Electric Enterprise's Baa1 rating, affirmed on September 29, 2017, reflects its improved financial profile after successful implementation of the rate recovery plan, and better fixed cost recovery going forward owing to the 10-year capacity contract signed with Kentucky Municipal Energy Agency (KyMEA), effective 2019.

Moody's views favorably KMPA's reduced all-in cost of power due to the improved operating performance of Prairie State coal-fired generation plant, which has maintained a capacity factor above 70% since 2015, in addition to the long-term cost advantages of prepaid and favorably priced coal supply and the location of coal reserves in close proximity to the generation facility.

Moody's notes that the two members have a power supply concentration in Prairie State plant with limited step-up provisions that would not be adequate to cover debt service in the event that Paducah defaults. KMPA also has weaker debt service liquidity as a portion of their cash-funded debt service reserve fund was replaced with surety bonds.

RATING OUTLOOK

The stable outlook reflects the strong take-or-pay power sales contracts, the successful implementation of Paducah's rate recovery plan and power purchase agreements that will increase Paducah's financing flexibility. The stable outlook further incorporates the belief that Prairie State's improved operating performance can be sustained, resulting in higher generation, lower cost of power supply and incremental revenue from wholesale market sales.

FACTORS THAT COULD LEAD TO AN UPGRADE

-Improvement in the credit quality of the participants

-The KyMEA capacity contract can be demonstrated to provide clear and sustained benefits to Paducah's credit quality

FACTORS THAT COULD LEAD TO A DOWNGRADE

-The credit quality of the project's members decline

-Either member does not meet their obligations under their take-or-pay power sales agreements

-The cost of power becomes uncompetitive or if the Prairie State project incurs substantial operating problems

LEGAL SECURITY

The bonds are secured by the trust estate that includes all power sales revenues and KMPA's rights, title and interest in the take-or-pay power sales agreements with the two municipal electric systems. Member payments to KMPA are limited obligations payable solely from the revenues of each electric plant board and must be paid regardless of whether or not Prairie State is operating. The power sales agreements extend for the life of the bonds and contain a 20% step-up provision, obligating each member to increase their share by up to 20% of their original entitlement share if the other member defaults on their payment obligations. Moody's notes that the step-up provision would not be adequate to cover a default by Paducah.

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. Moody's notes that other states, such as Ohio, have stronger statutes, making it clear that bondholders can enforce JAA take-or-pay contracts.

The rate covenant for the existing bonds requires net revenues to cover maximum annual debt service by 1.1 times and the additional bonds test requires independent certification that net revenues after five years of new debt issuance will be 1.2 times maximum annual debt service. The debt service reserve fund (DSRF) requirement is maximum annual debt service. The indenture requires additional capital, operating, and rate stabilization reserve funds to be cash funded post commercial operation. The required size of these funds is determined by an independent consultant.

USE OF PROCEEDS

The proceeds of the Series 2019A and Series 2020A Bonds will be applied to refund the Series 2010B and 2010A Bonds, respectively.

PROFILE

KMPA is a joint public agency organized under the provision of Chapter 65 of the Kentucky Revised Statutes. The agency was formed for the purpose of providing municipal electric systems in Kentucky with an on-going source and supply of electric power to meet the demands for growth of power consumption.

METHODOLOGY

The principal methodology used in these ratings 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, 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.

David Kamran
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

No Related Data.
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