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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.
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.
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
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.
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.
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.
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