New York, April 18, 2016 -- Issue: Greenup Hydroelectric Project Revenue Bonds - Series 2016A; Rating: A1; Rating Type: Underlying LT; Sale Amount: $140,000,000; Expected Sale Date: 05/02/2016; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service has assigned an initial A1 rating to the American Municipal Power Inc. (AMP) sale of $140 million Greenup Hydroelectric Project Revenue Bonds, Series 2016 A. The bonds are expected to be sold in May 2016. The rating outlook is stable.
The rating takes into consideration the sound operating record of the Greenup Hydroelectric facility; the strong bond security including AMP's take-or pay contracts with 47 municipal electric utilities that have a weighted average credit quality of A3 and the AMP's credit characteristics reflected in the AMP's. A1 rating. See Moody's April 4,2016 report that describes the affirmation of the A1 rating.
The bonds will finance the acquisition of 48.6% of the 70.2 MW Greenup run-of-the-river hydroelectric facility from Hamilton, Ohio (electric utility A3; stable). Hamilton will retain ownership of the balance of the facility (51.4%) and continue to operate it. There is no construction risk since the hydroelectric facility has been in operation since 1982 and has registered an average capacity factor of 44%. An important factor is that the forecasted capacity factors for Greenup should remain steady as the facility is located on the Ohio River and the lock and dam system requires river flows adequate for water transportation and commerce which also then produces sufficient water levels for electric generation.
The acquisition of a portion of the Greenup facility is part of AMP's overall strategy of expanding through the development of hydroelectric generation environmental attributes and the diversification of power resources for its participants and reducing regional energy market exposure.
Bond security is derived from AMP's take-or-pay power sales agreements that extend to the final maturity of the debt with 47 municipal electric utilities. Security provisions include a 25% step-up and a fully funded maximum annual debt service reserve. No participant has a major portion of the project obligation nor their share of the hydroelectric generation project represent a material portion of their own power supply mix.
The stable outlook is based on our expectation that the Greenup Hydroelectric facility will have steady capacity factors; the strong take-or-pay contractual relationship between AMP and its Project participants and the favorable economic and environmental attributes of the project.
Factors that Could Lead to an Upgrade
Improvement in the participant credit quality which is an important weight in the credit rating assigned.
Factors that Could Lead to a Downgrade
If participants challenge their take-or-pay power supply contracts with AMP.
The average weighted credit quality of participants erodes.
Greenup Project bond security, under the Master Trust Indenture which includes US Bank National Association as Trustee, AMP has pledged the gross revenues in the Trust Estate, derived from take-or-pay power sales contracts with municipal electric utility participants, payable monthly regardless of whether the project is completed, operating or operable. The take-or-pay contracts have a 25% step-up provision. The master indenture includes a 1.10x net revenue rate covenant; 1.10x minimum additional bonds test after commercial service; and a fully cash funded maximum annual debt service reserve. The participant payments are payable as an O&M expense of their respective electric systems. Except for the Michigan participants (Coldwater (3.35%); Wyandotte (3.39%) and Marshall (1.14%) who pledge a subordinate lien to O&M and their direct debt.
Legal opinions have been issued that the take-or-pay contracts are valid and enforceable. Also, on December 7, 2007, the Franklin County, Ohio Court of Common Pleas issued a non-appealable order validating the power sales contract relating to the Meldahl hydroelectric project between AMP and the Ohio participants. In that project, including the take-or-pay and step-up provisions were exactly similar to the Greenup 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 10.56% 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 non-defaulting participants to be legally responsible for any defaulted costs for up to their original entitlement.
Payment compliance by participants is aided by AMP's 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.
The participant Agreement and the Greenup Operating Agreement are the two legal documents that establishes the framework for the sale of the Greenup Hydro asset from Hamilton to AMP Inc. and how the units will be operated.
Use of Proceeds
The proceeds will fund AMP's acquisition of 48.6% Greenup Hydroelectric facility from the City of Hamilton. Also, repayment of the portion of the AMP credit line used for costs related to the acquisition and to fund a common debt service reserve.
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 Greenup Hydroelectric Project is a generation project secured by take-or-pay contracts with 47 member participants.
Joint Action Agency-Take-or-Pay Methodology Scorecard Factors: Greenup Project Rating:
As indicated below, the grid indicated rating for AMP-Greenup Project is A1, in line with the assigned rating. The grid is a reference tool that can be used to approximate credit profiles in the joint action agency sector in most cases. However, the grid is a summary that does not include every rating consideration. Please see the US Municipal Joint Action Agencies Methodology for more information about the limitations inherent to grids.
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.
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.
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Moody's has assigned an A1 rating to AMP Inc. $140 mil. Greenup Hydroelectric Project Rev. Bonds, Ser. 2016 A
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