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Rating Action:

Moody's upgrades to A2 the rating on American Municipal Power Inc.'s - Meldahl Hydro Project, OH; outlook stable

05 Sep 2018

$685.2 million debt affected

New York, September 05, 2018 -- Moody's Investors Service has upgraded the rating on the outstanding $685.2 million American Municipal Power Inc. - Meldahl Hydroelectric Project Revenue Bonds to A2 from A3. The outlook has been revised to stable from positive.

RATINGS RATIONALE

The upgrade on the Meldahl Hydroelectric Project Revenue Bonds to A2 considers the satisfactory operating experience of the new hydro-electric facility with 2017 capacity factor of 53.4% and AMP and the participants deriving the value expected from the project. In addition, now that the full weight of debt service has been phased in the participants have generally managed adequately the transition to full cost recovery.

The A2 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 51.4% obligation share of the City of Hamilton, Ohio Electric Enterprise (Electric Revenue bonds rated A3/stable) bears significant weight in the rating. The obligation of the 48 participants is absolute and unconditional regardless of whether the project is operating or operable. The project has a fully funded maximum annual debt service reserve. The rating also considers the environmental attributes of the hydro facility and the long-term economic value of the project, as well as the A1 issuer rating assigned to American Municipal Power, Inc. which 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 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 each 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 in the 50% range.

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 participated in financing a portion of the Prairie State coal-fired generation facility and the Freemont Energy Center natural gas fired units. AMP has also issued revenue bonds (Combined Hydroelectric Project rated A2) to finance three new hydroelectric facilities along the Ohio River Cannelton (88MW); Smithland (76MW); and Willow Island (44MW).

The Meldahl Project is operated by the City of Hamilton, Ohio Electric Enterprise (Electric Revenue bonds rated A3/stable), who has a 51.4% 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.

RATING OUTLOOK

The rating outlook is stable given the Meldahl Project is in commercial operation and there are strong bond security provisions. A sound operating record that establishes the Meldhal hydroelectric project as a key asset and participants successfully have incorporated the higher costs into their rates is a positiive factor.

FACTORS THAT COULD LEAD TO AN UPGRADE

The rating could be upgraded if Hamilton's credit position improves and the new hydro has both an operating and financial record.

FACTORS THAT COULD LEAD TO A DOWNGRADE

The rating could be downgraded if the project costs rose further to a level that participants considered unsupportable and they challenged their power supply contracts with AMP, or if credit quality of the participants eroded.

LEGAL SECURITY

Under the Master Trust Indenture, AMP pledges its net revenues, derived from a long-term 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 has a 106% step-up provision. The master trust indenture includes a 1.10x rate covenant, 1.10x additional bonds test 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 contract is 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 AMP's combined hydroelectric projects between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions which are in all material respects identical 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.

PROFILE

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.

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 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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