NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following Missouri Joint Municipal Electric Utility Commission (MJMEUC) power project revenue bonds (Iatan 2 Project):
--approximately $120 million-$147 million series 2014A.
The bonds are expected to price via negotiation on Sept. 23, 2014. Proceeds will refund a portion of MJMEUC's outstanding series 2006A and 2009A bonds for upwards of 10% savings of the refunded par amount.
In addition, Fitch has affirmed the 'A' rating on the following MJMEUC power project revenue bonds (Iatan 2 Project), with par amounts shown before the series 2014A refunding:
--$170,265,000 series 2006A;
--$97,880,000 series 2009A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by Iatan 2 project net revenues, which are principally derived from (a) two unit power purchasers (UPPs), Independence Power & Light (IP&L) and Columbia Water and Light (CW&L), pursuant to life-of-unit, take-or-pay unit power purchase agreements (UPPAs); and (b) the 35 members of the Missouri Public Energy Pool #1 (MoPEP 1; power supply system revenue bonds rated 'A'/Stable Outlook by Fitch) under all-requirements, take-and-pay pool power purchase agreements (PPPAs).
KEY RATING DRIVERS
GROWING JOINT ACTION AGENCY: MJMEUC is a growing joint action agency composed of 67 municipal retail electric systems located across the state of Missouri. Advisory, non-voting membership has been extended to four additional Arkansas-based retail electric systems.
SOLID PURCHASER FUNDAMENTALS: Separate power purchase agreements and the credit characteristics of the two UPPs and MoPEP 1 members underpin the 'A' project rating. The participants, who purchase MJMEUC's entire 100MW interest in the project, exhibit generally solid financial metrics and customer diversity. In addition, each system's self-regulation of rates supports the full and timely recapture of costs.
DIRECT BONDHOLDER EXPOSURE: While bondholders have direct exposure to IP&L, the utility's credit quality amply supports the MJMEUC project rating. IP&L's 50MW project entitlement share exceeds the capacity of a 100% step-up provision in the life-of-unit, take-or-pay UPPAs. MoPEP 1's share of project output is supplied to pool members pursuant to all-requirements, take-and-pay PPPAs that effectively provide for an unlimited step-up.
STABLE LONG-TERM RESOURCE: Strong unit performance, including some of the lowest heat rates in the country for a coal-fired generating asset, supports long-term project economics. In addition, the resource is equipped with the latest environmental control technology that should contribute to relative rate stability.
ADDITIONAL RESERVE FUNDS: Two reserve funds established by the indenture - a $2.6 million operating reserve account and a $2 million reserve and contingency fund - support project liquidity. MJMEUC's 30-day advanced billing further enhances project financials.
RATING SENSITIVITIES
OFFTAKER CREDIT QUALITY DRIVES RATING: The MoPEP 1 members' credit quality drives the project rating, which is further supported by the two UPPs and sound unit operations. Changes to the MoPEP 1 credit quality would likely trigger a rating review, as the MoPEP 1 members are not required to support the UPP obligations and vice versa.
CREDIT PROFILE
MJMEUC is a joint action agency formed in 1979 to provide its member utilities with an adequate, reliable, and economical power supply. The growing MJMEUC membership principally consists of 67 municipal retail electric systems, ranging in size from approximately 225-111,000 meters, located across the state of Missouri.
MJMEUC has an 11.76% (100MW) undivided ownership interest in the Iatan 2 project, a supercritical coal-fired electric generating facility. In addition to the Iatan 2 project and MoPEP 1, MJMEUC has interests in the Plum Point (147MW) and Prairie State Energy Campus (195MW) projects. Each project, as well as MoPEP 1, is separately secured; the projects have different UPPs.
PURCHASER CREDIT QUALITY OFFSETS LIMITED STEP-UP PROTECTIONS
Bondholders have direct exposure to IP&L, whose credit quality amply supports the MJMEUC project rating. The utility's 50MW project share exceeds the capacity of the 100% step-up provision (200% of original entitlement shares) by CW&L, which maintains a 20MW project share.
The MoPEP 1 PPPAs provide an unlimited step-up of the pool's 35 members. If a member defaults, the others are required to incur the redistributed costs, including debt service. This ultimately benefits bondholders, but to a limited extent; MoPEP 1 members are not required to support the UPP obligations and vice versa.
UPPs SHOW SOUND FINANCIAL METRICS
IP&L and CW&L each operate in sound service territories with no concentration of largest payers. The UPPs exhibit generally strong financial metrics. In addition, fuel adjustment mechanisms in their respective rate structures support the timely recapture of costs.
Fitch-calculated debt service coverage for IP&L and CW&L averaged 3.5x and 3x, respectively, from 2011-2013, and coverage of full obligations averaged 1.4x and 1.3x. The ratio of equity-to-capitalization registered 55.0% and 49.8%, respectively, in 2013.
MoPEP 1 CONTINUES TO DEVELOP
In a positive indication of its competitiveness, the MoPEP 1 membership has grown to 35 participants today from 19 at inception. The generally small- and mid-sized participants are located throughout the state and serve an estimated population of 185,400. MJMEUC has supplied the power requirements of certain members through MoPEP 1, its all-requirements power pool, since 2000.
An indenture requirement to generate 1.1x coverage of debt service benefits MoPEP 1's financial position. MJMEUC is developing a cash reserve and capital funding policy for the pool, given the additional equity generated by its rate structure.
MoPEP 1's operating revenues have grown by one-quarter since 2009 to nearly $200 million, and fund equity has more than doubled to $25.2 million. However, its proportionate share of MJMEUC project debt tempers the pool's adjusted financial metrics.
MJMEUC expects that an increased proportion of owned generation, better asset performance, and certain purchased power contracts will result in more stable, albeit higher, wholesale rates for pool participants over the medium term near $70/MWh.
MoPEP 1's largest participants each exhibit strong balance sheets and liquidity metrics, as well as good cash flows.
PROJECT SHOWING GOOD OPERATIONS
Iatan 2's operating performance has been strong relative to industry standards, as management has continued to work through startup issues. The unit ran from March 17, 2013 to its mid-April 2014 scheduled outage without disruption, after planned and unplanned outages in early 2013.
Outages have caused some fluctuations in plant capacity factors. However, the ratio remained an above-average 78.2% in 2013, after reaching 88.5% in 2012. The unit heat rate was a low 9,013Btu/kWh and 9,150Btu/kWh in 2012 and 2013, respectively. In addition, the unit was designed for 850MW of output, but actual output has been closer to 870MW.
The project cost of power has been higher than early estimates but remains competitive with other recently completed, coal-fired generating units. Moreover, MJMEUC believes the unit's emission-control technology should benefit rate stability over the long term.
The 2015 forecast cost of power ($54.78/MWh) is in line with estimates at the commencement of commercial operations ($48/MWh-$54/MWh). This follows a spike in the 2014 forecast cost to $69.65/MWh, stemming from a planned fall outage.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'Fitch Affirms Missouri Joint Muni Electric Utility Comm's Prairie State Revs at 'A'; Outlook Stable' (Nov. 21, 2013);
--'Fitch Affirms Missouri Joint Muni Electric Utility Comm's Power Supply Revs at 'A'; Outlook Stable' (Nov. 18, 2013);
--'Fitch Affirms Missouri Joint Muni Electric Utility Comm's Plum Point Revs at 'A- '; Outlook Stable' (July 18, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789
U.S. Public Power Peer Study Addendum
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534046
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=861614
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