Fitch Rates Missouri Joint Muni Electric Utility's Prairie State Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the following Missouri Joint Municipal Electric Utility Commission (MJMEUC) power project revenue refunding bonds (Prairie State Project):

--Approximately $157,830,000 series 2015A.

The bonds are expected to price via negotiation on March 11-12, 2015. Proceeds will be used to advance refund a portion of MJMEUC's series 2007A Prairie State project revenue bonds for savings.

In addition, Fitch affirms the 'A' rating on the following MJMEUC power project revenue bonds (Prairie State Project), shown with current par amounts:

--$532,660,000 series 2007A and series 2007B (Federally Taxable);

--$205,830,000 series 2009A (Federally Taxable Build America Bonds - Direct Pay) and series 2009B (Federally Taxable);

--$76,710,000 series 2010A (Federally Taxable Build America Bonds - Direct Pay) and series 2010B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by MJMEUC's Prairie State Energy Campus (PSEC) project net revenues, which are principally derived from (i) seven unit power purchasers (UPPs) located in Missouri, pursuant to take-or-pay unit power purchase agreements (UPPAs); and (ii) the 35 members of the Missouri Public Energy Pool #1 (MoPEP 1; MJMEUC power supply revenue bonds rated 'A'/Outlook Stable by Fitch) under all-requirements pool power purchase agreements (PPPAs).

KEY RATING DRIVERS

GROWING JOINT ACTION AGENCY: MJMEUC is a joint action agency comprised of 67 municipally-owned, growing retail electric systems located across the state of Missouri. Advisory, non-voting membership has been extended to four Arkansas systems.

SOLID PURCHASER FUNDAMENTALS: The solid fundamentals of the seven UPPs and 35 MoPEP 1 members, who together purchase MJMEUC's entire 195MW interest in the PSEC project, underpin the 'A' rating on the bonds. The two largest UPPs representing about 40% of MJMEUC's project ownership exhibit good cash flow metrics, healthy system equity, and robust and growing liquidity. All of the power purchasers own and operate electric distribution systems that enjoy self-regulation of rates.

ROBUST CONTRACT STEP-UPS: Bondholders do not have direct exposure to any single participant. A requirement that each of the UPPs step-up their original entitlement shares by 200%, as well as the effectively unlimited step-up of MoPEP 1 participants, mitigates participant default risk.

PLANT PERFORMANCE BELOW EXPECTATIONS: PSEC has exhibited uneven operating performance since entering commercial operation due to a series of unscheduled outages and derates during 2013 and 2014. While the take-or-pay nature of the PSEC contracts obligates the participants to pay regardless of plant performance, the resultant reduction in plant availability has increased all-in power costs to levels above original estimates.

STRATEGIC OVERVIEW IMPLEMENTED: The owners of PSEC, including MJMEUC, have implemented a strategic overview designed to stabilize and improve operations in 2015 and beyond. The overview, which included a change in project leadership, appears reasonable and has contributed to stronger plant availability for the period July 2014 - January 2015.

ADDITIONAL RESERVE REQUIREMENTS: Two reserve funds established by the indenture enhance project liquidity. A $2 million reserve and contingency fund and a $5 million operating reserve have been fully funded. MJMEUC further enhances project liquidity by billing all participants 30 days in advance.

RATING SENSITIVITIES

PARTICIPANT CREDIT QUALITY: The credit quality of the UPPs and MoPEP 1, as well as resource operations, will remain central to the rating. Widespread changes in the participants' credit quality would likely trigger a rating review of the MJMEUC project bonds.

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 meters to 111,000 and serving 700,000 customers located across the State of Missouri. Advisory, nonvoting membership extends to four additional Arkansas-based retail electric systems.

In addition to PSEC, MJMEUC has interests in the Plum Point (147MW; rated 'A-'/Outlook Stable by Fitch) and Iatan 2 (100MW; rated 'A'/Outlook Stable by Fitch) projects. Each project, as well as MoPEP 1, is separately secured.

SEPARATE AND DISTINCT PROJECT

PSEC is a mine-mouth, pulverized coal-fired generating station located in Washington, St. Clair and Randolph Counties in Southwest Illinois. The generating station consists of two supercritical units with a design net rated electric capacity of approximately 800 MW each. The plant design incorporates state-of-the-art emissions control technology resulting in significantly less carbon emissions than a legacy U.S. coal plant.

The plant's location adjacent to a coal mine means that all associated rail, water, coal combustion waste storage and ancillary support are available on site. Underground coal reserves are expected to meet project fuel needs for approximately 30 years.

PSEC is fully operational with Unit 1 commissioned in June 2012 followed by Unit 2 in November 2012. Since returning to normal operation following extended maintenance outages for both units during the first half of 2014, the project has demonstrated meaningful improvement in operating performance. In particular, the equivalent availability factor (EAF) for the six month period July 2014 - January 2015 averaged 81% versus 2013 average EAF of 63%. With all major start-up issues resolved and initial maintenance completed, Fitch expects the units to exhibit more stable availability and capacity factors going forward.

CHANGE IN PARTICIPANT COMPOSITION

Fitch believes the growing MoPEP 1 membership is well positioned to absorb the city of Marceline's small 4 MW PSEC project share, pursuant to a recent agreement that will end Marceline's participation in the project. While Marceline's small share in the project is not material to the rating, Fitch views the change as a credit positive for bondholders as MoPEP 1 is a larger, more stable participant.

Marceline will assign and transfer its 4 MW PSEC project share to MJMEUC for the benefit of MoPEP 1 at the expected June 1, 2017 closing date. The city's UPPA will likewise terminate at such time. Marceline has agreed to pay a total of approximately $1 million in equal monthly parts until closing. In addition, the city has granted a security interest in its electric facilities in consideration of the new agreement.

STEP-UPS MITIGATE DIRECT EXPOSURE

The distribution of project capacity among the currently seven UPPs and MoPEP 1 eliminates direct bondholder exposure to any single participant, given the generous step-up provisions. UPPs are required to step-up their original entitlement shares by 200%, and the MoPEP 1 PPPAs essentially require an unlimited step-up of participants.

MoPEP 1's assumption of the Marceline UPPA obligations at closing will include the 200% step-up for the city's 4MW project share.

SOLID UPPs

The largest UPPs sufficiently support the MJMEUC PSEC project rating. The cities own and operate retail electric systems that exhibit generally good financial metrics and service territories, as well as average customer rates. In particular, Columbia and Kirkwood - representing about 40% of MJMEUC's project interest - both have strong balance sheets, good cash flow metrics, and abundant liquidity.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);

--'Revenue-Supported Rating Criteria' (June 16, 2012);

--'U.S. Public Power Peer Study - June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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 -- February 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980928

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Contacts

Fitch Ratings
Primary Analyst
Hugh Welton, +1-212-908-0742
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson
Alan Spen, +1-212-908-0594
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Hugh Welton, +1-212-908-0742
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson
Alan Spen, +1-212-908-0594
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com