Fitch Rates Missouri Joint Muni Electric Utility Iatan 2 Revs 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'A' rating to the following Missouri Joint Municipal Electric Utility Commission (MJMEUC) power project revenue bonds (Iatan 2 Project):

--$78,365,000 series 2015A.

The bonds are expected to price via negotiation during the week of Oct. 19th. Proceeds will refund a portion of MJMEUC's outstanding series 2006A and 2009A bonds for savings.

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 2015A refunding:

--$28,630,000 series 2006A;

--$64,410,000 series 2009A;

--$155,730,000 series 2014A.

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 comprised 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: The two UPPs' and MoPEP 1 members' credit characteristics underpin the 'A' project rating, pursuant to separate power purchase agreements. 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. CW&L's share is 20 MW. MJMEUC supplies MoPEP 1's share of project output pursuant to all-requirements, take-and-pay PPPAs that effectively provide for an unlimited step-up of pool members.

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: While project debt service coverage (DSC) is expected to be near 1.0 times (x), 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: The credit quality of the Missouri Joint Municipal Electric Utility Commission's Missouri Public Energy Pool #1 (MoPEP 1) currently drives the project bond rating. Changes to the MoPEP 1 credit quality would likely result in changes to the project's bond rating.

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, MJMEUC has interests in the Plum Point (147MW) and Prairie State Energy Campus (195MW) projects, as well as ownership of the Dogwood combined cycle plant and Fredericktown peaking plant through MoPEP 1. Each project, as well as the MoPEP 1 obligations is separately secured.

PURCHASER CREDIT QUALITY LIMITS STEP-UP RISK

Bondholders have direct exposure to IP&L, since its 50 MW project share exceeds the capacity of the 100% step-up provision. However, the utility's credit quality amply supports the MJMEUC project rating. CW&L's 20MW project share is well contained within the related step-up provision. Additional support is also provided pursuant to covenants that provide for the allocation to MoPEP 1 of any UPP capacity that is not otherwise sold.

The MoPEP 1 PPPAs provide an unlimited step-up of the pool's 35 members. If a member defaults, the others are required to pay the redistributed costs, including debt service.

UPPs SOUND FINANCIAL METRICS

IP&L and CW&L each operate in sound service territories with no concentration of largest payers. The UPPs generally exhibit strong financial metrics. In addition, IP&L's fuel and purchased power adjustment mechanism supports the timely recapture of costs.

Fitch-calculated debt service coverage for IP&L and CW&L averaged 3.2x and 2.9x, respectively, from 2011-2014, and coverage of full obligations averaged 1.3x and 1.3x. The ratio of equity-to-capitalization registered 56.1% and 48.6%, respectively, in 2014.

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 200,000. 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. MoPEP 1's operating revenues have grown by one-quarter since 2009 to nearly $200 million, and fund equity has more than doubled to $29.3 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 $65-$70/MWh.

MoPEP 1's largest participants each exhibit solid balance sheets and liquidity metrics, as well as good cash flows.

PROJECT SHOWING GOOD OPERATIONS

Iatan 2's operating performance has been solid relative to industry standards, as management continues 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 with the ratio dropping to 59.1% in 2014 compared to 78.2% in 2013 and 88.5% in 2012. However, the capacity factor was around 71.5% through August 2015 and expected to remain at solid levels with the next major outage (28 days) not planned until Fall 2016.

The unit heat rate is competitive averaging 9,159Btu/kWh from 2012 through 2014. 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 ($56.20/MWh) is modestly higher than estimates at the commencement of commercial operations ($48/MWh-$54/MWh), but is down following a spike in the 2014 cost of $78.42/MWh, which stemmed largely from a planned fall outage.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992455

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Alan Spen
Senior Director
+1-212-908-0594
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Alan Spen
Senior Director
+1-212-908-0594
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com