NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the following American Municipal Power, Inc. (AMP), Prairie State Energy Campus (PSEC) project revenue bonds:
--$534.9 million Prairie State Energy Campus project revenue bonds, refunding series 2015A;
--$246 million Prairie State Energy Campus project revenue bonds, refunding series 2015B (B-1, B-2, B-3).
The bonds are expected to price on Dec. 16, 2014. Proceeds will be used to advance refund portions of AMP PSEC's outstanding series 2008A and 2009A bonds. In addition, Fitch affirms AMP PSEC's outstanding $1.7 billion Prairie State Energy Campus project revenue bonds at 'A'.
The Rating Outlook is revised to Negative from Stable for all bonds.
The bonds are secured and payable solely from gross receipts including payments made by the PSEC participants under the power sales contract and other funds established pursuant to the indenture. AMP has covenanted under the indenture to set participant rates at a level sufficient to generate 1.1x debt service coverage on the PSEC project bonds.
KEY RATING DRIVERS
WEAKENED PARTICIPANT FINANCIAL METRICS: The Negative Outlook reflects weakened fiscal 2013 financial metrics for several of the 21 largest projects participants which together represent 80.8% of project capacity. A key credit concern is the meaningful deterioration exhibited by four of the top six participants - Hamilton, Cleveland, Piqua, and Celina. In particular, a delay in implementing needed rate increases to recover higher purchased power costs may have contributed to the decline in debt service coverage and depletion of cash resources at these cities.
PLANT PERFORMANCE BELOW EXPECATIONS: Operating performance at PSEC, a dual unit, pulverized coal-fired generating station located in southwest Illinois, has been relatively weak since entering commercial operation and was hampered by several unscheduled outages and de-rates 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 along with higher transmission congestion costs increased all-in power costs to levels well above original estimates which in turn has pressured participant financial metrics.
STRATEGIC OVERVIEW IMPLEMENTED: The owners of PSEC, including AMP, 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 toward the latter part of 2014.
ENTIRE OUTPUT CONTRACTED: AMP'S entire share of PSEC's output is purchased pursuant to take-or-pay power sales contracts with 68 municipally-owned electric systems. Participants' obligations consist of their respective shares of all project costs. Debt service is paid entirely by the municipal systems as an operating expense.
STANDARD CONTRACT STEP-UP PROVISION: The power sales contract includes standard step-up provisions that require each participant to step up its purchase by 25% of its original allocation of the project output in the event that another participant defaults.
CHANGES IN PARTICIPANT METRICS: The operating and financial metrics of the project participants, many of which exhibited meaningful erosion in financial metrics during 2013, will be a key factor in future rating actions.
AMP is a nonprofit wholesale power supplier and services provider that was organized in 1971 for the benefit of its members. As of Dec. 1, 2013, AMP reported 129 members located throughout seven states (Delaware, Ohio, Kentucky, Pennsylvania, Michigan, Virginia and West Virginia). Together, the AMP members serve approximately 625,000 retail electric customers. Fitch notes that AMP and its members have dramatically shifted from purchasers of market power to owners of generating assets. AMP's ability to oversee a number of existing and new power resources and monitor project participants' credit standing are important credit considerations.
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 800 approximately MW each. The plant design incorporates state-of-the-art emissions control technology which means 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 now 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 five month period July-November 2014 averaged 80% versus 2013 average EAF of 63%. With all major start-up issues resolved and initial maintenance completed, Fitch expects the units to exhibit a high degree of availability and capacity factors.
Take-or-Pay Power Sales Contract
Each participant's obligation under the power sales contract (PSC) is on a take-or-pay basis, similar to most Fitch rated project based entities. The strength of a take-or-pay agreement lies in the participant's requirement to make payment regardless of the unit operation and as long as the bonds remain outstanding.
The contract features a standard step-up required by non-defaulting participants to purchase a pro-rata share of the defaulting participants' allocation. This provision typically serves to mitigate the default risk of the weakest and smallest participants or any exposure to the largest participant. In this case, default of the smallest 47 participants accounting for a combined 19% entitlement share is mitigated, while the default of the largest entitlement of 13.52%, held by Danville, is covered.
Project Participant Credit Quality
The PSEC project's rating is heavily dependent on the underlying creditworthiness of the participating members, which historically have exhibited satisfactory cash flow, modest (if any) leverage, and healthy cash balances. Fitch has reviewed 2013 financial metrics for the 21 largest participants and believes that the blended credit quality of the participants has, on balance, weakened during 2013. None of the participants are rated by Fitch, however, debt service coverage, leverage (total debt/funds available for debt service; equity to capitalization) and liquidity (days cash on hand) metrics for many of the participants reviewed have gravitated toward the lower end of 'A' category medians for Fitch-rated retail systems series 2015B Bonds Subject to Re-Marketing.
The series 2015B bonds are expected to be subject to optional tender by the holder during the 2019-2020 time period. In the event of a failed remarketing, AMP is not obligated to purchase any series 2015B bonds tendered and the inability of the remarketing agent (RBC Capital Markets) to rollover any tendered bonds will not constitute an event of default under the indenture. At the same time, a failed remarketing would potentially expose the PSEC project and the AMP participants to higher borrowing costs. Mitigating factors include AMP's option to call the series 2015B bonds six month ahead of the tender date and/or its ability to utilize its $750 million five-year revolving credit facility to refinance the bonds if capital market access was impaired.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Rating Criteria