American Municipal Power, Inc. Prairie State Project

Transcription

1 CREDIT OPINION New Issue American Municipal Power, Inc. Prairie State Project New Issue: Moody's assigns A1 to American Municipal Power Inc. Prairie State Refunding Revenue Summary Rating Rationale Contacts Dan Aschenbach Senior Vice President Kurt Krummenacker Senior Vice President/ Manager Frieda Shalam Associate Analyst CLIENT SERVICES Americas Asia Pacific Japan EMEA Moody's Investors Service has assigned an A1 to the $67 million American Municipal Power Inc. Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2017A. Moody's also maintains the A1 rating on the American Municipal Power Inc. (AMP) outstanding $1,562,250,000 Prairie State Energy Campus Project Revenue Bonds. The Series 2017 A bonds are scheduled to sell in late October 2017 and the proceeds will be used to refund certain maturities of outstanding Series 2008A and 2009A. The outlook is stable. The main consideration in the assignment of the A1 credit rating is the strong bond security which includes the unconditional take-or-pay obligation of 68 Midwestern municipal project participants (cities) in the AMP Inc. Prairie State project to pay O&M and debt service on the revenue bonds. The obligation pursuant to the power sales contract through December 31, 2057 of the AMP municipal participants is an unconditional obligation and is payable by participants regardless whether the project operates or not. The Prairie State Project represents AMP s 23.26% ownership interest in the 1628 MW coalfired generation facility and also financed the adjacent coal mine that has 27 years of Illinois Basin coal supply. Prairie State is a supercritical, coal-fired, mine mouth electric generating facility and utilizes the most advanced coal-fired generation technology. It already meets the most stringent environmental standards on coal-fired generation units and is among the newest units constructed. AMP reports that Prairie State is fully compliant with the Mercury and Air Toxic rule. Prairie State coal-fired generation units averaged a 75% net capacity factor between 2014 through August 2017, with the plant management's objective to get into the 80% range. Operating at this capacity factor indicates the plant is being consistently competitively dispatched into the regional energy markets. The heat rate and O&M costs were among the lowest in Illinois for peer base load coal-fired generation units. Eight other utilities including five other municipal joint action agencies are the other owners of Prairie State and their debt is separately secured from AMP s revenue bonds. The average weighted credit quality of the AMP participants is A2 but Moody s also weighs heavily that the 68 participants are spread across a large geographic area which narrows concentration risk. Another strength is no one participant s obligation (Danville, Virginia (GO-Aa3) has the highest ownership at 13.5%) represents a major portion of the total AMP Prairie State revenue bond obligation. Prairie State coal fired generation represents no more than 16% of 2018 total energy of AMP membership. Such diversity reduces the risk of any

2 one city from creating broader fiscal problems for the agency if there is ever noncompliance with the Prairie State take-or-pay contracts. Also, an important strength is that AMP has a strong fiscal oversight program to monitor participant finances and contract compliance. The rating further considers the important role AMP plays (A1 issuer rating, stable outlook). AMP is involved with power supply planning and procurement for the AMP participants including the successful implementation of its fuel diversification strategy, including Prairie State, and for its provision of other energy services to municipal participants. AMP has just brought on line during over 300 MWs of new hydro-electric generation further diversifying member power supply. AMP's participants have a competitive advantage with their retail rates being lower than neighboring utilities largely due to the overall competitive wholesale power rates charged by AMP. AMP's strong liquidity is also important to the financial position of the project. Moody's believes the value of Prairie State as a long term asset remains favorable as a source of long-term stable electrical base load capacity for the participants. The plant enjoys a very competitive on site 27-year supply of coal reserves with no transportation costs and level debt service which equates to a stable capacity price for an extended period. This could be a particular advantage as energy and capacity markets change as a result of industry developments such as sustained lower natural gas prices; the shutdown of older nuclear and coal-fired generation units; potential pricing of carbon through regulation; and stronger economic trends. Without advancements in carbon capture and control technology, further plant specific carbon restrictions are not possible given the state and cost of such technology. Absent carbon pricing, the worst case could be EPA regulation in the future that would reduce output of coal-fired generating units. This could present challenges for Prairie State as well as for the other coal-fired units in the Midwest. Trading of carbon credits if enacted in the future could add to the cost of Prairie State complicating its economic position in the longer-term. The proposed Trump Administration EPA revision of the Clean Power Plan represents a reduction in immediate regulatory risk for Prairie State and it doesn t appear Illinois will further regulate carbon unless there is national plan. Credit Strengths» Take-or-pay contracts with municipalities with a weighted average credit quality of A2. Moody s adds a positive notch in rating based on the strong AMP management and the broad diversity factors such as: lack of customer concentration and geographic diversity, related to AMP participants.» Power supply contract through December 31, 2057 by participants with AMP.» The Prairie State Project has several unique advantages including a prepaid coal supply that should be relatively stable in price; the adjacent location of coal reserve and mine near coal-fired generation facility eliminates rail transportation risk; and advanced environmental controls which meet current standards for pollution control.» Competitive current and projected AMP member retail rates» AMP has a well-regarded fiscal monitoring system to provide ongoing assessment of members' credit profiles including evaluation of financial metrics» Coal generation as % of AMP energy mix is below 25% versus about 75% for the rest of Ohio This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Credit Challenges» Regional energy prices have remained low due to the decline in natural gas prices. To the extent natural gas prices remain low and drive the regional energy price, this will be a pressure.» Federal regulation of carbon as a greenhouse gas and under the Clean Air Act subjects all coal-fired generation facilities with the specter of future regulations that could reduce the economics of this generation. While Prairie State is in a favorable current position due to its compliance with federal environmental regulations, it remains subject to potential further regulation on coal-fired generation. Rating Outlook The rating outlook is stable given that both units are commercial and operating at strong capacity factors and participants are expected to remain in full compliance with the strong take-or-pay contracts that lend credit stability. Factors that Could Lead to an Upgrade» All-in costs of Prairie State improve relative to regional comparable energy prices.» Project participant credit quality improves. Factors that Could Lead to a Downgrade» Any participant successfully challenges through litigation their take-or-pay Prairie State contract that are the underpinning of credit quality.» AMP Prairie State participant credit quality weakens» The Prairie State production cost rises significantly and impacts participant retail electricity prices or should the two units net capacity factors decline significantly in the next year. Key Indicators Exhibit 1 1 American Municipal Power, Inc. - Prairie State Project ,265,897 8,350,518 9,664,791 11,106,837 10,619,157 Capacity Factor (%) Heat Rate (Btu/kWh) 9,375 Net Generation (MWh) 9,582 9,819 9,472 9,312 Participant Credit Quality A3 A3 A3 A3 A2 Debt Outstanding ($'000) 1,676,920 1,676,920 1,577,776 1,590,590 1,562, Debt Ratio (%) Days Cash on Hand (1) (1) AMP liquidity on hand is significantly greater when adding the AMP Inc. line of credit and its accordion feature. Source: Energy Information Administration; Moody's Investors Service Recent Developments» Prairie State coal-fired generation facility in 2016 had a 76.42% net capacity factor; an equivalent availability factor of 77.31% and operating expense of $29.64/MWh.» Prairie State coal-fired generation facility had 100% compliance with environmental permits in

4 » All AMP-Prairie State participants were in compliance with their take-or-pay contractual obligation in 2016 and through October Detailed Rating Considerations Revenue Generating Base AMP historically has been a wholesale power supplier using power market purchases to resell to its participants. AMP has 24 Master Service Agreements in place with counterparties that allow energy trading. AMP has undertaken a significant shift in its power resource strategy from mostly market purchases to moving towards generation ownership of generation projects like Prairie State. The main driver has been to mitigate the volatility that municipal electric utilities have had to face with the restructured wholesale power markets. AMP had derived over 70% of its energy from purchased power which is now in the 40% range. Prairie State generation represents on average less than 16% of individual utilities power supply mix. The Prairie State Project represents AMP s 23.26% ownership interest in the 1628 MW coal-fired generation facility and also financed the adjacent coal mine that has 30 years of Illinois Basin coal supply. Prairie State is a supercritical, coal-fired, mine mouth electric generating facility and utilizes the most advanced coal-fired generation technology. Prairie State coal-fired generation units averaged a 75% net capacity factor between 2014-through August 2017, with the plant management's objective to get into the 80% range. Rate competitiveness for Prairie State participants has been maintained with AMP members averaging retail rates lower than the region's investor-owned utilities. Operational and Financial Performance In 2016, Prairie State had the lowest heat rate among peer coal-fired units in Illinois at 9375 Btu/kWh and operated with one of the highest capacity factors at 76.42%. Net generation was 10,619,157 MWh in Total operating and maintenance expense per MWh was among the lowest in region. An important factor is that Prairie State fuel costs are also among the lowest since the coal comes from a mine adjacent to the units. AMP Prairie State financial performance is largely related to the performance by the 68 participating cities compliance with take-orpay contractual obligations. In 2017 all participants were in compliance with their contractual obligation. LIQUIDITY Besides the approximately 100 days unrestricted cash on hand in the separate Prairie State fund, AMP has a $600 million revolving line of credit with 9 banks. The line was effective May 3, 2017 with a current maturity date of May 3, The LOC has an accordion feature to expand the line to $850 million. As of August 31, 2017, about $300 million is outstanding on the line. Debt and Other Liabilities AMP Prairie State Energy Campus Project Revenue Bonds have been issued as fixed rate debt and the debt is structured with a relatively level debt service schedule. Prairie State Energy Campus Management Inc.,the management group responsible for operating the Prairie State facility, has a preliminary Capital Improvement Plan of about $150 million in improvements over the next 5 years. AMP's share of the CIP is $34 million. AMP has no new borrowing expected for Prairie State improvements; AMP may have potential refundings of portions of outstanding Prairie State project revenue bonds over next several years. DEBT-RELATED DERIVATIVES None related to Prairie State Project PENSIONS AND OPEB Not a material credit risk related to the AMP Prairie State Project. Management and Governance AMP was established by state statute (Ohio Revised Code Chapter 1702) as a non-profit corporation in 1971 to provide its members, which are municipal electric utilities, a reliable and competitive power supply. AMP is governed by a 21-member Board of Trustees made up of officials from member municipalities elected among the members and DEMEC. AMP operates like a joint powers agency 4

5 and most of its members have home rule powers which permit retail rates to be set by the local governing boards with no external regulation. AMP obtained a determination letter and qualifies as a Section 501(c) 12 corporation and a private letter rulings that in effect permits it to issue tax-exempt bonds. The Ohio members have their authorization to enter into power sales contracts derived from the state constitution. The AMP members from the other states have specific state statutes that govern their authority and participation in take-or-pay contract obligations. The Prairie State owners Participation Agreement is governed and operated through the Prairie State Generating Company, which is owned by the Prairie State Energy Campus Management Inc., an Indiana nonprofit corporation, which is owned by the Prairie State owners, including AMP, according to their share of ownership interest. Legal Security Under the master trust indenture, AMP pledges its net revenues, derived from take-or-pay power sales contracts with 68 municipal participants, payable regardless of whether the project is completed, operating, or operable. The take-or-pay contracts have a 25% step-up provision. The master indenture includes a 1.10x rate covenant and a 1.10x additional bonds test after commercial operation. There is a fully funded maximum annual debt service reserve. The member payments are payable as O&M expenses of their respective electric systems. All participants are current on the payment of AMP billings. The power sales contract also has a fall back provision-if the take-or-pay provision is invalidated by any court of competent jurisdiction, the obligation becomes a take and pay obligation not subject to reduction, whether by set-off, counterclaim and is not conditioned on performance of either party. Legal opinions have been issued that the take-or-pay contracts are 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 a hydroelectric project (Meldahl) between AMP and the Ohio participants in that project, including the take-or-pay and step-up provisions that are exactly similar to the provisions securing these bonds. Most of the participants in this project are located in Ohio. Several of the participants are located in Michigan, Virginia and West Virginia. Michigan and Virginia have passed specific legislation authorizing take-or-pay contracts, including step-up provisions with out-of-state corporations. If there is a payment default of any participant, AMP has the power to suspend delivery. Should such a default occur, AMP would first offer the power to other project participants, other AMP members, other entities that are not AMP members (to the extent that doing so won't impact the tax advantaged status of AMP and/or its bonds) and then exercise the step-up provision that requires nondefaulting participants to be legally responsible for any defaulted costs for up to 25% of their original entitlement. AMP would also enforce the contract on the defaulting party. Payment compliance is aided by a credit monitoring program that AMP manages which produces early warning signs should a member be in fiscal distress. This includes a well-regarded monthly evaluation program of participant credit by AMP monitoring a credit scorecard that includes financial metrics. Importantly, an Ohio state statute provides further bondholder protection as most of participants are located in Ohio. The Ohio state auditor has fiscal emergency powers to place a city on Fiscal Watch or Emergency to correct a fiscal stress problem. Moody's believes this structured process to catch any potential non-compliance with the take-or-pay contracts is a positive consideration in the rating. Local governments also cannot be forced into bankruptcy. Only the Ohio tax commissioner can recommend that an Ohio local government file for Chapter 9 bankruptcy. In Chapter 9 bankruptcy, the fiscal affairs of the local government are reorganized and debts can be adjusted but not reduced. AMP is not authorized to file for bankruptcy and cannot be forced into bankruptcy. Use of Proceeds The current offering is an advanced refunding of portions of outstanding bonds. The refunding is being done to maximize interest cost savings to lower debt service over the next five years to better position the project cost structure in relation to participant billings. The final maturity of the AMP debt will not be extended. 5

6 Obligor Profile AMP was established by state statute (Ohio Revised Code Chapter 1702) as a non-profit corporation in 1971 to provide its members, which are municipal electric utilities, a reliable and competitive power supply. AMP is governed by a 21-member Board of Trustees made up of officials from 20 member municipalities and Delaware Electric Municipal Electric Corporation (DEMEC). 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. JOINT ACTION AGENCY RATING METHODOLOGY FACTORS-PRAIRIE STATE PROJECT The scorecard indicated rating of A1 is the same as the rating assigned to the bonds. The scorecard indicated rating includes a positive notch for the strong AMP oversight of its participants and the participant diversity and limited concentration risk. The grid indicated rating is a reference tool that can be used to approximate credit profiles in the public power electric utility sector in most cases. However, the grid is a summary that does not include every rating consideration. Please see Methodology on US Municipal Joint Action Agencies for more information about the limitations inherent to grids. Exhibit 2 2 Methodology Scorecard Factor 1. Participant Credit Quality and Cost Recovery Framework 2. Asset Quality 3. Competitiveness 4. Financial Strength and Liquidity Material Asset Event Risk Subfactor/Description Score a) Participant credit quality. Cost recovery structure and governance A2 a) Asset diversity, complexity and history Baa a) Cost competitiveness relative to market Baa a) Adjusted days liquidity on hand (3-year avg) (days) b) Debt ratio (3-year avg) (%) A 100 Baa c) Fixed obligation charge coverage ratio (3-year avg) (x) Baa 1.01 Does agency have event risk? No Notching Factors Metric Notch 1 - Contractual Structure and Legal Environment Participant Diversity and Concentration Construction Risk 4 - Debt Service Reserve, Debt Structure and Financial Engineering 5 - Unmitigated Exposure to Wholesale Power Markets Scorecard Indicated Rating: A1 Source: Moody's Investors Service Methodology The principal methodology used in this rating was US Public Power Electric Utilities with Generation Ownership Exposure published March Please see the Rating Methodologies page on for a copy of this methodology. 6

7 Ratings Exhibit 3 AMP, Inc. - Prairie State Project Issue Rating Prairie State Energy Campus Project Revenue Bonds, Refunding Series 2017A Rating Type Sale Amount Expected Sale Date Rating Description A1 Underlying LT $67,000,000 10/27/2017 Revenue: Government Enterprise Source: Moody's Investors Service 7

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9 9 Contacts CLIENT SERVICES Dan Aschenbach Senior Vice President Americas Asia Pacific Japan EMEA