Fitch Affirms American Muni Power Prairie State Energy Campus (OH) at 'A'; Outlook Revised to Stable
Fitch Ratings has affirmed the 'A' rating on the following American
Municipal Power, Inc. (AMP) Prairie State Energy Campus (PSEC)
outstanding project revenue bonds:
--$95.8 million Prairie State Energy Campus project revenue bonds series
2008A;
--$456 million Prairie State Energy Campus project revenue bonds series
2009A, 2009B, and 2009C;
--$300 million Prairie State Energy Campus project revenue bonds series
2010;
--$738.3 million Prairie State Energy Campus project revenue bonds
series 2015A, 2015B-1, and 2015B-2.
In addition, Fitch withdraws its 'A' long-term rating on AMP series
2015B-3 bonds, as the bonds are privately placed and are not rated by
Fitch.
The Rating Outlook is revised to Stable from Negative.
SECURITY
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.
KEY RATING DRIVERS
IMPROVED PARTICIPANT CREDIT QUALITY: The Outlook revision to Stable from
Negative reflects a strengthening in financial performance and metrics
for several of the largest participants over the past two years. The
participants' service area covers four states consisting of a diverse
group of municipalities with the six largest purchasers accounting for
48.77% of AMP's share of PSEC.
STABLE PLANT PERFORMANCE: Prairie State Energy Campus (PSEC) is a
mine-mouth, pulverized coal-fired generating station located in
southwest Illinois. The plant consists of two approximately 800 MW units
with state-of-the-art pollution control technology.
Although initial operating results fell short of expectations, unit
availability and capacity factors are now in line with industry averages.
UNCONDITIONAL POWER SALES CONTRACTS: AMP's 23.26% share (368 MW) of
PSEC's output is sold pursuant to absolute and unconditional 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.
LOW FUEL-SUPPLY RISK: The project is located adjacent to a 7 million ton
per year underground coal mine mitigating fuel supply risk. Underground
coal reserves are expected to meet project fuel needs for approximately
30 years.
CONTRACT STEP-UP PROVISION: The power sales contract includes 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.
RATING SENSITIVITIES
CHANGES IN PARTICIPANT METRICS: The rating on the American Municipal
Power, Inc. Prairie State Energy Campus Project bonds is sensitive to
shifts in the credit quality of the project participants, particularly
the largest six participants.
CREDIT PROFILE
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,
2016, AMP reported 135 members located throughout nine states (Delaware,
Ohio, Kentucky, Pennsylvania, Michigan, Indiana, Maryland, Virginia and
West Virginia). AMP members supplied a total of approximately 16.5
million MWh of electricity to approximately 650,000 retail electric
customers, for a total of $1.2 billion in gross sales.
AMP and its members have continued to shift from predominantly market
purchasers to owners of generating assets. AMP's project activities
include the recent completion of several hydroelectric projects totaling
237 MW, as well as its acquisition of an ownership interest in PSEC and
the Fremont Energy Center. The projects represent the cornerstone of
AMP's strategy to own an increasing portion of member power supply
resources.
AMP anticipates power purchases will compose 39% of its resource mix by
2017, down from roughly 75% just 10 years prior. AMP's ability to
oversee its growing power resource base and monitor project
participants' credit standing are important credit considerations.
STABLE OUTLOOK ON IMPROVED PARTICIPANT CREDIT QUALITY
The rating on the PSEC bonds reflects the creditworthiness of the
underlying participants, who collectively serve a wide variety of cities
and towns dispersed over a broad geographic area. Financial and debt
metrics for the six largest participants (equivalent to 48.8% of AMP
PSEC participation) have displayed stable credit characteristics with
financial metrics and sales volumes that have improved over fairly weak
results a few years prior and are increasingly more supportive of an
'A'/Stable Outlook project rating on the bonds. Debt service coverage,
leverage (total debt/funds available for debt service), equity to
capitalization, and liquidity (days cash on hand) metrics for the
largest six participants are generally consistent with the medians for
Fitch-rated retail systems.
SEPARATE AND DISTINCT PROJECT, IMPROVED OPERATING PERFORMANCE
The PSEC units reported combined equivalent availability and capacity
factors of 80.8% and 77.7%, respectively, in 2015. Similarly, plant
capacity factors were a somewhat lower but still solid 75.4% and 71.9%
through the first six months of 2016. The lower 2016 year-to-date
performance results from two scheduled outages, although expectations
are for performance and availability to remain consistent with 2015
performance levels and industry averages.
Performance of the units is notably improved over initial performance
levels following their commissioning in 2012, which was hampered by both
planned and unplanned maintenance issues. The improvements reflect the
owner's increased emphasis on reliability and overall enhancements made
to equipment and operations, as well as an overhaul of plant management
in 2014.
TAKE-OR-PAY POWER SALES CONTRACTS
Each participant's obligation under the power sales contracts (PSCs) is
made on a take-or-pay basis. The strength of a take-or-pay agreement
lies in the participant's absolute requirement to make payment
regardless of the unit operation and as long as the bonds remain
outstanding. Contract payments are made as an operating expense of the
participants, and are subordinated to their own utility system debt,
except for two participants, where payments may be subordinated to their
own utility system debt. The municipalities are only required to make
payments from their electric system revenues and no other sources of
revenues of the municipalities are pledged.
Additionally, the PSCs feature a step-up provision that requires
non-defaulting participants to purchase a pro-rata share of any
defaulting participants' allocation up to 125% of their original
allocation. This provision serves to mitigate participant default risk,
particularly of the smallest participants. The required step-up is
sufficient to cover a default of the largest entitlement of 13.52%, held
by the city of Danville, VA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016270
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016270
Endorsement Policy
https://www.fitchratings.com/regulatory
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