Fitch Rates Indiana Muni Power Agency's 2016 Series A Power Supply System Rev Bonds 'A+'
Fitch Ratings assigns an 'A+' rating to Indiana Municipal Power Agency's
(IMPA) proposed $379.9 million power supply system refunding revenue
bonds, 2016 series A.
The bonds are expected to price during the week of Dec. 7, 2015.
Proceeds will be used primarily to refund IMPA's outstanding 2007 series
A bonds.
In addition, Fitch affirms the 'A+' rating on IMPA's $1.213 billion
power supply revenue bonds (including amounts to be refunded).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by revenues derived from the operation of IMPA's
power supply system, including payments received from its 60 members
pursuant to power sales contracts (PSCs), as well as dedicated funds
established under the master resolution.
KEY RATING DRIVERS
LOW-COST POWER: IMPA's prudent power supply strategy, solid mix of
low-cost baseload power resources and competitive wholesale rate are key
factors in the rating. Added support is derived from the take-and-pay
full-requirements contracts with members that expire on April 1, 2042.
IMPLIED STEP-UP PROVISION: The take-and-pay full-requirements PSCs are
viewed as having an implied step-up provision as a result of the ability
to amend the annual revenue requirement for unexpected costs, including
those related to a member default.
RELIANCE ON COAL-FIRED RESOURCES: Coal-fired resources provide
approximately 75% of IMPA's energy requirements and should remain the
cornerstone of the agency's portfolio given the recent commissioning of
the Trimble County Unit 2 and Prairie State Energy Campus (PSEC) Units 1
and 2. Environmental compliance expenditures appear manageable through
2020.
IMPROVED OPERATING PERFORMANCE: The rating reflects the improved
operating performance of PSEC Units 1 and 2 exhibited since 2014 and
Fitch's expectation that operating metrics will remain at current
levels. PSEC's early operations were plagued by a series of planned and
unplanned outages resulting in performance that fell short of original
estimates.
STABLE FINANCIALS WITH IMPROVING LEVERAGE: IMPA's financial performance
reflects stability with debt service coverage at 1.36x and improved cash
liquidity of 105 days. Leverage as measured by debt-to-funds available
for debt service (FADS) remains acceptable at 10.8x for 2014, down from
a peak of 20.2x in 2012 as a result of rate increases related to PSEC's
commercial operation.
INDUSTRIAL CUSTOMER CONCENTRATION: IMPA has a high concentration of
industrial customers who accounted for 44% of MWh sales in fiscal 2014.
This concern is somewhat mitigated by the diversity of the industrial
customer segment.
RATE REGULATION OF MEMBERS: IMPA's wholesale rates are not regulated.
However, retail rates of eight members, representing 40.7% of revenue in
2014, are regulated by the Indiana Utility Regulatory Commission (IURC).
Although Fitch believes that rate regulation can limit financial
flexibility, provisions of the IMPA Act, the use of energy cost
adjustment (ECA) factors and the ability of members to opt out of
regulation largely mitigate this risk.
RATING SENSITIVITIES
MEMBER CREDIT QUALITY: The credit quality of the Indiana Municipal Power
Agency's member utility systems, who are the ultimate off-takers of the
power supply system, will be a key factor in future rating actions.
PLANT OPERATIONS: Failure to operate the Prairie State Energy Campus
(PSEC) and/or Trimble County Unit No. 2 generating units at high levels
of availability and capacity to capture capital and operating costs
could result in downward rating pressure.
PSEC LITIGATION: Adverse developments in a class action lawsuit filed
against IMPA (and others) related to its role in the development of PSEC
could also have negative rating implications.
CREDIT SUMMARY
LARGE WHOLESALE SYSTEM
IMPA is a joint-action agency that provides wholesale electricity to 59
Indiana members and one Ohio customer, pursuant to take-and-pay
full-requirements agreements. The PSCs expire on April 1, 2042 and are
subject to automatic one-year renewal thereafter. IMPA's currently
outstanding bonds mature on Dec 31, 2042. The member utilities are
located throughout the state of Indiana and serve a population of
approximately 338,000 and roughly 200,000 customers.
DIVERSE POWER SUPPLY STRATEGY
IMPA's power requirement of about 1,200 MW is met with a mix of partial
ownership interests in several power plants, long- and short-term
purchased power arrangements, and member-owned generating facilities.
Trimble County Unit 2 and PSEC's Unit 1 and 2 - all coal-fired units -
were commissioned in January 2011, June 2012, and November 2012,
respectively. IMPA maintains a 100 MW-share each in Trimble County Unit
2 and PSEC's Unit 1 and 2.
In addition to the coal units, IMPA also owns 419 MW of simple cycle
natural gas plants. These plants are primarily used as peaking units and
generally run only during summer hours. Member-owned capacity
contributes an additional 108 MW to IMPA's power supply portfolio.
Indiana does not currently have a renewable mandate applicable to IMPA;
however the agency has contracted for 50 MW of wind capacity and is
developing a small amount of solar generation.
Although IMPA's asset mix is balanced from a capacity perspective, the
agency's energy mix is heavily skewed toward coal-fired resources, which
provide approximately 75% of energy. A fuel diversification strategy
involving the addition of natural gas-fired combined cycle capacity will
require higher growth of native load or the addition of new large
members. Absent this, coal will continue to be the dominant fuel for
IMPA.
RATE STRUCTURE
IMPA's wholesale rate to members is set by its board of commissioners
and is required to cover IMPA's operating costs plus 1.10x aggregate
debt service. The ability of IMPA to review its wholesale rate at least
once a year in order to meet its revenue requirement effectively results
in a de facto unlimited step-up obligation among the members.
IMPA's board approved an increase in IMPA's target debt service coverage
ratio during 2012 to 1.20x from 1.125x, which Fitch views favorably.
IMPA also has an ECA component in its wholesale rate which can be
changed every six months to adjust for changes in fuel and purchased
power costs, while the members utilize a quarterly ECA. The agency is
projecting annual rate increases that will bring member rates from an
average of 7.22 cents per kWh in 2015 to 7.54 cents per kWh in 2020, an
aggregate 4.4% increase. Fitch views the projected increases as
necessary to maintaining financial margins given escalated operating and
debt service costs during the same period.
FINANCIAL PERFORMANCE
Financial performance remained relatively strong in 2014 reflecting the
commercial operation of the new Trimble County and PSEC generating units
and execution of planned rate increases. Debt service coverage was 1.36x
in fiscal 2014 and debt-to-FADS moderated to 10.8x, which is more in
line with Fitch 'A+' category medians versus prior years. Forecast 2015
performance is expected to remain relatively stable, with continued
improvement in equity and cash on hand.
IMPA maintains a revolving line of credit with PNC Bank National
Association (rated 'A+/F1') for up to $50 million through May 23, 2016.
IMPA primarily uses the credit facility for the posting of letters of
credit to trading counterparties. Liquidity (DCOH) has steadily improved
since 2009 to 105 days, a notable achievement given the scope of IMPA's
now-concluded construction program.
For additional information, please see Fitch's report, 'Indiana
Municipal Power Agency', dated Oct. 22, 2014.
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
Related Research
Indiana Municipal Power Agency
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=791248
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995639
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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