OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the Northern Illinois Municipal Power Agency's (NIMPA) $249.9 power project revenue refunding bonds (Prairie State Project) series 2016 A.

The bonds are expected to be sold the week of Aug. 22, and proceeds will be used to refund a portion of the agency's outstanding series 2007A bonds.

Fitch also affirms the 'A-' rating on the following outstanding NIMPA power project revenue bonds:

--$298.19 million, series 2007 A;

--$3.51 million, series 2009 B;

--$119.67 million, series 2009 C;

--$72.3 million, series 2010 A;

The Rating Outlook is Stable.


The bonds are secured by the net revenues of NIMPA, after payment of operations and maintenance expenses. NIMPA's revenues are supported and derived largely from the power sales agreements (PSAs) with each of its three member distribution systems.


PARTIAL REQUIREMENTS WHOLESALE SUPPLIER: NIMPA provides wholesale power resources to its three Illinois member distribution systems pursuant to long-term PSAs. Power and energy is supplied primarily from the agency's 7.6% ownership share in the Prairie State Energy Campus (PSEC), with firming capacity and replacement power purchased as necessary. NIMPA supplied approximately 86% of the aggregate member energy requirements in 2015.

RESOURCE CONCENTRATION: NIMPA's ownership interest in PSEC, a 1,600 MW coal-fired station, is the agency's sole generating resource. Although initial operating results fell short of expectations, PSEC's performance has improved and stabilized, and unit availability and capacity factors are now in line with industry averages. The total cost of energy supplied by NIMPA is expected to stabilize around $66/MWh over the near term but will remain heavily influenced by PSEC's operating performance.

STABLE MEMBER SYSTEMS: Each of NIMPA's member systems, the cities of Batavia, Geneva and Rochelle, continue to exhibit solid credit characteristics and utility fundamentals, including solid liquidity metrics, stable operating performance and competitive retail rates, which support the rating. The cities of Geneva and Batavia additionally maintain well above-average wealth and income levels, which provide some added rate and financial flexibility.

HIGH DEBT BURDEN: The debt burden for each of the member cities related to NIMPA's ownership in PSEC is relatively high. At year-end 2015, NIMPA's total debt exceeded $505 million or the equivalent of $4,200/kW. Including both NIMPA and electric system debt, adjusted debt per retail customer approximates a $19,148 for the three member systems, well above the median for the 'A' rating category ($6,552).

ROBUST STEP-UP PROVISION: The PSA's include robust step-up provisions that require each member system to purchase up to 200% of its entitlement share in the event that another system defaults, thereby eliminating direct exposure to any one member. However, Fitch believes the step-up provides only limited protection given the magnitude of the PSA obligations and the relatively small size of the members.


MEMBER CREDIT QUALITY: Northern Illinois Municipal Power Agency's rating will be driven by the credit quality of its three member electric systems. The continued deleveraging of the agency and member systems combined with consistently strong operating performance at the Prairie State Energy Campus could lead to consideration of an upgrade. Conversely, any failure to maintain solid financial metrics, particularly if PSEC performance becomes challenged, could result in downward rating pressure.


NIMPA is a joint-action agency composed of three members located in Illinois, which was formed in 2004 to participate in the joint development of power generation resources. NIMPA's members include the cities of Batavia, Geneva, and Rochelle, all of which are located within 80 miles of Chicago. Collectively, the members serve a population of approximately 57,611 residents and 28,250 retail electric customers.


NIMPA's sole generating asset is its 7.6% ownership share of the PSEC project, a 1,600 MW coal-fired generating station located in southern Illinois. NIMPA and its members have executed take-or-pay PSAs, which require the agency to provide, and the members to pay for, their entitlement shares of the PSEC project. Pursuant to the PSAs, which expire in 2042, NIMPA is also required to provide firming capacity and replacement energy to the members from alternative sources in the event that output from the PSEC project is unavailable.

In addition to the two generating units, the PSEC project also includes a coal mine and rail spur, along with facilities for water cooling, waste storage, and ancillary operations. The coal mine is expected to meet all of PSEC's fuel requirements for approximately 30 years. Construction began in the fall of 2007, and Unit No. 1 was commissioned in June 2012 followed by Unit No. 2 in November 2012.

PSEC was completed at a total cost of approximately $5 billion, including costs related to the adjacent coal mine. The cost was well above initial estimates of $4 billion and largely related to higher than anticipated material costs and construction challenges. NIMPA's share of the project was entirely debt funded and has resulted in relatively high fixed costs for the member systems.

While the initial all-in cost of power has exceeded original expectations, NIMPA's rates to members are expected to stabilize at approximately $66/MWh over the next several years and should provide a reasonably competitive long-term source of energy and capacity. The cost of power will vary based on regional transmission tariffs and wholesale power costs but will primarily be driven by the performance of the PSEC units.


Batavia and Geneva exhibit similar economic and demographic characteristics, as neighboring communities. Both cities are relatively wealthy suburbs of Chicago, which have experienced solid economic and population growth. Unemployment figures for Batavia (5.3%) and Geneva (5.7%) also compare favorably to the state average (6.4% as of May 2016) reflecting relatively strong employment throughout the service territories that includes a diverse base of food industry companies and light manufacturers.

Rochelle's demographic characteristics reflect the more rural and industrial nature of the service area, which is approximately 80 miles west of Chicago. The city benefits from its access to transportation including two Class 1 railroads and two interstate highways, but has been challenged by declines in population since 2009, median household income that is lower than the state average and volatile unemployment. Although Rochelle's unemployment rate was reported as low as 5.7% in May 2016, the rate peaked as high as 18.5% during 2010.

During the most recent fiscal year, the electric systems collectively provided retail service to approximately 28,250 customers. Nearly 78% of the member cities' total electric revenues are derived from sales to commercial and industrial customers, which is a concern as these customer typically exhibit higher price sensitivity and instability compared to residential users. Although no specific industrial concentration exists, each of the electric systems exhibits a modest degree of customer concentration.


NIMPA's financial performance has been very stable since 2013, and reflective of the both commercial operation of the PSEC units and the consistent improvement in unit operating performance. Stable operating income of $25-$26 million per annum over the last three years has driven stable FADS of $42-$43 million, and debt service coverage of 1.15x in each of the last two years.

Total agency debt amounted to $505.3 million at Dec. 31, 2015, all of which was amortizing and fixed rate. Agency leverage is expected to remain high (11.8x total debt/funds available for debt service in 2015) and decline gradually with steady debt amortization.

Cash on hand has steadily increased in recent years to $17.6 million at year end 2015, from $7.8 million in 2013 to ensure project liquidity and fund working capital as well as capital investment requirements. NIMPA's liquidity is further enhanced by a $30 million committed line of credit with PNC bank expiring in June 2017. Availability under this line, after factoring outstanding letters of credit, was $24 million bringing total liquidity to 522 days on hand at year-end 2015.


NIMPA's financial profile is largely supported by the creditworthiness of its three member systems, which typically exhibit stable cash flow, modest leverage and solid cash balances. A series of consistent electric rate increases at Batavia and Geneva have contributed to stronger performance since 2013. Lesser increases at Rochelle failed to keep pace with growing expenses in 2014 and 2015, but unaudited fiscal 2016 results suggest the further increases have improved results.

Debt service coverage and leverage metrics for each of the systems, adjusted for their actual obligations to NIMPA, are more demonstrative of member credit quality. Factoring NIMPA-related debt and debt service obligations results in adjusted 2015 debt service coverage ratios of 1.12x to 1.44x, and adjusted total debt to funds available for debt service ratios of 9.8x to 12.3x. Although weaker in some cases than the medians for similar Fitch-rated retail issuers (1.33x and 6.93x), the ratios are reasonable and should improve with the steady amortization of existing debt. Cash on hand metrics are also reasonable, ranging from 79 to 167 days, and broadly in line with rating category medians (132 days).