Fitch Rates American Muni Power Greenup Project Bonds 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the following American Municipal Power, Inc. (AMP) revenue bonds:
--Approximately $144 million Greenup Hydroelectric Project revenue bonds, series 2016A.
The bonds are expected to sell via negotiation in early May. Proceeds will be used to finance AMP's purchase of an ownership interest in the Greenup Hydroelectric Facility (Greenup) project including AMP's share of capital expenses for Greenup, repay an interim line of credit, fund capitalized interest, make a deposit into the debt service reserve and pay issuance costs.
The Rating Outlook is Stable.
The bonds are secured and payable from the net revenues and other income received from AMP's 48.6% ownership interest in Greenup, including payments made by the participants under the power sales contracts (PSCs).
KEY RATING DRIVERS
CONTINUED RESOURCE DIVERSIFICATION: AMP's ownership interest in Greenup, an existing 70.2 MW hydroelectric facility, will continue the long-term strategy to expand its resource platform with additional base load projects. Greenup power will be above current market prices, but the power supplied will be environmentally friendly and comprise a small amount of each participant's own base load needs.
RATING REFLECTS PARTICIPANT CREDIT QUALITY: The rating reflects the credit quality of the project participants, particularly two of the largest, Cleveland, OH and Paducah, KY ('BBB'/Outlook Stable), which together hold a 26.5% entitlement share of the project. Although unrated by Fitch, Cleveland exhibits operating risk and credit quality that is consistent with the rating on the bonds.
STRONG TAKE-OR-PAY CONTRACTS: Take-or-pay power sales contracts obligate the 47 participating municipally owned electric systems to pay for their respective shares of all project costs, including debt service on the bonds, whether or not the project is operating or any power is delivered.
STANDARD CONTRACT STEP-UP PROVISIONS: The PSC's include standard step-up provisions that require each participant to purchase up to 125% of its original allocation of the output in the event that another participant defaults. This step-up is sufficient to absorb the loss of the largest participants' share in the event of a default.
CHANGES IN PARTICIPANT CREDIT METRICS: The rating on the American Municipal Power, Inc. Greenup Project bonds is sensitive to shifts in the credit quality of the project participants, particularly the largest. Changes in credit quality as a result of regional economic trends, fluctuating power project costs, and adopted financial policies could result in corresponding rating changes.
AMP is a nonprofit wholesale power supplier and services provider organized in 1971 for the benefit of its members. As of Feb. 1, 2016, AMP reported 132 members located throughout nine states (Delaware, Kentucky, Michigan, Ohio, Pennsylvania, Indiana, Maryland, Virginia, and WV). Together the AMP members supplied approximately 16 million MWhs of electricity to approximately 637,000 retail electric customers for a total of $1.1 billion in gross sales in 2015.
STAND-ALONE PROJECT ALREADY IN SERVICE
AMP and its members have continued to shift from market purchases to owners of generating assets. Greenup is an existing 70.2 MW run-of-the-river hydroelectric generating facility located at the Greenup Lock and Dam (maintained by the Army Corps of Engineers) on the Ohio River. Built originally in 1982 by the city of Vanceburg, KY, Greenup has been owned and operated by the city of Hamilton, OH (the city) since 1988. The powerhouse consists of three bulb-type turbine-generating units, using diverted water from the existing dam to generate electricity.
After receiving a FERC license in 2008 to develop, construct, and operate Meldahl, AMP and the city (also an AMP member) negotiated and agreed that the city would sell a 48.6% undivided ownership interest in Greenup (approximately 34 MW) to AMP within 60 days of the projected date of Meldahl's commercial operation, which is expected in mid-April 2016.
ELEVATED COST OF POWER
Greenup's gross cost of power to the participants is expected to be high. Projections indicate power costs will escalate from roughly $68/MWh in 2016 to over $91/MWh by 2020 due principally to the anticipated rise in annual debt service (ADS) on the 2016 bonds and the recovery of planned capital improvements.
Power costs will be influenced somewhat by revenues obtained from offering some Greenup capacity into the PJM reliability pricing model and the sale of renewable energy certificates. Net power costs are projected to be closer to $76/MWh in 2020, which is still high but similar to costs at AMP's other hydroelectric facilities, Belleville and Meldahl. Additionally, Greenup comprises a very small amount of peak participant demand, further offsetting the high unit costs.
TAKE-OR-PAY POWER SALES CONTRACTS
Each participant's obligation under the PSCs is made on a take-or-pay basis. 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. Contract payments are considered an operating expense for all but two participants, the cities of Coldwater and Wyandotte, Michigan, where payments may be subordinated to their own utility system debt.
Additionally, the PSCs feature a step-up provision that would require non-defaulting participants to purchase a pro-rata share of any defaulting participants' allocation up to 125% of their original allocation. This provision typically serves to mitigate participant default risk, particularly for the weakest and smallest participants. In this case, the required step-up is sufficient to cover a default of the largest entitlement of 17.6%, held by the city of Cleveland, OH.
PROJECT PARTICIPANT CREDIT QUALITY
The project rating will continue to reflect the creditworthiness of the underlying participants, which historically have exhibited satisfactory cash flow, modest leverage, and healthy cash balances. The participants collectively serve a wide variety of cities and towns dispersed over a broad geographic area.
Financial metrics for the eight largest participants (equivalent to 63.3% of Greenup participation) support the rating on the bonds. Energy sales among the largest eight participants are reasonably balanced, but several have a relatively high concentration of industrial customers. None are publicly rated by Fitch, with the exception of Paducah.