Fitch Rates Missouri Joint Muni Electric Utility Comm Prairie State Revs 'A'; Outlook Stable.
--$30.8 million power project revenue refunding bonds (Prairie State Project), series 2017.
The bonds are expected to price during the week of December 11 via negotiation. Bond proceeds will advance-refund portions of outstanding series 2009A bonds on a crossover basis and pay the costs of issuance. The final maturity of 2029 is not being extended and the majority of savings are expected to be structured into the last five years.
In addition, Fitch has affirmed the 'A' rating on the following MJMEUC power project revenue bonds (Prairie State Project):
--$714.6 million (pre-refunding amount) Prairie State Power Project revenue bonds series 2009A, 2010A, 2015A, and 2016A.
The Rating Outlook is Stable.
The bonds are secured by MJMEUC's Prairie State Energy Campus (PSEC) project net revenues, which are principally derived from (i) six unit power purchasers (UPPs), pursuant to take-or-pay unit power purchase agreements (UPPAs), and (ii) the 35 members of the Missouri Public Energy Pool #1 (MoPEP 1, rated A/Stable) under all-requirements pool power purchase agreements (PPPAs).
KEY RATING DRIVERS
JOINT ACTION AGENCY: MJMEUC is a joint action agency comprising 70 municipally owned, retail electric systems located across the state of Missouri. MJMEUC has a 12.33% interest in the Prairie State Energy Campus (PSEC), a dual-unit, pulverized coal-fired generating station located in southwest Illinois.
SOLID PURCHASER FUNDAMENTALS: The credit quality of the UPPs and MoPEP 1 members underpin the 'A' rating on the bonds given their unconditional contractual commitment to pay the debt service regardless of project operations. The three largest UPPs, representing about half of MJMEUC's project ownership, each exhibit good cash flow metrics, solid system equity, and healthy liquidity. All of the power purchasers own and operate electric distribution systems that benefit from self-regulation of rates.
ROBUST 200% CONTRACT STEP-UPS: Bondholders do not have direct exposure to any single participant. A requirement that each of the UPPs step-up their original entitlement shares by 200%, as well as the effectively unlimited step-up of MoPEP 1 participants within the power pool, mitigates individual participant default risk.
STABILIZED PLANT PERFORMANCE: PSEC's operating performance stabilized after experiencing a series of unscheduled outages and reductions in rated capacity in 2013 and 2014, but remains below original expectations. Power costs are above original projections due to the reduced availability.
ADDITIONAL RESERVE REQUIREMENTS: Two reserve funds required by the indenture enhance project liquidity. A $2 million reserve and contingency fund and a $5 million operating reserve are fully funded and able to support project operations. MJMEUC further enhances project liquidity by billing all participants 30 days in advance.
CHANGE IN PARTICIPANT CREDIT QUALITY: The rating on the Missouri Joint Municipal Electric Utility Commission (MJMEUC) power project bonds will continue to reflect the collective underlying credit quality of the Missouri Public Energy Pool No. 1 and the six unit power purchasers. Credit drivers for the participants include financial performance, liquidity levels, and rate flexibility.
MJMEUC is a joint action agency formed in 1979 to provide its member utilities with an adequate, reliable, and economical power supply. MJMEUC's membership principally consists of 70 municipal retail electric systems, ranging in size from approximately 235 meters to 113,966, serving customers located across the state. Advisory, nonvoting membership extends to four additional Arkansas-based retail electric systems.
MJMEUC purchased a 12.33% (195MW) interest in the PSEC project, a 1,600MW coal-fired generating station, which includes an adjacent coal mine and transmission tie-ins. The Missouri cities of Columbia, Kirkwood, Hannibal, Fulton, Centralia, and Kahoka hold 56% of MJMEUC's project interest. The remaining 44% or 86MW has been assigned to MoPEP 1, MJMEUC's full-requirements power pool. These percentages reflect the assignment of the city of Marceline's 2% share to MoPEP 1 as of June 1, 2017. MoPEP 1 assumed Marceline's UPPA responsibilities, including the 200% step-up (on the acquired 2% share only).
In addition to the Prairie State project and MoPEP, MJMEUC has interests in the Iatan 2 (100MW), Plum Point (147MW), and Dogwood combined cycle plant (50MW) projects, as well as exclusive ownership of the Fredericktown peaking plant. Each of the Iatan 2, Prairie State, and Plum Point projects, as well as the MoPEP 1 obligations for Dogwood and Fredericktown, are separately secured. The projects each have distinct groups of UPPs.
STABILIZED PROJECT PERFORMANCE
PSEC is a mine-mouth, pulverized coal-fired generating station located in Washington, St. Clair and Randolph Counties in southwest Illinois. The generating station consists of two supercritical units with a design net rated electric capacity of approximately 800MW each. The plant design incorporates state-of-the-art emissions control technology resulting in significantly less carbon emissions than a legacy U.S coal plant.
The plant's location adjacent to a coal mine means that all associated rail, water, coal combustion waste storage and ancillary support are available on site. Underground coal reserves were projected in 2007 to meet project fuel needs through 2044.
PSEC is fully operational and project performance has stabilized after recording relatively high forced outage rates and operational issues early in the project's life. Availability levels were the highest to date in 2015 and 2016 at 80.9% and 77.3%, respectively. Capacity factors were also significantly improved at 77.7% and 74.1%, respectively, in 2015 and 2016. Year-to-date performance in 2017 continues the general trend of improved and stable operations. Availability levels are moderately lower at 74.2%, largely reflecting the planned and extended outage for unit 1's steam turbine major maintenance outage. Unit 2 will undergo its first steam turbine major maintenance outage in 2018.
The cost of power for the MJMEUC's PSEC participants should continue to improve as a result of the progress made on the operational front. Power costs in 2016 were approximately $71.16/MWh and forecast at $74.00/MWh in 2017 reflecting the downtime associated with the major maintenance outage for unit 1. Budgeted costs for 2018 are at $71.00/MWh, incorporating the expected extended outage for unit 2's steam turbine major maintenance. Going forward, MJMEUC projects PSEC all-in rates to trend in the mid-to-upper $60/MWh range as operating performance rises to meet longer-term expectations.
STEP-UPS MITIGATE DIRECT EXPOSURE
The distribution of project capacity among the six UPPs and MoPEP 1 eliminates direct bondholder exposure to any single participant, given the generous step-up provisions. UPPs are required to step-up their original entitlement shares by 200% in the event another UPP defaults on its obligations; this provision is not triggered if MoPEP 1 defaults on its original 42% obligation. The MoPEP 1 PPPAs require an unlimited step-up among the 35 participants, whereby if one or multiple members default the costs are redistributed to the non-defaulting members without limitation.
SOLID CREDIT QUALITY OF PARTICIPANTS
MoPEP 1 and the largest UPPs sufficiently support the MJMEUC PSEC project rating. The cities own and operate retail electric systems that exhibit generally good financial metrics and service territories, as well as average customer rates. In particular, Columbia and Kirkwood, the largest UPP participants representing about 40% of MJMEUC's project interest, both have strong balance sheets, good cash flow metrics, and healthy liquidity.
ADEQUATE FINANCIAL PERFORMANCE
Project debt service coverage is expected to be near 1.0x, given provisions of the UPPAs and PPPAs that collect a like amount (1.1x for MoPEP 1).
Fully funded reserves provide additional liquidity: reserve and contingency ($2 million) and operating reserve ($5 million) funds are included in restricted cash. MJMEUC retains a $48 million revolving line of credit that is available to all of MJMEUC's projects; approximately $40.5 million is available. MJMEUC uses $5 million and $2.5 million to post a letters of credit, respectively, to SPP and MISO. In addition, project participants are billed 30 days in advance, which provides additional cushion.
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