Illinois Agency Pricing Mostly-BAB Deal for Coal Plant

CHICAGO - The Northern Illinois Municipal Power Agency enters the market today with nearly $150 million of debt, including $125 million of taxable Build America Bonds, to fund its remaining costs as a part-owner in the $4.36 billion, coal-fired Prairie State Generation Station.

Citi is the senior manager with BMO Capital Markets Inc., JPMorgan, Morgan Stanley and Wachovia Bank NA serving as co-managers. Ice Miller LLP is bond counsel and McDonald Partners Inc. is acting as financial adviser to NIMPA.

The finance team was still finalizing structural details but officials expect to sell all of the bonds in two series - a taxable one for $23 million and a taxable BAB series for $125 million. The preliminary offering statement allows for a tax-exempt piece but a finance team member said based on current interest rates the agency was leaning towards putting all of the bonds that qualify for a tax-exemption in the BAB series.

The $23 million taxable series that doesn't qualify for a tax-exemption is tentatively set to mature serially between 2013 and 2017, and the BAB series is tentatively structured to mature serially between 2017 and 2021 with a 2024 term bond and a $96 million term due in 2039.

The utility was leaning towards including a traditional 10-year call on the serials and possibly the 2024 term with a make-whole call feature on the later term. It will apply for the federal government's direct-pay 35% interest subsidy.

"Our intention was always to break the financing up into two deals, one in 2007 and one in the fall of 2009," said NIMPA president Gary Larsen. "We moved up the deal somewhat as our finance team said it was a good time to enter the market."

Fitch Ratings affirmed its A-minus rating and Moody's Investors Service affirmed its A2 rating on the power agency's debt. NIMPA sold $318 million in 2007 in its first financing to raise funds towards covering its $354 million share in the Prairie State project - a 1,600-megawatt coal-fired plant under construction in southwestern Illinois.

The bonds are secured by the power purchase agreements between the agency and its three member distribution systems in Batavia, Geneva and Rochelle. The three formed the joint power agency in 2004 for the purpose of participating in the Prairie State project to serve its combined 28,084 electrical customers. NIMPA's management is handled by the Indiana Municipal Power Agency.

The project includes two supercritical units, and the development of a coal mine and other related facilities. The project is being built by Bechtel. Engineering work is 76% complete and construction 21% complete. The first unit is scheduled to open in August 2011 and the second in May 2012.

A total of six municipal electric utilities will own the plant: NIMPA, American Municipal Power Inc., the Illinois Municipal Electric Agency, the Indiana Municipal Power Agency, the Kentucky Municipal Power Agency, and the Missouri Joint Municipal Electric Utility Commission.

Prairie Power Inc., Southern Illinois Power Cooperative and investor-owned Peabody Energy are also co-owners. The project is considered unique on several fronts. Once completed, it will be one of the nation's most state-of-the art coal-fired facilities, with advanced environmental controls that meet stricter pollution control standards.

It provides its participating members with a prepaid coal supply of 200 million tons, which should last for the 30-year life of the plant. The generating unit is located on top of the coal reserves and adjacent to the mine, reducing potential rail transportation risks.

The credit's most significant challenges come from ongoing construction risks and future federal regulations to control emissions. The project's costs are over budget by about 8.7% but the cost of the power contracts remains competitive.

"Fitch notes that should the project be completed on time and the project's cost of power maintain its competitive position and the members maintain their solid financial position, NIMPA and Batavia's credit ratings are poised for possible positive rating action by Fitch," analysts wrote.

Environmental groups unsuccessfully challenged the project, contending that even with the advanced controls it will still be a major polluter because the plant will burn higher-sulfur coal that releases more pollutants into the air. The Sierra Club in its failed legal challenge asserted that the plant will become the largest new source of global warming.

Like other municipal power utilities buying ownership stakes in new coal-fired generation plants, NIMPA wants to lock in more stable power rates rather than relying on the open market to purchase power.

The participating power agencies have locked in the price for the coal supply for 35 years - the term during which the coal supply is expected to last, Moody's wrote.

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