CHICAGO — Public power agencies in Indiana and Ohio plan to return to the market this month with their final borrowings for the Prairie State coal-fired plant project that has risen in cost by more than $1 billion to $4 billion.
The nine power agencies that own a stake in the Prairie State Energy Campus will need to come up with more than $1 billion to cover rising construction costs associated with the project, one of the only new coal plants being built in the U.S.
The agencies are expected to cover the new costs through a mix of borrowing, cash, and reserves. The Ohio and Indiana agencies currently don’t have plans to issue additional debt to cover the higher costs.
The bond issues come two months after the participating agencies negotiated a new deal with the construction contractor Bechtel Power Corp. that has established a fixed price of $4.4 billion, up from the originally estimated price of $2.9 billion.
Despite the rising costs, issuers and credit analysts believe Prairie State’s economic benefits remain strong. The project will allow participants to generate their own power — locking in prices through 2042 — and avoid the risk associated with buying power on the open market.
“Even with these increased costs, the Prairie State project is very economical resource compared to if we were to continue to purchase power,” said Chris Rettig, senior vice president and chief financial officer of the Indiana Municipal Power Agency. “This is displacing the need to purchase long-term power, so we believe that even with these increased costs, Prairie State will still result in lower rates in the long term for our members.”
IMPA on Sept. 29 and 30 will price $123 million of taxable Build America Bonds and $22 million of tax-exempt bonds that will refund debt issued in 1999. Proceeds from the BABs will finance Prairie State project costs.
Citi will senior manage the deal. Ice Miller LLP is bond counsel and McDonald Partners Inc., a California-based firm that specializes in public power, is financial adviser.
Fitch Ratings rates the debt A-plus, and Moody’s Investors Service rates it A1. Standard & Poor’s had not yet released its rating as of Tuesday.
Rettig estimates that IMPA, which owns a 12.64% stake in Prairie State, will likely spend roughly $60 million more to cover the increased costs of the project. The agency plans to use its cash to cover the new costs, Rettig said. It expects to tap its funds by the end of next year. After the upcoming bond issue, IMPA will have borrowed a total of $570 million for the project.
For all participating agencies, the increased costs will ultimately mean higher electric rates for municipalities and other customers that buy their power from the agencies. IMPA, for example, has a rate covenant that requires it to set rates to meet 1.1 times annual debt service.
“We will ultimately end up spending more for the project than what we had originally planned to, and yes, there will be a small impact on rates as a result of those increasing costs,” Rettig said.
In Ohio, public power provider American Municipal Power Inc. is expected to sell $300 million of revenue bonds next week to mark its final Prairie State financing.
Fitch and Standard & Poor’s rate the debt A and Moody’s gives it an A1.
After the transaction, AMP will have issued $1.65 billion of debt to pay for its 23% ownership stake. AMP’s Prairie State costs have risen roughly 30%, to $1.3 billion from $1 billion, according to Fitch.
It’s unclear how AMP plans to cover its new costs. The agency did not return several phone calls.
Prairie State’s other joint public power agency owners include the Illinois Municipal Electric Agency, the Missouri Joint Municipal Electric Utility Commission, the Kentucky Municipal Power Agency, and the Northern Illinois Municipal Power Agency.
Peabody Energy Corp., the world’s largest private-sector coal company, is the project’s developer.
Like IMPA, the Kentucky Municipal Power Agency is expected to use cash to cover its additional costs. The Northern Illinois Municipal Power Agency will likely enter the market sometime next year with roughly $50 million of new debt to make its final financing, Rettig said.
The Prairie State campus includes two pulverized-supercritical generating units with a combined 1,582-megawatt capacity and an adjacent mine that is under construction with 200 million tons of coal reserves.
It is considered unique on several fronts. It is expected to 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 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 risk.
The coal plant is about 50% complete, with the first unit scheduled for completion by December 2011 and the second by May 2012. Construction began in 2007.
“The project itself, because it’s located adjacent to the coal mine and fuel supply, and it has a relatively fixed price of fuel for 30 years — along with a now relatively level debt-service structure — has a lot of economic advantages, even with the price increases they’re now facing,” said Moody’s analyst Dan Aschenbach.
He added that while the new construction contract is actually stronger than the original one as it locks in costs, it is possible that new carbon emissions regulation could mean more costs in the future.
“Prairie State is one of the last coal plants that got permitted and started construction after there was a deluge of others that were stopped because of regulatory uncertainty,” Aschenbach said.
“For any of these larger plants, it would be very difficult for them to retrofit for carbon because there’s no acceptable technology,” he said. “If it’s a cap-and-trade issue, it could push up the costs.”
Proponents have promoted the project as state of the art with advanced scrubbing systems that will produce clean, low-cost electricity to serve more than 1.7 million households and promote business growth in the Midwest.
Its detractors, led by environmental groups, counter that while the plant will burn cleaner than existing decades-old facilities, it will still add significantly to global warming in part because it will burn “dirty” high-sulphur coal.
The director of the Sierra Club’s national coal campaign, Bruce Nilles, has said that once the plant is operational, it will become “the largest new source of global warming.” That’s because of the carbon dioxide levels it will release into the air, in addition to other pollutants, including sulfur dioxide, mercury, and nitrogen oxides.
The Sierra Club, the American Lung Association, and the American Bottom Conservancy petitioned the U.S. Circuit Court of Appeals for the Seventh Circuit challenging the air permit, but were unsuccessful. The groups worry over the impact of emissions on the St. Louis area and the region’s lakes, rivers, and streams, as well as the effect of water use from the nearby KasKaskia River on its fish population.
“Beware of a coal company promising you low-cost power,” Nilles said in an update on the project posted on the organization’s website “We predicted four years ago that this was going to be a bad deal for ratepayers. But we never envisioned they would get hosed this bad even before Prairie State generates a watt.”
The Illinois Municipal Electric Agency last summer sold $325 million of mostly taxable BABs to pay what it thought then were its final costs for its 15.2% ownership in the plant. It had sold $670 million of revenue bonds in 2007 to cover initial costs.
The Northern Illinois Municipal Power Agency last summer sold $150 million of debt, including $125 million of BABs, to fund what it thought then were its final costs as a part-owner in the facility. NIMPA sold $318 million in 2007 in its first financing to raise funds towards covering its original $354 million share in Prairie State.
The Columbia-based Missouri agency has sold more than $600 million of revenue bonds for the project to cover its 12.3% ownership stake. It plans to issue additional debt to cover its increased costs, although those numbers have not yet been finalized, said chief financial officer Mike Loethen. “The immediate need for funds is not there yet, but we may enter the market before the end of the year to take advantage of the BAB program,” he said.
Other tax-exempt bonds have also been issued for the project through the Illinois Finance Authority by three other power providers with a stake in the plant. Three borrowers — Lively Grove Energy Partners LLC, Prairie Power Inc., and the Southern Illinois Power Cooperative — each used the IFA to sell $13.3 million of tax-exempt solid-waste disposal facility revenue bonds. Each won a piece of Illinois’ private-activity bond volume.
Lively Grove will have 5% ownership in the project, while Prairie Power will own 8% and Southern nearly 8%. Peabody is the parent of Lively Grove.
Prairie Power is a member-owned, nonprofit electric generation and transmission cooperative that supplies 11 member distribution coops. Southern Illinois Power Cooperative, located south of Marion, is serving as the project site’s regional wholesale power supplier.