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Prairie State Economics Still Work for JPA Owners

JAN 7, 2013 5:20pm ET
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CHICAGO — Investors who hold some of the $4.5 billion of revenue bonds issued for the controversial coal-fired Prairie State Energy Project can take heart that its long-term economics remain favorable for participating public power agencies despite cost overruns, says Moody’s Investors Service.

The project’s worth provides incentive for the ongoing support of its joint-power authority owners, Moody’s said in its latest report on the project published in a compilation of infrastructure-related research. Strong contracts securing the Prairie State debt provide rating stability and also should help allay investor concerns.

Lead analyst Dan Aschenbach tempered the report’s positive assessment, from an investors’ perspective, noting that rating stability depends on the ongoing support of JPA participants.

“The final cost of the project is above the original budget, but the economics of the long-term asset remain favorable and the strong contracts securing the debt mitigate investor concerns and provide for rating stability, as long as the joint action agency participants continue to demonstrate their willingness to meet their obligations to bondholders,” the report read.

The state-of-the-art southern Illinois coal plant became fully operational in 2012 after some delays. The campus includes a two-unit 1,629 megawatt pulverized coal, supercritical coal-fired generating facility at a site with an adjacent coal mine.

The project’s growing price tag has drawn public and political scrutiny, with some municipalities who are locked into contracts through their participation in local public power agencies calling the project a bad deal.

Higher than projected power costs have fueled the ire of environmental groups who long have warned that even with more advanced controls the plant will still be a major contributor to greenhouse emissions.

A report last year from the Institute for Energy Economics and Financial Analysis warned that some local communities in eight states with a stake in the project could face fiscal stress due to the higher rates they now face.

The cost of the project, first estimated at about $1.8 billion, rose to $3 billion and the utilities and project managers in 2010 negotiated a fixed cost of $4 billion. Current costs for the project are estimated at nearly $5 billion, according to published reports.

Customers in a total of 217 municipalities and 17 electric membership cooperatives in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, Virginia and West Virginia will use power from the plant.

Majority owners include the A1-rated American Municipal Power Inc., the A1-rated Illinois Municipal Electric Agency, the A1-rated Indiana Municipal Power Agency, the A3-rated Missouri Joint Municipal Electric Utility Commission, the A3-rated Kentucky Municipal Power Agency and the A2-rated Northern Illinois Municipal Power Agency.

The six collectively sold $4.5 billion in debt to fund their ownership stake and tapped the Build America Bond program for some of their issuance. The bonds are secured by payments from over 200 municipal electric utilities in 10 Midwestern states, Moody’s said in its latest report published in Global Infrastructure Focus.

Two rural cooperatives and Peabody Energy, the initial sponsor of the project constructed by Bechtel Power Corp., have smaller shares.

Last fall, then-U.S. Rep. Dennis Kucinich, D-Ohio, asked the Treasury Department to investigate whether it was proper for BABs, which offer a federal interest rate subsidy, to have been used to finance the power plant. Kucinich, who lost his 2012 re-election bid in a primary, complained that the bond issuance was benefitting “a private, multinational energy firm.”

Moody’s in its latest report notes the questions raised by some ratepayers and environmental groups over the project’s economics and investor concerns over the plant’s competitive pricing, ratings risks and vulnerability to future environmental regulation.

While concluding that the project’s economic remain favorable, Moody’s also said the project’s advanced environmental controls and a higher than projected fuel-efficiency rate to date are “important advantages versus other base load power plants in the region.”

The power agencies touted the project as one that provides cost certainty for decades even if the rates are initially higher than originally expected.

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