CHICAGO - The Illinois Municipal Electric Agency heads into the market as soon as Tuesday with a $585 million revenue bond issue to refund debt sold to finance its participation in the controversial Prairie State coal-fired power plant project, and for an ownership stake in a Kentucky-based coal plant.
Citi is senior manager and BMO Capital Markets, JPMorgan, and PNC Capital Markets round out the team. Public Financial Management Inc. is advising the agency.
The bonds will refund paper from 2006 and 2007 issues for annual interest rate savings of about $5.4 million. The bonds mature from 2017 through 2035 and are secured by participant payments to IMEA and the participants must ensure their retail rates are sufficient to meet their obligations.
The original bonds helped finance the agency's ownership stakes in Prairie State and the Trimble County 1 and Trimble 2 projects that have shifted the agency from a primary purchaser to an owner of power generation.
IMEA chief executive officer Kevin Gaden sought in an investor presentation to highlight improving operations at the Prairie State and Trimble 2 plants and stressed that they are "well-positioned as long term assets."
On Prairie State, Gaden said: "IMEA's members remain committed to the Prairie State complex" and will benefit from its improved operations over the last year and top management changes.
IMEA's members pay $76 per megawatt hour for power, according to the presentation. That's higher than open market pricing but less than what neighboring communities pay to investor-owned utilities.
Ahead of the sale, Fitch Ratings and Standard & Poor's affirmed their respective A-plus and A ratings on the bonds and Moody's Investors Service affirmed its A1 rating on the power supply system refunding and a total of $1.17 billion of debt.
Moody's said its rating is tied primarily to the average A2 credit of the electric agency's 32 project participants and IMEA's "demonstrated willingness to maintain satisfactory financial metrics as its risk profile has transitioned over the last two years to include more exposure to generation asset ownership."
IMEA's dependence on power purchase agreements has fallen to about 43% from almost 80% of its annual energy needs, adding to the reliability of its power resources, Moody's added.
The addition of two affluent Chicago far western suburbs --Naperville and St. Charles -- have helped bolster the weighted credit quality of participants. Combined, the two account for nearly 50% of power supply purchases, the agency said in its investor presentation. Naperville’s previous refusal, however, to raise rates needed to cover higher energy costs had weakened the agency’s overall credit quality, Fitch said in its report. The city’s approval of higher base rates this year and in 2015 are expected to help restore the utility to sounder footing, Fitch added
The rating also takes into account IMEA's relatively diverse power supply portfolio and the favorable take-and-pay participant contracts that require a five year notice for a member to terminate at the end of the current contract in 2035. The contracts also include provision that require other members to step up to cover a default of a fellow member's obligations.
Moody's said its rating also factors in the higher-than-projected cost of power from Prairie State and Trimble County Unit 2, which make "IMEA's all-in cost of power less competitive." Both Prairie State's and Trimble County Unit 2's operating performance have been improving, according to Moody's.
Several other joint power agencies with an ownership stakes in the Prairie State project have recently refunded debt, including the Kentucky Municipal Power Agency, Missouri Joint Municipal Electric Utility Commission, and AMP Ohio.
The $4.9 billion Prairie State coal plant in Washington County, Ill. includes a dual unit, coal-fired plant and an adjacent mine to supply its coal. It is owned by nine joint action authorities and cooperatives across the Midwest, which each have contracts with local municipal utilities to supply their power for up to 30 years in some cases.
The project has sparked controversy for years, starting with cost overruns of nearly 25% that boosted the final price tag to nearly $5 billion. As the project's costs increased, so did the costs passed along to local governments and utilities. The higher-than-expected power costs have triggered lawsuits from local participants, calls for state attorneys general investigations, and subpoenas reported by a handful of the JPA's from the Securities and Exchange Commission seeking information on the project.
Despite the rising scrutiny, analysts from Fitch Ratings and Moody's Investors Service praised the project in recent reports that highlighted its long-term benefits.
In a special report released March 9, Fitch Ratings estimates the project should produce power with a cost range of $60/MWh to $65/MWh over the long term. While admitting that the current $72/MWh is more than double day-ahead prices on Midwest Independent System Operator Inc. wholesale market, Fitch said the long-term benefits remain sound.
Many of the JPAs have long refused to provide information or even confirm the receipt of an SEC subpoena with several only just recently disclosed the information in their offering statements. IMEA's offering statement reports that it received one in January 2013. The agency does not believe the "investigation will have a material impact" on its financial position, the offering statement reads.
