BRADENTON, Fla. - Two small western Kentucky utilities that issued bonds for their stake in the Prairie State Energy Campus hope to benefit from a refunding next week.
The $200 million advance refunding by the Kentucky Municipal Power Agency, pricing Tuesday, comes to market as other public utilities refund bonds tied to the controversial Illinois coal-fired power plant.
Officials at KMPA, a joint action agency formed by the electric boards of Paducah and Princeton, said they are keeping an eye on how the market prices this week's $158 million refunding by the Missouri Joint Municipal Electric Utility Commission.
The Illinois Municipal Electric Agency expects to bring a $590 million refunding the week of March 30.
The three entities are among the nine owners of Prairie State, a modern coal-fired plant in Washington County, Ill., that went into service in 2012.
The plant has been more costly than anticipated due to delays and operational issues, leading to legal action in some states and an inquiry by the Securities and Exchange Commission.
"We're working closely with other Prairie State participants watching and supporting their deals," said KMPA chief financial officer Heather Overby.
KMPA's refunding is being done for economic savings within existing maturities, and is also designed to enhance cash flow for KMPA, Paducah and Princeton, according to Greg Phillips, the agency's financial advisor at J.J.B Hilliard, W.L. Lyons.
Officials expect to receive present value savings of 3% or more, with most of the savings taken over the first five years, he said, adding that the refunding is part of KMPA's plan to enhance and improve the financial conditions of its members.
The deal comes as rating agencies have noted operational improvements at Prairie state, particularly in the six months up to January.
KMPA owns a 7.82% share in Prairie State, and has $517 million of outstanding debt secured by the revenues from take-or-pay power sales agreements with two municipal electric systems.
Paducah Power, the larger system with about 22,300 customers, owns 83.9% of the KMPA investment.
Princeton has about 3,880 customers and has a 16.1% share in KMPA. The customer base of both utilities is primarily residential.
Increased debt obligations of the two utilities for payments to KMPA prompted Moody's Investors Service to downgrade KMPA's bonds to Baa1 from A3 ahead of the refunding, the agency said in a March 2 report.
At the same time, Moody's downgraded Paducah's ratings to Baa1 from A3 because of a weakened financial profile "owing to increased debt service obligations, weakened liquidity, and higher than expected cost of power from the Prairie State project."
Standard & Poor's maintained its A-minus underlying rating on KMPA's bonds, and assigned an A-minus to the refunding.
Both rating agencies have stable outlooks.
"We expected some change [in the rating] with all the turmoil that's going on," KMPA general manager John Humphries said in a nod to customer backlash against rate increases in Paducah.
Humphries, who is also general manager of Princeton Electric, said his agency has not experienced the high number of complaints about base rates and added power cost adjustments seen in Paducah.
Humphries said he is unaware of any local pending or contemplated legal action with regard to electric rates or Prairie State, but added that there have been "rumblings by local attorneys who said they are looking into litigation."
The preliminary official statement for next week's offering by KMPA discloses for the first time that the agency received a subpoena from the SEC in January 2013.
KMPA said it complied with the SEC's request for "information and documents" relating to the development of the Prairie State Energy Campus, and has received no requests or communications from the SEC since.
Missouri and Ohio-based American Municipal Power Inc. also received subpoena's from the SEC.
KMPA was also named as a respondent in discovery - not a defendant - in an August 2014 class-action lawsuit filed by ratepayers in Batavia, Ill.
The POS for next week's refunding also details problems encountered by Paducah Power related to increased costs at Prairie State.
Multiple base rate increases in one year and added power cost adjustments as high as 15% resulted in "considerable customer complaints," concern from elected officials, and extensive media coverage, the document said.
Last September, Paducah Power's long-time board chairman as well as its manager resigned, and a financial recovery plan was implemented to stabilize the agency's rates under interim manager Mark Crisson.
In February, Gary Zheng was hired to become Paducah Power's new manager. Before moving to Kentucky, he spent 18 years with Lubbock Power & Light in Texas.
As part of Princeton's plan to improve finances, Humphries said the utility closed last week on the issuance of $10.4 million in tax exempt refunding bonds to take out taxable Build America Bonds that were callable due to the federal government's reduction in the subsidy.
The BABs were issued in 2009 to finance distribution and generation system improvements so the utility could purchase power from KMPA.
"On that refunding, we were able to see about $5 million in savings and reduce the term by one year," Humphries said. "We removed the uncertainty with the subsidy."
Depending on market conditions, all or a portion of KMPA's refunding will be wrapped by National Public Finance Guarantee, which is rated AA-plus by Kroll Bond Rating Agency, AA-minus by Standard & Poor's, and A3 by Moody's Investors Service.
"We think the wrap by National Public Finance Guarantee adds value to the transaction moving it into the double-A category," said Phillips.
One-on-one calls with prospective investors were scheduled Thursday and Friday.
"We feel that we have a good plan," Humphries said. "Prairie State is improving, and operations are getting much better. Things have been difficult but we've turned the corner."
Goldman, Sachs & Co. is senior manager for Tuesday's refunding. Co-managers are JPMorgan, Citi, Morgan Stanley, Raymond James, and Wells Fargo Securities.
Rubin & Hayes is bond counsel.
Stites & Harbison PLLC is underwriters' counsel.
