CHICAGO — The ratings of joint power agencies with an ownership interest in the Illinois-based Prairie State coal-fired plant are expected to withstand the burden of incurring an additional $1 billion for cost overruns, but further problems could have a negative impact, Fitch Ratings writes in a report due out today on the project.
Additional construction costs are expected to be limited by a new engineering, procurement, and construction contract signed in July by the project’s participants — which collectively have issued $5 billion of mostly tax-exempt debt — and by construction manager Bechtel Power Corp. It locks in a fixed price of $4 billion. When the nine participating agencies first signed on to the project a few years ago, the project carried a “targeted” price of $2.9 billion.
“We know the contract has increased the cost of power but it is somewhat mitigated by the fixed-price, turnkey nature of the revised contract,” said one the report’s authors, W. Drake Richey.
Analysts and the power agencies acknowledge near-term energy costs for power agency members will exceed market rates because of the cost overruns, but over the long term they believe it will save money based on projected costs to purchase wholesale power on the open market.
Fitch rates five of the nine power agencies that have an ownership stake in the Prairie State Energy Campus. It does not rate the Kentucky Municipal Power Agency, but it does rate the Paducah Power Services, which makes up 84% of KMPA. While Fitch considers the new contract a credit-neutral, analysts looked at its effect and at the strengths and weaknesses of each of the rated power agencies with an eye toward assessing their ability to withstand further problems that could arise and assigned a credit score.
The contract establishes a fixed price, but given the size and complexity of the project, unforeseen problems could still arise. Energy costs are fixed through 2042. The contract also provides a guaranteed completion date and provides compensation in the event operations are delayed, but does not address potential future operational challenges or the possibility of federal legislation imposing carbon emission taxes.
The Prairie State campus includes two pulverized-supercritical generating units with a combined 1,582-megawatt capacity and an adjacent mine. Its supporters argue it will be one of the most advanced coal-fired facilities, with environmental controls that meet stricter pollution-control standards. Detractors claim it will be one of the largest new producers of greenhouse gases and cite concerns by some local municipalities about their residents’ ability to pay the higher initial costs.
In the event of further pricing strains, the report says: “The credit impact will not be uniform across the owner systems, but will depend on each member’s share of PSEC as a percentage of its resource mix, as well as its ability to absorb or pass through cost increases.”
The participants include Fitch-rated entities American Municipal Power in Ohio with a 23.26% ownership interest, A rating, stable outlook, and credit score of 2.5 on a scale of one to five, with five being the strongest; Illinois Municipal Electric Agency, with a 15.17% interest, A-plus and stable rating, and 4.5 score; and Indiana Municipal Power Agency, with a 12.64% interest, A-plus and stable rating, and 4.5 score.
It also rates the Missouri Joint Municipal Electric Utility Commission, with a 12.33% interest, A-minus and stable rating, and 3 score; Northern Illinois Municipal Power, with a 7.6% interest, A-minus and stable rating, and 2 score; and Paducah Power Services, which has a 7.82% share, A rating with a negative outlook, and a 1.5 score.
“The credit quality reflects the low default risk that stems from the revenue raising capacity of the underlying retail participants,” Richey said.
The report analyzes each rated utility’s generation mix relative to its energy and capacity requirements, assessment of fuel or unit concentration, and construction risk. The strongest of the six is IMEA which will complete its power supply portfolio with another coal-fired plant coming online this year. The weakest is PSEC, which has taken on new construction projects and will rely on Prairie State for 69% of its power. Fitch said systems that rely on a single resource for more than 50% of power are at greater risk. That’s the case with PSEC, Paducah, and NIMPA.
In looking at the credit strength of the power agencies’ members, the weakest are AMP Ohio, Paducah, and NIMPA, which each have high fixed costs associated with construction of new generation. Even with the higher costs, Fitch said most owners and underlying participants will not experience a dramatic increase in the costs with the commercial operation of PSEC and most power agency participants enjoy full rating authority.
All of the rated power agencies have either a take-and-pay contract with its members or a take-or-pay contract. The first – and the strongest – requires members to make debt service payments regardless of the unit’s operation, mitigating the default risk of the weakest and smallest participants. The second is also strong as participants are obligated to pay an amount typically tied to debt service regardless of whether service is delivered.
The project located in Washington County is nearly 53% complete and roughly four months behind schedule. Mine construction is nearly 60% complete and on schedule with total overall costs now estimated at $5.1 billion. Unit One is scheduled to be operational in December 2011 and Unit two in August 2012.
Energy costs are now expected to begin at about $58 per megawatt hour, which represents a $12 to $15 increase from 2007 projections. The initial costs exceed current market rates due to the recession’s impact on open market pricing and low natural gas prices. However, Fitch and others, project that wholesale power prices will jump to $56 per MWh in 2013 and continue to rise.
Fitch acknowledges the political challenges of the project given growing support to curtail global warming, but notes that the region relies heavily on coal plants for power and on older, less efficient plants. The region will face more costly challenges should new regulations be imposed.
Prairie State is one of the only new coal plants being built in the U.S. because of the current regulatory environment and it is one of the largest. The power agencies are expected to cover the higher costs through a mix of borrowing, cash, and reserves. The Ohio and Indiana agencies currently have no plans to issue additional debt to cover the higher costs after recently coming to market.
The Indiana agency last month sold $150 million of debt and AMP Ohio sold $300 million of revenue bonds. Neither has further issuance plans, but the other power agencies rated by Fitch are still reviewing their costs and how to finance it.