CHICAGO — The Illinois Municipal Electric Agency enters the market today with about $325 million of debt — mostly taxable Build America Bonds — to finance the remaining costs tied to its participation in the $4.37 billion, coal-fired Prairie State Generation Station.
JPMorgan is senior manager. BMO Capital Markets GKST Inc., Edward Jones, Morgan Stanley, and Wachovia Bank NA are co-managers. McDonald Partners Inc. is the agency’s financial adviser. Chapman and Cutler LLP is bond counsel on the transaction.
Though subject to change, the agency and its finance team decided late last week to put most of the transaction, $295.4 million, into its planned Series C of BABs. The agency will apply for the federal government’s direct-pay 35% interest subsidy. The tax-exempt Series A is currently sized at $11.3 million, and Series B, taxable due to the use of proceeds, is $17 million.
The BABs are tentatively set to mature serially between 2016 and 2023 with a term bond in 2035. The deal is expected to include make-whole call provisions and an extraordinary optional redemption in the event the subsidy program is canceled or altered by the federal government.
The agency initially planned a traditional municipal 10-year call provision, but “received some push-back from potential investors on the 2035 term bond,” one member of the finance team said. The agency shifted to the make-whole provision that favors investors in the event an issuer wants to redeem the bonds before maturity when preliminary pricing scales showed greater savings.
Ahead of the sale, Fitch Ratings affirmed the A-plus rating on the agency’s power supply system revenue bonds. Moody’s Investors Service affirmed its A1 and Standard & Poor’s affirmed its A-plus. The IMEA pledges its net revenues from take-and-pay power sales contracts between the agency and its members that terminate in 2035. It must set rates sufficient to pay debt service and operation and maintenance obligations.
Proceeds of the deal will fund IMEA’s remaining contribution to cover the costs of its 15.17% ownership, representing 240 megawatts, in the 1,600-megawatt coal-fired Prairie State project under construction in southwestern Illinois. The agency sold $670 million of revenue bonds in 2007 to cover its initial costs associated with the Prairie State facility.
The project includes two supercritical units, and the development of a coal mine and other related facilities. The project is being built by Bechtel. Engineering work was 74% completed and construction 18% completed as of May, according to the preliminary offering statement. The first unit is scheduled to open in August 2011 and the second in May, 2012.
A total of six municipal electric utilities will own the plant: IMEA; American Municipal Power Inc., the Indiana Municipal Power Agency, the Kentucky Municipal Power Agency, the Northern Illinois Municipal Power Agency, and the Missouri Joint Municipal Electric Utility Commission, along with Prairie Power Inc., Southern Illinois Power Cooperative, and investor-owned Peabody Energy. The project is considered unique on several fronts. Once completed, it will 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 for 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 risks.
The project’s most significant risks come from future federal regulations to control emissions.
“Moody’s expects some form of federal regulation on greenhouse gases to be implemented which will impose new costs on coal-fired generation,” analysts wrote. “Moody’s believes that the cost and timetable of implementation of a federal cap and trade program remains subject to significant debate and remains uncertain.”
Environmental groups had challenged the project, contending that even with the advanced controls it will still be a major polluter. The Sierra Club in its failed legal challenge asserted that the plant will become the largest new source of global warming because of the carbon dioxide levels it will release into the air, in addition to other pollutants including sulfur dioxide, mercury, and nitrogen oxides.
Construction of the facility and a 38-mile transmission line also pose some risk to the credit.
The IMEA was created in 1984. It currently has 32 member agencies across Illinois that provide power to 158,300 customers. The two newest members, the cities of Naperville and Red Bud, will formally join the system next year. About 40% of revenues comes from residential customers. One-third comes from industrial customers.
“In our opinion, credit strengths include all-requirements, take-and-pay power sales contracts (through 2035) between IMEA and 32 participating members, with unlimited step-ups among the 30 members currently receiving power; and a membership base that has, during the past several years, strengthened in credit quality,” wrote Standard & Poor’s analyst Jeffrey Panger.
Like other municipal power utilities buying ownership stakes in new coal-fired generation plants, the IMEA wants to lock in more stable power rates. The IMEA is also participating in the 750-megawatt Trimble County Unit 2 coal-fired plant, located in Kentucky.