CHICAGO — The Indiana Municipal Power Agency, which supplies power to municipal electric utilities, is expected to enter the market Thursday with $88.5 million of power supply system revenue bonds.
The transaction is a mix of new money and refunding. Proceeds from the new-money portion of the deal will be used to finance various capital improvements.
Citi is senior manager. BMO Capital Markets, City Securities Corp., Morgan Stanley, JPMorgan and Wells Fargo Securities round out the underwriting team. Ice Miller LLP is bond counsel.
The IMPA is in the midst of two large projects that will boost the amount of power it generates on its own, allowing it to avoid price volatility that comes with buying power on the open market. The Trimble County 2 unit came online in January, and the $4 billion Prairie State project, an Illinois-based coal plant, is expected to have its first unit online by December with its second unit up by the end of the second quarter of 2012.
Like Trimble County, Prairie State will allow participants to generate their own power, locking in prices through 2042. Construction on that project is 87% complete. The Indiana agency owns a 12.64% stake in Prairie State, and is one of eight municipal electric utilities that, together with Peabody Energy, own the project.
The coal project was initially estimated to cost $1.8 billion. The price tag then rose to $3 billion, and now, after a new agreement with the construction contractor, it has a fixed cost of $4 billion.
The agency has ramped up its borrowing over the last few years to pay for the generation projects and accompanying cost overruns. Its debt service payments will climb from $57 million this year to $87 million in 2013, according to Fitch Ratings. It now has $1.3 billion of parity debt outstanding.
The massive project has sparked criticism from opponents who claim it will be one of the largest new producers of greenhouse gases and initially will force customers to pay higher energy prices.
Preliminary bond documents for next week’s sale note that environmental regulations could have an impact on the IMPA, and that global warming legislation is “likely to have an adverse effect on, and increase the cost of, coal-fired and other fossil-fuel fired electricity generation.”
Analysts also warn that regulatory uncertainty tied to future greenhouse emissions legislation and the Cross State Air Pollution Rule pose a credit risk.
“Additional environmental regulations could result in higher capital expenditures to bring existing units into compliance,” Moody’s Investors Service analyst Richard Donner said in a report on the deal. “Or [it] could result in unit retirement, which would require IMPA to source power needs via market purchases or long-term contracts, thereby potentially undermining its current competitive position.”
Moody’s rates the bonds A1 with a stable outlook. Fitch and Standard & Poor’s rate the bonds an equivalent A-plus, also with stable outlooks.
Analysts said a key rating consideration is the agency’s membership, made up of 54 municipal electric utilities, all but one located in Indiana.
The bonds are secured by the agency’s net revenues, which are derived from the members’ power contracts. Nine of the members represent nearly half of the agency’s 2010 energy sales, and overall the members display medium-investment grade characteristics, analysts said.