CHICAGO — Standard & Poor's dropped Michigan Public Power Agency's AMP Fremont Energy Center project revenue bonds one notch to BBB due to the weakened operations of some cities that participate in the project.

The action taken Dec. 23 impacts $31.3 million of bonds sold in 2012. The outlook is stable.

"The downgrade reflects what we consider to be weak 2014 financial performance among a number of the participating cities that support the agency's cash flows, and uneven financial performance among these participants in previous years," said analyst David Bodek.

Factors that offset analyst concerns include MPPA's sound debt service coverage and liquidity, the strong credit profiles of some participant cities, the participants' pledge to set rates at levels sufficient to support their project obligations, and participants' commitment to cover defaults as long as they do not raise members' initial obligations by more than 25%.

The 2012 bonds funded the agency's acquisition of a 5.16% interest in the 675 megawatt gas-fired, combined-cycle, AFEC power plant. Commercial operation began in January 2012. Ohio-based American Municipal Power Inc., known as AMP, owns the balance of the plant and oversees its operation and arranges its fuel purchases. The plant operates to meet its owners intermediate energy needs.

MPPA and AMP separately financed their interests in the project. Thirteen of the MPPA's 17 members participate in its share of the project. "The stable outlook reflects our assessment of the participants' unconditional pledge to support the project's debt, coupled with commitments to cover defaults, subject to a cap," S&P wrote.

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