Hermann, Mo. went to court seeking escape from its obligations to the coal-fired Prairie State power plant in Illinois.

CHICAGO - A Missouri city is asking a state judge to void its contract with the Missouri Joint Municipal Electric Utility Commission in the latest pushback from local utilities angry over higher-than-expected energy costs from the controversial Prairie State coal plant project.

The city of Hermann filed a lawsuit earlier this month in Gasconade County Circuit Court suing the commission for breach and contract, breach of fiduciary duty, and violations of state law that limit local government debt obligations.

The city asks the court to void its contract with the commission as a member of the Missouri Public Energy Pool and to free it of any liability for the commission's more than $1.5 billion of debt, including its Prairie State bonds.

Hermann, home to 2,400 residents with a $1.1 million annual budget -- is the latest municipality to pursue action seeking relief from the burden of inflated rates driven by the higher-than-projected cost of the $4.9 billion project in Washington County, Ill. The project includes a dual unit, coal-fired power plant and an adjacent mine to supply its coal.

MJMEUC is one of nine joint power authorities and cooperatives that issued debt to help finance their ownership stake Prairie State.

Originally pitched to local participants as a means to own their own generation asset, the project's price tag rose by several billion over the years, causing higher energy costs for local participants under take-and-pay contracts with their JPAs that span the life of the bonds.

The city alleges in the lawsuit that its current agreements with the commission hold the city liable for the debt obligation, which violates state statutes that hold only the commission liable for the debt.

The city's share of the commission's $1.5 billion in debt obligations under its agreements would total about $37 million. The city alleges that violates state law that prohibits "local governments from becoming indebted in an amount exceeding in any year the income and revenue provided for such year."

The city first notified the commission in early 2013 of its wish to exit its contract by pursuing an assignment of its obligations to another city.

Under its agreements with the Missouri commission, the city's obligations can only be assigned to another local governmental entity. Knowing its wishes, the commission still allowed a dozen cities to enter the pool in 2013 without offering "Hermann the opportunity to negotiate an assignment" with one of the qualified cities, the lawsuit alleges.

The commission in a disclosure filing said it "believes Hermann's claims are without merit, but cannot predict the outcome of this litigation."

Hermann's peak load in 2014 was 11.5 megawatts which represented 2.2% of the Missouri pooled capacity.

The city is represented by attorneys from Curtis, Heinz, Garrett & O'Keefe and Zick, Voss, Politte & Richardson. Marceline was previously allowed to exit its contract with the Missouri agency. Other cities involved with JPAs with an ownership stake are exploring their options.

The Missouri agency earlier this month refunded $158 million of its Prairie State debt for savings. Despite the rising scrutiny, analysts from Fitch Ratings and Moody's Investors Service praised the project in reports this week that highlighted its long-term benefits.

Moody's upgraded MJMEUC's Prairie State project-related debt to A2 from A3, citing the project's improving performance over the past six months, the credit quality of the participants, and the legal security from the take-or-pay purchase agreements.

The commission's bonds are secured by the take-or-pay agreements with seven municipal electric systems and the power purchase agreements with the 35 members in the Missouri Public Energy Pool No. 1. The members must make the payments regardless of Prairie State's performance or whether or not it's even operational.

The project has sparked controversy for years, starting with cost overruns of nearly 25% that boosted the final price tag to nearly $5 billion. At the same time, Prairie State has seen a number of outages and capacity reductions since its 2012 launch that have dragged down its operating performance although its operations have been on the rise since.

As the project's costs increased, so did the costs passed along to local governments and utilities. The cost of power is significantly higher than originally expected and nearly double current prices on the open market, according to Fitch Ratings.

In a special report released March 9, Fitch Ratings estimates the project should produce power with a cost range of $60/MWh to $65/MWh over the long term. While admitting that the $72/MWh is more than double day-ahead prices on Midwest Independent System Operator Inc. wholesale market, Fitch said the long-term benefits remain sound.

The higher-than-expected power costs have triggered lawsuits from local participants, calls for state attorneys general investigations, and subpoenas from the Securities and Exchange Commission.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.