CHICAGO — The Missouri Joint Municipal Electric Utility Commission is selling $158 million of power refunding bonds this week tied to the Prairie State coal plant in Illinois, a project that has sparked lawsuits and investigations but recently won a round of fresh praise from ratings analysts.
The MJMEUC deal is tentatively set to price March 11 and 12. It features $158 million of power supply advance refunding revenue bonds that mature from 2018 through 2029. The utility expects to see a net present value savings of 7% to 10% from the refunding.
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.
JPMorgan is senior manager with seven additional firms on the underwriting team. Gilmore & Bell PC is bond counsel. Ramirez & Co. Inc. and Mohanty Gargiulo LLC are financial advisors.
The 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 $4.9 billion Prairie State coal plant in Washington County, Ill. includes a dual unit, coal-fired plant and an adjacent mine to supply its coal. It is owned by nine joint action authorities and cooperatives across the Midwest, which each have contracts with local municipal utilities to supply their power for up to 30 years in some cases.
Ohio-based American Municipal Power Inc. is the largest owner, with a 23% stake. MPMEUC owns 12.33%.
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.
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.
"Although the cost of PSEC power could exceed spot market prices for an extended period of time, Fitch considers the plant's long-term fundamentals to be sound, as the owners should remain effectively insulated from the volatility of wholesale power prices, fuel costs and transportation costs," Fitch analyst Hugh Welton wrote. "By virtue of their ownership of a minimum 30-year coal supply located adjacent to the plant, the PSEC owners are assured cost certainty for their underlying fuel needs for the foreseeable future."
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 to at least two of the owners, Missouri and AMP.
In an internet road show and bond documents promoting this week's deal, the Missouri finance team downplayed the controversies surrounding the plant.
"Both Prairie State units have seen increasing performance, especially through the latter half of 2014," said John Grotzinger, chief operating officer at MJMEUC. "The improving performance can be attributed to the ability to identify and mitigate issues that have plagued the units in startup."
MJMEUC chief financial officer Mike Loethen said the agency paid $75.31 per megawatt/hour in 2014 and expects to pay $67/MWh in 2015. The agency expects a trend of mid- to upper-60-dollar range, he said.
In bond documents, MJMEUC acknowledges the SEC investigation, saying it has complied with all SEC requests and that it "does not believe this investigation will have a material impact on MJMEUC's financial position, operating results or its authority to issue the Series 2015 bonds."
Bond documents also refer to an August 2014 class-action lawsuit filed in Illinois on behalf of ratepayers from the city of Batavia. The lawsuit focuses only names MJMEUC as a "respondent in discovery." The case is currently in the U.S. District Court for the Northern District of Illinois, though the plaintiffs want it moved to the Circuit Court of Kane County, Ill.