CHICAGO — The Illinois Municipal Electric Agency plans to enter the market Thursday with $130 million of mostly taxable Build America Bonds to finance its share of $1 billion in cost overruns for the controversial $4 billion Prairie State coal-fired power plant under construction in Washington County, Illinois.
JPMorgan is the senior manager and McDonald Partners is the financial adviser. The bonds include a roughly $112 million BAB series and a $18 million tax-exempt series. The final maturity is in 2035. Proceeds will finance additional costs for IMEA’s 15% stake in the Prairie State Energy Campus project and reserves.
The nine power agencies that own a stake in the Prairie State Energy Campus are covering the more than $1 billion in new costs for the project through a mix of borrowing, cash, and reserves. The participating agencies over the summer negotiated an agreement with the construction contractor Bechtel Power Corp. that has established a fixed price of $4 billion, up from a previous price tag of $2.9 billion, and an original estimated cost of $1.8 billion.
The Missouri Joint Municipal Electric Utility Commission will sell $80 million of bonds later this month due to the rising costs.
Despite the rising costs that will be passed along to local ratepayers, issuers and credit analysts believe Prairie State’s benefits remain solid. The project will allow participants to generate their own power — locking in prices through 2042 — and avoid the risk associated with buying power on the open market. Construction is about 54% complete.
While investors may be aware of the overruns and the policy discussions over the future of coal as a power source, the deal isn’t likely to face any headline driven pricing penalties given the strength of the security. “New capacity is needed and there aren’t many alternatives,” said Thomas Spalding, senior investment officer at Nuveen Investments.
Ahead of the sale Fitch Ratings and Standard & Poor’s affirmed the agency’s A-plus rating that is also assigned to $1.1 billion of parity power-supply system revenue bonds and Moody’s Investors Service affirmed its equivalent A1 rating. Fitch called the rising costs of Prairie State a credit concern but said it was manageable for IMEA.
Moody’s said the A1 rating reflects the credit of the 32 members that are participating in the project, IMEA’s strong management, its long-term cost-based focus on its power supply plan, and its efforts to keep liquidity at an adequate level as it transitions to a generation owner.
The wealthy and highly rated Chicago suburbs off Naperville and St. Charles account for more than 50% of the agency’s power supply demand. With the completion of Prairie State, IMEA will own stakes in three generating facilities.
Its Trimble 1 unit is online and Trimble Unit 2 will come online late this year. Prairie State’s first 800-megawatt unit is scheduled to come online in late 2011 and its second 800-megawatt unit in mid 2012.
The agency has seen its debt-service coverage ratios and liquidity weakened but expects improvement due to a new rate increase that takes effect in fiscal 2011 and a $25 million line of credit from PNC National Bank.
IMEA’s current debt-service coverage stands at 1.15 times and cash provides coverage of 78 operating days, a level Fitch said “is still adequate for the rating category.” It faces escalating debt-service costs that could require rate increases when the power plants come online and interest is no longer capitalized.
Some market exposure will remain — about 20% in 2012 — albeit at a lower level than the current 38%. The agency has set a goal to obtain 5% of its energy needs from renewable sources and signed a 20-year deal with Florida Power and Light for 70 megawatts of wind power.
The bonds are secured by IMEA’s net revenues which include the take-and-pay all-requirements power sales agreements between agency and its 32 participants. The contracts run through 2035 after the bonds mature. The participants are required to charge retail rates that meet its obligations under the contracts. IMEA also must maintain 1.1 times annual debt-service coverage. If one member fails to meet its obligation, the others must make up the difference. Several reserves are also pledged to the bonds.
Despite questions from some market participants and local governments over the worth of the project given its rising price tag, Moody’s analysts wrote that the projected economics and value of the Prairie State project to IMEA members “is only modestly impacted by the $1 billion Prairie State cost overrun.”
The cost will add about 3% to IMEA’s cost of power resulting in a rate of about $58 per megawatt hour. A six-month delay in Trimble Unit 2 due to a burner problem is expected to result in an additional 3% in costs in fiscal 2011 to cover open market purchases during peak periods.
Member rates for Prairie State are expected to remain competitive with regional investor owned utilities and the project still carries the benefit of being located adjacent to a coal mine with 200 million tons of coal reserves that eliminates transportation risk. Its use of advanced environmental controls meets current federal and state standards.
The shift to owning power generation does carry operating risks for IMEA and the increased cost of Prairie State underscores that exposure. The agency also could face higher operating costs if regulators stiffen greenhouse gas and renewable standards given its heavy reliance on coal plants for power.
Moody’s said it expects the agency to effectively manage those risks, but the rating does take into account “the construction risk of Prairie State and the six-month delay of commercial operation at Trimble County Unit 2 , as well as the uncertainty about the scale, scope and depth of regulatory intervention regarding greenhouse gas emissions and renewable regulation.”
Prairie State is one of the only new coal-fired plants being built in the U.S. because of the current regulatory environment and it is one of the largest. Its supporters argue it will be one of the most advanced coal-fired facilities, with environmental controls that meet stricter pollution-control standards. Detractors claim it will be one of the largest new producers of greenhouse gases and cite concerns by some local municipalities about their residents’ ability to pay the higher initial costs.
Fitch wrote in a recent report that the ratings of the joint-power authorities involved in Prairie State should withstand the increased costs but any further problems could have a negative impact. The agencies have collectively issued more than $3 billion in mostly tax-exempt or Build America Bond debt for the project.
In a recent commentary published in The Bond Buyer, critics of the project — public policy consultant Tom Sanzillo of T.R. Rose Associates and attorney Lisa Anne Hamilton — argued that the “use of the BAB program to finance coal-fired power plants threatens to sully” the BAB program.
“While electric utility projects represent only a fraction of the kinds of projects funded by the BAB program, coal-fired power plants are by far among the costliest,” they wrote. “Furthermore, it is the ratepayers of financially strapped municipalities throughout the Midwest who are locked into paying above-market electric rates to provide the revenue to finance these overruns for decades.”
Peabody Energy Corp., which led development of the plant, has a 5% ownership stake.