Fitch Ratings issues warning to Prairie State investors!

On October 10, 2010, Fitch Ratings issued the following very strong warning. If there is more mismanagement and more cost overruns on the already grossly mismanaged and severely cost overrun Prairie State coal-fired plant, the credit ratings of MJMEUC and the other six muni consortium investors rated by Fitch Ratings* may be damaged. If one rating company, such as Fitch, begins dropping ratings the other two rating agencies, Moody’s and S&P will not be far behind.

If MJMEUC's 'A-' is dropped to a ‘B’ rating that means they’re a “junk” bond, their interest rates will go up and current bond holders could dump their bonds on the secondary market. As Grotzinger reported to the MoPEP committee in 2008, this could cost MoPEP another $30 Million a year in additional interest costs! That’s probably an underestimate because in 2008 their investment debt was only at about $1.3 billion. Now it’s over $2 Billion.

MJMEUC/MoPEP is a “joint venture” so any financial collapse will fall on all 60 MJMEUC members and all 35 MoPEP members. None of the MJMEUC/MoPEP communities sitting under this hanging sword are aware of any of this.

It’s important to bear in mind when reading credit reports such as this that the entity being rated paid the rating company for the rating and most of the information used for the rating came from the entity being rated. That often explains a “strong credit profile.”

(emphasis below by ed.)

Fitch: Credit Impact of Prairie State Energy Campus' Revised EPC Contract Will Not be Uniform

Posted on : 2010-10-04

NEW YORK - (Business Wire) According to a new report issued by Fitch Ratings, the credit impact of the Prairie State Energy Campus' (PSEC) revised engineering, procurement, and construction (EPC) contract will not be uniform for all PSEC owners. The July 22, 2010 contract revision has increased the price of the EPC contract but also limited the impact of further cost increases and delays. 

PSEC, a 1,600 MW coal-fired generating station located in Washington County, IL, is owned by eight public power agencies, six of which are rated by Fitch. While Fitch believes that the ratings of the owners are currently stable, further project delays, cost increases, and the initial operational performance of the PSEC have the potential to impact each owner’s credit rating.
"While all PSEC owners have manageable debt and strong credit profiles, it's important to note that the credit impact and pressures as a result of the increased cost of PSEC will be different for each owner," said W. Drake Richey, Associate Director at Fitch. "The impact will depend on each owner's dependence on the Prairie State units and the credit quality of underlying retail participants." 

All Fitch-rated PSEC owners remain in the 'A' rating category, which indicates a high credit quality and low default risk stemming from the strong contractual obligations requiring owners to make debt service payments regardless of the project’s operation together with adequate revenue capacity derived from each system’s full rate-setting authority. 


Over the last 10 years, each PSEC owner has been transitioning from purchasing the majority of its power to owning resources such as the PSEC. Fitch judges a utility's resource mix based on individual unit concentration as well as its fuel exposure compared with the regional makeup. The systems that receive greater than 50% of their power from a single resource are exposed to single-unit risk. In the event that the project's costs are higher than expected, the credit rating of the utility could be impacted. In the case of participants in PSEC, Paducah Power System and the participants in Northern Illinois Municipal Power Agency (NIMPA) are exposed to this risk. Paducah, in particular, which is transitioning away from purchasing power from Tennessee Valley Authority, will have excess energy and capacity when PSEC comes on line. 

Regarding the fuel mix of owner systems, most of them will not be out of line with their respective regions, which are coal based. The exception is Illinois Municipal Electric Agency (IMEA) since the state has the highest nuclear generating capacity of any state in the nation.
Fitch's special report 'Prairie State Energy Campus Review' includes detailed credit summaries of each Fitch-rated PSEC owner in addition to in-depth analysis of key issues affecting PSEC. The report is available at 'www.fitchratings.com'. 

Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Prairie State Energy Campus Review: Finding the Bottom of a Mine-Mouth Coal Plant 

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=561248
 
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 

Fitch Ratings
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
or
W. Drake Richey, +1-212-908-0325

(* Fitch rated-not rated PS Investors: American Municipal Power (AMP), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Missouri Joint Municipal Electric Utility Commission (MJMEUC), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Lively Grove Energy (sub. Of Peabody Energy NR)

The Silence of the MoPEP Lambs

Dave Marner, editor of the Gasconade County Republican, is the only reporter in the state who has covered the out-of-sight, out-of-mind" MoPEP meetings held in Columbia, Missouri at the MPUA office. Thanks to Marner we have a blow-by-blow account of the meeting held during the MPUA Annual Conference where, without one protest or one question by the MoEPEers, they obediently voted to add another $140,000,000 to the existing Billions in revenue bond liabilities to cover the latest cost overruns on Prairie State and two other MJMEUC projects. 
 

MoPEP approves $100 million in bonds for Prairie State project

Wednesday, 06 October 2010 08:47 Dave Marner

HERMANN ALDERMAN Brian Chorley (left) looks on as Vernon Kincheloe explains progress on the Prairie State Energy Campus construction project MoPEP cities are helping fund. The project’s costs have risen from $2.9 billion to $4.2 billion. MoPEP members voted Friday to issue $100 million in construction bonds to finance the group’s portion of the cost overruns on for the coal-fired power plant.
LAKE OZARK, Mo., — Without asking a single question, MoPEP member cities voted unanimously by voice vote on Friday to issue an additional $100 million in construction revenue bonds to cover cost overruns on the Prairie State Energy Campus in southern Illinois.

John Tracy, city administrator for Owensville, did not cast a vote. Previously during votes to issue debt on the Prairie State, or the Iatan II project near Kansas City, Tracy has voted against such proposals. He said afterward that recent negotiations have shown MoPEP and MJMEUC officials seem willing to work with Owensville in the city’s efforts to exit the pool.

“I didn’t want to vote yes,” said Tracy about Resolution 07-2010 for the Prairie State project approved during the Missouri Public Utility Alliance’s annual conference held at Tan-Tar-A. “As a gesture of Owensville’s good faith, I didn’t want to vote no. As a gesture of good faith, I didn’t want to say anything.”

Bonds approved Friday go toward the estimated cost overruns listed by the daily newspaper of public finance, The Bond Buyer, at $1.3 billion. The original project was projected to cost $2.9 billion. Revised estimates on construction costs show the project at $4.2 billion. Duncan Kincheloe, general manager of the Missouri Public Utility Alliance, noted in his report to  Missouri Public Energy Pool cities that a negotiated  cap on construction costs had been reached.

The bonds approved Oct. 1 brings the total issuance of MoPEP and MJMEUC participation in the Prairie State project up to the $850 million figured originally authorized  back in 2007. Kincheloe’s report noted “This resolution would authorize final financing for the updated costs, and includes an increase of $7 million dollars over and above the $850 million authorization approved in 2007.”

Owensville’s portion of the long-term debt on the $100 million issue, calculated at the 1.23 percent rate of electrical power dedicated to Owensville’s future needs, is $1.23 million. On the entire $850,000 issuance by MoPEP for the project, Owensville’s portion is $10,541,100, according to Tracy’s calculations.
Owensville is seeking a replacement in MoPEP and such a replacement would take over the city’s assignment of power and financial commitment to MoPEP projects.

Tracy said recent discussions with MoPEP and MJMEUC (Missouri Joint Municipal Electric Utility Commission) members indicate a willingness to work with the city to accommodate an exit.

MoPEP cities have voted to “invite” any of the Sho-Me Electric Cooperative cities to join the pool through a request for proposal (RFP) due Oct. 1.  The pool, Kincheloe noted in his report, “is further pointing to a potential special opportunity to benefit from Owensville’s interest in assigning its MoPEP status.”

At a Sept. 21 committee meeting in Columbia of MoPEP cities, a motion was approved including a provision in the RFP to “credit any approved Owensville assignee approximately $60,000 in recognition of Owensville’s approximate” (6MW) peak electric use. Basically, the group granted Owensville a credit for paying into a reserve fund for the pool which generated $12.5 million from last fall to early this summer.
MPUA STAFFER Mike Loethen explains a resolution Friday authorizing the Missouri Joint Municipal Electric Utility Commission to issue $100 million in revenue bonds for the Prairie State Energy Campus project. Based on new projections, Loethen said they may only need to actually between $78 million to $80 million in bonds to complete MJMEUC’s portion of the project. Cost overruns have driven the projected $2.9 billion project up to an estimated and recently capped completion total of $4.2 billion, according to The Bond Buyer newspaper which tracks financing projects. The bonds mature no later than 2042 and “shall bear interests at various rates not to exceed 10 percent” annually, according to the resolution approved by voice vote.
Minutes from the meeting also indicate a statement was made by Jim Roach, of Jackson, Mo., that “Owensville should have priority for any member transfer.” His motion was to include the credit provision into the RFP response to any Sho-Me cities expressing interest in joining MoPEP.

Tracy noted the city “did get a little commercial into the RFP” regarding their contribution to fund balances as a credit to a potential incoming member taking the city’s assignment. “It can’t hurt.”

City aldermen on Monday expressed frustration at what they perceive as another delaying tactic by Kincheloe. Tracy, however, noted the other cities appear to understand Owensville’s need to exit the pool and seem willing to help make it happen. “If they want to get along, we’ll go along until they prove different,” Tracy told The Republican this week.

Resolutions were also approved on vice vote issuing $20 million in construction bonds for the group’s portion of costs to help complete the Iatan II power plant near Kansas City. The measure funds a previous vote which allowed MJMEUC official to obtain a $20 million line of credit to cover construction costs. Another authorized the issuance of $20 million in revenue bonds for a MJMEUC combustion turbine project at Fredericktown, Mo.
Tracy did not cast a vote for, or against, either resolution.