The MoPEP Machine: Oct 17, 2010

Sunday, October 17, 2010

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)

Glossary

"Joint Municipal Utility Commission Act." RSMo Chapter 393.700 – 393.770. The laws that turned MJMEUC/MoPEP contracts loose on the unsuspecting public in 2002. They were subsequently amended until in 2007 they - and the MoPEP contract they spawned - became truly lethal. Thanks to our state legislators for paying no attention to what they were voting on and what it was really doing to our ‘naked’ small towns and their monopoly detainees that are denied PSC protection.
MJMEUC debts: MJMEUC debts and MoPEP debts are the same because MJMEUC and MoPEP are the same. Of the 60 MJMEUC members only 35 have also signed the MoPEP contract - the rest must have read it first. The remaining 25 MJMEUC members that were smart enough to NOT sign the MoPEP power contract probably think they aren’t part of the mega billion investment mess and that their cities are not liable for the MJMEUC debt. Are they ever going to be surprised!
MoPEP contract: (the “Amended and Restated Missouri Public Energy Pool #1 Agreement Among Missouri Joint Municipal Utility Commission and Pool Members”) One of the worst Trojan contracts of the 21st century. It is not, as represented by MJMEUC officials, a routine industry-standard commodity contract to provide allegedly cheaper or “stable” power due to MoPEP’s alleged “economies of scale,” it is actually a device to feudalize small towns and turn them into a “collateral farm” so MJMEUC can, without the knowledge or consent of these electrical serfs, pledge their collective electric revenues to leverage MJMEUC’s first $10 million bank loan into $2-plus Billion in revenue bond debt. The $2-plus Billion in revenue bonds was used to purchase equity ownership in five power plants being built in the Midwest. Equity investments are illegal for all Missouri political entities.
MoPEP No 1 captives: Albany * Ava * Bethany * Butler * (Campbell escaped!) Carrollton * Chillicothe * El Dorado * Springs * Farmington * Fayette * Fredericktown * Gallatin * Harrisonville * Hermann * Higginsville * Jackson * Lamar * LaPlata * Lebanon * Macon * Marshall * Memphis * Monroe City * Odessa * Owensville * Palmyra * Rock Port * Rolla * Salisbury * Shelbina * St. James * Stanberry * Thayer * Trenton * Unionville * Vandalia. (35 as of 10/10)
MoPEP: The Missouri Public Energy Pool #1 is merely a “project” of MJMEUC, not a separate corporate entity. MoPEP is a window-dressing committee formed ostensibly to set electric rates. The “project” has even less power than a corporate affiliate or empty shell but the “project” serves to prop up the illusion that the MoPEP member cities have control of their power rates. Utility managers, and city officials or “Pool Members” who take the pro forma votes aren’t aware of their impotence. If they had bothered to read their MoPEP contracts they would have seen that MJMEUC has all the power and all the rights in the contract and MoPEP committee members have nothing but obligations to MJMEUC. Note the chilling designation of #1, signaling that there will be clones of this unnatural thing.
state audit hell: What you’re living in if you’re a city manager or mayor and the State Auditor - in the petition audit forced upon you by angry citizens – publicly yanks your pants down for covering up your financial mismanagement by inflating utility rates and raking off hundreds of thousands or millions of dollars to subsidize your misfeasance. And after all that agony…you still have to pay the audit bill.
“direct costs:” Arguably the most poisonous provision in the MoPEP contract and the key to dumping all MJMEUC’s financial obligations onto MoPEP members along with their power bills. Direct costs are defined on page 3 as: “All costs MJMEUC incurs in connection with acquiring, providing, arranging or financing the provision of Services hereunder, including without limitation all payments MJMEUC is required to make (including reserves and debt service coverages MJMEUC is required to maintain pursuant to any bond indenture, financing lease or loan agreement) under contractual and/or financial commitments and obligations entered into by MJMEUC in order to procure, deliver, or finance resources intended to provide Services, without regard to whether any particular resource is available to or used by any particular Pool Member….” The “without limitation” part on page 3 is where cities should have stopped reading and moved on to discuss relining their sewers.
“going bare:” What you feel you are doing when you live in a rural town in Missouri that has a city utility but unlike the favored Missouri citizens who live in big cities you have no Public Service Commission protection to keep you from being gouged by uncontrolled and unlimited utility rates.
“joint venture:” What State Auditor Susan Montee said in the Rolla and Marceline petition audits about the MJMEUC/MoPEP organization’s debts and liabilities may be “…pursuant to Governmental Accounting Standards Board statements, it appears the relationship between the RMU and the MJMEUC/MoPEP may be a joint venture. Additionally, joint venture participants must disclose specific information including information regarding ongoing financial interest and/or financial responsibility and information to evaluate whether the joint venture is accumulating significant financial resources or causing a financial burden on the participating government in the future.” -Montee, Rolla audit 2009
“Marceline Migraine:” What you get every time you open your electric bill if your city government is too chicken and too lazy to ask voters to raise property or sales taxes to support essential city services but instead they keep playing the “pump ‘n skim” game with electric rates. The Poster City for this is Marceline Missouri that has abused their monopoly hostages until the electric rate is 15.35¢ per kilowatt and 63% of the city budget comes from illegal utility overcharges.
“pump ‘n skim:” What your city government (utility board) does when they contract for power from a commercial wholesale source then pump up the kilowatt price far higher than needed to run the utility department so they can covertly “skim” a few hundred thousand or a few million a year to subsidize their mismanagement in other city operations or fund pork projects for their cronies.