Fitch Ratings assigns an initial 'A-' rating to Missouri
Joint Municipal Electric Utility Commission's (MJMEUC) $263.75 million
Plum Point Project series 2006 power project revenue bonds. The Rating
Outlook is Stable. Proceeds will fund MJMEUC's portion (22.1%) of the
costs associated with the acquisition and construction of the Plum
Point Project (the project), a 665 MW coal-fired plant being built in
Osceola, Arkansas. The bonds are secured through power purchase
contracts with seven (four in Missouri and three in Arkansas) of
MJMEUC's member distribution systems. The bonds are expected to be
insured and to price the week of May 8, 2006 with Goldman, Sachs & Co.
as senior manager.
The 'A-' rating takes into account credit factors including Fitch's assessment of the plant developer, Plum Point Energy Associates, LLC (PPEA) (a subsidiary of LS Power Associates, L.P.); the unit's projected cost of power (including transmission); member system composition; the step-up provisions in the power purchase contracts (including potential limitations applicable to the Arkansas participants); and construction risk associated with the development of a coal-fired facility. While the limited step-up provision could be an issue (as further described below), Fitch views the probability of a sequence of events occurring that could affect the payment of debt service on the bonds to be remote. It is Fitch's opinion that the current rating is reflective of the likelihood that the project meets its commercial operation date targets and the fundamental credit support by the members during the plant's operating life.
Below is a list of key credit strengths and concerns factored into the rating, as well as more complete descriptions of credit factors included in our analysis.
Credit strengths include:
-- Experienced management with a solid record of power procurement;
-- Good project economics;
-- EPC contract which helps to mitigate construction risk;
-- Solid power purchase contracts;
-- The members' historically strong financial performance and diverse customer base.
Credit concerns include:
-- Risks associated with construction and on time completion of the unit;
-- Possible limitation on Arkansas participants' step-up provision;
-- Single unit risk issues;
-- Member's ability to manage future power resource needs.
The following are key credit factors:
Management
Fitch believes MJMEUC management has a balanced and well-defined strategy to provide its 58-member and four-advisory member systems with a diverse mix of reliable, competitively priced owned and purchased power. MJMEUC historically relied on a combination of market based, short- and long-term power purchase contracts and the dispatching of member-owned (primarily diesel) generating capacity to meet the power needs of its members. With load requirements increasing and existing power purchase contracts expiring, MJMEUC members need new resources to meet their power requirements. MJMEUC management has carefully evaluated its power supply position and has decided to shift its strategy to include more self-owned generation. Management determined that by owning a diversified portfolio of reliable, cost-based resources its members would benefit from cost stability and reduced dependence on market based contracts. Fitch recently met with MJMEUC management and viewed their strategy as sound given current market dynamics and the regions in which the members operate.
Power Purchase Contracts
The unit power purchase contracts are valid and enforceable, extend through the life of the bonds (2036) and require each participant to pay its proportionate share of all costs of operating the project, including debt service. Under the step-up provision each system is obligated to a 200% step-up in the event of a default by another participant. However, the Arkansas participants have no step-up requirement in either of the following situations: initial start-up is delayed over 11 months with operation not beginning by July 1, 2011 (guaranteed commercial operation date is July 31, 2010); or during an outage which exceeds five years in length. Fitch believes these two risks are mitigated by capitalized interest through Sept. 30, 2010 (two months after guaranteed completion), $4 million in cash reserves, a strong EPC contract with sufficient incentives and safeguards for on-time completion, start-up would have to be delayed over 11 months to trigger the contract limitations, and the remote likelihood of a member defaulting during this time frame; or the unlikely possibility of an outage lasting more than five years at a plant of this type.
The limited nature of the step-up provision does not provide the same rating support as a traditional step-up provision. However, Fitch notes that given the Arkansas participants' legal restrictions on entering into the same take-or-pay contracts as the Missouri participants, they have consciously tried to provide investors with the strongest provisions possible within their legal ability. Fitch believes this effort demonstrates the Arkansas participants' commitment and support of the Project.
Construction and Single Unit Risk
While Fitch has become comfortable with project specifications and Plum Point Energy Associates, LLC (PPEA), this is one of the first coal-fired projects to be developed by this developer. It also should be noted that while PPEA expects to enter into long-term power purchase agreements with buyers for its entire 418 MW (62.85%) share of the project, agreements are currently in place for only 90 MW of this amount. Construction risk is partially mitigated by a strong EPC contract, the proven technology of this type of unit and the fact that work has already begun at the site. Fitch's primary concern is the potential impact on the participating systems in the event of a delay in completion or a prolonged outage. In either of these events, the ability of each system, particularly the six smaller systems, to meet both their Project obligations and to purchase power in the short-term market could be a concern. For the Arkansas participants, this concern is only minimally mitigated by the requirement of MJMEUC to provide replacement energy, as the participants are still exposed to market power cost uncertainty.
Participant System Management
Fitch also notes that through participation in the project, the seven participants over time will be shifting from being primarily long-term power purchasers to managing a more diverse power supply. Fitch will be monitoring the ability of each system to manage this transition. Helping to mitigate this concern is the oversight to be provided by MJMEUC, which has a solid history of participating in the power markets.
Member Participants
MJMEUC member distribution systems participating in the project are relatively small, ranging in size from 36,900 (North Little Rock, AR) to 2,300 (Piggott, AR) customers. While MJMEUC's participation in the Project is concentrated in one participant (North Little Rock, AR at 40%), this is not viewed as a credit concern due to the strong past financial performance of the electric system and the solid economic base of the city, as well as the past financial results of the other participant systems. The participants' aggregate customer base is reasonably diverse with a revenue mix consisting of 33% residential, 27% commercial, 37% industrial and 3% other. Customer and sales growth (CAGRs of 0.3% and 1.1% over the last four years, respectively) have been and are expected to continue to be moderate. It should be noted that there is some single customer concentration in two individual systems (Osceola, AR and Malden, MO), which is factored into the 'A-' rating.
Security Provisions
Fitch views the issue's security provisions as adequate for a transaction of this type. Security provisions include a pledge of revenues derived from payments made by the participants under the unit power purchase contracts; indenture required reserves including maintenance of a $4 million operating reserve, the funding of a reserve and contingency fund and a debt service reserve fund fully funded at MADS; and a required debt service coverage ratio of 1.0 times (x). Fitch views the 1.0x coverage ratio as weak relative to other similar issues, but adequate for this project.
MJMEUC is a joint-action agency providing wholesale energy to its participant utilities. MJMEUC's interest in the Plum Point Project will be used to meet its commitments under unit power purchaser contracts, providing power to seven of its retail electric distribution systems in Missouri (four) and Arkansas (three). The seven participants had total 2004 revenue of $136 million and serve a diversified mix of over 68,000 customers.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
The 'A-' rating takes into account credit factors including Fitch's assessment of the plant developer, Plum Point Energy Associates, LLC (PPEA) (a subsidiary of LS Power Associates, L.P.); the unit's projected cost of power (including transmission); member system composition; the step-up provisions in the power purchase contracts (including potential limitations applicable to the Arkansas participants); and construction risk associated with the development of a coal-fired facility. While the limited step-up provision could be an issue (as further described below), Fitch views the probability of a sequence of events occurring that could affect the payment of debt service on the bonds to be remote. It is Fitch's opinion that the current rating is reflective of the likelihood that the project meets its commercial operation date targets and the fundamental credit support by the members during the plant's operating life.
Below is a list of key credit strengths and concerns factored into the rating, as well as more complete descriptions of credit factors included in our analysis.
Credit strengths include:
-- Experienced management with a solid record of power procurement;
-- Good project economics;
-- EPC contract which helps to mitigate construction risk;
-- Solid power purchase contracts;
-- The members' historically strong financial performance and diverse customer base.
Credit concerns include:
-- Risks associated with construction and on time completion of the unit;
-- Possible limitation on Arkansas participants' step-up provision;
-- Single unit risk issues;
-- Member's ability to manage future power resource needs.
The following are key credit factors:
Management
Fitch believes MJMEUC management has a balanced and well-defined strategy to provide its 58-member and four-advisory member systems with a diverse mix of reliable, competitively priced owned and purchased power. MJMEUC historically relied on a combination of market based, short- and long-term power purchase contracts and the dispatching of member-owned (primarily diesel) generating capacity to meet the power needs of its members. With load requirements increasing and existing power purchase contracts expiring, MJMEUC members need new resources to meet their power requirements. MJMEUC management has carefully evaluated its power supply position and has decided to shift its strategy to include more self-owned generation. Management determined that by owning a diversified portfolio of reliable, cost-based resources its members would benefit from cost stability and reduced dependence on market based contracts. Fitch recently met with MJMEUC management and viewed their strategy as sound given current market dynamics and the regions in which the members operate.
Power Purchase Contracts
The unit power purchase contracts are valid and enforceable, extend through the life of the bonds (2036) and require each participant to pay its proportionate share of all costs of operating the project, including debt service. Under the step-up provision each system is obligated to a 200% step-up in the event of a default by another participant. However, the Arkansas participants have no step-up requirement in either of the following situations: initial start-up is delayed over 11 months with operation not beginning by July 1, 2011 (guaranteed commercial operation date is July 31, 2010); or during an outage which exceeds five years in length. Fitch believes these two risks are mitigated by capitalized interest through Sept. 30, 2010 (two months after guaranteed completion), $4 million in cash reserves, a strong EPC contract with sufficient incentives and safeguards for on-time completion, start-up would have to be delayed over 11 months to trigger the contract limitations, and the remote likelihood of a member defaulting during this time frame; or the unlikely possibility of an outage lasting more than five years at a plant of this type.
The limited nature of the step-up provision does not provide the same rating support as a traditional step-up provision. However, Fitch notes that given the Arkansas participants' legal restrictions on entering into the same take-or-pay contracts as the Missouri participants, they have consciously tried to provide investors with the strongest provisions possible within their legal ability. Fitch believes this effort demonstrates the Arkansas participants' commitment and support of the Project.
Construction and Single Unit Risk
While Fitch has become comfortable with project specifications and Plum Point Energy Associates, LLC (PPEA), this is one of the first coal-fired projects to be developed by this developer. It also should be noted that while PPEA expects to enter into long-term power purchase agreements with buyers for its entire 418 MW (62.85%) share of the project, agreements are currently in place for only 90 MW of this amount. Construction risk is partially mitigated by a strong EPC contract, the proven technology of this type of unit and the fact that work has already begun at the site. Fitch's primary concern is the potential impact on the participating systems in the event of a delay in completion or a prolonged outage. In either of these events, the ability of each system, particularly the six smaller systems, to meet both their Project obligations and to purchase power in the short-term market could be a concern. For the Arkansas participants, this concern is only minimally mitigated by the requirement of MJMEUC to provide replacement energy, as the participants are still exposed to market power cost uncertainty.
Participant System Management
Fitch also notes that through participation in the project, the seven participants over time will be shifting from being primarily long-term power purchasers to managing a more diverse power supply. Fitch will be monitoring the ability of each system to manage this transition. Helping to mitigate this concern is the oversight to be provided by MJMEUC, which has a solid history of participating in the power markets.
Member Participants
MJMEUC member distribution systems participating in the project are relatively small, ranging in size from 36,900 (North Little Rock, AR) to 2,300 (Piggott, AR) customers. While MJMEUC's participation in the Project is concentrated in one participant (North Little Rock, AR at 40%), this is not viewed as a credit concern due to the strong past financial performance of the electric system and the solid economic base of the city, as well as the past financial results of the other participant systems. The participants' aggregate customer base is reasonably diverse with a revenue mix consisting of 33% residential, 27% commercial, 37% industrial and 3% other. Customer and sales growth (CAGRs of 0.3% and 1.1% over the last four years, respectively) have been and are expected to continue to be moderate. It should be noted that there is some single customer concentration in two individual systems (Osceola, AR and Malden, MO), which is factored into the 'A-' rating.
Security Provisions
Fitch views the issue's security provisions as adequate for a transaction of this type. Security provisions include a pledge of revenues derived from payments made by the participants under the unit power purchase contracts; indenture required reserves including maintenance of a $4 million operating reserve, the funding of a reserve and contingency fund and a debt service reserve fund fully funded at MADS; and a required debt service coverage ratio of 1.0 times (x). Fitch views the 1.0x coverage ratio as weak relative to other similar issues, but adequate for this project.
MJMEUC is a joint-action agency providing wholesale energy to its participant utilities. MJMEUC's interest in the Plum Point Project will be used to meet its commitments under unit power purchaser contracts, providing power to seven of its retail electric distribution systems in Missouri (four) and Arkansas (three). The seven participants had total 2004 revenue of $136 million and serve a diversified mix of over 68,000 customers.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.