Fitch Ratings assigns an 'A+' rating to Indiana Municipal Power
Agency's (IMPA) proposed $379.9 million power supply system
refunding revenue bonds, 2016 series A.
The bonds are expected to price during the week of Dec. 7, 2015.
Proceeds will be used primarily to refund IMPA's outstanding 2007
series A bonds.
In addition, Fitch affirms the 'A+' rating on IMPA's $1.213
billion power supply revenue bonds (including amounts to be
refunded).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by revenues derived from the operation of
IMPA's power supply system, including payments received from its 60
members pursuant to power sales contracts (PSCs), as well as
dedicated funds established under the master resolution.
KEY RATING DRIVERS
LOW-COST POWER: IMPA's prudent power supply strategy, solid mix
of low-cost baseload power resources and competitive wholesale rate
are key factors in the rating. Added support is derived from the
take-and-pay full-requirements contracts with members that expire
on April 1, 2042.
IMPLIED STEP-UP PROVISION: The take-and-pay full-requirements
PSCs are viewed as having an implied step-up provision as a result
of the ability to amend the annual revenue requirement for
unexpected costs, including those related to a member default.
RELIANCE ON COAL-FIRED RESOURCES: Coal-fired resources provide
approximately 75% of IMPA's energy requirements and should remain
the cornerstone of the agency's portfolio given the recent
commissioning of the Trimble County Unit 2 and Prairie State Energy
Campus (PSEC) Units 1 and 2. Environmental compliance expenditures
appear manageable through 2020.
IMPROVED OPERATING PERFORMANCE: The rating reflects the improved
operating performance of PSEC Units 1 and 2 exhibited since 2014
and Fitch's expectation that operating metrics will remain at
current levels. PSEC's early operations were plagued by a series of
planned and unplanned outages resulting in performance that fell
short of original estimates.
STABLE FINANCIALS WITH IMPROVING LEVERAGE: IMPA's financial
performance reflects stability with debt service coverage at 1.36x
and improved cash liquidity of 105 days. Leverage as measured by
debt-to-funds available for debt service (FADS) remains acceptable
at 10.8x for 2014, down from a peak of 20.2x in 2012 as a result of
rate increases related to PSEC's commercial operation.
INDUSTRIAL CUSTOMER CONCENTRATION: IMPA has a high concentration
of industrial customers who accounted for 44% of MWh sales in
fiscal 2014. This concern is somewhat mitigated by the diversity of
the industrial customer segment.
RATE REGULATION OF MEMBERS: IMPA's wholesale rates are not
regulated. However, retail rates of eight members, representing
40.7% of revenue in 2014, are regulated by the Indiana Utility
Regulatory Commission (IURC). Although Fitch believes that rate
regulation can limit financial flexibility, provisions of the IMPA
Act, the use of energy cost adjustment (ECA) factors and the
ability of members to opt out of regulation largely mitigate this
risk.
RATING SENSITIVITIES
MEMBER CREDIT QUALITY: The credit quality of the Indiana
Municipal Power Agency's member utility systems, who are the
ultimate off-takers of the power supply system, will be a key
factor in future rating actions.
PLANT OPERATIONS: Failure to operate the Prairie State Energy
Campus (PSEC) and/or Trimble County Unit No. 2 generating units at
high levels of availability and capacity to capture capital and
operating costs could result in downward rating pressure.
PSEC LITIGATION: Adverse developments in a class action lawsuit
filed against IMPA (and others) related to its role in the
development of PSEC could also have negative rating
implications.
CREDIT SUMMARY
LARGE WHOLESALE SYSTEM
IMPA is a joint-action agency that provides wholesale
electricity to 59 Indiana members and one Ohio customer, pursuant
to take-and-pay full-requirements agreements. The PSCs expire on
April 1, 2042 and are subject to automatic one-year renewal
thereafter. IMPA's currently outstanding bonds mature on Dec 31,
2042. The member utilities are located throughout the state of
Indiana and serve a population of approximately 338,000 and roughly
200,000 customers.
DIVERSE POWER SUPPLY STRATEGY
IMPA's power requirement of about 1,200 MW is met with a mix of
partial ownership interests in several power plants, long- and
short-term purchased power arrangements, and member-owned
generating facilities. Trimble County Unit 2 and PSEC's Unit 1 and
2 - all coal-fired units - were commissioned in January 2011, June
2012, and November 2012, respectively. IMPA maintains a 100
MW-share each in Trimble County Unit 2 and PSEC's Unit 1 and 2.
In addition to the coal units, IMPA also owns 419 MW of simple
cycle natural gas plants. These plants are primarily used as
peaking units and generally run only during summer hours.
Member-owned capacity contributes an additional 108 MW to IMPA's
power supply portfolio. Indiana does not currently have a renewable
mandate applicable to IMPA; however the agency has contracted for
50 MW of wind capacity and is developing a small amount of solar
generation.
Although IMPA's asset mix is balanced from a capacity
perspective, the agency's energy mix is heavily skewed toward
coal-fired resources, which provide approximately 75% of energy. A
fuel diversification strategy involving the addition of natural
gas-fired combined cycle capacity will require higher growth of
native load or the addition of new large members. Absent this, coal
will continue to be the dominant fuel for IMPA.
RATE STRUCTURE
IMPA's wholesale rate to members is set by its board of
commissioners and is required to cover IMPA's operating costs plus
1.10x aggregate debt service. The ability of IMPA to review its
wholesale rate at least once a year in order to meet its revenue
requirement effectively results in a de facto unlimited step-up
obligation among the members.
IMPA's board approved an increase in IMPA's target debt service
coverage ratio during 2012 to 1.20x from 1.125x, which Fitch views
favorably. IMPA also has an ECA component in its wholesale rate
which can be changed every six months to adjust for changes in fuel
and purchased power costs, while the members utilize a quarterly
ECA. The agency is projecting annual rate increases that will bring
member rates from an average of 7.22 cents per kWh in 2015 to 7.54
cents per kWh in 2020, an aggregate 4.4% increase. Fitch views the
projected increases as necessary to maintaining financial margins
given escalated operating and debt service costs during the same
period.
FINANCIAL PERFORMANCE
Financial performance remained relatively strong in 2014
reflecting the commercial operation of the new Trimble County and
PSEC generating units and execution of planned rate increases. Debt
service coverage was 1.36x in fiscal 2014 and debt-to-FADS
moderated to 10.8x, which is more in line with Fitch 'A+' category
medians versus prior years. Forecast 2015 performance is expected
to remain relatively stable, with continued improvement in equity
and cash on hand.
IMPA maintains a revolving line of credit with PNC Bank National
Association (rated 'A+/F1') for up to $50 million through May 23,
2016. IMPA primarily uses the credit facility for the posting of
letters of credit to trading counterparties. Liquidity (DCOH) has
steadily improved since 2009 to 105 days, a notable achievement
given the scope of IMPA's now-concluded construction program.
For additional information, please see Fitch's report, 'Indiana
Municipal Power Agency', dated Oct. 22, 2014.
Additional information is available at www.fitchratings.com
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Related Research
Indiana Municipal Power Agency
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=791248
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Fitch RatingsPrimary AnalystDennis PidhernyManaging
Director+1-212-908-0738Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystAlan SpenSenior
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