American Municipal Power, Inc. -- Moody's assigns A2 to American Municipal Power, Inc. Solar Electricity Prepayment Project Revenue Bonds; outlook stable
Rating Action: Moody's assigns A2 to American Municipal Power, Inc. Solar Electricity Prepayment Project Revenue Bonds; outlook stable
Global Credit Research - 30 Jul 2020
New York, July 30, 2020 -- Moody's Investors Service has assigned a rating of A2 to the $24.9 million American Municipal Power, Inc. (AMP) Solar Electricity Prepayment Project Revenue Bonds, Series 2020A (Green Bonds) (Series 2020A Green Bonds). The outlook is stable. The Series 2020A Green Bonds will be issued on parity with the $53.94 million of outstanding Series 2019A Project Revenue Bonds, rated A2.
RATINGS RATIONALE
American Municipal Power, Inc. - Solar Electricity Prepayment Project's A2 rating considers the strength of the bond security pledge between the 22 AMP participants with an average A2 credit quality and AMP, Inc. (A1 stable) under a Power Sales Contract (PSC) obligating the participants to pay their share of a demand charge sufficient to provide cash flow equal to 110% of aggregate annual debt service (after taking into account amounts deposited to the rate stabilization fund created under the indenture). This structure provides a high degree of cash flow predictability over the term of the debt. The project's credit quality is anchored by a Power Purchase Agreement (PPA) between AMP and DG AMP Solar, LLC, a subsidiary of NextEra Energy, Inc. wherein AMP has prepaid for twenty-five years of output at each solar facility located behind the meters of the AMP members. The amortization of the bonds, whose cash flow is provided through the demand charge, is not related to nor does it mirror the annual reduction of the prepayment balance by the amount of solar output.
A key credit attribute in the financing is the provision in the PSC which provides that so long as "any" energy is delivered from "any" System to "any" delivery point in a calendar month, AMP bills the participants and the participants are obligated to pay all of the revenue requirements for such month, including the demand charge that fully pays AMP O&M expenses and debt service. While the PSC is a take-and-pay contract, we think this provision makes participant non-payment highly unlikely and mitigates solar related resource risk given the very low probability there would be no solar output produced at any one of the 16 locations for any day in a calendar month. The solar sites are located in 13 different communities in AMP's footprint in Delaware, Ohio, Michigan and Virginia. Moreover, historical operating performance indicates that electric production, while lower in the winter months, has occurred at all of the sites for every month of operation.
The assets are owned and operated by the NextEra subsidiary, DG AMP Solar, LLC, whose parent has an extensive track record owning and operating renewable resources. Under the 25 year PPA with DG AMP Solar, LLC, AMP takes 100% of the solar output from the already constructed solar facilities that are located throughout AMP's service footprint. The energy is delivered behind the meters to the host participants minimizing delivery risk. The initial solar output prepayment made by AMP to DG AMP Solar, LLC was calculated based on the number of megawatt hours expected to be generated at a P90 distribution probability and assumed a 0.5% degradation factor. The expected generation is then multiplied by a uniform rate per MWh to reach the prepayment amount. Over the term of the PPA, the prepayment balance is reduced by the value of the actual output credit until the prepay balance is $0. Stronger solar output above the agreed upon prepaid amount would mean that AMP would incur greater costs but also receive more energy and AMP has covenanted to pay for any incremental energy over the life of the PPA. Also, if the solar generation is less than the value of the initial prepayment, the seller is obligated to reimburse AMP the value for the undelivered energy or can apply the value to an acquisition price should AMP agree to acquire the solar asset or extend the life of the contract such that the power obligation is met. Moreover, there is also a minimum performance requirement which the seller is obligated to meet. Should the seller not meet the requirement, which we believe is set an achievable threshold, AMP can exercise its rights under the PPA that would include replacing the NextEra subsidiary with another operator.
The Series 2020A bonds are being issued for the purpose of repaying the draw on the AMP line of credit for the prepayment of a specified supply of electricity from the second tranche of solar photovoltaic generating facilities. The bond covenants include a 110% rate covenant (after Rate Stabilization Funds are considered); a 25% step-up provision and a debt service reserve funded at 25% maximum annual debt service, which we view as weak relative to other municipal utility finance structures. This weakness is mitigated by the existence of a Rate Stabilization account; a General Reserve, and is tempered by AMP's strong liquidity position.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for American Municipal Power, Inc. - Solar Electricity Prepayment Project. However, the situation surrounding Coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of American Municipal Power, Inc. - Solar Electricity Prepayment Project changes, we will update the rating and/or outlook at that time.
RATING OUTLOOK
The stable outlook rests on the importance of the solar project to AMP's 22 members due to its renewable content, the PSC which establishes the terms and conditions we expect the participants to adhere to and the strong joint action agency role AMP plays in liquidity, power supply management and contract enforceability.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
- Should the credit quality of the AMP participants in the solar prepay project improve
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- Should the credit quality of the AMP participants in the solar prepay project deteriorate
- Should a default by the owner and operator result in protracted litigation over power purchase contract provisions
LEGAL SECURITY
The bonds are special and limited obligations of AMP payable solely from and secured by the revenues pledged under the indenture dated January 1, 2019, as supplemented, which includes revenues from the power sales contracts with 22 AMP participants based on predetermined allocation shares of the solar output. The participant payments are paid as an O&M expense of each respective city's electric system. Bond security provisions include a rate covenant that requires demand charges to be sufficient to generate an amount equal to 110% of aggregate annual debt service after rate stabilization funds are considered. The parity common reserve fund is required to equal 25% of the maximum annual debt service and is available to fund any deficit in the debt service fund.
USE OF PROCEEDS
The Series 2020A bonds will be fixed rate obligations in the principal amount of $24.9 million and are being issued for the purpose of (i)repaying the draw on the AMP line of credit for the prepayment of a specified supply of electricity from the second tranche of solar photovoltaic generating facilities, (ii) funding a deposit to the Parity Common Reserve Fund, and (iii) paying costs of issuance of the Series 2020A Bonds.
PROFILE
AMP was established pursuant to state statute (Ohio Revised Code Chapter 1702) as a non-profit corporation in 1971 to provide its members, which are 135 municipal electric utilities, a reliable and competitive power supply. The 22 AMP participants in the Solar Electricity Prepayment Project are members of AMP located in a 5 state area. AMP is governed by a 21-member Board of Trustees made up of officials from 20 member municipalities and DEMEC. AMP operates like a joint action agency and most of its members have home rule powers which permit retail rates to be set by the local governing boards with no external regulation.
METHODOLOGY
The principal methodology used in this rating was US Municipal Joint Action Agencies Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1163699. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Thomas Brigandi Lead Analyst Project Finance Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Kurt Krummenacker Additional Contact Project Finance JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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