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Fitch Rates Indiana Muni Power Agency's Power Supply System Rfdng Rev Bonds 2012 Ser A 'A+'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A+' rating to the $56.2 million power supply system refunding revenue bonds, 2012 series A, issued by Indiana Municipal Power Agency (IMPA or agency).

The bonds are expected to price around Oct. 16, 2012. Proceeds will refund IMPA's outstanding 2002 series B bonds.

In addition, Fitch affirms the ratings on the following outstanding IMPA bonds:

--$1.186 billion power supply system revenue bonds, various series.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by revenues derived from the Power Supply System and dedicated funds established under the master resolution.

KEY RATING DRIVERS:

LOW COST POWER: IMPA's prudent power supply strategy, solid mix of existing low cost 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 power sales contracts (PSCs) are viewed as having an implied unlimited step-up provision by virtue of the ability to amend wholesale rates to cover unexpected costs, including those resulting from a member default.

PSEC COMMERCIAL OPERATION: The rating reflects the commercial operation of Prairie State Energy Campus's (PSEC) Unit 1 and the expected operation of Unit 2 in late 2012. IMPA's participation in the recently commissioned Trimble County Unit #2 and the partially commissioned PSEC will reduce its reliance on purchased power and provide long-term cost stability to members, albeit at a higher initial price.

STABLE FINANCIALS WITH HIGH LEVERAGE: IMPA's financial performance reflects stability with debt service coverage at 1.28x and improved cash liquidity of 90 days. Leverage as measured by debt to funds available for debt service (FADS) remains significantly above the 'A+' rating category median. Fitch expects the ratio to eventually moderate, but remain high over the near term.

INDUSTRIAL CUSTOMER CONCENTRATION: Fitch notes that IMPA has a high concentration of industrial customers who accounted for 44% of MWh sales in fiscal year 2011. 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 charged by nine members, representing 49.4% of revenue in 2011, are regulated by the Indiana Utility Regulatory Commission (IURC). Although Fitch believes rate regulation can limit financial flexibility and delay the timing or amount of rate increases necessary to meet operating costs, provisions of the IMPA Act largely mitigate this risk.

WHAT COULD TRIGGER A RATING ACTION

MEMBER CREDIT QUALITY: The operating and financial performance of IMPA's members, who are the ultimate off takers in the new power projects, will be a key factor in future rating actions.

TIMELY PROJECT COMPLETION: A delay in the commissioning of PSEC's Unit 2, well beyond the late 2012 time frame, could pressure the rating.

CREDIT SUMMARY:

LARGE WHOLESALE SYSTEM

IMPA is a joint-action agency that provides wholesale electricity to 54 Indiana members and one Ohio customer, pursuant to take-and-pay full-requirements power sales contracts (PSC). 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 around 330,000 and roughly 190,000 customers.

DIVERSE POWER SUPPLY STRATEGY

IMPA's power requirement of about 1,250MW is met with a mix of partial ownership interest 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 were recently commissioned in January 2011 and June 2012 respectively. IMPA maintains a 100MW share each in Trimble County Unit 2 and PSEC's Unit 1 and 2. Although Indiana does not currently have a renewable mandate applicable to IMPA, the agency has also recently contracted for 50MW of wind capacity.

PROJECTED RATE INCREASES

IMPA's wholesale rate to members is set by its board of commissioners and is required to cover IMPA's operating costs plus 1.10 times (x) 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.

Positively, the board has historically set the wholesale rate at 1.125x debt-service coverage and recently approved setting rates to produce 1.20x coverage. IMPA also has an Energy Cost Adjustment (ECA) component in its wholesale rate which can be changed every six months to adjust for changes in fuel and purchased power costs. The agency is projecting annual rate increases through 2016 which will bring member rates from an average of 6.51 cents per kWh in 2012 to 7.41 cents per kWh in 2016 (13.8% increase). Fitch views the projected increases as necessary to maintaining financial margins given the escalating debt service costs during the same period.

IMPROVED FINANCIAL PERFORMANCE

Financial performance in 2010 and 2011 improved over 2009 which saw financial metrics, excluding the use of rate stabilization funds, below IMPA's historical and minimum targeted performance. Debt service coverage was 1.28 times (x) in fiscal 2011 and debt-to-funds available for debt service (FADS) was 20.1x, which although lower than the recent past is still high.

IMPA recently arranged a revolving line of credit with PNC Bank National Association (Rated 'A+/F1' by Fitch) for up to $50 million through May 23, 2016. The agency plans on using this facility working capital purposes and routine capital expenditures prior to issuing long-term debt. Liquidity as measured by day's cash on hand has nearly doubled in 2011 from 2010, which is a significant improvement given IMPA's robust construction program.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 12, 2012);

--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

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Source: Fitch Ratings