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 February 3, 2016 - 4:24 PM EST
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Fitch Rates Indiana Muni Power Agency's 2016 Series C Power Supply System Rev Bonds 'A+'

Fitch Ratings assigns an 'A+' rating to Indiana Municipal Power Agency's (IMPA) proposed $146.33 million power supply system refunding revenue bonds, 2016 series C.

The bonds are expected to price during the week of Feb. 8, 2016. Proceeds will be used primarily to refund IMPA's outstanding 2009 series A and B bonds.

In addition, Fitch affirms the 'A+' rating on IMPA's $1.135 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, but longer term compliance could present challenges.

IMPROVED OPERATING PERFORMANCE: The rating reflects the improved operating performance exhibited by the PSEC and Trimble County Units since 2014 and Fitch's expectation that operating metrics will remain at current levels. Early operations were plagued by a series of planned and unplanned outages resulting in performance that fell short of original estimates.

STABLE FINANCIALS WITH IMPROVED LEVERAGE: IMPA's fiscal 2014 financial performance reflects stability with debt service coverage at 1.36x and improved cash liquidity of 92 days. Leverage as measured by debt-to-funds available for debt service (FADS) remained 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. Unaudited results for 2015 suggest slightly weaker coverage and leverage metrics but improved liquidity.

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. Fitch-calculated 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 slightly lower debt service coverage, but 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.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998990

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998990

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com


Source: Business Wire (February 3, 2016 - 4:24 PM EST)

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