Electricity Prepayment Project American Municipal Power ...€¦ · » Execution risk of cure should seller, the project operator, default. AMP has step-in-rights to engage an experienced

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION27 December 2018

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Dan Aschenbach +1.212.553.0880Senior Vice [email protected]

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Eriq Alexander +1.212.553.4418Associate Lead [email protected]

Scott Solomon +1.212.553.4358VP-Sr Credit [email protected]

VictoriaShenderovich

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Kurt Krummenacker +1.212.553.7207Senior Vice President/[email protected]

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American Municipal Power, Inc. - SolarElectricity Prepayment ProjectCredit update following A2 rating assignment

SummaryThe A2 credit profile considers the strength of the bond security pledge befween the 22AMP participants with an average A2 credit quality and AMP, Inc. (AMP: A1 stable) under aPower Sales Contract (PSC) obligating the participants to pay their share of a demand chargesufficient to provide cash flow equal to 110% of aggregate annual debt service (after takinginto account amounts deposited to the Rate Stabilization Fund created under the Indenture)providing a high degree of cash flow predictability over the term of the debt. The creditprofile also considers the existence of a Power Purchase Agreement (PPA) between AMP andDG AMP Solar, LLC (the Seller), a subsidiary of NextEra Energy, Inc. (NextEra: Baa1 stable)wherein AMP has prepaid for twenty-five years of output following COD at each site for solarfacilities located behind the meters of the AMP members.

A key credit attribute in the financing is the provision in the PSC which provides that solong as “any” energy is delivered from “any” System to “any” delivery point in a calendarmonth, AMP bills the participants and the participants are obligated to pay all of the revenuerequirements for such month, including the demand charge that fully pays AMP O&Mexpenses and debt service. While the PSC is a take-and-pay contract, we think this provisionmakes participant non-payment highly unlikely and mitigates solar related resource riskgiven the very low probability there would be no solar output produced at any one of the13 locations for any day in a calendar month. The solar sites are located in 13 differentcommunities in AMP's footprint in Delaware, Ohio, Michigan, Pennsylvania and Virginia.Moreover, historical operating performance indicates that electric production, while lower inthe winter months, has occurred at all of the sites for every month of operation. Importantly,the resource provides positive economic value to the participants, which increases their long-term contract compliance as it provides a competitive renewable peaking resource at anexpected price of $38 per megawatt hour with no delivery cost or risk since the output isproduced behind the meter at the 13 sites.

The assets will be owned and operated by the NextEra subsidiary, DG AMP Solar, LLC, whoseparent has a deep and 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 fromthe 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 calculatedbased on the number of megawatt hours expected to be generated at a P90 distributionprobability and assumed a 0.5% degradation factor. The expected generation is then

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multiplied by a uniform rate per MWh to reach the prepayment amount. Over the term of the PPA, the prepayment balance is reducedby the value of the actual output credit until the prepay balance is $0. Stronger solar output above the agreed upon prepaid amountwould mean that AMP would incur greater costs but also receive more energy and AMP has covenanted to pay for any incrementalenergy over the life of the PPA. Also, if the solar generation is less than the value of the initial prepayment, the seller is obligated toreimburse AMP the value for the undelivered energy or can apply the value to an acquisition price should AMP agree to acquire thesolar asset or extend the life of the contract such that the power obligation is met. Moreover, there is also a minimum performancerequirement in which the seller is obligated to meet. Should the seller not meet the requirement, which we believe is set an achievablethreshold, AMP can exercise its rights under the PPA that would include replacing the NextEra subsidiary with another operator.

It is important to note that the amortization of the bonds, whose cash flow is provided through the demand charge, is not related tonor does it mirror the annual reduction of the prepayment balance by the amount of solar output.

The obligated AMP participants have an A2 weighted average credit quality, as determined by Moody's. Our assessment of theparticipant credit quality considers both the initial facilities allocation of the participant shares and also after completion of the full-buildout. Participants pay their obligation as an operating expense of the member's electric system, all of which are self-regulated withlocal control over the service area. The largest participant is Bowling Green, Ohio (Aa2) who represents 37.3% of the initial systems(36.825 MW) and 22.7% of the expected project shares of all the systems once constructed (60.518 MW). Bowling Green's electricsystem is a full-requirements customer of AMP, and the City of Bowling Green, anchored by the activities at Bowling Green University,has a strong general financial position, and a satisfactory tax and economic base.

The bonds being issued will refinance the AMP line of credit financing which was used to prepay for the projected solar output from thefacilities already in operation. The current solar prepayment long-term bond financing is for the initial solar development phase andadditional parity bonds could be issued for an additional 23 MW now under development or study. The revenue bonds are fixed rate(level debt service) revenue bonds with a final maturity of 2043 which is 25 years from the commercial operation date (COD) of thelast solar system that is completed. 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 relativeto other municipal utility finance structures. This weakness is mitigated by the existence of a Rate Stabilization account; a GeneralReserve, and is tempered by AMP's strong liquidity position.

Other considerations include the solar project's diverse array of already constructed solar facilities (except for the Brewster, Ohiofacility expected to enter commercial operation in January 2019) located in several states that are at a 99-100% availability factorand have operated historically at an average 20-25% capacity factor. An additional consideration is the involvement by AMP thatfeatures a strong management team, a proven track record around providing a diverse and cost effective generation resource mix for itsparticipants, and a willingness to support its participants from a liquidity perspective.

Credit strengths

» The 22 AMP participant credit quality is estimated at A2 with the local municipal electric utilities having self-regulation over rateswhich fund their contract payments

» The provision in the PSC that requires AMP participants to pay the revenue requirement if any energy is delivered from any of the 13solar facility sites and delivered to any delivery points during any one month period.

» AMP has strong financial liquidity

» AMP has a strong management record of power supply and strategy and is responsible for contract enforcement

» 12 of 13 solar facilities have achieved in a short operating record the project's P90 assumptions with an average rated capacityfactor in the 20-25% range and an estimated budgeted price of $38.00/MWh. The solar facilities have had a 99 - 100% availabilityfactor to date.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 27 December 2018 American Municipal Power, Inc. - Solar Electricity Prepayment Project: Credit update following A2 rating assignment


» Initial solar systems are located in 13 different locations throughout AMP's footprint in 5 different states providing geographicdiversity.

» Limited transmission cost since solar facilities are located behind the meter

Credit challenges

» Transaction structure is new and there is not a long record of being tested

» Execution risk of cure should seller, the project operator, default. AMP has step-in-rights to engage an experienced operator. (AMPwould still then receive energy from systems and charge the demand charge sufficient to pay debt service)

» Remaining 23MW of new solar in the solar prepayment project could experience construction risk for the seller

» Weak debt service reserve

Rating outlookThe stable outlook rests on the importance of the solar project to AMP’s 22 members due to its renewable content; the power salescontract which establishes the terms and conditions we expect the participants to adhere to and the strong joint action agency roleAMP plays in liquidity, power supply management and contract enforcement.

Factors that could lead to an upgrade

» Should AMP participants in solar prepay project credit quality improve

Factors that could lead to a downgrade

» Should the credit quality of the AMP participants in the solar prepay project deteriorate

» Should a default by owner and operator result in protracted litigation over power purchase contract provisions

ProfileAMP was established by 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.

Detailed credit considerationsRevenue Generating BaseThe Solar Project and Systems:The solar project is part of AMP’s strategy to diversify its power supply and meet members' peak demand needs through the additionof cost-effective renewable energy which also lowers the members' carbon emission footprint. The initial systems are 36.825 MWand additional system estimated at 23 MW for total output of 60.518 MW. The additional systems could be reach their commercialoperations date (COD) in 2019.

The solar photovoltaic facilities utilize polycrystalline photovoltaic modules and central inverters which are mounted or fixed tilt ortracker racking systems. DG AMP Solar LLC owns and operates and maintains the systems and has holds title to the systems. DG AMPSolar LLC is responsible for facility maintenance. The initial systems that are now commercial have an average rated capacity estimatedat 20-25% capacity factor. Availability factors have been 99-100%.



Exhibit 1

Solar Phase II Transactional Flow

Source: American Municipal Power, Inc.

Financial and Operating Position

The solar electricity prepayment financial performance will be accounted for in a separate project fund as are all other AMP generationprojects. While each AMP generation project is reflected in the consolidated statement, the bond security for each project is separatelysecured. The solar electricity prepayment financial performance will be guided by the indenture with typical joint action agencycovenants such as 1.10x rate covenant required to be met by AMP participants which would then reflect 1.10x debt service coverage.The project has no physical assets but does have the PPA so a debt ratio calculated against physical assets will not be reflective of theproject’s leverage. There is a Rate Stabilization account available for unrestricted purposes in the amount of 25% of maximum debtservice.

LIQUIDITYWhile the solar prepayment project has indenture required funds that includes a rate stabilization fund, the major source of liquidityfor the AMP project as well as other AMP operations is AMP’s line of credit. AMP’s line of credit is with a syndicate of banks led byRoyal Bank of Canada, with a total line of $600 million and subject to certain conditions can be increased to $850 million. The line ofcredit is a general obligation of AMP’s 135 members with draws approved by the AMP Board of Trustees. The expiration date is May2, 2022. As of December 1, 2018, approximately $258.9 million had been drawn on the line for various purposes including the initialprepayment for the solar electricity prepayment financing (which will be repaid with the bond proceeds) ; refunding certain obligationsor providing working capital for other AMP projects.



Debt and Other Liabilities

The AMP Solar Electricity Prepayment Series 2019 A Revenue Bonds are the only outstanding obligations under the solar prepaymentindenture. AMP has $5.1 billion of outstanding revenue bond debt related to its financing of other generation projects. For moreinformation on AMP, please refer to the most recent Credit Opinion which can be found on AMP's landing page on moodys.com.

Bond Security

The AMP Solar Electricity Prepayment Series 2019 A (Green Bonds) Bond Security:

The Series 2019A bonds are special and limited obligations of AMP payable solely from and secured by the revenues pledged underthe indenture dated January 1, 2019 including revenues from the take and pay PSC with 22 AMP participants based on predeterminedallocation 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: The rate covenant requires demand charges need to generate an amount equal to 110% of aggregateannual debt service subject to use of Rate Stabilization Fund deposits. The parity common reserve fund is required to equal 25% of themaximum annual debt service and be available to fund any deficit in the Debt Service Fund. Additional bonds can be issued as longas required accounts such as common reserve fund and rate Stabilization Fund are at their required amounts. AMP can redeem the2019A bonds should there be a declaration of an Early Termination Event and AMP has covenanted to pay the shortfall amount shouldthe outstanding prepayment balance amortize more quickly than the bonds that were issued. Conversely, the seller will pay AMP theprepayment balance amount should it occur which would be subtracted from the cost of acquisition should AMP make the decision topurchase solar assets.

Use of Bonds Proceeds

The Series 2019 A bonds issued by AMP will fund the prepayment for a specified supply of electricity from 13 solar photovoltaicgenerating facilities with rated capacity of 36.825 MW. Also funded by bond proceeds is a bond reserve.

DEBT-RELATED DERIVATIVESNone

PENSIONS AND OPEBSolar project is a facility with no employees; pensions and OPEB are not a material credit factor

Management and Governance

AMP was established by state statute (Ohio Revised Code Chapter 1702) as a non-profit corporation in 1971 to provide its members,which are municipal electric utilities, a reliable and competitive power supply. AMP is governed by a 21-member Board of Trusteesmade up of officials from 20 member municipalities and DEMEC. AMP operates like a joint action agency and most of its membershave home rule powers which permit retail rates to be set by the local governing boards with no external regulation.



Other Considerations: Mapping to the Grid: US Municipal Joint Action Agency Rating Methodology-Take-or-Pay

As indicated below in Exhibit the grid indicated rating for American Municipal Power, Inc. Solar Electricity Prepayment Project RevenueBonds of A2 is the same as the current rating assigned of A2.

The grid is a reference tool that can be used to approximate credit profiles in the public power electric utility sector in most cases.However, the grid is a summary that does not include every rating consideration. Please see Methodology on US Municipal Joint ActionAgencies (Take-or-Pay) for more information about the limitations inherent to grids

Exhibit 2

Methdology Scorecard

Factor Subfactor/Description Score Metric

1. Participant Credit Quality and Cost Recovery Framework a) Participant credit quality. Cost recovery structure and governance A2

2. Asset Quality a) Asset diversity, complexity and history A

3. Competitiveness a) Cost competitiveness relative to market A

4. Financial Strength and Liquidity a) Adjusted days liquidity on hand

(3-year avg) (days)

Aa 200

b) Debt ratio (3-year avg) (%) Baa 100%

c) Fixed obligation charge coverage ratio (3-year avg) (x) Baa 1.1x

Material Asset Event Risk Does agency have event risk? No

Notching Factors Notch

1 - Contractual Structure and Legal Environment 0

2- Participant Diversity and Concentration 0

3 - Construction Risk 0

4 - Debt Service Reserve, Debt Structure and Financial Engineering -0.5

5 - Unmitigated Exposure to Wholesale Power Markets 0

Scorecard Indicated Rat ing:

Source: Moody's Investors Service



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Documents

Electricity Prepayment Project American Municipal Power ...€¦ · » Execution risk of cure should seller, the project operator, default. AMP has step-in-rights to engage an experienced