Ohio-based American Municipal Power Inc. heads into the market this week to refund debt for a portion of its coal-fired Prairie State Energy Campus with stalled Illinois energy legislation looming over the coal-fired plant’s future.
AMP, the largest stakeholder among 10 municipal owners of the Illinois-based plant, will refund $142 million of debt Tuesday. The bonds mature from 2032 to 2038. BofA Securities Inc. is the senior manager.
The Illinois Senate Energy Committee was holding a subject matter hearing Monday afternoon on the latest version of the legislation that is laid out as a Senate amendment to House Bill 3666.
The latest version being debated during the subject matter hearing requires municipal-owned coal plants obtain 105% carbon emission reduction by 2045 through the use of carbon sequestration and/or direct air capture. PSEC must meet interim carbon reduction deadlines including 50% carbon reduction by 2040 to stay open, according to lawmakers.
Investors are protected by lockbox sales contracts that support bond repayment whether the plant is operational or not and extend 10 years past final maturity of AMP’s PSEC bonds.
Contracts also carry a default provision that requires other AMP members to step up and cover any member’s default but the plant’s fate is uncertain, which poses other threats to stakeholders.
AMP in offering documents lays out the differing terms that have been proposed in the Illinois legislation, counter-proposals and the legislation’s ties to nuclear subsidies for Exelon Corp. that complicate consideration as the company has threatened to shut down two nuclear plants if the package is not soon passed.
“AMP cannot predict whether any of the proposals will become law in Illinois or, in such an event, what the final form of any energy legislation will provide. Nevertheless, if proposals such as those described … were to become law, the impact on the PSEC, AMP and the participants could be material,” the offering statement says.
AMP and the other PSEC owners have engaged consultants to develop various contingency plans should the Illinois legislature pass comprehensive de-carbonization legislation.
Ahead of the sale, Moody’s Investors Service affirmed the A1 rating and stable outlook assigned to the agency’s Prairie State debt and S&P Global Ratings affirmed its A rating and stable outlook. S&P said the project has $1.5 billion of debt outstanding.
Neither rating incorporates the potential shut-down. Under the proposed legislation, the plant faces an early decommissioning ahead of the maturity date for some of the billions of bonds issued for the project by power agencies in several states.
The sweeping legislation backed by Gov. J.B. Pritzker remains stalled with lawmakers, labor, and environmental groups unable so far to resolve differences on several issues including a timetable for phasing out coal- and gas-fired plants.
The rating reports underscore the lockbox repayment structure under the take-or-pay contracts requiring repayment but also underscore the uncertainty of threats that loom.
"The stable outlook reflects our view of the depth and diversity of AMP's membership base, which provides for a degree of compensation in the event of uneven financial performance of individual participants," said S&P analyst Jeff Panger.
“Should legislation advance and be signed into law, it could exert downward pressure on the rating, although at this time we are unable to assess the extent of the downward pressure or whether the pressure would become manifest in the near term,” S&P said.
“While the plant has decades of useful life remaining, there was recent proposed legislation in Illinois that could cause the plant to retire as early as 2035,” Moody’s said. “The risk of an early retirement is largely mitigated by the unconditional take-or-pay obligation from the municipal project participants that covers the plant's obligations whether or not it is in operation.”
AMP Ohio has 135 municipal members in Ohio, Delaware, Indiana, Kentucky, Michigan, Maryland, Pennsylvania, Virginia, West Virginia, and Virginia. A total of 66 members are participants in Prairie State with six of them accounting for about half of AMP's output from Prairie State.
Negotiators had sought to move forward during the
In addition to the coal issue, a dispute over prevailing wages and emission targets on natural gas-fired electric generation plants were in dispute also. Backers believed they have resolved key differences and hoped to bring the latest version of the legislation being discussed late Monday to a vote this week.
The original package under consideration would have decommissioned Prairie State and the Dallman 4 coal plant in 2035. Negotiators later pushed the date back by 10 years to 2045 conditioned on the capture of 90% of carbon emissions by 2034. Such technology doesn’t currently exist.
Some local Illinois municipalities were fine with the 2035 deadline as their contracts tied to Prairie State end by then. Most of the more than $4 billion borrowed by municipal agencies across states is retired by 2045 but not all is as some extends several years out.
AMP Ohio’s power sales contracts for the project remain in place through 2057. All debt is retired Feb. 15, 2047.
Pritzker has warned that he won’t “sign a bill that does not match the gravity of this moment” by making progress on decarbonization that adheres to his 2050 target to reach 100% clean energy.
Supporters of Prairie State promote it as one of the cleanest-burning coal plants in the country but environmental groups counter that it’s still the largest carbon dioxide emissions polluter in the state and in the top 10 nationally.
The legislation would provide nearly $700 million in subsidies over five years for Exelon Corp. to keep three nuclear power plants open. Exelon is moving forward on closures in the absence of the legislative action so pressure is mounting for an agreement.
Retiring the coal plant early would mark the latest headache for some of the public utility stakeholders who say that plant despite early difficulties is now an affordable source of energy.
Peabody Energy Inc. initially sponsored the project in Washington County promoting it as an affordable source of energy with an adjacent mine and a cleaner one given its state-of-the-art technology at the time. Bechtel Power Corp. built it. It initially carried a $2 billion price tag that rose to a $4 billion fixed cost under the 2010 contract with utilities, but cost overruns drove the price tag up to $5 billion.
The plant became fully operational in 2012 after some delays. The campus includes a two-unit 1,629 megawatt pulverized coal, supercritical coal-fired generating facility at a site with an adjacent coal mine. It initially experienced outages and capacity reductions that were a drag on its operating performance.
The
The plant has seen $1 billion in investment to update environmental controls and remains 100% compliant with environmental regulations and is the host site for carbon capture study led by the University of Illinois that in 2019 won a federal grant.
The COVID-19 pandemic had no material impact on operations and while customer delinquencies increased they did not cause any defaults among utility members.
AMP holds a 23.26% ownership stake and it accounts for 17% of the agency’s power supply. The Illinois Municipal Electric Agency follows with a 15% stake, Indiana Municipal Power Agency with a 12.6% stake, and the Missouri Joint Municipal Electric Utility Commission has a 12.3%. The remaining owners with smaller shares are Prairie Power Inc., Southern Illinois Power Cooperative Inc., Kentucky Municipal Power Agency, Northern Illinois Municipal Power Agency, and the Wabash Valley Power Association.
More than half of the ownership is among power agencies outside Illinois. It’s unclear whether they would mount a legal challenge should Illinois attempt to close the plant.
