Missouri Electric Commission refunds bonds for coal-fired power plant

Coal-fired electric generation is buffeted by market and regulatory forces, but bond investors in one Missouri utility's coal-plant refinancing should be insulated, analysts say.

The Missouri Electric Commission this week is issuing $105 million of power project revenue refunding bonds to refund bonds it issued in 2014 for the Plum Point Energy Station in Osceola, a city of roughly 6,600 in northwest Arkansas, in which the MEC has a minority share. 

The deal comes on the heels of newly-finalized Environmental Protection Agency rules to cut pollution from fossil fuel-fired power plants.

Courtesy NRG

The Biden administration's new rules supersede the Trump administration's Affordable Clean Energy rules that relaxed coal emission regulations by superseding the Obama administration's stricter Clean Power Plan rules.

The MEC, formally known as the Missouri Joint Municipal Electric Utility Commission, is a nonprofit wholesale power supplier with 72 member municipal electric utilities in Missouri and four associate members in Arkansas.

Fitch Ratings assigns an underlying A rating to the tax-exempt, fixed-rate Series 2024 bonds for Plum Point. The outlook is stable. Moody's Ratings assigns an A3 rating with a stable outlook.

The senior manager on the deal is RBC Capital Markets. The financial advisor is Ramirez & Co. 

The bonds priced Wednesday, according to LSEG's Municipal Market Monitor (TM3), with 5% coupons yielding between 2.6% for a January 2027 maturity to 3.09% for the 2034.. 

Fitch said in its rating commentary that its rating reflects the credit quality of the top two participants, the 35-member Missouri Public Energy Pool #1 and the city of North Little Rock, Arkansas. 

"The Plum Point financing structure, it's a very unusual contractual structure for those project bonds," Fitch's Dennis Pidherny, U.S. public finance ratings managing director for public power, told The Bond Buyer. "The way the contracts work is: the obligations related to the pool of cities that are separate and distinct from the power pool, those entities are required to make their respective payments based on their ownership share. If any one of those entities doesn't pay for any reason, their obligation can be spread among the other cities that are in that group. That group is dominated by North Little Rock."

The payment from the power pool is separate and is not afforded that same coverage by those other cities, he said.

In its rating action, Moody's said the A3 rating "reflects the strong weighted average credit quality of its participants" pursuant to 'take or pay' unit power purchase agreements" and pool power purchase agreements with its member utilities. " Both types of agreement require unconditional payments regardless of whether Plum Point is operating.

"The rating also considers the material environmental and carbon transition risks of MEC Plum Point as a single-asset coal-fired generator that is exposed to changes in future environmental regulations and potentially adverse social and investor receptivity," Moody's said.

The total population within the corporate limits of all Plum Point pool power purchasers combined stood at about 192,000 as of 2023 U.S. Census Bureau population estimates, an online investor presentation about the deal said. 

There's no limit on MEC's ability to pass costs on to customers, Fitch's Pidherny said. Within the MoPEP power pool, all members have "complete discretion over rate-setting," he said. 

Power purchasers "all have similar rate-setting authority," he added. "And MEC as the project entity has complete authority to set the charges that go to each of the members, to make sure that the cash flow is sufficient… As far as the retail systems, there are no competitive dynamics there." 

According to the EPA's Power Plants and Neighboring Communities mapping tool, Plum Point's annual CO2 emissions come to over 4.5 million tons.  

The EPA notes on its website that fossil fuel projects such as coal-fired power plants "can lead to respiratory and cardiovascular problems" for residents in surrounding communities.

MEC owns a 22.1% share in the Plum Point project, making it the second-largest investor. Private investor Plum Point Energy Associates, LLC, owns a majority 56.85% share, according to the preliminary official statement. PPEA, owned by private equity firm Lotus Infrastructure Investments, has publicly stated its intention to sell its remaining interest in the Plum Point station, according to the POS.

Plum Point opened in 2010. Its trajectory has been quieter than another MEC bond-financed coal plant, the Prairie State Energy Campus in Illinois, which opened in 2012 after significant cost overruns.

In 2014, an outcry from some of its customers over high costs for power led Ohio-based American Municipal Power, the biggest public owner of Prairie State, to restructure roughly $646 million of debt in an effort to ease rate pressures. That followed other troubles, including a subpoena from the Securities and Exchange Commission, and lawsuits from utilities and ratepayers in Batavia. The SEC probe ended years later without enforcement action.

Prairie State's future is further pressured by a clean energy law Illinois Gov. JB Pritzker signed in 2021. The Climate and Equitable Jobs Act was hailed as "nation-leading" by the Natural Resources Defense Council.

The 2021 clean energy law gave municipally-owned coal plants like Prairie State until 2045 to cut carbon emissions totally or shutter. In 2038, by which time plants must have cut emissions by 45%, roughly $1 billion of debt issued for the Prairie State project will remain outstanding.

Prairie State's leadership "is evaluating all potential options to reduce carbon emissions while also maintaining low-cost power production," said Alyssa Harre, vice president of external affairs and organizational strategy for Prairie State Generating Company.

"Prairie State is an essential component of our state's electric grid, especially for downstate Illinois, as fewer dispatchable baseload resources are available to serve as the backup to intermittent power sources like wind and solar," she said. "We are proud of the value we provide to the communities we serve."

The Prairie State plant's annual CO2 emissions come to over 13.591 million tons, according to the EPA.

A spokesperson for the Sierra Club, a natural resources advocacy group that has sued Marissa, Illinois-based Prairie State in federal court for operating without a permit, said by email that coal burning facilities require the production, storage and transportation of numerous toxic byproducts, and the failure of any of those systems can cause an environmental disaster.

"Even in a relatively newer plant, there is no 100% safe or clean way to burn coal," the spokesperson said. "Investors with ESG concerns should stay away from coal if climate and environmental impact are central to those concerns."

Fitch gave the Plum Point deal an ESG score of 3, which means that environmental, social and governance issues "are credit-neutral or have only a minimal credit impact on the entity," according to the rating agency.

"If this was a hydroelectric facility, the ESG score would be no different," said Fitch's Pidherny. "The risk that it's a coal-fired unit that could face premature decommissioning is factored into our analysis of the individual cities, knowing that those obligations are going to have to get paid… [But] the key rating drivers of this credit really are not [ESG] issues. It's really a mix of credit issues and other operational issues that ultimately drive the rating." 

Environmental regulation isn't the only pressure weighing against coal-fired generation: long-run U.S. market conditions have increasingly favored more affordable natural gas.

The Illinois Municipal Electric Agency, one of the nine public power agencies that own Prairie State and the second largest stakeholder after AMP, said that IMEA "has continued to diversify our portfolio by adding multiple new wind and solar resources," said Staci Wilson, its director of government affairs.

"The IMEA board has committed to reach a power portfolio net-zero carbon emissions goal by 2050," she said. "IMEA is also commissioning a formal study to plan for deployment of battery storage resources… [And] the IMEA Board recently authorized IMEA management to negotiate a contract for a 150 MW utility scale solar project."

Wilson noted that IMEA "will conclude all of our system ownership debt payments in 2035. This includes the Prairie State project."

The Sierra Club spokesperson said the U.S. District Court of Southern Illinois ruled in the advocacy group's favor in August, rejecting Prairie State's motion to dismiss the case. The judge found Prairie State "has been operating the facility for a decade without any permit, and that the state and federal governments have simply ignored the facility's existence," the spokesperson said. 

But Pidherny said whether it's Plum Point, Prairie State or another coal plant, "all of the entities that we are talking to and rating on a regular basis are beginning to evaluate options under the [federal] rulemaking." The introduction of natural gas could extend the life of such plants but is in preliminary stages, he said, and ultimately comes down to an economic analysis of the costs of repowering versus the benefits of longer term operations.

"The obligation under these bonds has absolutely nothing to do with the operation of the plant," he added.

MPUA Chief Financial Officer Ken Reasoner did not respond to requests for comment.