Fitch Ratings in December said that it assigned an “A+” rating to approximately $265.7 million Power Supply System Revenue Bonds, 2025 Series A issued by the Indiana Municipal Power Agency.
Bond proceeds will be used to refund all or a portion of series 2010A, 2013A and 2014A bonds for savings. Proceeds will also be used to provide $100 million to finance a portion of capital improvement costs and pay costs of issuance.
Bonds are expected to price the week of Jan. 13, 2025, via negotiated sale.
Additionally, Fitch affirmed the following ratings at “A+”:
- Approximately $1.2 billion in outstanding Power Supply System Revenue Bonds;
- Issuer Default Rating (IDR).
The Rating Outlook is Stable.
The “A+” IDR and bond ratings “reflect the agency's very strong revenue defensibility, which is supported by IMPA's role as a wholesale power supplier serving 61 member-utility systems,” Fitch noted.
“The rating also reflects the strong credit quality of the largest members. Members are bound by long-term, take-and-pay power supply contracts, which provide for the full cost recovery of all of IMPA's costs,” it said.
The ratings also reflect the agency's strong operating risk profile characterized by a low-cost resource base rooted in coal-fired generation, including its ownership interest in Prairie State Energy Campus (PSEC), and moderate life-cycle investment needs.
These factors should help the agency keep its operating cost burden (7.0 cents/kWh in 2023) low.
IMPA's financial profile and leverage ratio have been stable, with the leverage ratio expected to remain supportive of the rating through Fitch's rating case scenario, the rating agency said.
The bonds are secured by revenues derived from the operation of IMPA's power supply system, including payments received from the 61 members pursuant to long-term, take-and-pay PSCs.
Revenue Defensibility ('aa')
IMPA's very strong revenue defensibility is supported by the revenue framework provided by the long-term, take-and-pay PSCs with its members, the strong/midrange credit quality of IMPA's largest five members that account for around 46% of revenue, and solid rate flexibility, Fitch said.
Fitch's Purchaser Credit Quality (PCQ) sub-assessment is 'a' for IMPA's five largest members, but is somewhat strained by the more midrange credit profiles of its two largest members, it said.
The PSCs for all but one of the members are 30-year, rolling contracts. As such, the contracts for the majority of members continue unless and until the member provides notice, in which case the PSC would terminate 30 years after such notice was provided. The members signed to 30-year rolling PSCs account for approximately 94% of total member sales.
Beginning on April 1, 2032, the PSC for the City of Frankfort continues unless and until Frankfort provides notice, in which case the PSC would terminate 10 years after such notice was provided. If Frankfort were to provide notice, the Frankfort PSC could terminate as early as April 1, 2042, which is prior to the scheduled final maturity of certain series 2022A and series 2025A bonds.
However, given the fact that most of IMPA's debt (86% following the issuance of the series 2025A bonds) matures on or prior to Jan. 1, 2042, the earlier termination of the Frankfort PSC is credit neutral at this time.
Operating Risk ('a')
"IMPA's low operating cost burden and diverse mix of resources, by both number of units and fuel type, underpin the low operating risk assessment," Fitch noted.
Operating cost burden averaged 6.2 cents/kWh over the last five years. The cost burden increased to roughly 7.0 cents/KWh for 2023 due to a slight decline in member sales and an increase in transmission costs and other expenses compared to several years prior.
Power requirements are met with a mix of partial ownership interests in several power plants, purchased power arrangements, and member-owned generating facilities totaling around 1,200 MW used to meet member needs. Coal-fired resources provide 41% of total capacity and provided 61% of energy in 2024, the rating agency said.
Fitch expects coal generation to remain integral to the agency's portfolio given the fact that newer vintage coal units account for nearly half of IMPA's total coal capacity. With the expected addition of wind and solar generation, management projects that coal will decline as a percentage of its energy supply to 48% by 2030.
"IMPA has invested significantly in its system over the past decade, including the addition of new baseload capacity, which has led to a low average age of plant and manageable capital needs. Projected capital spending in 2024-2028 totals approximately $300 million, which will be partially funded from the series 2025A bond proceeds. Operating costs are expected to remain low and operating cost flexibility is considered neutral."
Financial Profile ('a')
IMPA's financial profile remained solid in 2023 with Fitch-calculated coverage of full obligations (COFO) of nearly 1.4x and a 6.9x leverage ratio, measured by Fitch as net adjusted debt compared with adjusted funds available for debt service (FADS).
"IMPA's capital plan is manageable and management anticipates stable member sales and revenue over the near term, resulting in stable financial metrics including leverage, COFO and liquidity, which are expected to remain neutral to the financial profile assessment. Leverage in Fitch's rating case is expected to trend in the range of 7.0x-8.0x."
IMPA management has indicated potential plans for the construction of additional generation in the 2030 timeframe.
Expected costs and financing could lead to an increase in planned capex and leverage over 9.0x in Fitch's rating case scenario.
"Even at this level, if management decides to proceed with the project, the anticipated rise in leverage should support the financial profile assessment and the overall rating, with the related rate recovery from members supporting the investment."
