Fitch Ratings has assigned an “A” rating to approximately $120 million power system revenue bonds, series 2025 issued by the Kentucky Municipal Energy Agency.
The bonds are expected to price the week of Jan. 6 by negotiated sale. Bond proceeds will be used to finance a portion of the construction and acquisition of a 75-MW natural gas-fired electric generating station, known as the Energy Center I Project (ECI Project), fund a cash-funded debt service reserve, finance capitalized interest, and pay issuance costs.
In addition, Fitch has affirmed KYMEA's Issuer Default Rating at “A,” and withdrew the all-requirements project obligations rating of “A”/Rating Outlook Stable as it is no longer relevant to the agency's coverage.
The Rating Outlook is Stable.
The “A” rating on the bonds and IDR “reflect the agency's very strong revenue defensibility, which is supported by the revenue framework that includes long-term, take-and-pay power sales contracts (PSCs) signed with its all-requirements members, and rate-setting requirements pursuant to those contracts that provide for an unlimited reallocation of costs in case of member default,” Fitch said.
It also noted that KYMEA's strong operating risk profile, evidenced by a low operating cost burden and flexible and diverse mix of power supply, and its strong financial profile are important rating considerations.
KYMEA's leverage ratio, measured as net adjusted debt to adjusted funds available for debt service, has averaged 5.7x over the past five years and was just 4.8x in fiscal 2024, which is considered very low.
The proposed bonds will result in higher leverage over the next few years, but Fitch expects the leverage ratio to peak at about 9.4x in fiscal 2027, which is consistent with the “A” rating.
Once the ECI Project's costs are billed to members beginning fully in fiscal 2028, the leverage ratio is expected to decline.
Bond proceeds will be used to fund the initial acquisition and construction costs of the project, which will consist of four reciprocating internal combustion, natural gas-fired engines aggregating to 75-MW of capacity.
The facility will be located in Madisonville, KY, with construction anticipated to be completed by mid-2027.
Interest on the bonds is expected to be capitalized until July 2027 and funded from proceeds.
The agency estimates the total cost of the project to be $180 million (including capitalized interest and debt service reserves), and expects to issue completion bonds in fiscal 2027 or 2028.
Pursuant to a participation agreement with nine of the agency's all-requirements members, KYMEA will construct, own and operate the project. The participating members will own an undivided interest in the capacity and energy from the project, and will sell the output to the agency through a separate power purchase agreement.
The project's costs will include capacity and energy charges, and will ultimately be charged to the all-requirements members through the PSCs, resulting in member payment obligations on par with any of the agency's other all-requirements obligations.
“The capacity charge will include the annual debt service for the bonds, as well as a coverage component, and shall be charged notwithstanding the facility's availability, or the production of energy, making it an unconditional obligation and supportive of the very strong revenue defensibility, in Fitch's view,” the rating agency said.
The all-requirements project obligations rating has been withdrawn because it is no longer considered by Fitch to be relevant to its coverage of the agency.
