Energy industry analyst offers suggestions, ideas for PPS rate relief

Neither the Fine Print Nor a Review by Moody’s Shed an Honest Light on Prairie State’s Dark Finances

Prairie State Energy Campus

By Tom Sanzillo, The Institute for Energy Economics and Financial Analysis 

Ratings-agency reviews this week of new debt offerings associated with Prairie State Energy Campus, and the fine print in the bond offering itself, simultaneously illuminate and obscure the financial and operational failures of the power plant in southern Illinois.

The reports by the ratings agencies — one by Fitch Ratings, the other by Moody’s — take very different views of Prairie State’s tangled finances, and of its prospects for recovery.

Both agencies see the municipalities that are stuck with high rates for Prairie State electricity most likely continuing to pay those rates. The question is for how long.

Fitch takes the deeper, more serious look, peering into the books of 21 participating Ohio communities and finding weakening finances. Moody’s, by contrast, skips the local research and concludes everything is fine. So, stable is the outlook at Moody’s; negative is the view at Fitch.

Fitch, much to its credit, holds Prairie State to its original electricity-price estimates, and notes that those estimates have long been vastly exceeded, implying that the customers who are tied into long-term contracts with the plant simply cannot continue to see rates keep going up. Fitch finds that high rates are already draining local cash reserves and hurting municipal credit ratings. Moody’s, to its discredit, concludes that the high cost of Prairie State electricity is competitive, and it takes no note of the deteriorating financial condition of customer cities.

Debt documents submitted for review by AMP Ohio, the largest participant in the Prairie State portfolio and the link between Prairie State and many member communities, are also supposed to shed light on Prairie State’s dark finances. But they don’t. The documents put 2014 rates for electricity at $73.66 per megawatt hours and assert that they will drop in 2015 to $71.38 megawatt hour. These numbers are presented by AMP after an almost incomprehensible explanation of how various internal subsidies are being used to depress rates that would otherwise be even farther off the chart than they are now. While it’s clear that the rates Prairie State is charging are not based on the real cost of electricity from the dysfunctional plant, it would take a team of auditors to figure out the full truth behind AMP’s many tangled cross-subsidies.

As for the rates being competitive, nothing could be further from the truth. The communities tied to Prairie State — if they weren’t locked into such ill-advised contracts — would be able to get electricity off the open market for about half what they’re paying for Prairie State’s. Prairie State’s rates for electricity are captive, to put it bluntly, not competitive.

Moody’s relies nonetheless in its review of the new bond offering on a vague standard of competitiveness that muddies the kind of clear and concrete information investors deserve. Crucial facts that go overlooked include that Prairie State produces electricity at far above market prices and far above the original estimates used to encourage local governments to sign on.

Fitch—again to its credit—is worried about shrinking cash reserves of member municipalities now and in the future. Moody’s—again to its discredit—seems to suggest a simplistic way forwarding in which communities presumably cut other services to keep up with electricity-rate increases.

Meanwhile in Illinois, some of the same people who put out the Moody’s report on Prairie State have incongruously placed the municipality of Batavia, Illinois, on a negative credit watch due in no small measure to its exposure to the Prairie State plant. Citing rate pressure from Prairie State debt, Moody’s outlook for Batavia is decidedly negative.

Moody’s notes, too, that Batavia’s trouble is rooted also in off-balance-sheet debt, something Batavia is trying to correct — and a problem faced by every community in the Prairie State consortium. If those many debts were brought onto the books, significant numbers of communities would violate state debt standards.

The people are restive, and at least some officials and their citizenry are starting to wonder. Residents of Batavia have started litigation. The SEC has subpoenaed AMP and Peabody Energy. Paducah has fired the head of its power agency and brought in new board members.

Any truly independent look at Prairie State would raise eyebrows. Yet last year, when several elected officials from AMP communities asked Ohio Attorney Genera Mike Dewine for an investigation, he demurred. Dewain and Moody’s are in the same camp, it seems, the one that can’t be bothered with hard questions.

Tom Sanzillo is IEEFA’s director of finance.

Utility bonds downgraded to BBB rating


“Fitch Ratings, one of three bond rating agencies Paducah Power System officials met with last week, has downgraded the utility’s revenue bonds from A-minus to BBB. The bonds in question include $153 million in revenue bonds, series 2009A, and $1 million in refunding revenue bonds, series 2010.

“The ratings downgrade reflects PPS’ constrained financial position resulting from several years of inadequate rate recovery and Fitch’s expectation that the utility’s medium-term financial metrics will be supported by planned, one-time actions to bolster liquidity,” according to a Fitch news release Wednesday.

The agency said it views the actions, however necessary, “as stopgap measures more consistent with the lower rating until improved asset performance at the Prairie State Energy Campus provides longer-term relief through lower purchased power costs.”

Mark Crisson, PPS interim general manager, called the move disappointing but not totally unexpected. “I don’t want to give the impression this is a catastrophe,” Crisson said.

“It’s not good.” Though the news is not positive, “Triple B is still investment grade,” he said.

In a trip to New York City last week, PPS officials met with Fitch and rating agencies Standard & Poor’s and Moody’s, in addition to three bond insurance companies to discuss a surety bond to free up debt service reserve funds as part of their rate recovery plan.

The recovery plan calls for freezing, then lowering the power cost adjustment, as one method of providing rate relief to customers.

Back in September, the board chose not to raise the PCA even though its rate formula called for it. “We explained (to Fitch) what we were doing to offset that, but apparently they discounted that,” Crisson said.

According to Fitch, “while the utility’s financial position and recovery plan support an investment-grade rating, its weakened metrics; planned, one-time measures to generate liquidity; and modest projected debt service coverage ratios from cash flows are more consistent with the BBB category.”

The downgrade could increase the fee PPS will have to pay for a surety bond, Crisson said, “but it doesn’t mean we can’t move forward.”

The interim general manager said PPS should know about the surety bond sometime in January.

“This is the challenge we’ve talked to the board about,” Crisson said. “We’re trying to walk a fine line to maintain strong credit on one hand and (provide) rate relief on the other. That’s difficult to do.””

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Sanzillo and Schlissel: There’s a Better Way Out of This Mess Than What Paducah Power Proposes

By Tom Sanzillo and David Schlissel — 

The recent plan proposed by Paducah Power System to reduce high electricity costs for residents and businesses will neither bring rates down to a manageable level nor stabilize the utility’s finances.

The good news: There’s a better way forward.

To see through the bad offer on the table, it’s helpful to understand some of the background on how Paducah today has the highest electricity rates in the state and pays far more than it should.

For most of the history of Paducah Power, ratepayers were charged reasonable rates. That all began to change when the utility agreed in 2005 to buy more power than it needed from the Prairie State Energy Campus in a deal that locked the utility-and its customers-into an expensive long-term commitment that benefitted the builders and financiers behind Prairie State at the expense of PPS’ customers.

Natural gas is abundant and inexpensive today, and power prices are low and affordable in regional competitive power markets-which is where Paducah should be buying its electricity. Paducah residents and businesses, by all rights, ought to be paying much lower rates now and into the foreseeable future.

That’s not what’s happening, though, because Prairie State is producing absurdly expensive electricity, and through deals like those it has with Paducah, has pushed ratepayers into bearing the brunt of that expense.

The rate-reduction plan Paducah Power rolled out last month might provide some relief, but that relief will be small, temporary and costly in the long run. It pushes short-term costs onto future ratepayers, and it kicks the can down the road by promising-through unproven assertions-that millions of dollars can be saved just by bringing in a new salesman to help PPS sell its share of the excess and overpriced electricity it has to buy from Prairie State.

The heart of Paducah Power’s problem is that it has too much debt. That’s because the utility was recruited into investing in Prairie State with promises of stable, low-cost power.

Paducah was enticed somehow into buying too big of a stake in the plant, which was constructed at a cost of $5 billion, twice what was initially estimated. Paducah Power’s electricity is unaffordable today because of those overruns and because of Prairie State’s fundamentally weak business model.

What to do?

Paducah Power executives, and some of the city’s elected leaders, want citizens to shoulder the burden themselves. That’s the core of the utility’s recent proposal.

This is wrong.

Peabody Energy, Bechtel Corp., various investment bankers, assorted bond dealers, bondholders and several law firms have profited or continue to profit from what was plainly a mistake.

They can afford to share this load. The bondholders who own the debt Paducah is paying for have assets worth a combined $6.7 trillion.

Three of those bondholders—Invesco, Franklin Templeton and Nuveen Investments—hold approximately 66 percent of the debt. They and their subsidiaries are worth $2.4 trillion. Peabody, even with its recent dismal financial performance, is worth $2.4 billion. Bechtel, which billed for the cost overruns, is one of the largest companies in the world, with annual revenues of $37.9 billion in 2013.

The underwriters for the bonds—those who engineered the deal and collected big fees on it—included Hilliard Lyons, J.P. Morgan & Co., Wells Fargo, Raymond James Securities and Edward Jones.

Paducah Power took a risk, to be sure, but so did the other players. Anytime a public power project is financed, it has many stakeholders by design, so that risk is distributed equitably. The way forward in Paducah is to implement a debt-relief plan that requires all parties to contribute and that offers an honest assessment of Prairie State’s operating viability.

While workouts like these are rare, they do occur. Just in the past two years, for example, Jefferson County, Alabama, and the city of Stockton, Calif., have gone through bankruptcy proceedings in which bondholders in each case ended up forgiving some of the principal value of debts.

In the 1990s, Troy, N.Y., renegotiated lower interest payments with bondholders to avoid bankruptcy, and the distressed Washington State Public Power Supply System worked out a deal in which bond investors received between 10 and 40 cents on the dollar. There are many other instances of public entities reaching new arrangements with creditors to spread financial fallout fairly.

The Prairie State plant is not producing affordable electricity for Paducah, even though that’s what the city was supposed to get for its multi-decade commitment to the plant through 2041.

It was, and is, a bad deal for Paducah, and those who have gained from it should be compelled to join the public dialogue on how to find a solution. The idea that residents and businesses alone should bear all the costs of a shared mistake is hogwash.

Tom Sanzillo is the director of finance for the Cleveland-based Institute for Energy Economics and Financial Analysis. David Schlissel is IEEFA’s director of resource planning analysis.

[This op-ed first appeared in the Paducah Sun on December 15, 2014]

PPS optimistic about NYC meetings

“Paducah Power System officials may not know how successful this week’s trip to New York to meet with bond insurance companies and rating agencies was until next month.

Interim General Manager Mark Crisson said he believes the meetings were productive and the utility will be treated fairly.

Crisson, Board Chairman Hardy Roberts and Dave Carroll, director of finance and administration, will return today from New York, where they met with six firms.

‘What we hope to accomplish is to get competitive bids or proposals from one or more bond insurance companies for a surety bond to free up our debt service reserve, and reaffirm and/or maintain our current bond rating,’ Crisson said by phone.

‘All of the meetings went well,” Crisson said. “They had a lot of questions.’

Crisson said Paducah Power will probably hear from surety companies in January.

‘I feel optimistic about the outcome there,’ Crisson said. ‘What we don’t know is what the fee might be.’

The officials met with bond insurance companies Build America Mutual, National Public Finance Guarantee and Assured Guaranty Corp., and the three main rating agencies: Fitch Ratings, Standard & Poor’s, and Moody’s.

Crisson likened the meetings to appearing before a judicial panel, in that “it’s not always easy to read which way they’re leaning based on what they say.”

In their meetings with the credit rating agencies, with the last one scheduled this morning, ‘We made it clear we’re taking steps both to provide some rate relief and strengthen our finances,’ Crisson said, referring to the PPS board’s rate recovery plan.

‘One of the (rating) companies wanted to know the likelihood of obtaining a surety bond, and when that’s going to happen,’ Crisson said. ‘Based on those questions, they may wait to see what happens with the surety bond (before addressing the rating).’

Before the officers left for New York on Tuesday, the board passed a resolution reaffirming its commitment to the rate recovery plan approved Nov. 12 and its intent not to seek Chapter 9 bankruptcy relief.

‘If you’re contemplating bankruptcy, they’re not interested in providing any funding or help with your credit rating,’ Crisson said.

The Paducah group went through the rate recovery plan in detail in the meetings, as it did at the Nov. 12 board meeting in Paducah.

‘I don’t think there were too many surprises,’ Crisson said of the discussions.

‘There were a lot of questions on Prairie State. Some of them were more well-versed than others’ on the operations of the Prairie State Energy Campus, PPS’ chief supplier of power, Crisson said.

He said the discussion indicated the rating agencies felt Prairie State was a ‘good asset, and you’ve got to take a long-term view.’

By David Zoeller, Paducah Sun

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Commissioners discuss PPS

City leaders discussed some of the latest developments in addressing Paducah Power’s high electric rates at the Paducah City Commission meeting Tuesday.

Three months following the commission meeting where leaders from Prairie State Energy Campus and Paducah Power System made a presentation regarding the campus’ operation and the system’s rates, commissioners talked about what has been done since then to remedy the power problem.

Commissioner Richard Abraham brought up Friday’s editorial in The Paducah Sun, which criticized Paducah Power’s choice in using Louisville-based financial consulting firm Hilliard Lyons for advice on PPS’s options. The company was involved in Paducah Power’s bonding for the Prairie State Energy Campus project.

“I’m not sure if bankruptcy is the way to go, but we passed a resolution the night that Prairie State was here … that everything was on the table and (Paducah Power) was to always move in a way that is transparent,” Abraham said.

Paducah Power Board Chairman Hardy Roberts addressed the issue in a letter to the editor that was published in Monday’s edition of The Sun. Roberts stated PPS sought bankruptcy advice from a legal firm with bankruptcy experience. Commissioner Sandra Wilson suggested that the commission invite PPS interim general manager Mark Crisson for an update on the status of a rate recovery plan and options for PPS. Paducah Power officials flew to New York on Tuesday for meetings this week. They are set to meet with different companies and discuss issues such as an insurance policy and bond ratings relating to the rate recovery plan.

In November, the Prairie State campus performed at its highest operating capacity to date. City Manager Jeff Pederson, who is a member on the PPS Board, said over the past three months combined the capacity of the plant was the highest of any three-month period. “Those are encouraging notes,” he said. “Those are very strong and very encouraging indicators, and that’s a part of the financial recovery too, the improved operation of that plant. Combined with other things that we’re doing, clearly things are looking positive and the ship appears to be turning in the right direction.”

At Monday’s PPS Board meeting, the board approved a plan to provide no- or low-cost energy audits for residential customers. The audits provide customers with suggestions on ways to save energy. Mayor Gayle Kaler said Tuesday that PPS should offer the audits at no cost. “There are many ways you can save power,” she said. “I think it should be provided at no cost.”

Pederson said he would invite Crisson to attend next Tuesday’s commission meeting.


By Lauren Duncan, Paducah Sun. No Link. Subscription required

PPS officials head to NYC as next step in financial plan

Paducah Power System officials are flying to New York today to meet with bond insurance companies and rating agencies as they proceed with a rate recovery plan they hope will stabilize the utility’s finances and provide rate relief.

Interim General Manager Mark Crisson, Board Chairman Hardy Roberts, and Dave Carroll, director of finance and administration, will take part in meetings through Friday. They will carry with them a resolution approved by the board Monday which reaffirmed its commitment to the plan and specifically states its intent not to seek Chapter 9 bankruptcy relief.

“We’ve planned this trip for some time (in anticipation of the rate recovery plan being approved) because our recovery plan has an essential element to it, which is an insurance policy which would free up what’s called a debt service reserve for the bonds we hold,” Crisson said.

To get the insurance policy, “you have to demonstrate you have strong credit,” he said. “Insurance companies like to avoid or minimize risk, so to get the most competitive bid on the (one-time) fee for the policy, it’s important to make our case first-hand. So, we’ll be meeting with three bond insurance companies.

“We’ll also have a set of meetings with the three major ratings agencies. We currently have an (A minus) bond rating for both Paducah Power and Kentucky Municipal Power Association, our joint action agency, and we want to get that rating reaffirmed and, if possible, strengthened,” Crisson said. “So, we’re positioned to refinance all or a portion of our debt service going forward, which again will reduce our costs and stabilize our finances and give us the ability to reduce rates.”

In addition to reaffirming its commitment to the rate plan, the board Monday approved a plan to provide no- or low-cost energy audits for residential customers.

According to Andrea Underwood, PPS director of community relations and marketing, the home audit program is designed to supplement the free home energy checks that have been conducted since October. The checks are helpful for 90 to 95 percent of PPS customers, she said.

The audits provide more detailed information on ways to save energy, according to Underwood. The cost of the vast majority of audits is approximately $250, and some can cost as much as $550. Under the proposal, PPS would pay $250 for each audit done, and customers would be asked to pay the difference if the amount is higher.

Crisson also updated the board on the recent operation of Prairie State Energy Campus, its chief supplier of power.

“I’m pleased to report that Prairie State set a new record with its equipment availability factor of 90 percent as of November,” Crisson said. “That continued until yesterday (Sunday) when they had a tube leak in one of the boilers on Unit 2, so that one is temporarily down until they can fix that.

“But for the last three months, Prairie State in fact has operated right around 85 percent which is where we want it,” he said. “If we can continue to expect operation like that going forward, it will help our finances and our ability to market some of our assets.”

Regarding the resolution on bankruptcy, Crisson said it is not an option because Paducah Power is solvent.

“I think it’s important that the board be clear, both to the community and the credit markets, about where we are with bankruptcy,” Crisson said. “I think we fulfilled the board’s commitment to look at all available options.”

Crisson said after consulting with specialists on the subject, “It was pretty clear, by any objective measurement, that we are not a candidate (for bankruptcy).”


By David Zoeller,  Paducah Sun. No link subscription required

FALLS SHORT PPS consultations on bankruptcy flawed

“Paducah Power System says it is not a candidate for Chapter 9 bankruptcy. It says it plans to adopt a resolution to that effect at its next board meeting.

The troubled local utility made the announcement in a three-paragraph news release it sent out several days ago. The release said the board reached the conclusion after consulting with “financial and legal experts with Chapter 9 bankruptcy experience.”

The news release did not identify the parties the board consulted. But it has since been learned that that the financial advisor is Louisville-based Hilliard Lyons, and that the consultations took place in Hilliard Lyons’ Louisville corporate offices. The American Public Power Association, a power industry trade group formerly headed by PPS Interim General Manager Mark Crisson, provided the legal advisors the PPS board spoke with. That telephone conference also occurred in Hilliard Lyons’ offices.

For Paducah Power System to present this as an objective exercise is a stretch.
Hilliard Lyons was the lead manager on the sale of many of the very bonds that would be compromised by a PPS bankruptcy filing. According to a June 2010 article in Louisville Business First, the placement of a $184 million bond issue that year as part of the financing of Paducah Power’s interest in the Prairie State Energy Campus was one of the largest public financing placements in the history of Hilliard Lyons.

The firm was also the “bookrunner” on the deal, which means it controlled the allocation of the bonds to other investment banks that participated in the placement. In most deals, the bookrunner retains the majority of the bonds for its own inventory and markets those bonds to its retail customers.

The notion of the board going to the entity that sold PPS’ bonds, in what was one of the firm’s most important deals ever, and asking, “Gee, do you think we should declare bankruptcy and default on these bonds,” is somewhat comical. It’s just not a serious exercise.

Likewise, we have concerns about the board getting advice from attorneys supplied by an industry trade group that is by and large concerned with promoting a positive image for community-owned public power systems, and that’s what APPA does. It just seems that the answer to the question of should we file bankruptcy is preordained in this context.

The PPS board made a commitment to the public that it was going to seriously explore all options for rate relief, including bankruptcy. We don’t think the exercise in Louisville quite measures up.

Certainly we as a newspaper are not pounding the table for a bankruptcy filing. We don’t know if it is a viable option, now or in the future, and we retain an open mind. However, we continue to think PPS would do well to hire independent restructuring advisors to explore all options for reducing debt and providing rate relief. Such advisors might recommend an array of choices, and bankruptcy may or may not be among them.

For now, the appearance is that PPS sought out advisors who would give it the answer it wanted so it could dismiss one of the hard choices and proceed with its recovery plan. We don’t think that’s what the ratepayers were promised.

We understand the pressure PPS is under from bondholders, ratings agencies and even Mayor Gayle Kaler to renounce bankruptcy. But the PPS board shouldn’t be beholden to them. Their duty is to the ratepayers, some of whom are sitting in cold houses in overcoats right now because they can’t afford the heating bill. PPS has a duty to seriously explore all options for rate relief, and the recent exercise in Louisville just doesn’t measure up.”

Paducah Sun

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Ideas for rate relief from another city facing high power bills

WPSD Local 6: Your news, weather, and sports authority

BATAVIA- Paducah Power customers pay one of the highest rates in the state for energy. It’s an issue we’ve been tracking since last winter, when residents and business owners started getting bills two and three times bigger than expected.

The problem boils down to a decision Paducah Power board members made to invest in a new, coal-fired power plant in 2005. Now, Paducah Power System gets the majority of the city’s energy from The Prairie State Energy Campus in southern Illinois, but the business deal hasn’t worked out like they thought it would.

Mayor Galye Kaler has described the cost of energy as the biggest problem facing the city since the great flood, but Paducah isn’t the only town looking for ways to fix the Prairie State problem….

By Briana Conner, WPSD News

Full article

Painesville City Council talks AMP-Ohio agreement

PAINESVILLE – “Painesville City Council members again discussed the arrangement that the city has with a power company that provides access to higher streams of energy during peak times.

Debate surrounds the price negotiated between the city and American Municipal Power Inc. in the power purchase agreement the city entered into in 2007.

Ward 1 Councilman Andrew Flock said at the presentation given by AMP-Ohio that the agreement, which runs 30 years, set the price at roughly $48 per megawatt hour….

Earlier this year, business leaders in Batavia, Illinois filed a class-action lawsuit against the power companies who persuaded the city to buy into the Prairie State project, according to reporting by the Kane County Chronicle and The Chicago Tribune….

Flock, as in previous meetings, suggested that council draft a resolution asking for a letter to be sent to the Ohio Attorney General to see if he could look into the deal. He said there are too many questions left unanswered regarding the projects AMP-Ohio brings to its members….

“I think what (council) wants is a monthly presentation as we go forward on those levelization costs,” McHugh said. “At some point the AMP members are going to decide that we can’t keep supporting this. The plant’s going to have to stand on it’s own.”