September 11, 2008

Fitch Rates Indiana Municipal Power Agency’s 2008A $30MM Rev Bonds ‘A+'; Outlook Stable

Fitch has assigned an 'A+' rating to Indiana Municipal Power Agency's (IMPA) $30 million power supply system revenue bonds, series 2008A. Fitch also affirmed the 'A+' rating on IMPA's $1 billion of outstanding parity power supply system revenue bonds. The 20-year fixed rate bonds are scheduled to price Sept. 25. Proceeds from the series 2007A bonds will fund capital improvements to IMPA's existing generating assets. The Rating Outlook is Stable.

The rating reflects IMPA's balanced and prudent resource plan, solid mix of low-cost power resources, and competitive wholesale rate. Added support is derived from the members' competitive retail rates and the take-and-pay full requirements contracts with IMPA through 2042.

Fitch also views favorably IMPA's management policies and practices, which enhance IMPA's ability to manage its market risks and capital planning process.

Credit concerns center on IMPA's relatively high leverage, which is partially due to the construction of two coal plants. IMPA has a 12.64% share in the 1600-megawatt (MW) coal-fired plant at the Prairie State Energy Campus (operational by 2012) as well as 13% in Trimble County 2, a 750MW coal-fired unit (operational by 2010).

While each project is in the construction phase and generally on schedule, both projects are experiencing price escalations. This concern for the Prairie State Project is mitigated by IMPA's prior allocation for its share of cost escalations of up to 7.5% of the total project. Furthermore, the utility is able to pass increased construction costs through member rates.

While financial metrics are in line with the rating category, Fitch notes that IMPA expects to experience a net loss in income in 2008. The expected net loss is a result of IMPA's decision to reduce members' 2008 rates by drawing from its rate stabilization fund to mitigate the impact of increasing fuel prices to its members. The net loss will also result in a decrease in historical debt service coverage to 1.15 times (x) in 2008 from 1.23x in 2007, which is above the rate covenant of 1.10x. With an updated fuel forecast, IMPA expects that it will not need to draw from the rate stabilization fund in the future, as it will pass fuel increases through its rates on a semi-annual basis.

Fitch also notes that while IMPA has a high concentration of industrial customers (47%), this concern is somewhat mitigated by the diversity of this customer segment.

Fitch will monitor the following key credit drivers that could affect the rating:

--Completion of coal generation projects and ultimate impact of cost overruns;

--Maintenance of financial metrics in line with the rating category as IMPA increases leverage to implements its capital plan;

--Impact of Indiana's economy on IMPA's industrial customer base;

--Impact of compliance with future regulations to reduce CO2 emissions.

IMPA is a joint-action agency that provides wholesale electricity to 51 members and one customer, pursuant to take-and-pay full-requirements contracts that mostly expire on April 1, 2042. The member utilities are located throughout the state of Indiana and serve a combined population of about 320,000 people.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.