AMP-Ohio has recently released a revised feasibility study, prepared by RW Beck, for the construction of a new 960MW coal-fired power plant in Meigs County, Ohio. This is the third time in the past 18 months RW Beck has been asked to prepare an initial feasibility study for the now $4bln project to reflect changes in the plants expected construction, financing, fuel, and carbon costs. 

While the new study does include some new cost estimates for their Base Case and Sensitivity Case project cost scenarios, the RW Beck analysis appears to have under-estimated or completely ignored a significant number of risk factors that could affect the plant's economic viability. 

From a potential bond investor's perspective, these risk factors could have a material impact on the return profile as they could 1) affect the demand requirements for the new facility, 2) add an additional $24bln in long-term costs to the project, and 3) impact the ability of the 81 member participants' to service the 50yr "take or pay" contracts they have entered into with AMP-Ohio. Indeed, given the current economic and political climate, it is not enough to simply assume this $4bln deal will pay off to the bond holders as promised if these concerns are not addressed before construction is scheduled to begin in 2009.

The unaddressed project risks and their estimated costs are highlighted below and represent costs through 2050 1*:

1) Fuel costs are inexplicably decreased by 30% in the Sensitivity Case.

RW Beck actually reduces fuel costs in their Sensitivity Case assumption by 30% falling from $386mln in 2033 in the Base Case to $282mln in 2033 in the Sensitivity Case. One can only assume this was a typo and that RW Beck actually meant to increase fuel costs by 30% in their "sensitivity" case to reflect the risk of the highly volatile coal markets, which has seen coal rise from $30/ton in 2006 to $195/ton at its peak in the summer of 2008 and $100/ton today. Using a 30% fuel cost increase rather than a 30% fuel cost decline as the sensitivity scenario would imply $4.7bln in additional potential fuel costs through 2050 in the Base Case and $8.2bln in potential costs under the Sensitivity Case.

2) Carbon Risk has been omitted in the Base Case and generously factored into the Sensitivity Case

While RW Beck's latest feasibility study has updated the construction, fuel, and financing costs to reflect current cost considerations for the facility, they have now elected to completely eliminate carbon risk as an input in their Base Case analysis without offering any rational basis for this decision.

This omission seems particularly troubling given that President-elect Obama has stated his intention to try to pass cap and trade legislation as early as next year and to use $150bln of the revenue from the auction of carbon permits to fund his green jobs program. Indeed, given that Obama intends to use funds generated from the sale of CO2 permits to help jump start efficiency and renewables, both of which could reduce the need for new coal-based generation, it seems particularly difficult to justify RW Beck's decision to dismiss carbons costs for a facility that will generate 7mln tons of CO2 annually starting in 2014.

Further, even in their Sensitivity Case, RW Beck is assuming that AMP-Ohio's 960MW plant would be entitled to free carbon allowances until 2030 to help defray nearly half of their carbon costs. While Boxer-Lieberman-Warner did allow a declining scale of carbon allowances to be given to emitting facilities on an output basis through 2030, the latest cap and trade bill put forth by Representatives Dingell and Boucher has accelerated the phase out of such allocations, requiring that facilities meet a performance standard after 2025.  Ignoring the costs of complying with a new performance standard and only assuming the new time frame as a guide to the direction of cap and trade proposals going forward, it appears likely that by not including CO2 costs in their Base Case analysis RW Beck has understated the costs for the AMP-Ohio facility by over $14.3bln through 2050 2*.

3) Reduced demand is not mentioned as a risk factor in either the Base Case or the Sensitivity Case for the project.

Given the fact that the Wall Street Journal has recently reported evidence of an actual drop in power demand over the past few months, demand risk should be of primary concern to "take or pay" participants in the AMP-Ohio facility.

The 960MW AMP-Ohio facility was already expected to exceed the Energy Information Administration's demand forecast needs of the Greater Cleveland area by nearly 500MW.  Given the current economic downturn, it is particularly important to reconsider whether this facility needs be built at all at the current time.

Moreover, as the AMP-Ohio participant communities are obligated to increase their energy "take" by 25% in the event of a delinquency from one of the other partnership communities, the risk of over-supply should not be ignored from the bond holder's perspective. Indeed, it should also be noted that AMP-Ohio's Cleveland customers have an escape clause from the project since the city of Cleveland has door-to-door competition for their energy business from First Energy. This means that if power costs from the AMP-Ohio plant rise too high, these customers can simply walk away from the deal, leaving Cleveland Public Power and the rest of our participants, under a great deal of financial stress. 

In fact, a 25% incerase in "take" power demand without any increase in actual power needs would equate to an additional $27-$44/MWH in average power costs per participant over the 50 year lifetime of the power contract with AMP-Ohio 3*.

4)  Financing cost risk is left unchanged in the Sensitivity Case despite difficulties accessing the credit markets for large scale projects.

RW Beck assumes that they will be able to finance their 960MW plant at a 6% interest rate for the majority of the $4bln in financing they are seeking. Given the inability to access credit in the market at the moment, this rate should also be subject to analysis under a "sensitivity" case scenario. Assuming a 100bp (1%) increase in the financing cost of the plant and facilities, this translates into roughly $1.5bln in additional costs over the 35 year life of the plant.

5) Construction costs are left unchanged in the Sensitivity Case despite high cost volatility.

Despite having to revise cost estimates four times in the last 2 years from $1.5bln to $3.94bln, the RW Beck Sensitivity Case does not factor in the likelihood of further cost over-runs to the plant. Given the highly volatile nature of construction costs in recent years, it appears appropriate to provide sensitivity analysis for a further 20% increase in costs at a minimum. This 20% increase in costs would result in an additional $2bln in funding costs under the Base Case scenario.

6)  Revenues for the project actually increase under Sensitivity Case which seems improbable.

The RW Beck study actually increases the revenue to the facility under their Sensitivity Case scenario. This does not seem consistent with a stress test of the performance of the facility and as a result, this $1.25bln benefit over the life of the facility should instead be considered a deficit of $1.25bln relative to the Base Case.

In sum, the Base Case analysis put forward by RW Beck for AMP-Ohio's 960MW coal-fired power facility fails to account for nearly $24bln in potential carbon, financing, fuel, construction, and revenue risks associated with this facility under justifiably conservative assumptions (see participant cost profile below):

In addition, the analysis does not include the costs of reduced demand or program delinquency that could raise the individual participant costs by as much as $27-$44/MW for the remaining life of the participant's 50 year contract with AMP.

Furthermore, bond holders looking to invest in such a deal should be aware that these studies are being relied upon at the participant level to make their investment decisions. As a result, it should not be assumed that the bond holders' capital would be secure if these risk assumptions are not clearly explained to the participants before construction on the new facility begins.

Indeed, given the number of risk factors highlighted above, it is not enough to assume that the 81 communities that have signed up for 50yr "take or pay" agreements with AMP-Ohio will be held liable for all of the additional cost over-runs from this facility. Under certain economic conditions this may no longer become an acceptable alternative, which would leave the bond investors exposed to more risk than they bargained for.

**This document is published solely for information and educational purposes and nothing in this document should be construed as investment advice, either as regards specific investments or overall investment strategies.  No representation or warranty, expressed or implied, is made as to the fairness, or correctness of the information contained in this document. 

1* Using RW Beck's cost assumptions through 2050 for comparison purposes. 

2* This estimate conservatively uses EPA carbon prices which are lower than those used by RW Beck in its Sensitivity Case scenario.

3* The $27-$44/MW cost estimate is derived by taking the average power costs per participant from the Base Case and the revised power costs per participant included above through 2050 and multiplying these averages by 25%.

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