alabama municipal electric authority

U.S. PUBLIC FINANCE

CREDIT OPINION30 September 2016

Update

Analyst Contacts

Charles Berckmann [email protected]

A.J. Sabatelle 212-553-4136Associate [email protected]

Alabama Municipal Electric AuthorityUpdate: Moody's Upgrades AMEA's 2013 Series A PowerSupply Revenue Refunding Bonds to A2; Outlook Stable

Summary Rating RationaleMoody's Investors Service has upgraded Alabama Municipal Electric Authority's (AMEA, orAuthority) 2013 Series A Power Supply Revenue Refunding Bonds to A2 from A3. Concurrentwith this action, Moody’s revised AMEA’s outlook to stable from positive.

The A2 rating recognizes the credit strength of the eleven participant members (A1 weightedaverage credit quality); AMEA's demonstrated improvement in liquidity, which is directlytied to an amended power supply agreement with Alabama Power Company (APC: A1,stable) and AMEA's willingness to increase rates and strengthen forward looking financialperformance through energy charge adjustments (ECAs); and competitive wholesale powerrates in the region.

The A2 rating recognizes however that AMEA's power supply agreement with APC expireseight years prior to debt maturity. The rating further acknowledges the potential for elevatedcarbon related risks as AMEA's fuel supply mix incorporates nearly 45% of coal-firedgeneration; while somewhat high for the sector, this level of coal-fired fuel supply has beendeclining from previous levels.

The AMEA has approximately $34.6 million in revenue refunding bonds due 2033outstanding.

Credit Strengths

» Strong average-weighted credit rating of A1 of participant members

» Improved rate policies and demonstrated willingness to improve liquidity profile

» Power supply contract with high investment grade supplier through 2025

» Competitive wholesale rates in the region

Credit Challenges

» Elevated exposure to environmental costs with coal providing nearly 45% of fuel supply

» Weak rate covenant with sum sufficient net revenue coverage of debt service

» Power Supply Agreement expires eight years prior to debt maturity

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 September 2016 Alabama Municipal Electric Authority: Update: Moody's Upgrades AMEA's 2013 Series A Power Supply Revenue Refunding Bonds to A2; Outlook Stable

Rating OutlookThe stable outlook considers our expectations that AMEA's prospective financial performance will remain in line with recentperformance, owing largely to the amended power supply agreement and ECAs that automatically trigger revenue increases in order toensure budgeted revenues are achieved.

Factors that Could Lead to an Upgrade

» Debt service coverage ratios on a net revenue basis approaching 2.0x on a sustained basis

» Strong liquidity profile such that days cash on hand near 150 days on a consistent basis

» Successful extension of long-term power supply arrangements through debt maturity for a substantial portion of AMEA's powerneeds.

Factors that Could Lead to a Downgrade

» Decline in weighted average participant credit quality

» Material deterioration in the credit quality of AMEA's main power supplier

» Decrease in liquidity to below 75 days cash on hand

» DSCR below 1.2x times on a sustained basis

Key Indicators

Exhibit 1

AMEA key financial metrics

Source: AMEA financial statements; Moody's Investors Service

Detailed Rating ConsiderationsRevenue Generating BaseAMEA generates all of its revenue pursuant to a full-requirements power purchase contract with its eleven participants (weightedaverage rating of A1) through 2035. The contracts authorize the authority to set rates that will produce sufficient revenues to coverits proportionate share of operating, capital, and debt service costs. The authority has a power supply agreement with Alabama PowerCompany (APC or Alabama Power: A1 Stable) for almost all of its energy and capacity needs through 2025. The remaining energycomes from hydro generation allocations with Southeastern Power Administration (SEPA) and Santee Cooper and self-supplied peakingpower.

Under AMEA's power supply contract, AMEA receives allocations of APCs generating assets. The resource mix is concentrated with45% of its generation provided from coal which introduces elevated carbon risk, but is otherwise diversified with 18% of generationfrom nuclear generation, 14% of generation from natural gas, 6% from hydro and other renewables and 17% from market purchases.Additionally, AMEA owns a peaking unit, has a power purchase agreement with Santee Cooper, and is eligible to pursue third partycontracts for specific amounts of capacity beginning in 2018, allowing for some operational flexibility.



The eleven members are located throughout the state of Alabama and we expect the weighted average participant rating to remain atcurrent levels given the quality and stability of the participants' local economies. None of the participating members currently own anygeneration capacity and therefore purchase all of their bulk power and energy from the Authority and SEPA. The top three participantsgenerate over 75% of the authority's revenues: the Utilities Board of the City of Foley (Aa2), approximately 35% revenue share; theCity of Dothan (GOLT rating Aa2), approximately 29.3% revenue share; and the City of Opelika (A1 electric enterprise rating) withapproximately 11.2% revenue share.

According to Moody's Analytics, tourism and aerospace manufacturing in southern Alabama will continue to support the localeconomic region. Specifically, UTC Aerospace System, the area's largest manufacturing employer, provides a solid economic basefor Foley with large corporates like Airbus operating nearby in Mobile, AL. Dothan is a regional health care hub with limited nearbyalternatives and offers high-wage employment prospects.

Operational and Financial PerformanceThe authority's financial position has improved meaningfully since 2013 as the changes to the power supply agreement with APChave reduced the volatility in financial metrics under the prior contract. In addition, the AMEA's implementation of energy chargeadjustments (ECAs) allows them to further stabilize financial performance in the event load or weather conditions change. Theimprovements are most notably evident in AMEA's improved debt service coverage ratios which improved to over 2.10x in FY2015 ona net revenue basis where just two years prior the authority was utilizing cash from rate stabilization to meet sum sufficient coverage.The authority's debt ratio at 39% FY2015, is well below the median for the sector and will continue to improve as debt is amortizedand as liquidity builds up. On a year-to-date basis, the AMEA anticipates they will continue to deposit excess revenues into ratestabilization as it continues to generate surplus cash as a result of rate triggers driven by ECAs.

The authority benefits from unregulated rate setting in Alabama, and none of its member participants are subject to rate regulation inthe state, allowing room for more rate increases if needed. At a wholesale cost of nearly $0.067/kWh to member participants, we notethe AMEA's delivered cost to its members is competitive relative to regional peers. This should allow AMEA to implement its energyrate modification and still remain a competitive power supplier in the region.

AMEA remains indirectly exposed to elevated carbon costs since roughly 45% of its generation is coal-fired. AMEA's chief powersupplier, APC, has actively managed its carbon exposure through coal-to-gas conversions and retirements of existing, aging facilitieshowever, which we believe has led to a modest reduction in coal-generated supply from nearly 55% a several years ago.

LIQUIDITY

AMEA's liquidity position has improved markedly over the past several years owing to policies implemented to increase cash balancessuch as the ECAs mentioned above as well as contractual and load-driven savings. In 2015 the AMEA deposited around $17 million intorate stabilization and anticipates adding a further $3 million to rate stabilization in FY 2016 (ends September 30). Assuming operatingcosts remain consistent with current levels, we expect liquidity will be in line with median levels for A-rated joint action agencies.Median days cash on hand is approximately 102 days for A-rated all-requirements joint action agencies. At the end of FY2016, AMEA'sliquidity is anticipated to exceed 100 days cash on hand.

Debt and Other LiabilitiesDEBT STRUCTURE

Alabama Municipal Energy Authority currently has $34.6 million in 2013 Series A Power Supply System Revenue Refunding Bonds debtoutstanding. All of the authority's debt is fixed rate consisting of flat payments of approximately $2.7 million per year through bondmaturity in 2033. There is no plan for additional leverage in the next five years.

DEBT-RELATED DERIVATIVES

None

PENSIONS AND OPEB

Pensions and OPEB are not a material credit driver for AMEA.



Management and GovernanceAlabama Municipal Electric Authority is managed by a board of directors composed of eleven members serving staggered terms whoare elected by an election representative appointed by each of the participating members. The board elects officers to serve one yearterms including the Chairman, Vice-Chairman and other officers.

Legal SecuritySecurity is in the form of a pledge of gross revenues derived from payments from AMEA's eleven members under take-and-pay, full-requirement power sales contracts; a sum sufficient rate covenant; cash-funded debt service reserve fund sized at maximum annualdebt service of approximately $2.86 million. Each member has agreed, pursuant to its contract, to pay deficiencies on a pro rata basisif net revenues are insufficient to meet debt service. The security package also includes an interest in all funds established by theauthority including construction funds, operating and maintenance funds, general reserve funds, and debt service reserve funds.

Obligor ProfileAMEA is a joint-power agency providing electricity to its eleven participant members in southeastern and southern Alabama with aweighted average credit rating of A1. AMEA receives 100% of its energy and capacity needs from APC pursuant to a Power SupplyAgreement in excess of the hydro power (approximately 10%) supplied by the Southeastern Power Administration, energy and capacityit receives from Santee Cooper, and energy and capacity it self-supplies from the AMEA-Sylacauga Plant. The power supply contractwith APC expires in 2025, while the power sales contract AMEA has with its members (a take-and-pay, full-requirements contract)expires in 2035. SEPA generally provides up to 9-10% of the authority's energy needs though this can vary as SEPA's energy is solelyreliant on variable hydro flows. The authority has entered into an agreement with Tenaska Power Services Co., which allows AMEA tobuy replacement energy for AMEA's resources.

AMEA also owns a 95MW GE LM6000 peaking facility financed through the 2003A bonds. The facility has generally performed in-linefor peaking facilities with availability factors above 98% since commercial operations in May 2004. There is no LTSA agreement but allinternal work related to the combustion turbines is done either by GE or TransCanada (certified OEM service provider). Balance of plantservicing is mostly through local contractors and AMEA self-performs its O&M.

MethodologyThe principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2012. Please see theRatings Methodologies page on www.moodys.com for a copy of this methodology.



Exhibit 2

Source: Moody's Municipal Financial Ratios



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Analyst Contacts

Charles Berckmann [email protected]

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