Kansas Power Pool -- Moody's assigns Baa1 rating to Kansas Power Pool's (KS) $4.71 million Electric Utility Revenue Bonds 2012 Series B and C; Outlook is stable

New York, November 19, 2012 -- Moody's Rating

Issue: Electric Utility Revenue Bonds Series B, 2012 (Rice Neshap Project); Rating: Baa1; Sale Amount: $3,250,000; Expected Sale Date: 12-11-2012; Rating Description: Revenue: Other

Issue: Taxable Electric Utility Revenue Bonds Series C, 2012 (Erie and Luray Projects); Rating: Baa1; Sale Amount: $1,460,000; Expected Sale Date: 12-11-2012; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Baa1 rating to the Kansas Power Pool's (KS) $4.71 million Electric Utility Revenue Bonds, consisting of $3.25 million Electric Utility Revenue Bonds Series B, 2012 (Rice Neshap Project) and $1.46 million Taxable Electric Utility Revenue Bonds Series C, 2012 (Erie and Luray Projects). Concurrently, Moody's has affirmed the Baa1 rating on about $30 million of outstanding parity rated debt. The outlook is stable.

RATING RATIONALE:

The Baa1 rating reflects the A3 weighted average credit quality of the 21 relatively small and rural Kansas Power Pool (KPP) participants, with several having notable industrial manufacturing customer concentration. The rating incorporates KPP's limited operating history as a full requirements joint action agency and its historically competitive power costs that have been on par with other regional wholesale utilities as KPP has historically sourced the majority of its energy from long-term power purchase agreements, market purchases, and member owned generation assets. Thus, KPP has exposure to contract renewal risk as its power purchase agreements expire prior to bond maturity. In addition, KPP's minority ownership stake in the combined cycle gas fired Dogwood Generating Facility diversifies the generation portfolio, but exposes KPP to the credit risk of the majority merchant owner that has highly speculative grade characteristics and KPP could be indirectly affected by the majority owner's credit deterioration. The credit quality of future owners of the facility is also uncertain given the contractual structure that allows for additional asset sales to owners of similar credit quality.

The rating finally considers KPP's historically break even financial margins, lack of significant assets or leverage, and minimally maintained internal liquidity. KPP's liquidity has notably improved in 2012 and is expected to be at about 50 days cash on hand by year-end versus the 35 originally anticipated. Moody's does not include KPP's current bank line of credit in our liquidity assessment given weak contract terms with an unrated bank. Long-term projected net revenue debt service coverage is expected to average just above 1.20 times after the debt begins to amortize.

STRENGTHS

o Sound legal structure including Participant Power Purchase Contracts that extend past the final maturity of the bonds and participants cannot terminate the contracts while any debt is outstanding

o 21 Participant electric systems have a weighted average credit quality of A3 and serve a total population base of about 55,000 located in central and eastern Kansas

o Debt service costs are collected one year in advance of actual debt service payments, providing significant lead time to adjust rates to respond to any unexpected shortfalls

o Monthly billing and reconciliations ensures steady and adequate cash flows from members and KPP retains the right to shut off power to a members that are late on their payments

o KPP maintains 10 year financial and operating projections, a requirement for SPP transmission owners

o KPP has secured transmission and congestion rights for all of its members in preparation for the SPP's change to an integrated marketplace in March 2014

CHALLENGES:

o Limited operating history as a joint action agency and power pool

o All of KPP's members are unrated by Moody's and serve smaller communities with below average socioeconomic indicators and modestly declining populations over the last couple of decades as residents migrate to urban centers

o Narrow liquidity profile as Moody's does not consider KPP's current bank line of credit as available liquidity given contractual weaknesses in the bank agreement

o KPP has not owned generation assets in the past and has not had to maintain a stronger liquidity position and financial margins to address the challenges of generation ownership at the KPP level versus the municipality level

o Credit quality of majority owner of Dogwood gas plant has highly speculative grade characteristics and may expose KPP and the other municipal minority owners to increased costs should the majority owner be unable to cover its share of costs

o Managing a 15% decrease in total pool capacity in the next two years due to the receipt of termination notices from 12 of the current 34 electric service receiving members, none of these members are Participants in this financing

o Wholesale rates are technically under the jurisdiction of the Kansas Corporate Commission (KCC), who regulates the rates of investor owned utilities, but KPP has not been asked to appear before KCC for a rate case to date

o KPP's property tax abatement agreement with Cass County expires in 2026, when KPP will become responsible for 7% of the assessed property taxes on the facility

OUTLOOK

The stable outlook reflects the expectation that KPP will meet its projected financial metric targets, in compliance with its financial covenants, while ensuring full recovery of projected costs under the participant's full requirement's take-and-pay Power Purchase Contracts.

What Could Change the Rating - UP:

The rating could face upward pressure if the credit quality of the majority owner of the Dogwood facility improves, likely achieved through the sale of ownership shares to other credit worthy utility systems, and KPP's financial metrics exceed current projections on a sustained basis with debt service coverage consistently exceeding 1.30 times and available liquidity in excess of at least 90 days cash on hand. The rating could also improve if the average credit quality of the all requirements participants notably improves.

What Could Change the Rating - DOWN:

The rating could be downgraded if the majority merchant owner is unable to meet its share of the Dogwood facility costs, resulting in additional payments from the other owners, and/or if the ownership profile of the Dogwood plant is not further diversified and improved with creditworthy entities. The rating could also face downward pressure if KPP's wholesale rates become subject to regulation by the state, the credit quality of the KPP all requirements members declines, and/or if KPP does not meet its projected financial metrics with debt service coverage in excess of 1.2 times annually and available liquidity growing to at least 60 days in the near term.

RATING METHODOLOGY

The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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John MedinaAsst Vice President - Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Chee Mee Hu MD - Project Finance Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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