Fitch Rates MEAG Power Project One and General Resolution Bonds 'A+'; Outlook Negative
Fitch Ratings has assigned an 'A+' rating to the following Municipal
Electric Authority of Georgia (MEAG Power) bonds:
--$30 million project one power revenue, series HH;
--$165 million project one subordinate bonds, series 2015A;
--$5 million general resolution projects subordinated bonds, series
The bonds are expected to sell via a negotiated sale during the week of
Dec. 7, 2015. Proceeds of each series will be used to finance certain
capital improvements, refinance existing debt, retire outstanding
commercial paper, fund debt service reserves and pay costs of issuance.
The Rating Outlook on the bonds is Negative.
The bonds are secured by a pledge of revenues received by MEAG Power
attributable to each individual project (Project One and the General
Resolution Projects), including payments pursuant to power sales
contracts with respective project participants.
KEY RATING DRIVERS
STRONG POWER AGENCY FUNDAMENTALS: Each of MEAG Power's individual
projects and ratings is supported by the authority's strong credit
fundamentals, including a diverse mix of generating resources, sound
financial performance, competitive wholesale and retail rates, and
strong court-validated power sales contracts with the project
OUTLOOK NEGATIVE ON NUCLEAR CONCERNS: The Negative Outlook reflects
Fitch's concern that additional construction delays and/or cost overruns
related to the Vogtle nuclear expansion project could result in future
rate pressures, which ultimately lead to erosion in financial metrics,
the competitiveness of MEAG's power supply and the credit quality of the
RATINGS UNIFORM DESPITE OBLIGATIONS: The 49 city- and county-owned
electric systems that participate in MEAG Power's various projects
exhibit solid diversity and creditworthiness. Fitch maintains uniform
ratings on the MEAG Power projects despite entitlement shares and
varying payment provisions upon participant default reflecting
consolidated billing procedures and required reserves.
SIZABLE ACCUMULATED TRUST FUNDS: The availability of funds held in the
Municipal Competitive Trust (MCT, $644.3 million at April 30, 2015)
mitigates the impact of the planned expenditures on the authority and
its participants. The funds have been accumulated over time and may be
used by the participants to reduce current power costs, or redeployed to
address future generation costs, including those related to the Vogtle
DEBT REQUIREMENTS PRE-FUNDED: MEAG Power's strategy of pre-funding
capital requirements for the Vogtle expansion further mitigates funding
risk. Proceeds from previously issued debt, together with committed
funding from the Department of Energy (DOE) loan guarantee program,
should be sufficient to finance the currently expected remaining
construction costs. An additional $285 million of funding is also
available for contingencies.
ADVERSE NUCLEAR DEVELOPMENTS: Further adverse developments related to
the development of the Vogtle Nuclear Units 3 and 4 including sizable
cost overruns and extensive delays that result in rate pressures and
ultimately lead to erosion in financial metrics, the competitiveness of
Municipal Electric Authority of Georgia's power supply and the credit
quality of the participating cities could result in a downgrade.
Evidence that the Vogtle expansion project is likely to be completed
within the current time and cost parameters could stabilize the Outlook.
MULTI-PROJECT JOINT-ACTION AGENCY
MEAG Power is a joint-action agency created to provide bulk electric
power to municipally-owned electric distribution systems located
throughout the state of Georgia. The authority effectively supplies the
full energy requirements of 49 systems via participation in a series of
power supply projects. The participating systems, in turn, provide
electric service to approximately 308,000 retail customers, representing
a total population of 614,000.
DIVERSE POWER SUPPLY RESOURCES
MEAG Power currently has ownership interests in 2,069 MW of generating
capacity, including the natural-gas fired combined cycle project (503
MW). The majority of the authority's capacity is co-owned with Georgia
Power Company, Oglethorpe Power Corporation, and the City of Dalton;
however, the Combined Cycle Project is owned exclusively by MEAG Power.
The portfolio of resources available to serve participant requirements
during 2014, which also included 431 MW of Southeastern Electric Power
Authority (SEPA) hydroelectric capacity and purchased peaking capacity,
was comfortably above peak demand (1,926 MW). For 2014, the fuel mix for
delivered energy exhibited solid diversity: 48% nuclear, 26% coal, 15%
natural gas, 7% hydroelectric and 4% purchased power.
NUCLEAR CHALLENGES PERSIST
MEAG Power is participating in the development of the Plant Vogtle
nuclear unit 3 & 4 expansion project. The Negative Outlook is rooted in
the increasing uncertainty related to the Vogtle expansion project,
particularly the final cost and associated in-service date. Although the
project has been subject to challenges from its inception, Fitch's
ratings have considered the size and scope of the project and reflected
expectations that reasonable cost overruns and delays were likely, but
could be managed at the prevailing rating level.
The latest challenges, however, have increased the risk that further
cost overruns and/or delays could eventually result in financial
pressures that are no longer consistent with the current rating category.
Fitch views the recently proposed settlement agreement to resolve
disputes between the Vogtle co-owners (including MEAG) and the
contractor as positive, but broader evidence that the Vogtle expansion
project is likely to be completed within the current time and cost
parameters will be necessary to stabilize the Outlook.
The proposed agreement would (i) resolve all outstanding claims between
the co-owners and the contractor, (ii) restrict the contractor's ability
to seek further increases in the contract price, (iii) enhance dispute
resolution procedures, (iv) revise the guaranteed completion dates to
June 30, 2019 for unit 3 and June 30, 2020 for unit 4, (v) clarify the
terms for delay-related liquidated damages and (vi) require payments
from the co-owners related to earlier contract disputes.
SOUND FINANCIAL POSITION AND STRONG LIQUIDITY
MEAG Power's Fitch calculated debt service coverage (DSC) was 0.84x for
fiscal 2014. While Fitch's debt service calculation excludes MCT
credits, Fitch acknowledges the application of the MCT credits is
consistent with the long-term plan that was developed with the funding
of the MCT. Fitch expects the application of MCT credits to continue.
Including the MCT credits, DSC improves to 1.05x, which is more
consistent with comparable wholesale power suppliers, but below the
median for the Fitch rating category.
Bolstering the authority's financial position and mitigating Fitch's
concerns are cash and investments on hand exceeding $2.7 billion at
year-end 2014, a large portion of which is available to ease the capital
funding requirements of the participants going forward.
For further information, please refer to Fitch's full rating report for
MEAG Power dated Aug. 5, 2014 and press release dated Aug. 10, 2015.
Date of Relevant Rating Committee: Aug. 10, 2015
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
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RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
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