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 December 1, 2015 - 3:36 PM EST
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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 2015A.

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.

SECURITY

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 participants.

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 participating cities.

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 expansion.

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995727

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR 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 WEBSITE.

Fitch Ratings, Inc.
Primary Analyst
Dennis Pidherny, +1-212-908-0738
Managing Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alan Spen, +1-212-908-0738
Senior Director
or
Committee Chairperson
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations
Sandro Scenga, New York
+1-212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (December 1, 2015 - 3:36 PM EST)

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