Fitch Rates MEAG Power, GA's Project One & General Resolution Bonds 'A '; Outlook Negative
--\\$20 million project one power revenue, series HH;
--\\$276.7 million project one subordinated bonds, series 2016A;
--\\$5 million general resolution projects senior bonds, series 2016A;
--\\$78.5 million general resolution projects subordinated bonds, series 2016A.
The bonds are expected to sell via a negotiated sale during the week of May 2, 2016. Proceeds will be used to repay outstanding bond anticipation notes, refinance existing debt and finance certain capital improvements.
In addition, Fitch affirms the ratings on the following MEAG power bonds:
--\\$416.4 million project one senior bonds at 'A+';
--\\$1,496.9 million project one subordinate bonds at 'A+';
--\\$205.8 million general resolution projects senior bonds at 'A+';
--\\$396.86 million general resolution projects subordinated bonds 'A+'.
--\\$1,433.6 million outstanding project J bonds at 'A+';
--\\$459.7 million outstanding project P bonds at 'A-';
--\\$1,028.9 million outstanding project M bonds at 'A+';
--\\$183.8 million combined cycle project bonds at 'A+'.
The Rating Outlook on the project P bonds is Stable. The Outlook on all other bonds is Negative.
The project one, the general resolution projects, combined cycle project, and project M bonds are secured by a pledge of revenues received by MEAG Power attributable to each individual project, including payments pursuant to power sales contracts with respective project participants. Payment on subordinate project one and general resolution projects bonds is subject to the prior pledge of revenues to holders of the senior bonds of each project.
The project J bonds are secured by the net revenues of MEAG Power's project J, including payments received under a power purchase agreement with JEA, FL (JEA; 'AA'/Stable Outlook) and power sales contracts with the participating cities.
The project P bonds are secured by the net revenues of MEAG Power's project P, including payments received under a PPA with PowerSouth Energy Cooperative (PowerSouth, 'A-'/Stable Outlook) and power sales contracts with the participating cities.
KEY RATING DRIVERS
STRONG POWER AGENCY FUNDAMENTALS: Each of MEAG Power's individual projects and related ratings are supported by the authority's strong 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.
NUCLEAR CONSTRUCTION CHALLENGES: The Negative Outlook for certain MEAG Power bonds reflects Fitch's concern that additional construction delays and/or cost overruns related to the Vogtle nuclear project expansion could result in future rate pressures and reduced financial and operating flexibility no longer consistent with the current rating. Challenges to date have already driven MEAG Power's share of project costs from \\$3.5 billion to \\$4.4 billion and in-service dates from 2016/2017 to 2019/2020.
NUCLEAR CONTRACTOR CONCERNS: Although Fitch views the recent consolidation of the Vogtle contractors (Westinghouse Electric Company LLC and Stone & Webster, Inc.), as well as a settlement between the contractors and co-owners positively, increasing concerns over the weakening credit profile of Toshiba Corporation (not rated by Fitch) are also driving the continuance of the Negative Outlook. Toshiba is the majority owner of Westinghouse and has guaranteed certain Westinghouse obligations, while letters of credit mitigate some of the risk.
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, \\$627.2 million at Dec. 31, 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 deployed to address future generation costs, including those related to the Vogtle expansion.
LOW FUNDING RISK: MEAG Power's pre-funding strategy and access to the Department of Energy (DOE) guaranteed loan program largely mitigate construction-related funding risk.
VOGTLE PROJECT RATINGS: The ratings on the project J and P bonds reflect the credit quality of the participating MEAG Power participants, as well as obligations of JEA and PowerSouth, respectively, to pay debt service on those respective bonds for the first 20 years. The Rating Outlook on the project P bonds is Stable, as the lower rating captures additional risk.
ADVERSE NUCLEAR DEVELOPMENTS: Further adverse developments related to the development of the Vogtle Nuclear Units 3 and 4, including sizable cost overruns, extensive delays or contractor insolvency, that result in rate pressures and ultimately lead to erosion in MEAG power's financial metrics, the competitiveness of its power supply and the credit quality of the participating municipal systems could result in a rating downgrade.
POTENTIAL FOR STABLE OUTLOOK: Evidence that the Vogtle expansion project is likely to be completed within the current time and cost parameters and that the credit quality of the Vogtle contractor and its guarantor has improved could result in the return to a Stable 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, which also includes 431 MW of Southeastern Electric Power Authority (SEPA) hydroelectric capacity and purchased peaking capacity, is comfortably above peak demand. For 2014, the fuel mix for delivered energy exhibited solid diversity: 48% nuclear, 26% coal, 15% natural gas, 7% hydroelectric and 4% purchased power.
VOGTLE NUCLEAR PROJECT
MEAG Power is participating in the Vogtle nuclear expansion project along with the current co-owners. Units No. 3 and No. 4 are being developed pursuant to an engineering, procurement and construction (EPC) agreement with Westinghouse and Stone & Webster, using the Westinghouse AP1000 technology. On Dec. 31, 2015, Westinghouse acquired Stone & Webster, consolidating the related responsibilities and liabilities.
The Vogtle project has been subject to extensive delays and cost overruns, which is a concern for Fitch and the primary factor driving MEAG Power's Negative Outlook. Originally expected to be completed June 2016 and June 2017, Units No. 3 and No. 4 are now scheduled to enter commercial operation in June 2019 and June 2020, respectively, largely as a result of challenges related to design approval, issuance of the construction and operating license, module fabrication and general construction activities. The total budget for MEAG Power's 22.7% share of the units, including capital costs, allowance for funds used during construction and some contingency is now \\$4.4 billion, up from initial estimates of \\$3.5 billion.
Fitch views the acquisition of Stone & Webster and the recent settlement agreement between the co-owners and Westinghouse as positive for MEAG Power. Importantly, the agreement effectively resolves all outstanding claims between the co-owners and the contractor and restricts the contractor's ability to seek further increases in the contract price. Moreover, with Westinghouse assuming the role of the primary contractor, concerns regarding inter-contractor disputes, which have plagued the project, should lessen.
However, Fitch has become increasingly concerned with the weakening credit profile of Toshiba, which is the majority owner of Westinghouse and has guaranteed certain Westinghouse obligations. Toshiba's credit rating has been lowered to well below investment grade by the other two rating agencies and prolonged financial weakness or insolvency could compromise project development and/or Toshiba's ability to perform under its guarantee. Given the amended terms of the EPC contract, and the increased responsibility of the contractors to bear cost overruns, performance under the guarantee could become increasingly important to the co-owners.
Westinghouse has provided letters of credit from two banks totaling \\$920 million to the co-owners in support of its obligations, as required under the EPC contract, partially mitigating Fitch's concern.
SOUND FINANCIAL POSITION AND STRONG LIQUIDITY
MEAG Power's Fitch calculated debt service coverage (DSC) was 0.84x for fiscal 2014. Fitch's debt service calculation excludes MCT credits; however, 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 these 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 \\$2.5 billion at year-end 2014, a large portion of which is available to ease the capital funding requirements of the participants going forward.
Audited results for fiscal 2015 are not yet publicly available, but are expected to show high leverage and weak debt service coverage, offset by very robust liquidity.
For further information, please refer to Fitch's full rating report for MEAG Power dated Aug. 5, 2014.