Fitch Ratings has affirmed the ratings on the following Municipal Electric Authority of Georgia (MEAG Power or the authority) bonds:
--$1.224 billion Project J bonds, taxable series 2010A (Build America
--$24.17 million Project J bonds, series 2010B (tax-exempt), 'A+';
--$1.012 billion Project M bonds, taxable series 2010A (Build America Bonds), 'A+';
--$16.71 million Project M bonds, series 2010B (tax-exempt), 'A+';
--$383.4 million Project P bonds, taxable series 2010A (Build America Bonds), 'A-';
--$7.09 million Project P bonds, series 2010B (tax-exempt), 'A-';
The Rating Outlook on all bonds is Stable.
The Project J bonds are payable from funds available to the authority including payments made pursuant to a power purchase agreement (PPA) with JEA and Project J power sales contracts with 39 participating members of MEAG Power.
The Project M bonds are payable from funds available to the authority including payments made pursuant to Project M power sales contracts with 29 participating members of MEAG Power.
The Project P bonds are payable from funds available to the authority including payments made pursuant to a PPA with PowerSouth Energy Cooperative and Project P power sales contracts with 39 participating members of MEAG Power.
KEY RATING DRIVERS
RATINGS REFLECT PARTICIPANT CREDIT QUALITY: Ratings on the Project M, J and P bonds reflect the credit quality of the MEAG Power members participating in the Plant Vogtle Nuclear Unit-based projects, as well as the credit quality of two independent power purchasers - JEA (rated 'AA' by Fitch; Project J) and PowerSouth (rated 'A-'; Project P).
MEAG POWER EXHIBITS STRONG FUNDAMENTALS: Projects J, M and P (the Projects) 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 take-or-pay power sales contracts with the participants.
PROJECT P BONDS RATED LOWER: The rating on the Project P bonds reflects the lower rating assigned to PowerSouth's obligations to purchase the entire output of the project for the first 20 years following commercial operation pursuant to a take-or-pay PPA.
PROJECT J BONDS REFLECT MEAG POWER RATING: The rating on the Project J bonds reflects the lower rating assigned to the MEAG Power participants' obligations despite the higher rated JEA obligations.
FULL FAITH AND CREDIT OF MEAG PARTICIPANTS: The city and county-owned electric systems participating in the Projects exhibit solid breadth, diversity and creditworthiness. Participant obligations under the power sales contracts are general obligations of which their full faith and credit are pledged.
NUCLEAR DEVELOPMENTS FACTORED IN: Recent developments in the construction of the Plant Vogtle Units 3 & 4 and the projected effect of the related borrowings on the financial metrics and power supply costs of the authority, JEA and PowerSouth has been factored into the ratings, but bear watching.
SIZABLE ACCUMULATED MEAG TRUST FUNDS: Mitigating the impact of the Vogtle expansion on MEAG Power and its participants is the availability of funds held in the Municipal Competitive Trust (MCT; $705 million at June 30, 2012), which have been accumulated over time and could be used by the participants to reduce current power costs, or redeployed to address future generation costs.
DEBT REQUIREMENTS PRE-FUNDED: MEAG Power's pre-funding strategy, whereby approximately 70% of the capital requirements for the Vogtle expansion has already been funded mitigates funding risk. A conditional commitment from the Department of Energy (DOE) Loan Guarantee program brings total funding and commitments to 121% of expected needs. Total Vogtle project construction funds exceeded $1.66 billion at year end 2011.
WHAT COULD TRIGGER A RATING ACTION
ADVERSE NUCLEAR DEVELOPMENTS: Adverse developments related to Vogtle construction that weaken the authority's current and forecasted metrics could lead to downward pressure on the rating or Outlook.
PURCHASER RATING CHANGE: A change in the rating or Outlook assigned to the PowerSouth obligations would result in a corresponding change to the rating or Outlook on the Project P bonds.
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 309,000 retail customers, representing a total population of 614,000.
VOGTLE PROJECT SHOULD NOT MATERIALLY IMPACT RATES
Fitch does not believe that the Vogtle expansion project will materially impact, or jeopardize the competitiveness of, MEAG Power's wholesale power rates, or rates charged by JEA or PowerSouth. The new Vogtle Units will account for only a small portion of each utility's total power supply. The project's effect on MEAG Power rates will be further mitigated by funds available to the participants through the MCT, as well as the PPAs.
The continuing disputes and litigation between the Vogtle project co-owners and the construction consortium, as well as widely anticipated delays in project completion, are growing Fitch concerns but do not yet appear to be materially adverse. Fitch expects greater clarity on projected costs and timing to emerge in 2013, and to review any new developments as appropriate.
VOGTLE INTEREST STRUCTURED AS THREE PROJECTS
MEAG Power has subscribed to an ownership interest of 22.7% in the Vogtle expansion project - consistent with its participation in Units 1 and 2 - or approximately 500.3 megawatts (MW) of capacity. However, the capacity attributable to MEAG Power's ownership interest is initially in excess of its participants' needs. As a result, the authority has structured its ownership interest in the new Vogtle units as three separate projects - Projects J (206 MW), M (169 MW) and P (125 MW) - to allow for a portion of the initial capacity to be purchased by entities other than the MEAG Power participants.
Agreements are currently in place with JEA and PowerSouth, wherein each of the utilities has agreed to purchase all of the output from, respectively, Projects J and P, for the first 20 years of commercial operation pursuant to take-or-pay PPAs. Upon the expiration of the PPAs the output of each project will be purchased by the designated MEAG Power participants.
All of the capacity allocated to Project M will be purchased by 29 participating members of MEAG Power.
STRONG TAKE-OR-PAY CONTRACTS AND AGREEMENTS
All of the participating members of MEAG Power have entered into power supply contracts related to the Projects in which they participate. The Project power sales contracts extend until June 15, 2058 and have been validated by the Superior Court of Fulton County, GA. They cannot be challenged in any subsequent proceeding. Each participant's obligation under the power sales contracts is also supported by a general obligation pledge, which would compel the participant to assess and collect an annual tax, if necessary, to meet its obligation to MEAG Power under the contract.
The power purchase agreements with JEA and PowerSouth unconditionally obligate the purchasers to take the entire output and to pay all of the costs related to the construction and operation of their respective projects, including debt service, for the initial 20 years of commercial operation.
Each of the Project power sales contracts contains an explicit 'step-up' provision that would require each participant to increase its obligation share up to 130% of its original share if an event of default has occurred with respect to other MEAG Power member-participants. The contracts further obligate the MEAG Power member-participants to pay certain annual costs during the term of the PPAs to the extent not paid by JEA or PowerSouth. However, the MEAG Power members are under no obligation to pay debt service related to the Project J or P bonds during this period.
For additional information on MEAG Power please see Fitch's release dated Oct. 12, 2012, available at www.fitchratings.com.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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