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MOODY'S ASSIGNS A3 RATING TO MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY'S $170 MILLION POWER SUPPLY PROJECT REVENUE BONDS, SERIES 2010; OUTLOOK IS STABLE

24 Sep 2010

UPGRADES TO A3 FROM Baa1 THE RATING ON PROJECTS 1, 3, 4, 6 AND AFFIRMS A3 RATING ON PROJECT 5; FIVE PROJECTS TOTAL $444 MILLION OF OUTSTANDING DEBT

Electric Utilities
MA

Moody's Rating

ISSUE

RATING

Nuclear Mix No. 1 Issue, Series 2010

A3

  Sale Amount

$11,350,000

  Expected Sale Date

10/15/10

  Rating Description

Revenue

 

Nuclear Project No. 3 Issue, Series 2010

A3

  Sale Amount

$62,980,000

  Expected Sale Date

10/15/10

  Rating Description

Revenue

 

Nuclear Project No. 4 Issue, Series 2010

A3

  Sale Amount

$35,320,000

  Expected Sale Date

10/15/10

  Rating Description

Revenue

 

Nuclear Project No. 5 Issue, Series 2010

A3

  Sale Amount

$9,030,000

  Expected Sale Date

10/15/10

  Rating Description

Revenue

 

Nuclear Project No. 6 Issue, Series 2010

A3

  Sale Amount

$52,100,000

  Expected Sale Date

10/15/10

  Rating Description

Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Sep 24, 2010 -- Moody's Investors Service assigns an A3 rating to Massachusetts Municipal Wholesale Electric Company's (MMWEC) $170 million Power Supply Project Revenue Bonds, Series 2010, consisting of $11.35 million Nuclear Mix No. 1 Issue, Series 2010, $62.98 million Nuclear Project No. 3 Issue, Series 2010, $35.32 million Nuclear Project No. 4 Issue, Series 2010, $9.03 million Nuclear Project No. 5 Issue, Series 2010, $52.1 million Nuclear Project No. 6 Issue, Series 2010. Concurrently, Moody's has upgraded to A3 from Baa1 the outstanding long-term rating on four MMWEC project based bond ratings, consisting of Nuclear Mix No. 1, Nuclear Project No. 3, Nuclear Project No. 4, and Nuclear Project No. 6. The A3 rating on Nuclear Project No. 5 has also been affirmed. The outlook for all five A3 ratings is stable affecting approximately $444 million of post-refunding debt outstanding. The current offering will refinance the outstanding Series One bonds, currently in Auction Rate mode, with long-term fixed rate bonds that do not extend the original bond maturity.

RATINGS RATIONALE

The rating upgrades are primarily related to the increased long-term value and competitiveness of the nuclear power relative to fossil fuel generation; the relatively stable asset performance that is expected to improve given recent reorganizations at Millstone Nuclear Station and upgrades at Seabrook Nuclear Station; and the lower debt service costs post 2010 from the 2001 bond refunding that is expected to lower each projects' total cost of power.

The A3 project ratings also reflect the project participants' Aa3 weighted average credit quality that heavily factors the strong relationship between the municipal light and power department and the municipal general government of towns in Massachusetts; the strength of the project participant take-or-pay contracts that have been upheld in court; the competitive retail rates of the project participants, which reduces pressure to find alternative power sources and/or challenge the project take-or-pay contracts; the satisfactory operating performance of the nuclear assets; and the moderated debt ratio due to rapid debt retirement that has resulted in a healthy asset to debt value as the nuclear asset life remaining extends well beyond the debt maturity. The ratings also incorporate MMWEC's relatively stable financial metrics, including sound available reserves and narrow essentially sum sufficient debt service coverage on a net revenue per project basis, and relatively stable cash flows due to monthly billing for cost recovery. Finally, given MMWEC's active role in managing many of the participant's power supply needs as members of MMWEC, the effectiveness of MMWEC's enterprise risk management program with regards to energy price hedging, contract negotiation, and the ongoing monitoring of member supply needs also remains a key rating consideration.

Outlook:

The stable outlook reflects our belief the general credit of the participants will remain stable, MMWEC management will continue to maintain healthy liquidity and effectively manage the power needs of its members, and the projects' value relative to other power providers will continue to increase.

What Could Change the Rating-UP

The rating could be upgraded should there be improvements in the projects' performance, each project's total cost of power, and the credit quality of the participants.

What Could Change the Rating- DOWN

The rating could be downgraded if an unexpected and extended forced outage or substantial additional capital costs lead to significant cost pressure resulting in non-competitive power rates from the projects and/or if the credit quality of the participants deteriorates.

SECURITY PROVISIONS: Each project is separately secured by the pledge from take-or-pay obligations contained in the power sales agreements with MMWEC participants. There is no cross collateralization among the projects.

The legal provisions of the six projects are essentially the same with no additional bonds test; a rate covenant that allows for the inclusion of available funds to satisfy the 1.10 times debt service requirement; and a debt service reserve requirement sized at maximum annual interest, except for Project No. 6 that has a higher debt service reserve level of $30.5 million, which is 90% of the project's maximum annual debt service. Participants are billed at an amount equal to 1.10 times annual debt service, with the additional 10% deposited monthly in the Reserve and Contingency Fund for each project. Monthly billing with an annual true-up within the first quarter of the succeeding fiscal year stabilizes each project's cash flows. MMWEC's Board determines the appropriate reserve requirement for each project's Reserve and Contingency Fund, which have historically been maintained at healthy levels and combined with capital reserve billings fund ongoing capital expenditures

Each project contains a 25% step-up provision whereby each participant remains liable for up to 25% of its original share of the project's costs to cover any default by other project participants. Each project has not utilized this provision except for Project No. 6, which only has a minimal 1.8% of step-up remaining since six Vermont participants successfully challenged their participant contracts and stopped paying their obligations. The lack of this available step-up prompted the larger debt service reserve for Project No. 6.

STRENGTHS:

*MMWEC participants have average weighted credit quality in the Aa3 range on a global scale

*Most MMWEC participant retail rates are competitive compared to other regional electricity providers

*MMWEC has court-tested take-or-pay power-sales contracts with the project participants where the Massachusetts State Supreme Judicial Court ruled in MMWEC v. Town of Danvers, MA that the participant agreements are unconditional and not subject to termination. The Rhode Island Supreme Court also upheld the validity of the power-sales contract (Project No. 6 has one RI participant)

*Seabrook Nuclear Station has had a solid operating record and Millstone Nuclear Station 3 has recently taken significant steps in staffing changes that are expected to improve operations moving forward. Projected capital needs at the nuclear facilities are modest over the next five years, barring any significant issues like a prolonged outage.

*Carbon regulatory environment increases the value of the nuclear power

*Strong cost recovery mechanisms allow for monthly billing to participants, stabilizing project cash flows

*MMWEC 2001 refunding savings lowers debt costs starting in 2010 lowering the total cost of power

*Removal of variable rate debt exposure by fixing out auction rate securities that accounted for 38% of outstanding debt as of mid-2010.

CHALLENGES:

*Ownership of nuclear generation has attendant risks such as long-term decommissioning cost uncertainty

*Project No. 5 and Project No. 3 have significant participant concentration and all five projects have a notable participant concentration with each project's top 10 participants accounting for nearly 80% of each project

*Several participants have large commercial customers who could be the first to pressure for competitive choice of power supplier

*MMWEC intends to obtain about 20% of capacity needs from wholesale market purchases and will address capacity needs through a new 280 MW combined-cycle generating unit at Stony Brook in Ludlow.

*Weak legals that include a low debt service reserve requirement (unusual for JPAs), a 1.1x rate covenant that allows for rolling coverage, and no additional bonds test. The low debt service reserve is of concern given historical challenges to the participant contracts.

*Should Massachusetts municipal utilities opt into retail competition, municipal electric utilities' stranded-cost-recovery charges could be established by local ordinance, limiting their flexibility. As a result, political and legal challenges could occur in a worst-case situation. We note that MMWEC and its members have available cash reserves to reduce some of the cost exposure.

*Millstone Unit 3 had an outage in 2010, while Seabrook 1 has operated at 100% capacity year to date. Both units have scheduled refueling outages in 2011, which will lower output and raise the cost of power.

The principal methodology used in rating Massachusetts Municipal Wholesale Electric Company was U.S. Municipal Joint Power Agencies rating methodology published in September 2006. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

John Medina
Analyst
Public Finance Group
Moody's Investors Service

Dan Aschenbach
Backup Analyst
Public Finance Group
Moody's Investors Service

Chee Mee Hu
Director
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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USA

MOODY'S ASSIGNS A3 RATING TO MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY'S $170 MILLION POWER SUPPLY PROJECT REVENUE BONDS, SERIES 2010; OUTLOOK IS STABLE
No Related Data.
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