Approximately $84.9 million of rated bonds
New York, November 06, 2020 -- Moody's Investors Service, ("Moody's"), has assigned an A1 rating to the Municipal Electric Authority of Georgia's (MEAG) planned issuance of approximately $84.9 million of Combined Cycle Project Revenue Bonds, Series 2020A. The rating outlook is stable.
The bonds are expected to be issued during November 2020; the amount of bonds issued could change subject to market conditions. The Series 2020A bonds will pari passu with about $107 million of MEAG Combined Cycle Revenue bonds outstanding at October 30, 2020, also rated A1.
RATINGS RATIONALE
MEAG Combined Cycle Project's (CC Project) credit profile reflects the estimated A2 weighted average credit quality of the 37 project participants, strong financial liquidity primarily through MEAG's Municipal Competitive Trust (MCT), diversification of the CC Project participants, and sound debt management at MEAG Power. The CC Project's credit quality also benefits from the strong security for the bonds provided through court validated take-or-pay (TOP) contracts that MEAG has with its project participants and additional security provided by the general obligation (GO) full faith and credit pledge of the participants. Additional credit strength stems from the CC project's competitive rates versus peers in Georgia and the sound operating record of its owned 503 megawatt (MW) Wansley natural gas-fired and steam driven combined cycle power plant.
These positive credit attributes help balance the CC Project's credit challenges, including moderate exposure to carbon transition risk owing to natural gas-fired generation exposure and the negative credit implications from MEAG's participation in the delayed and over budget Vogtle Units 3&4 new nuclear construction project.
CC Project's leverage continues to decline, with an adjusted debt ratio of 49.4% in fiscal 2019. The fixed charge coverage ratio in FY 2019 was at 1.0x, when considering the timing differences, as the project continues to adequately set rates, collect the necessary revenue and make scheduled debt service payments. The timing differences are attributable to the fact that all MEAG projects collect a large portion of their customer payments after their fiscal year end of December 31st but before their semi-annual debt service payment dates on May 1st and November 1st.
Days cash on hand decreased slightly to 137 days in fiscal 2019 from 151 days in fiscal 2018 as a result of the increased operating expenses from greater plant usage during the year. The project benefits from access to MEAG's MCT which had a cash and investment balance of approximately $630 million as of August 30, 2020, of which a substantial portion is available to mitigate any potential customer rate increases associated with future capital expenditures. This fund was applied to reduce customer rates as recently as fiscal 2018. CC Project shares a $62.5 million revolving line of credit with MEAG - Project One (issuer rated: A2 stable) and MEAG - General Resolution Project (A1 stable) of which, as of fiscal year end 2019, $38.5 million was available. This revolving line of credit was recently extended two years with a new expiration date of April 2022.
Overall, MEAG has seen a 4% decline in energy sales during 2020 owing to the Coronavirus outbreak. In response, MEAG has established a Covid-19 Gap Funding Agreement, non-recourse to MEAG which provides liquidity to participants to fund revenue shortfalls brought upon by Covid-19. No participants have signed up to access the facility so far and all participants have continued to pay their bills on time, indicating the credit strength of the participants and the relatively modest impact of Covid-19 to each participant.
Although the financing for MEAG - Combined Cycle revenue bonds is separate from the financing for MEAG's investment in the construction of Vogtle 3&4, several of the CC Project's participants are also participants in MEAG's nuclear project. Vogtle 3&4 construction continues to progress, with 88.1% construction completed as of August 2020 and cold hydro testing at Unit 3, a key milestone, recently completed, albeit slightly delayed from the prior planned July date. In June, Georgia Power Company (GPC: Baa1 stable) announced changes to the timing of certain activities at Vogtle 3&4. The shift in planned activities was primarily the result of continued challenges in electrical construction productivity, a previously implemented workforce reduction in April related to the coronavirus pandemic and adjustments to work practices at the project site amid the coronavirus pandemic.
The project does however continue to achieve key milestones indicated by the recent announcement of the completion of the structural integrity test and integrated leak rate test for the Unit 3 containment vessel. GPC and its affiliate, Southern Nuclear Operating Company, who manages project construction, continue to maintain target in service dates of November 2021 for Unit 3 and November 2022 for Unit 4.
RATING OUTLOOK
The stable outlook considers the high likelihood for stability in the weighted average credit quality of the participants and maintaining the CC Project's historically competitive wholesale power rates. The outlook also incorporates the benefits of a declining debt service schedule and a manageable capital spending program.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
- If the CC Project participants' weighted average credit quality improves
- Completing the Vogtle 3 & 4 construction without significant new schedule delays or cost overruns
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- If there is a decline in the weighted average credit quality for the CC Project participants
- If major regulatory changes or market conditions materially increase the CC Project's wholesale power supply costs
- Any attempt by a participant to not honor the TOP contract
LEGAL SECURITY
The bonds are secured by a pledge of the Trust Estate which includes bond proceeds and the revenues derived from 50-year TOP power supply agreements between MEAG - Combined Cycle and its 37 participants. The participants' payment is an O&M expense of each respective municipal utility electric system. If the payment is not made, the participant is required to include in its general revenue or appropriations measure or annual tax levy amounts sufficient to make payments.
The bond security for MEAG revenue bonds includes the unlimited general obligation tax pledge of the individual municipalities. The MEAG Act provides that MEAG can compel the participant's fiscal officers to appropriate amounts necessary to pay all amounts owned under the power sales contracts. This type of security is common in Georgia and there are several past cases where Georgia courts have confirmed the legal enforceability of these provisions. The CC Project has one of the strongest bond security provisions amongst its peers.
The payments are required to be made whether or not the project is operating, operable or its output is suspended, interrupted, interfered with, reduced, curtailed or terminated in whole or in part. MEAG had the bond resolution validated in state court proceedings and they have covenanted that they will, at all times, charge and collect rates, fees, and other charges at least sufficient to cover operating expenses, scheduled debt service and amounts required for reserves for that calendar year.
The CC Project's senior revenue bonds have a fully funded maximum annual debt service reserve.
USE OF PROCEEDS
The proceeds from the issuance of the Combined Cycle Project Revenue Bonds, Series 2020A will be used in part to (a) refund approximately $82.6 million Combined Cycle Series 2010A and $14.4 million of credit facilities (b) fund a portion of the 2020A bonds' debt service reserve requirements, and(c) pay a portion of the costs of issuance. MEAG anticipates net present value savings of around $13.8 million over the life of the debt, through the current refunding.
PROFILE
MEAG is the all-requirements wholesale power provider to 48 municipalities and one county located throughout the State of Georgia. The participants subscribe for a capacity entitlement on a project-by-project basis. MEAG has ownership interests in nine jointly-owned coal, nuclear and oil-fueled generation facilities; owns a natural gas-fired generation facility and is a 22.7% owner in Vogtle 3&4 under construction near Augusta, Georgia.
METHODOLOGY
The principal methodology used in this rating was US Municipal Joint Action Agencies Methodology published in August 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1207102. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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Jennifer Chang
Lead Analyst
Project Finance
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Angelo Sabatelle
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