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Rating Action:

Moody's downgrades Municipal Energy Agency of Mississippi's outstanding Plum Point project revenue bonds to Baa2; revises outlook to stable

15 May 2020

New York, May 15, 2020 -- Moody's Investors Service ("Moody's") has downgraded the $82.9 million power supply project revenue bonds (Plum Point project) rating of Municipal Energy Agency of Mississippi (MEAM) to Baa2 from Baa1. The outlook was revised to stable from negative.

RATING RATIONALE

The downgrade reflects continued limited economic strength within MEAM Plum Point participants' service area, which translates into members' weighted average credit quality towards to low-Baa rating category. Socioeconomic indicators of members' municipalities remain weak, which we deem will continue to come under pressure going forward. The members' economy is also highly reliant on manufacturing industries, which make their service territory substantially susceptible to economic downturns that may follow over the next intermediate term.

The Baa2 rating is mostly supported by the credit profile of Plum Point's three largest participants, Greenwood Utilities Commission (unrated), Canton Municipal Utilities Commission (unrated) and Light & Water Commission of the City of Kosciusko (unrated) that jointly account for 84.3% of the overall members' pool, which we view as being stronger than the remaining participants. Also, the legal structure provides a 125% step-up provision mechanism that would sufficiently cover a possible default by one of the smaller participant with weaker credit quality, should it occur. The rating is further underpinned by the agency's strong liquidity position, supported by a policy to maintain a capacity purchase reserve to make up for member's delinquent payments. As of September 30, 2019, the amount in the Capacity Purchase Reserve fund was nearly $23 million, equivalent to 350 days cash on hand.

The Baa2 rating further acknowledges the agency's adequate track record of take-or-pay compliance with its six member participants, as well as sound operating performance of Plum Point Energy Station (PPES), a 665 MW coal-fired generating plant, following remediation of water drainage issues combined with the operating benefits of having a subsidiary of NRG Energy, Inc. (Ba1 positive) act as the new plant operator. That said, MEAM and the Plum Point project are exposed to a high degree of carbon transition risk owing to its 6% interest in the PPES.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. However, the coronavirus crisis is not a key driver for this rating action, as we do not see the crisis as having an immediate material credit risk for MEAM. However, the situation surrounding the coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis, which could impact the credit quality at MEAM and at the Plum Point project.

RATING OUTLOOK

The stable outlook reflects our expectation that the three largest participants' weighted average credit quality will remain in the mid-Baa range and MEAM will continue to timely recover all project costs while maintaining robust liquidity levels. The stable outlook further recognizes the liquidity afforded to MEAM, including the Capacity Purchase Reserve fund as well as the strength of the step-up provisions.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- The rating could be upgraded if the credit quality of the participants notably improves.

- Material deleveraging with corresponding financial metrics and project's liquidity position improvement

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- The rating could be downgraded if participant credit quality deteriorates substantially

- Issues with timely cost recovery resulting in a reserve draw

- Total leverage grows notably without commensurate improvement in financial metrics or liquidity

- Power plant faces material and extended operational problems leading to competitiveness deterioration of the plant and increased power costs to the members

LEGAL SECURITY

The bonds are secured by revenues derived by MEAM under the take-or-pay project power sales contracts with the six participating MEAM members that extend until the final maturity of the bonds. Under the contract, each of the six participants has agreed to pay its allocated share of the project's costs, including debt service, regardless of the project's performance or completion. The participant's payments are payable as operating and maintenance expenses of their respective electric utility systems. All funds established by the MEAM bond resolution are also pledged as security to bondholders.

The rate covenant and additional bonds test are sum sufficient as each participant agrees to maintain electric rates to generate sufficient revenues to meet their MEAM obligations and maintain their system. MEAM can issue bonds up to 15% of operating expenses subject only to this test. If a participant defaults on its contractual payment obligation, the non-defaulting participants must step-up and accept a permanent increase in their project allocation up to 25% of the non-defaulting member's original allocation. The 12-month debt service reserve fund is 30% cash-funded and 70% satisfied through a surety provided by Assured Guaranty Municipal Corp. (A2, stable).

PROFILE

Municipal Energy Agency of Mississippi (MEAM) formed the Plum Point project take-or-pay joint action agency to finance its 6% ownership share of the PPES Project on behalf of six municipal utilities in the State of Mississippi. All project participants are obligated to establish, maintain, and collect rates, fees, and charges from its customers, to provide revenues sufficient to make payments for their share of Plum Point's fixed and variable costs.

METHODOLOGY

The principal methodology used in this rating was US Municipal Joint Action Agencies Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1163699. 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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Camila Yochikawa
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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