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Rating Action:

Moody's revises outlook to negative and affirms Baa1 on Municipal Energy Agency of Mississippi's outstanding revenue bonds

08 Jan 2019

New York, January 08, 2019 -- Moody's Investors Service ("Moody's") has affirmed the Baa1 rating on $84.8 million in power supply project revenue bonds for the Municipal Energy Agency of Mississippi (MEAM). The outlook has been revised to negative from stable.

RATING RATIONALE

The change to a negative outlook reflects our expectation of MEAM's increased exposure to power purchases on the Midcontinent Independent System Operator (MISO) market, the uncertainty in future MISO capacity payments, and MEAM's member participant's lack of ability to manage through capacity payment fluctuations given the service area's limited economic strength. With MEAM's incremental shift away from purchased power agreements beginning in 2015 with Entergy, and most recently with the retirement of Greenwood Utilities 33MW Henderson Station, reliance upon power purchases from the MISO market is expected to increase as the Plum Point project does not currently satisfy demand needs of member participants.

The affirmation of the Baa1 rating reflects our expectation that MEAM will continue to maintain its strong track record of take-or-pay compliance with six member participants (none rated by Moody's), reduced exposure to carbon transition risk from the reduction of purchased power from coal-fired generation assets, and incremental improvement in liquidity position. In addition we expect improved operating performance of the Plum Point project as a direct result of fully remediated water drainage issues combined with the entrant of NRG as the new plant operator.

The rating also reflects customer concentration risk with 50% of MEAM's ownership held by one utility, sizeable off-balance sheet leverage of the participants given significant debt issuance to finance their collective ownership share in the Plum Point generating facility, a debt service reserve fund that's cash funded up to 63% of annual debt service and 37% satisfied through a surety provided by Assured Guaranty Municipal Corp. (A2, stable).

RATING OUTLOOK

The negative outlook reflects MEAM's increased exposure to market risk and the limited ability of member participants to absorb fluctuations in energy and capacity payments in the regional wholesale market. Additionally the outlook considers MEAM's ability to utilize internal liquidity to manage adverse changes in wholesale market prices for a limited period of time.

FACTORS THAT WOULD LEAD TO AN UPGRADE

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

- If there is greater transparency regarding the credit quality of Plum Point's co-owners and the project's liquidity and cost recovery remains sound.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Continued exposure to fluctuations in market rates for a significant portion of the agency's power requirements

- 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

- Plum Point continues to incur significant operating problems or if the plants' co-owners experience substantial credit deterioration

LEGAL SECURITY

The bonds are secured by the 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. Of note, this step-up is inadequate if either of the two largest participants default on their payment obligations. The debt service reserve fund is 63% cash-funded and 37% satisfied through a surety provided by Assured Guaranty Municipal Corp. (A2, stable) as of fiscal year end 2017.

PROFILE

MEAM is managed by its president and CEO, a CFO and an Energy Operations Manager. MEAM is governed by a six person Board of Commissioners appointed by the members. Votes are weighted in favor of the three largest participants.

The largest member participants Greenwood, Canton and Kosciusko are each governed by a utility commission that has the power and authority to control, manage, operate and set rates for their respective electric systems. Members of the respective utility commission are elected by the governing body of the municipality for a term of three to five years.

The electric systems of Leland, Durant and Itta Bena are each governed and controlled by the governing body of the municipality. Each member has entered into a Power Purchase Agreement with MEAM. MEAM is considered a joint venture, since no member can unilaterally control the financial or operating policies of MEAM and members have an ongoing financial responsibility.

METHODOLOGY

The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Eriq Alexander
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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