NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the Municipal Gas Authority of Georgia's (MGAG) $100 million gas revenue bonds (gas portfolio III project) series U due 2024.
Fitch also affirms the 'A+' rating on the following outstanding MGAG gas revenue bonds:
--$66.66 million, series F;
--$15.67 million, series L;
--$5.23 million, series M;
--$12 million, series Q;
--$27 million, series S;
--$15 million, series T.
The Rating Outlook is Stable.
PROCEEDS
Bond proceeds will be used to refinance various outstanding bank notes maturing in October 2014 and October 2016.
SECURITY
The bonds are secured by the trust estate, which includes payments derived by MGAG from gas supply contracts with its member participants.
KEY RATING DRIVERS
STRONG SUPPLY CONTRACTS: MGAG provides all-requirements gas supply to 78 municipal gas distribution systems (members) pursuant to long-term gas supply contracts, including take-or-pay supplemental contracts, which obligate the members to pay all costs related to the Gas Portfolio III Project (the project), on an unconditional take-or-pay basis.
FULL FAITH AND CREDIT PLEDGE: The obligations under the supply contracts of the 65 Georgia-based participants are general obligations, supported by the full faith and credit and taxing power of the respective cities. The 15 largest members exhibit solid credit characteristics and utility fundamentals that support the rating.
STRONG FINANCIAL METRICS: MGAG exhibits financial metrics consistent with the current rating category for wholesale systems including total debt/funds available for debt service of 2.6 times (x). Fitch-calculated debt service coverage was 1.47x in fiscal 2013.
COMPETITIVE GAS SUPPLY: Through the development of a broad and diverse portfolio of producing natural gas resources and prepaid gas supply agreements, MGAG continues to provide members with competitively priced fuel, despite an inherently volatile natural gas market.
FAVORABLE BILLING SCHEDULE: Lower gas prices have challenged the economics of certain reserve production and reduced the expected savings provided by those assets. However, MGAG's billing schedule supports credit quality, as discounts are returned to members at the end of the year, after debt service obligations have been paid and reserve requirements fulfilled.
REFUNDING ADDRESSES REFINANCING RISK: The proposed series U bond offering further reduces the authority's historical dependence on short-term debt which exceeded 50% of total debt in 2012. Pro-forma for the issuance of the Series U bonds, short-term debt drops to under 10% of total debt at year-end 2013.
RATING SENSITIVITY
CHANGE IN MEMBER PROFILES: Evidence of stronger or weaker demographics throughout the member service areas, or operating and financial metrics at the member systems could trigger a change in the rating or Outlook.
CREDIT PROFILE
The MGAG, a natural gas joint-action agency, manages wholesale gas supply for its 78 members that own and operate gas distribution systems and represent approximately 243,000 primarily retail customers in Georgia, Alabama, Florida, Pennsylvania and Tennessee. Each member (including one in resigning member status) has entered into a long-term gas supply contract with MGAG, under which MGAG is obligated to provide (and such member is obligated to purchase) all of its gas supply requirements. In addition, members have also executed supplemental gas supply contracts that specifically require the member participants pay all expenses related to the gas portfolio III project on an unconditional basis. The gas authority also enters into intermediate term and limited services contracts with nine other gas agencies and municipal utilities (known as the limited basis partners).
DIVERSIFIED GAS SUPPLY
Supply for its members is derived from prepaid gas agreements, owned reserves (including the gas portfolio III project), and market purchases. The prepay agreements are transacted primarily through Main Street Natural Gas Corporation and in 2013 supplied 48% of MGAG's throughput. The agreements are two to 26 years long and secure a fixed amount of gas at a set discount to an index price.
Debt issued by Main Street is non-recourse to the authority, which is only required to pay for gas that is physically delivered. MGAG does take some risk that the gas will not be supplied by the financial institutions that are behind the contracts, however, the risk is limited to the guaranteed discount. Moreover, it would not be problematic for MGAG to procure replacement gas in the event of a delivery failure.
The price of the authority's owned-reserves, which accounted for 30% of total throughput in 2013, is relatively fixed and varies according to each reserve. The reserves purchased as part of Portfolio III are located in the Black Warrior Basin area of Alabama and the Cherokee Basin in Kansas are among the authority's lowest cost reserves. In contrast, the price of the reserves purchased through the joint action agency Public Gas Partners (PGP) are higher, which has led to lower overall discounts rebated to members in recent years.
STEADY FINANCIAL PERFORMANCE
Financially, MGAG has exhibited steady operating margins before depletion, and charges its members a cost of service rate that is competitive with other wholesale providers. Net margins have been positive in recent years, but very modest as billings, net of member returns, are designed to simply cover project operating costs.
Although operating income during 2013 increased from $23.4 million to $43.4 million, funds available for debt service (FADS) was virtually unchanged at $165.6 million. This reflects lower non-cash depletion expenses recorded in 2013 due to the absence of impairment charges on the authority's gas reserves. Generally, impairments do not have an impact on the authority's cash flow as all costs are expected to be recovered in future billings to members over the life of the properties.
The gas Portfolio III debt was originally incurred to finance the acquisition of the gas reserves. The initial debt structure exposed the authority to a moderate degree of refinancing risk however the proposed financing is expected to reduce MGAG's risk by refunding its outstanding $72 million bank notes due October 2014 along with the early refinancing of a portion of bank notes due October 2016.
MGAG currently maintains committed lines of credit totaling $50 million ($25 million available at Dec. 31, 2013) that expire in December 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', March 18, 2014;
--'U.S. Public Power Peer Study: June 2013', June 13, 2013.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
U.S. Public Power Peer Study -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833976
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