NEW YORK--()--Fitch Ratings has assigned the following ratings to the Municipal Gas Authority of Georgia's (MGAG) gas revenue bonds (gas portfolio III project):
-- $55 million, series R, 'F1+';
-- $14 million, series Q, 'A+';
-- $29 million, series S, 'A+';
-- $20 million, series T, 'A+'.
The bonds are scheduled to price during the week of Sept 10th and proceeds will be used refinance existing debt and pay for issuance costs.
Fitch also affirms the ratings on the following MGAG outstanding gas revenue bonds:
-- $55 million, series O, 'F1+';
-- $80 million, series P, 'F1+';
-- $77.77 million, series F, 'A+';
-- $30 million, series L, 'A+';
-- $10 million, series M, 'A+';
-- $10 million, series N, 'A+'.
The Rating Outlook on all long-term bonds is Stable.
The bonds are secured by a pledge of the trust estate, which includes payments received by the authority under gas purchase contracts with its 77 participating cities and towns.
KEY RATING DRIVERS
STRONG SUPPLY CONTRACTS: MGAG provides all-requirements gas supply to 77 municipal gas distribution system 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 on an unconditional basis.
MEMBERS' FULL FAITH AND CREDIT: The obligations under the supply contracts of the 63 Georgia-based member 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 1.8 times (x). Fitch-calculated debt service coverage was 1.55x in 2011, excluding the authority's series A February 2011 maturity ($35.51 million), which was refinanced.
COMPETITIVE GAS SUPPLY: Through the development of a broad and diverse portfolio of producing natural gas resources, prepaid gas agreements and owned reserves, MGAG has provided members with competitively priced fuel overall despite an inherently volatile marketplace.
FAVORABLE BILLING SCHEDULE: Lower gas prices have challenged the economics of certain reserve production which has reduced the expected savings provided by those assets. However, MGAG's billing schedule supports credit quality as members are billed at spot market prices and rebated MGAG project discounts at the end of the year, after debt service obligation and reserve requirements have been fulfilled.
ABOVE AVERAGE REFINANCING RISK: The authority's short-term debt is declining, but at 53% remains above average for joint action agencies in the current rating category. The current debt structure exposes MGAG to refinancing risk, but the staggered maturities of its one-year notes and solid liquidity (both in the form of day's cash on hand and available lines of credit) mitigate this risk.
WHAT COULD TRIGGER A RATING ACTION
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.
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 225,000 primarily retail customers in Georgia, Alabama, Florida, Pennsylvania and Tennessee. Each member 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 natural gas and oil reserves (including the gas portfolio III project), and market purchases. The prepay agreements are transacted primarily through Main Street Natural Gas Corporation and in 2011 supplied 48% of the authority's throughput. The agreements are 10 - 30 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 delivered. The authority 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; and it would not be difficult for the authority to procure replacement gas in the event of a failure by the financial institution supplier to deliver.
The price of the authority's owned-reserves, which accounted for 30% of total throughput in 2011, is relatively fixed and varies according to each reserve. The reserves that the authority purchased as part of project III (17% of total throughput) 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 currently above market prices, which has led to an erosion of the overall discounts rebated to members.
STEADY FINANCIAL PERFORMANCE
Financially, the gas authority 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.
As of year-end 2011, MGAG realized a non-cash impairment loss of $10.4 million on its gas reserves as a result of lower average commodity market pricing for gas during the year. The authority realized a similar loss of $4.4 million in 2009. The impairments, however, will not have an impact on the authority's cash flow as all costs related to the gas project are expected to be recovered in future billings to members over the life of the properties.
The gas project III debt was originally incurred to finance the acquisition of the gas reserves. The current project debt structure exposes the authority to refinancing risk (up to $85 million every six months), given the staggered maturity of its one-year notes, and has required the authority to build up its liquidity. Adequate liquidity, composed of cash and lines of credit, is maintained at all times, which Fitch assumes would be available in the stress case scenario that the gas authority is unable to access the market to refund its short-term bonds. The proposed financing is expected to reduce MGAG's refinancing risk by refunding its schedule November 2012 maturity (Series O) and reducing the size of its one-year notes to $55 million or less.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
-- 'Revenue-Supported Rating Criteria', June 12, 2012;
-- 'U.S. Public Power Rating Criteria', Jan. 11, 2012;
-- 'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', June 15, 2012;
-- 'Rating U.S. Municipal Short-Term Debt', Dec. 8, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
Rating U.S. Municipal Short-Term Debt