NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on the following Massachusetts Municipal Wholesale Electric Company (MMWEC) power supply project revenue bonds (various series, par amounts as of Dec. 31, 2012):
--$11.6 million nuclear mix no. 1;
--$55.9 million nuclear project no. 3;
--$57.6 million nuclear project no. 4;
--$16.9 million nuclear project no. 5;
--$142.1 million project no. 6.
The Rating Outlook is Stable.
The bonds are separately secured by revenues of the five respective projects. Revenues consist of payments received by MMWEC under court-tested, take-or-pay power sales agreements (PSAs) with each of the project participants.
KEY RATING DRIVERS
LOW-COST POWER PROVIDER: MMWEC is a project-based joint action agency providing low-cost power and energy principally to 28 Massachusetts municipal light departments.
STRONG PROJECT PARTICIPANTS: The strong credit quality of the participants, nearly all of which are part of multiple MMWEC projects, underpins the 'A+' ratings on the project bonds. The participants maintain strong financial positions, little to no electric system debt, and full rate-setting authority over their currently competitive retail rates. The participants also exhibit generally favorable wealth and employment levels.
CONTRACT OBLIGATIONS LEND SUPPORT: Long-term PSAs with the participants are court-validated to ensure their enforceability and provide some financial cushion. The participants are required to pay all monthly project costs from operating expenses of their respective utility systems, including 10% in excess of MMWEC's annual debt service costs.
STEP-UP AND RESERVE FUND PROJECTION: A 25% step-up provision for nuclear mix No. 1 and nuclear project Nos. 3-5 and a well-funded debt service reserve for project No. 6 provide increased bondholder protection against a possible default of the weaker participants.
COMPETITIVE POWER SUPPLY: The long-dated nuclear operating license for Millstone No. 3 (2045) and the pending extension for Seabrook Unit 1 (to 2050 from 2030) lengthen the useful lives of the stations well beyond the final maturity of MMWEC's project bonds (2019), which creates additional economic incentive for the participants to meet their financial obligations to MMWEC.
SATISFACTORY OPERATING PERFORMANCE: Both nuclear stations' performance metrics are generally in line with industry standards. However, the Institute of Nuclear Power Operations' evaluation of Millstone No. 3 indicates some operational concerns. The station operator has implemented extensive recovery programs to improve performance, according to MMWEC's independent assessment.
CHANGING PARTICIPANT METRICS: A shift in the project participants' financial or economic metrics could cause a rating change. However, the relative stability of the participants suggests this is unlikely in the near term.
MMWEC is a project-based joint action agency providing low-cost power and other services to 20 member electric utilities. These utilities, together with additional nonmember participants, provide retail service to approximately 300,000 customers mainly in the commonwealth. MMWEC has ownership interests in five electric generating facilities, including two baseload nuclear plants.
Take-or-pay, court-validated PSAs enhance the credit quality of MMWEC's project bonds. Each participant is required to make project payments as an operating expense of its electric utility (i.e. before debt service on the utility's own bonds), irrespective of the actual amount of energy delivered. In addition, the PSAs require a 25% step-up of each participant's original obligation to mitigate the risk of a default by the weakest participants.
Project 6 is alone without the full step-up; 23.2209% was exhausted principally when the Vermont Supreme Court voided the contracts of the six Vermont participants in 1988. Instead, project 6 maintains a $30.5 million debt service reserve fund that, together with the residual step-up, mitigates the risk of participant default to a satisfactory level.
The sound credit quality of Westfield Gas & Electric and Braintree Electric Light Department mitigates direct bondholder exposure in nuclear projects 3 and 5, respectively.
STRONG PARTICIPANT FINANCIALS
MMWEC's participants exhibit strong, stable financial metrics and economic indicators in support of the project ratings. Moreover, the extensive overlap of MMWEC's project participants is a consideration in Fitch's 'A+' ratings for all of the project bonds.
Collectively, the participants have very little electric system debt, which causes high ratios of equity to capitalization averaging over 80%. Debt service coverage ratios average over 6x and adjusted coverage of 1.57x exceeds Fitch's 'A+' retail median (1.34x). Cash on hand too averages a healthy 230 days.
As is typical of a project-based joint action agency, MMWEC maintains debt service coverage of only slightly over 1x for each of its separately secured projects, choosing instead to leave project equity at the participant level.
COMPETITIVELY PRICED POWER
MMWEC's limited financing plans should enable it to continue providing competitively priced power to its project participants. All non-nuclear project debt has been repaid and the nuclear project debt will fully mature in 2019, despite operating licenses extending to 2045 for Millstone No. 3 and 2030 for Seabrook Unit 1 (extension to 2050 pending).
The participants' retail rates equal about 88% of the regional average.
SATISFACTORY OPERATING PERFORMANCE
Operating statistics for both nuclear units continue to be generally in line with industry standards. However, the Institute of Nuclear Power Operations dropped Millstone No. 3 station's rating to a '3' from a '2' in June 2012. (Most plants are rated a '1' or a '2' on the five-point scale.) An independent assessment of the station suggests that extensive recovery programs are in place ultimately to improve performance.
Capacity factors for Millstone No. 3 and Seabrook Unit 1 were 100.7% and 75%, respectively, in 2012. Refueling outage caused the lower capacity factor for Seabrook Unit 1.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information from Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);
--'U.S. Public Power Peer Study Addendum -- June 2013' (June 13, 2013);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Massachusetts Municipal Wholesale Electric Company' (May 27, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2013
U.S. Public Power Peer Study Addendum -- June 2013
U.S. Public Power Rating Criteria
Massachusetts Municipal Wholesale Electric Co. (MA)