NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the Municipal Gas Authority of Georgia's (MGAG) $55 million gas revenue bonds (gas portfolio IV project) series A due 2024.
Fitch also affirms the 'A+' rating on the following outstanding MGAG gas revenue bonds (gas portfolio III project):
--$44.44 million, series F;
--$12 million, series Q;
--$27 million, series S;
--$15 million, series T;
--$92.5 million, series U.
The Rating Outlook is Stable.
PROCEEDS
Bond proceeds will be used to refinance outstanding debt issued to finance advances to Public Gas Partners, Inc. (PGP).
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 IV 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 1.9 times (x). Fitch-calculated debt service coverage was 1.35x in fiscal 2015.
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.
DECLINING MEMBER RETURNS: 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.
RATING SENSITIVITIES
IMPROVED PORTFOLIO ECONOMICS: Improved economics throughout the Municipal Gas Authority of Georgia gas supply portfolio, together with consistent demand and economic stability throughout the member service areas, could lead to consideration of a positive 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 also trigger a change in the rating or Outlook.
CREDIT PROFILE
The MGAG, a natural gas joint-action agency, manages wholesale gas supply for its 79 members that own and operate gas distribution systems and represent approximately 245,000 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, 78 members have also executed supplemental gas supply contracts that specifically require the member participants pay all expenses related to the gas portfolio IV 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 and gas portfolio IV projects), and market purchases. The prepay agreements are transacted primarily through Main Street Natural Gas Corporation and in 2015 supplied 36% of MGAG's throughput. The agreements are six to 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 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 34% of total throughput in 2015, is relatively fixed and varies according to each reserve. The reserves purchased as part of Portfolio III (and refinanced as part of Portfolio IV) are located in the Black Warrior Basin area of Alabama and the Cherokee Basin in Kansas, and are among the authority's lowest cost reserves. In contrast, the price of the reserves purchased through the joint action agency PGP are higher, which has led to a steady decline in 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 fell dramatically to $0.7 million from $45.6 million, funds available for debt service (FADS) remained close to historical levels at $159.1 million as the decline in operating income was attributable to higher non-cash depletion expenses recorded in 2015 reflecting 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. Fitch-calculated debt service coverage declined in 2015 to 1.35x from 1.56x, primarily due to increased principal amortization on MGAG's outstanding gas revenue bonds.
Leverage remained relatively unchanged at Dec. 31, 2015 as measured by net position (equity) to total capitalization at 10.7%, and was very low as measured by total debt/FADS at 1.9x. Cash and total liquidity metrics (111 days and 141 days) are both consistent with medians for the current rating category and continue to be managed in concert with the authority's short-term note issuance and cash requirements.
The gas portfolio IV bonds will be used to refinance outstanding debt which initially funded advances to PGP that were used to finance the acquisition of the gas reserves. Amounts refinanced will include scheduled debt maturities and previously issued bank notes maturing in October 2016. The resulting capital structure will leave MGAG with very manageable schedule debt maturities going forward.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008701
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008701
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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