Georgia’s MEAG to issue bonds for non-nuclear projects
The Municipal Electric Authority of Georgia plans to issue $245 million of tax exempt bonds for projects unrelated to the agency’s troubled nuclear reactor construction project.
The MEAG Power deal, selling as $175 million of series HH Project One senior power revenue bonds and $70 million of senior General Resolution project revenue bonds, prices Wednesday.
Bond proceeds will refund outstanding debt, refinance commercial paper, and fund nuclear fuel for reactors 1 and 2 at Plant Vogtle, in which MEAG is a 22.7% owner. Proceeds will also fund debt service reserves and pay costs of issuance.
The bond issue should include a small degree of concessionary pricing to reflect the “taint” from the ongoing construction challenges with Vogtle units 3 and 4, as well as litigation with Florida utility JEA, said Alan Schankel, managing director and municipal strategist with Janney Montgomery Scott LLC.
“But I believe the Project One and General Resolution project bonds will receive plenty of interest based on creditworthiness of the 49 project participants and validation of underlying take-or-pay agreements by the Georgia Supreme Court,” Schankel said.
Although the bonds are independently structured from other MEAG-financed projects, Fitch Ratings downgraded all of the authority’s bonds ahead of the deal due to the escalating costs of its 22.7% ownership in nuclear reactors 3 and 4, which are under construction at Plant Vogtle.
Fitch rated the bonds A-minus, a downgrade from A, and assigned a negative outlook.
MEAG expects investors will consider Fitch’s rating opinion, although there is uncertainty “if or to what degree the rating change will affect pricing,” said Edward E. Easterlin, senior vice president and chief financial officer.
Moody's Investors Service assigned an A1 rating with a stable outlook to the bonds, while S&P Global Ratings assigned an A rating with negative outlook.
Analysts reviewing this week’s bond issue said they considered the financial burden of building the new reactors as well as lawsuits between MEAG and JEA over the legality of JEA's take-or-pay power purchase agreement to buy future electricity from the project.
JEA has also asked the Federal Energy Regulatory Commission, which doesn’t typically oversee the nonprofit public power industry, to weigh in on its 20-year power purchase agreement. JEA wants out of the agreement and wants FERC to determine that the agreement is not “just and reasonable” because work on the reactors has been delayed and construction costs have nearly doubled.
“We anticipate the investor community will understand that MEAG Power’s projects are separate and distinct from each other including having separate power sales contracts, separate bond resolutions and separate collateral to bondholders,” Easterlin said. “Accordingly, we do not anticipate concerns pertaining to the Vogtle Units 3&4 project will have any material impact on the pricing of project one and general resolution project bonds.”
The Vogtle project and litigation between MEAG and JEA were also disclosed in MEAG’s preliminary official statement and internet roadshow presentation.
Fitch said higher leverage because of the new reactors’ costs and the potential for higher rates also led to rating downgrades on MEAG’s other debt. Fitch lowered to BBB-plus from A the ratings on MEAG’s project one subordinate bonds, general resolution projects subordinate bonds and combined cycle project bonds.
Fitch’s also lowered ratings on Vogtle construction debt, including the Project M bonds to BBB-plus from A, Project J bonds to BBB-plus from A, and Project P bonds to BBB-plus from A-minus.
All Fitch’s ratings have negative outlooks, except for the Project J bonds, which remain on rating watch negative because the debt is related to JEA’s contested power purchase agreement, said Fitch analyst Kathy Masterson.
Moody’s said its A1 rating on senior and subordinate Project One and General Resolution project bonds considers the “strong” security for the debt, including the court-validated take-or-pay contractual obligations, the general obligation full faith and credit pledge of 49 MEAG participants in Georgia, and their credit quality.
MEAG’s “competitive, reliable and diverse power supply portfolio,” its strong financial liquidity primarily from internal sources, and its management record also support the ratings, said Moody’s analyst Dan Aschenbach.
The Project One bonds will mature serially between 2020 and 2039; term bonds will mature in 2044 and 2049. The General Resolution bonds will mature serially from 2020 to 2040. Closing on the deal is expected Dec. 20.
PFM Financial Advisors LLC is advising MEAG.
Bank of America Merrill Lynch is the senior manager. Barclays, Goldman Sacks & Co., and Wells Fargo Securities are co-managers.
Bond counsel is Orrick, Herrington & Sutcliffe LLP. Nixon Peabody LLP is special tax counsel. King & Spaulding is counsel to the underwriters.