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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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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