ATLANTA -- In a double whammy for the Municipal Electric Authority of Georgia, two major rating agencies yesterday downgraded about $4 billion of authority debt, each citing financial stress caused by excess generating capacity.
According to Moody's Investors Service, its rating change affected about $3.2 billion of senior lien debt, which was lowered to A from A1, and about $600 million of fixed-rate and variable-rate subordinate lien debt, which was dropped to Baal from A.
Standard & Poor's Corp. said its downgrades affected $4.4 billion of senior lien bonds, which were lowered to A-plus from AA-minus, and $375 million of subordinate debt, lowered to A/A-1 from A plus/A-1.
The MEAG bonds will continue to carry a negative outlook from Standard & Poor's, but were removed from the agency's CreditWatch with negative implications, which was imposed in December.
Also caught up in the downgrades were $368.9 million of refunding bonds the authority plans to sell early next week. Tentative pricing on the deal is set for next Tuesday by a syndicate led by CS First Boston.
Moody's rated the upcoming $237.7 million of power revenue bonds, Series EE., at A, and the $131.2 million project one subordinate bonds Series 1994A at Baa1. Standard & Poor's rated the two series at A-plus and A, respectively.
Traders said yesterday that the downgrades did not prompt investors to begin a sell-off of the authority's debt.
"There was no unusual movement in these bonds, and I don't think you'll see any distress selling," said one Georgia trader. "The market has already been treating these bonds as if they were in the A category."
Moody's said, "The revision considers the authority's weakened competitive position and lack of significant load growth requirements among its 48 participants."
Although MEAG has been able to provide power to its customers at lower costs than its main competitor, Georgia Power Co., "those margins have narrowed dramatically, and given [its] high percentage of fixed costs, the authority would be pressed to react to further cost cutting measures expected by GPC in the future," Moody's said.
Standard & Poor's had a similar explanation for its rating action. "The downgrade of the authority's rating reflects the stress brought on by the absorption of excess baseload capacity," it said in a report.
MEAG's problems stem from slower-than-anticipated growth in power demand from some of its 48 members, which has resulted in the system's being forced to absorb a 16% surplus in total baseload capacity.
The authority's woes deepened last year when its members rejected a plan to reallocate the excess power.
Since then, the authority has worked to provide immediate rate relief by refunding some debt to extend maturities and reduce debt service. It has also attempted to allay its members' concerns by restructuring rates charged for intermediate and peaking power, and arranging bank lines for members with surplus shares.
Given these efforts, Ron Vasquez, MEAG's vice president of financial services, said he was disappointed with the downgrades.
"From a financial point of view, we are in significantly better shape than this time last year," Vasquez said. In addition to the restructuring plan, he noted that the authority realized $130 million in present value savings from a series of recent refundings.
Vasquez said the downgrade will not affect the decision to issue the refunding debt next week, with a tentative pricing still set for Tuesday.
Bradford Higgins, a CS First Boston managing director, said that the authority may opt to insure "part of all" of next week's transactions. "The decision will be made purely on our analysis of the cost benefits involved," he said.
Addressing the future of the authority, Standard & Poor's said in its report: "The negative outlook acknowledges the potential for serious disputes if the authority fails to find a satisfactory rate structure that adequately addresses the needs of the membership."
The lack of a comprehensive solution could lead to actions that add to the costs borne by some already weakened participants, further weakening overall credit quality," the rating agency said.
