NATIXIS
Fitch Ratings has assigned an 'A+(EXP)' rating to the following Energy Southeast, A
Approximately
The Rating Outlook is Stable.
Approximately
The Series 2023A bonds are expected to price as early as
Final ratings are contingent upon the receipt of final documents conforming to information already received and reviewed as well as the final pricing of the bonds.
RATING ACTIONS
Entity / Debt
Rating
Energy Southeast, A
Energy Southeast, A
LT
A+(EXP)
Expected Rating
Page
of 1
VIEW ADDITIONAL RATING DETAILS
SECURITY
The 2023A energy supply revenue bonds are secured by the trust estate pledged under the indenture, including revenues derived from the sale of electricity, payments received from the commodity swap provider, the interest rate swap provider (for the series 2023 A-2 and series A-3), and any payments due pursuant to the receivables purchase provisions in the prepaid energy sales agreement (energy purchase agreement).
KEY RATING DRIVERS
Counterparty Payment Obligations: The bond rating reflects the structured nature of the prepaid energy transaction and Fitch's analysis of the principal transactional counterparties, including:
Other counterparties will include investment agreement provider for the debt service account. The investment agreement provider will be selected on the pricing date and is required to be rated at least that of Fitch's Long-Term Issuer Default Rating on
Weak Link Counterparty: The rating on the bonds is driven by the credit quality of the weakest counterparty whose default risk is not otherwise mitigated. The rating on the bonds reflects the credit quality of
Additional Support from
Custodial Agreements Mitigate Risk to Commodity Swap Providers: The commodity swap provider will be
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Shifts in the rating or credit quality of
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unless otherwise mitigated, shifts in the rating or credit quality of
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
CREDIT PROFILE
Energy Southeast is a capital improvement cooperative district of the
STRUCTURE DESIGNED FOR TIMELY PAYMENT
Energy Southeast will use the bond proceeds to prepay MSES for a specified approximately 30-year supply of electric energy. By virtue of the sales, hedging and investment agreements outlined below, the project is structured to ensure that monthly net payments to Energy Southeast are sufficient to pay scheduled debt service, regardless of changes in energy prices, the physical delivery of energy or the acceptance of delivered energy.
Since the 2023 Series A-2 and A-3 bonds will be issued with variable interest rates, Energy Southeast will enter into an interest rate swap with MSES (guaranteed by
STRUCTURE PROVIDES FOR MANDATORY TENDER
The bonds are being issued as approximately 30-year amortizing debt with a mandatory tender date on
A failed remarketing will cause an early termination of the energy purchase agreement and the extraordinary redemption of the bonds. In this case, MSES (supported by the
Fitch's rating on the bonds only addresses the credit risk to bondholders up to and including the mandatory tender date.
ENERGY SOUTHEAST SELLS ENERGY TO AMEA AT FIXED PRICE DURING INITIAL ASSIGNMENT PERIOD
Energy Southeast will sell all of the energy delivered by MSES to AMEA (the project participant) pursuant to the PSC. AMEA will in turn resell the electric energy it purchases under the PSC to its participating members under the AMEA PSCs.
In conjunction with the execution of the PSC between AMEA and Energy Southeast, AMEA will enter into a limited assignment agreement to assign a portion of its rights and obligations under a previously existing power purchase agreement (PPA) with
If there is no assigned energy in place at any time for the full quantities of prepaid electric energy that MSES is required to deliver under the energy purchase agreement, MSES is required to deliver hourly quantities of electric energy (base energy) to Energy Southeast for resale to AMEA.
While electric energy will be purchased by AMEA at a fixed price, less a discount, during the initial assignment period, subsequent assignment periods and/or base energy will be delivered at variable rates (either the day-ahead average price for the month for assigned energy during a subsequent assignment period, or the day-ahead market price for base energy), less the monthly discount. While AMEA would be responsible for the payment of variable rate energy prices in the absence of a new fixed price PPA, bondholder risk to variable rate energy prices is mitigated through the commodity swap.
Payments to Energy Southeast by AMEA will represent an operating expense of AMEA's utility system.
COMMODITY SWAP HEDGES COUNTERPARTY RISK
To hedge the risk of changes electric prices, Energy Southeast will enter into a commodity swap agreement (front-end swap) with
A custodial agreement amongst
FAILURE TO ACCEPT OR DELIVER ENERGY
The failure by MSES to deliver electric energy, or Energy Southeast to accept electric energy, is not expected to jeopardize the transaction's performance. If MSES fails to deliver energy for any reason, it is required to pay Energy Southeast for the undelivered volumes at prices sufficient to allow Energy Southeast to meet its obligations, including debt service payments.
Alternatively, under the PSC, if Energy Southeast provides notice to MSES to remarket energy to other purchasers that it does not need, or does not accept delivered energy, MSES is required to remarket such energy. If the energy cannot be remarketed, MSES is required to purchase the energy for its own account. In either case, MSES's payments from the remarketing or purchasing of the energy will be based on index prices sufficient to preserve transactional cash flows.
AMEA'S CREDIT RISK MITIGATED BY PUT RECEIVABLES PURCHASE PROVISIONS
The energy purchase agreement will include put receivables purchase provisions, which mitigate risks to bondholders from non-payment by AMEA. The put receivables purchase provisions obligate the energy supplier to purchase receivables relating to non-payment by the project participant in amounts sufficient to cover the maximum scheduled debt service that Energy Southeast is required to make in any two consecutive months.
BONDS SUBJECT TO EXTRAORDINARY REDEMPTION
The bonds are subject to extraordinary redemption prior to maturity. Under certain circumstances (a designated seller default and buyer default) or events such as changes in laws resulting in nonperformance of the seller or buyer (designated non-default termination events), the bonds may be called prior to the stated maturity through the extraordinary redemption mechanism. In the case of an extraordinary redemption, MSES will be required to make an early termination payment, which together with available funds in the debt service account, is designed to be sufficient to pay the redemption price of the bonds.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
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