Fitch Affirms Massachusetts Muni Wholesale Elec Co Proj Revs at ‘A+’; Outlook Stable

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed the ‘A+’ rating on the following
Massachusetts Municipal Wholesale Electric Company (MMWEC) power supply
project revenue bonds:

–$20 million nuclear project No. 3;

–$21 million nuclear project No. 4;

–$7 million nuclear project No. 5;

–$65 million nuclear project No. 6.

The Rating Outlook is Stable.

SECURITY

The bonds are separately secured by the revenues of the four respective
nuclear power projects. Revenues are derived from payments received by
MMWEC for each project, pursuant to take-or-pay sales agreements (PSA)
with each of the project’s municipal participants.

KEY RATING DRIVERS

LOW-COST WHOLESALE POWER PROVIDER: MMWEC is a project-based joint action
agency providing competitive cost power and energy principally to 28
Massachusetts municipal light departments.

SOLID PROJECT PARTICIPANTS: The solid credit quality of the
participants, most of which are part of multiple MMWEC projects,
underpins the ‘A+’ rating on the bonds. The participants maintain
generally strong balance sheets, with little to no electric system debt
and sound liquidity. Many participants exhibit favorable wealth and
employment levels.

COURT-VALIDATED TAKE-OR-PAY CONTRACTS: Long-term PSAs with the
participants have been court-tested to ensure their enforceability. The
participants are required to pay all monthly project costs from
operating expenses of their respective utilities, including 10% in
excess of MMWEC’s annual debt service costs.

STEP-UP AND RESERVE FUND PROTECTION: A 25% step-up provision for nuclear
project Nos. 3-5 and a well-funded debt service reserve for project No.
6 increase bondholder protection against a possible default of the
weaker participants. Following the July 1, 2016 debt payments, existing
reserves will be sufficient to cover the remaining nuclear project debt
service through maturity.

ADEQUATE NUCLEAR OPERATING PERFORMANCE: Performance metrics for
Millstone Unit No. 3 and Seabrook Unit 1 have been in-line with industry
standards for the past five years.

RATING SENSITIVITIES

CHANGE IN PARTICIPANT CREDIT QUALITY: A shift in the financial or
economic position of Massachusetts Municipal Wholesale Electric Co.’s
nuclear project participants (28 municipal electric departments) could
lead to a rating change.

WEAK NUCLEAR OPERATING PERFORMANCE: Unlikely and extended poor operating
performance at the nuclear units that affects the municipal
participants’ ability to meet their total project payments, could
likewise lead to a rating change.

CREDIT PROFILE

MMWEC is a project-based joint action agency providing bulk power supply
to 21 member Massachusetts municipal electric systems, and seven
nonmember municipal participants (six in Vermont; one in Rhode Island).
MMWEC’s services include: power procurement, risk management, purchased
power arrangements, and ownership interests in five electric generation
facilities – predominantly nuclear-fueled.

CONTRACT OBLIGATIONS

Take-or-pay, court-validated PSAs enhance the credit quality of MMWEC’s
four remaining nuclear project bonds. Each participant is required to
make project payments as an operating expense of its electric utility,
before debt service on the utility’s own bonds. The project payments are
also payable whether the project is operating or not. In addition, the
PSAs require a 25% step-up of each participant’s original obligation to
mitigate the risk of a default by the weakest participants.

Project 6 is alone without the full step-up; 23.2209% was exhausted
principally when the Vermont Supreme Court voided the contracts of the
six Vermont participants in 1988. To bolster bondholder protection,
project 6 maintains a $30.5 million debt service reserve fund that,
together with the residual step-up, mitigates the risk of participant
default to a satisfactory level.

The solid credit quality of Westfield Gas & Electric and Braintree
Electric Light Department moderates their direct bondholder exposure in
nuclear projects 3 and 5, respectively.

STRONG PARTICIPANT FINANCIALS

MMWEC’s participants exhibit sound financial metrics and economic
indicators in support of the project ratings. Moreover, the extensive
overlap of MMWEC’s project participants is a consideration in Fitch’s
‘A+’ rating for all of the project bonds.

Collectively, the participants have modest electric system debt, which
results in high ratios of equity to capitalization averaging over 80%.
Debt service coverage ratios average over 6x and adjusted coverage of
1.47x is slightly above the Fitch ‘A+’ retail median (1.37x for fiscal
2014). Aggregate cash on hand averages a healthy 227 days and includes
certain MMWEC-member cash advances held in a trust reserve at the agency
level. Those funds are used by the member towns to help offset retail
rate increases.

As is typical of a project-based joint action agency, MMWEC maintains
debt service coverage of only slightly over 1x for each of its
separately secured projects, choosing instead to leave project equity at
the participant level.

COMPETITIVELY PRICED POWER SUPPORTED BY LOW DEBT

MMWEC’s very limited financing needs should enable it to continue
providing competitively priced power to its project participants. All
non-nuclear project debt has been repaid and the nuclear project debt
will fully mature by 2019, despite operating licenses that extend to
2045 and 2030 for Millstone No. 3 and Seabrook Unit 1, respectively. An
extension of the Seabrook license to 2050 is currently pending.

Additionally, MMWEC maintains project reserves that will be sufficient
to substantially cover remaining nuclear project debt service following
the July 1, 2016 debt payments. This provides an added financial cushion
as this nuclear project debt amortizes rapidly through final maturity in
2019. MMWEC’s consolidated debt-to-FADS is as expected very favorable at
2.4x, relative to the peer rating category median of 9.9x for 2014.

Participant retail rates remain competitive compared to other utilities
in the state and are about 85% of the regional average. Rate
competitiveness should improve further following the repayment of the
nuclear project debt.

SATISFACTORY OPERATING PERFORMANCE

Operating statistics for both nuclear facilities continue to meet
industry standards. However, in 2015, the NRC initiated increased
oversight at the Millstone nuclear power station due to a security
concern found in a November 2014 inspection. The NRC classified the
finding as a low-significance concern. MMWEC also has its own
comprehensive oversight program to monitor plant performance and ensure
compliance with NRC requirements at both nuclear generation units.

Capacity factors for Millstone No. 3 and Seabrook Unit 1 were 88.2% and
93.2%, respectively, in 2014. A scheduled refueling outage caused the
lower capacity factor for Millstone No. 3.

The nuclear decommissioning funds for both projects are adequately
funded as of the end of Dec. 31, 2014. MMWEC’s share of the capital
expenditures at each of the nuclear projects will be funded from
available capital reserves for fiscal 2015 and 2016, which Fitch views
as positive.

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=991598

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991598

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
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Lina Santoro
Analytical
Consultant
+1-212-908-0522
Fitch Ratings, Inc.
33
Whitehall Street
New York, NY 10004
or
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Pidherny
Managing Director
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or
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or
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