OREANDA-NEWS. Fitch Ratings affirms the 'A' rating on Public Gas Partners, Inc.'s (PGP) series A gas project revenue bonds (gas supply pool no. 1).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the unconditional take-or-pay obligation of the pool's members to pay all project costs, including debt service, as well as other funds held by the trust estate.

KEY RATING DRIVERS

UNCONDITIONAL PRODUCTION SHARING AGREEMENTS: The rating of PGP Gas Supply Pool No. 1 is supported by production sharing agreements (PSAs) with five participating members which unconditionally obligate each to pay for its proportionate share of project costs, including debt service, as an operating expense.

SOLID PARTICIPATING MEMBERS: The participating members all exhibit solid financial metrics, including the two largest - the Municipal Gas Authority of Georgia (MGAG rated 'A+'; Stable Outlook by Fitch) and the Southeast Alabama Gas District (SEAGD) - which together account for 86.7% of the series A bond obligations. The remaining participating members are the Patriots Energy Group and the Tennessee Energy Acquisition Corporation.

CAPABLE OPERATING MANAGEMENT: MGAG manages and operates all three of PGP's gas supply pools, including Pool No. 1. Fitch views MGAG as a very capable operator.

WEAK PROJECT ECONOMICS: The economics of the Pool No. 1 project have weakened since the reserves were acquired due to the dramatic decline in the price of natural gas. Persistently low prices have recently strained the economics even further; however, the current rating continues to reflect the unconditional obligation of the members to pay all project-related costs.

RATING SENSITIVITIES

CHANGE IN PARTICIPATING MEMBER RATINGS: The long-term rating on the Public Gas Partners bonds will continue to reflect the credit of the underlying participating members, specifically two largest participants, the Municipal Gas Authority of Georgia and Southeastern Alabama Gas District, whose default could not be restored by the required 25% step-up provisions.

CREDIT PROFILE

PGP is a joint action agency whose purpose is to secure gas supplies through acquisition and development of natural gas reserves for its members, which include all of the Pool No. 1 participating members plus the Florida Municipal Power Agency and National Public Gas Agency. Members elect to participate in specific pools and agree to pay their proportion of the full cost of acquiring and managing the related assets regardless of the reserve's performance.

PGP has undertaken three separate gas supply pools - Pool No. 1 (2004), Pool No. 2 (2005) and Pool No. 3 (2009) - each of which is owned by a separate limited liability company and supported by individual PSAs. All of the pools acquire and manage gas supplies for the respective participating members of each pool.

Pool No. 1 consists of working interests and royalty interests in over 3,000 producing oil and gas wells located in 16 states stretching from Alabama to California. The interests were recently estimated to contain approximately 55 billion cubic feet equivalent (Bcfe) of natural gas reserves, of which 37 Bcfe (67%) was classified as proved, developed and producing (PDP). Pool 1 has been closed to new acquisitions since June 30, 2008. The development of existing interests has continued, but slowed substantially with current market prices so low.

The production from Pool No. 1 accounts for varying but modest portions of the member's overall supply. Total production has declined roughly 21% since 2009 from 8,742 MMcfe to 6,868 MMcfe.

The credit quality of Pool No. 1 is supported by the members, which generally pursue similar strategies of locking into a portion of their supply long-term through prepays and reserves, and purchasing the remainder seasonally or daily while taking advantage of economies of scale. The two largest members are MGAG and SEAGD.

SEAGD provides natural gas service to roughly 29,000 customers throughout 35 communities located in Alabama. The district's credit quality is supported by the board's sole authority to establish rates for gas service and reflected in its strong financial metrics for fiscal 2015 including Fitch-calculated debt service coverage of 5.13x, cash on hand of 185 days, and a ratio of total debt-to-funds available for debt service of 2x.

For additional information on MGAG see Fitch's report dated June 10, 2014, available at www.fitchratings.com.