A Message from
the Chairman
and President MEAG Power
Indeed, in 2018, as highlighted on the previous pages, we came together to continue delivering an exceptionally high level of clean wholesale power, more than 65% emissions-free. We came together in securing Production Tax Credits for MEAG Power; to validate moving on with the construction of Plant Vogtle Units 3&4; and to substantially complete the distributions of Participant billing credits from the Municipal Competitive Trust (MCT).
Operations Performed Well
We kicked off the year with a hefty off-system sales accomplishment through optimizing the use of our resources. January’s cold weather sparked a demand for natural gas, and we took full advantage of this situation by using our available pipeline capacity to support gas sales. As a result, we generated $14.4 million in natural gas sales margins – a good example of how we stay alert to opportunities that create the most benefit for our Participants. At that point, it made the most sense to run our other units and sell natural gas rather than use it to operate our Wansley Combined Cycle Facility.
The year also began with implementation of the power supply arrangements with three Alabama cities. Providing service to these public power cities is a natural fit and benefits our Participant communities as well as the three Alabama communities. The transition was seamless, and we look forward to a long-term relationship. We will continue to look for similar wholesale opportunities on behalf of our Participants.
As the year progressed, we continued to adjust operations to derive benefit for our Participants. 2018 presented periods of high and low natural gas prices, high levels of hydro power and multiple extended planned unit outages. Each presented challenges and opportunities for our operations team. In December, the hydro energy we delivered to our Participants from the Southeastern Power Administration nearly doubled due to very wet conditions. This allowed us again to schedule some of our generation fleet’s output into the off-system sales market. In November, when natural gas prices increased, due to unusually cold weather and low storage levels, it was worthwhile to switch from gas to coal generation and run the Plant Scherer units rather than our Wansley Combined Cycle natural gas facility. As a result, that month our coal units, too, were used to make beneficial off-system energy sales.
Overall, off-system sales were better than budgeted and generated $6.7 million in margins in 2018. Taking advantage of these beneficial opportunities for our Participants remains a priority.
Off-system energy purchases also created opportunities for us early in the year as natural gas prices were low. While the year ended with $23 million in purchases over budget, an analysis by The Energy Authority shows that these off-system purchases reduced MEAG Power costs by $4.8 million versus running our generation units. This further demonstrates MEAG Power’s flexibility in operating our diversified resources and placing an emphasis on finding opportunity to reduce cost.
The Wansley Combined Cycle natural gas facility, of which we are the sole owner, underwent scheduled major maintenance in 2018 – including steam turbine maintenance for the first time since its construction in 2004. During the outage, numerous procedures were performed, including the upgrade and replacement of many components. As a result, the facility’s capacity has been improved by 7 MWs.
In 2018, Plant Vogtle set a record for a one-outage year, posting an Annual Capability Factor of 96.7%. Vogtle Unit 2 achieved an Annual Capability Factor of 100%, as it operated all 365 days of 2018, and Vogtle Unit 1 posted the second-shortest refueling outage duration for the fleet, just 20.9 days.
We continued to work with our Integrated Transmission System (ITS) partners to make certain this important statewide resource remains reliable and secure. All of the ITS partners, including MEAG Power, continue to invest in system expansions and improvements that address the demands on the system and reliability requirements, especially in the areas of physical and cybersecurity. To monitor the performance of the ITS, MEAG Power carefully tracks key metrics such as outage minutes, breaker operations and substation availability.
Looking ahead, we will continue to maximize the strength of our assets, focus on support of Participant load growth and pursue additional advantageous, long-term wholesale transactions. We continue to assist with remixing opportunities among Participants to balance their loads and resources. Further, we will continue to offer efficient, customized transmission support for new Participant customers as we did in 2018, adding substations in Adel and Fort Valley to serve their new corporate customers, The Linde Group and Pure Flavor, respectively. Both substations were completed on time and on budget, and both companies provided letters praising the work, as well as the team involved in getting it done.
Financial Positions Were Strengthened
MEAG Power manages our finances to maintain a strong, conservative profile. That means closely monitoring market conditions, while also weighing numerous risk factors and anticipating the needs of our Participants. We also place emphasis on maintaining good communication with our Board of Directors and member communities.
In 2018, we continued to pursue initiatives that translate into a low weighted-average cost of debt to finance our capital requirements. To that end, we refunded existing bonds and restructured new placements. The result was a net present value savings of $4.3 million. Additionally, anticipating a rising interest rate environment, we further reduced our exposure to variable-rate bonds, thereby taking more risk off the table.
MEAG Power’s annual debt service obligations peaked in 2014 and are expected to further decline as we pay down debt liabilities related to our operating projects. In ten years, annual debt service obligations for Project One, General Resolution Projects and the Combined Cycle Project are projected to be $200 million less than they are today.
The MCT, which now has a balance of $594.9 million, provides liquidity which, along with our good credit fundamentals plus strong take-or-pay sales contracts, helps MEAG Power retain sound ratings from the bond rating agencies.
Government Affairs Involvement ONGOING
While February’s federal legislation allowing us to monetize Production Tax Credits was a substantial win and a highlight of the year, closely monitoring activities in Washington D.C. and at the state capital, as well as building relationships with decision-makers was ongoing in 2018. We hosted Plant Vogtle visits for Congressional staff groups as well as for our Participants so that visitors could better understand the scope and importance of this project. And, we kept our members alert to those legislative and regulatory discussions and initiatives that were underway and could impact our business.
We are still waiting to see the effects of the 2017 Tax Reform measures on the competitive environment, and we are awaiting the final details of the new Affordable Clean Energy Rule which was proposed by the Environmental Protection Agency in August 2018 to replace the carbon dioxide regulations in the Clean Power Plan.
We believe that the new Georgia leadership team will continue the focus on economic development, and we look forward to establishing positive relationships with Governor Kemp and his staff, the new members of the General Assembly as well as new faces in Washington D.C. We intend to keep the MEAG Power name out front and work to further the recognition of the competitive benefits of our Participant communities, including their public power utilities.
Our Outreach to Participants Is CONTINUED
Throughout the year, we looked to create opportunities that would foster ongoing relationships with our Participants. We held several roundtable meetings throughout the state. We also hosted Orientation Meetings at the MEAG Power headquarters for our member communities to become more familiar with our staff and operations. These face-to-face events are valuable and will be continued in 2019.
In October, we came together, as we had in 2017, to help our communities in South Georgia recover from another devastating blow from Mother Nature. Hurricane Michael was the first hurricane to directly impact Georgia since the 1890s, and the damage was substantial. Through public power mutual aid, utility crews from Participant cities, along with assistance from many organizations, rallied to help restore power and begin the return to normalcy.
In November 2018, we co-sponsored with Electric Cities of Georgia an important Cybersecurity Workshop for our Participants to help them strengthen the cybersecurity culture at their public power utilities. They were introduced to the Cybersecurity Scorecard promoted by the American Public Power Association as a fundamental tool to assess their utilities’ level of cyber readiness. Going forward, we will continue to work with our member communities to approach all aspects of security with increased diligence.
For MEAG Power moving forward, our focus will be on completing Units 3&4 at Plant Vogtle and on addressing such matters as load growth, the evaluation of our generation portfolio and succession planning.
Cost saving remains a primary focus, and we approached the 2019 Annual System Budget with every effort to offset inflation and the higher price of fuel that we are anticipating lies ahead. Above all, we will make certain that what happens when we come together furthers the vitality of our Participant communities as we continue to provide them with affordable, reliable, emissions-free wholesale energy.
Gregory P. Thompson
Chairman
James E. Fuller
President and Chief Executive Officer
April 30, 2019