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Rating Action:

Moody's affirms ratings on MEAG Power's Vogtle Project M, P, and J bonds; rating outlooks for all Projects are negative

14 Aug 2018

Approximately $2.9 Billion of Revenue Bonds Affected

New York, August 14, 2018 -- Moody's Investors Service has affirmed the ratings on the revenue bonds issued by Municipal Electric Authority of Georgia (MEAG Power) for Project M at A2, Project P at Baa2, and Project J at A2, following the recently announced increase in construction and contingency costs relating to the construction of Vogtle Nuclear Units 3 and 4 (Vogtle 3&4). The rating outlook has been revised to negative from stable on Project M and Project P bonds and the negative rating outlook remains on Project J bonds.

RATINGS RATIONALE

The rating affirmations and negative rating outlook for Project M, Project P and Project J bonds reflect the credit negative aspects of the recently announced increase in the total budget for the construction of Vogtle Nuclear Units 3 and 4 recently announced by Georgia Power Company (GPC; Baa1 RUR down) and Southern Nuclear Operating Company, all of which occurred only less than a year after the Joint Owners approved a revised budget. The MEAG Power Projects M, P and J share of the projected cost increases, ($318 million of actual costs and $182million of contingency costs), primarily relate to revised cost estimates for subcontracts, contracts and craft labor, as well as for management and field supervision, all with a focus around improving craft personnel productivity in an effort to meet the in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, which remain unchanged. These developments come at a time when estimates place construction of the project at just over 50% complete. The ability to attract and retain the appropriate craft labor is critical to the progression and ultimate completion of Vogtle 3&4 under the current schedule.

The Joint Owners' revised ownership agreements provide MEAG Power with the option to no longer participate in the project under certain conditions, including if the aggregate project budget increases by more than $1.0 billion over that approved by the Georgia Public Service Commission (GPSC) in December 2017. Since the announced budget cost increase exceeds the $1.0 billion threshold, MEAG Power will be conducting its due diligence on this with its participants in Project M, J and P. A required Joint Owners 'vote to decide on whether to proceed with the project is expected by the end of the third quarter after the 19th Vogtle Construction Monitoring (VCM) report is filed with the GPSC. An affirmative vote by joint owners owning an aggregate of 90% of the ownership interests is required to proceed with the project, and the MEAG Power board will render the vote for the agency's 22.7% interest.

These negative developments are balanced by several mitigants affecting all three of the projects including the potential for MEAG Power to monetize federal production tax credits, which if successful would partially offset the budget increase, as well as the fact that the Chinese Sanmen AP 1000 project has been energized to the electric grid providing an indication that there may be less other first of a kind engineering obstacles ahead for the Vogtle contruction. We also note the strong support for the project from the federal government, which in addition to the federal production tax credits, include a substantial amount of federal loan guarantee commitments including a new loan commitment expected to be exercised in fourth quarter 2018 by MEAG Power for Projects M, J and P.

Project M's A2 rating for the $1.029 billiion in Project M's Vogtle 3 & 4 revenue bonds considers the A2 average underlying credit quality of MEAG Power's 29 municipal participants, and MEAG Power's strong financial and operational role including providing Project M with a strong liquidity profile. Project M's A2 rating also considers the very manageable impact of the phased-in Vogtle 3 &4 costs to wholesale rates owing to the declining debt service schedule on the other MEAG projects and the application of some of the approximate $600 million in Municipal Competitive Trust funds which together mitigate potential cost increases for these municipal participants.

Project P's Baa2 rating for the $460 million Project P Vogtle 3 & 4 revenue bonds considers the credit quality of PowerSouth Energy Cooperative (PowerSouth), the importance of fuel diversity that the nuclear generation provides to the cooperative, and the fact that Vogtle Units 3 & 4 will represent less than 10% of PowerSouth's total energy and capacity when the units are operational. Importantly, PowerSouth needs the incremental generation so even at the higher cost estimates the project is beneficial to their long-term power supply plans. Project P represents 24.955% of MEAG Power's 22.7% ownership interest in Vogtle 3 & 4 and is supported by a strong twenty year take-or-pay PPA between PowerSouth and MEAG Power.

Project J's A2 rating on the $1.433 billion Project J Vogtle 3 & 4 revenue bonds acknowledges the strong credit quality of JEA, FL - Electric Enterprise (Aa2 negative), balanced against the long-power position at the utility. While JEA has voiced concerns about the project, the utility recommitted itself in March 2018 to the take-or-pay contract that secures the Project J revenue bonds. Project J revenue bonds (Project J represents 41.175% of MEAG Power's 22.7% ownership interest in Vogtle 3 and 4) incorporates the strong bond security and the 20-year take-or-pay contract with JEA.

RATING OUTLOOK

The negative rating outlook for Projects M, P, and J factor into the negative outlook of the respective off-takers, the higher construction costs associated with Vogtle 3&4 construction, along with the challenges of a large complex project with three plus years of remaining construction, and engineering and regulatory approval risk which could affect the future cost and schedule. Assuming construction is completed on time and on budget, which will be influenced by an ability to attract a skilled workforce, implementation risks remain including receiving timely approvals from the Nuclear Regulatory Commission, where consideration of certain first-of- a -kind challenges concerning the cyber monitoring system and the AP 1000 reactor design persist. The negative outlook further considers the uncertainty around whether the Joint Owners will continue with the project with the off ramps now available to the Joint Owners.

FACTORS THAT COULD LEAD TO AN UPGRADE

In light of the ongoing construction delays and the uncertainty around the project's future direction, the ratings on MEAG Power M, P, and J bonds are not likely to be upgraded. Should construction continue on track and should the plants be constructed, the project bonds could be upgraded to be more reflective of the off-taker credit quality.

FACTORS THAT COULD LEAD TO A DOWNGRADE

The ratings on the three projects could be significantly pressured if any of the co-owners decide to cease their participation in connection with their upcoming votes, or if the project proceeds forward but construction costs continue to escalate. MEAG Power's M, P, and J ratings could be downgraded if there is a decrease in the level of regulatory, political, public, or co-owner support for the project; or if MEAG Power's participants challenge the take-or-pay contract terms.

LEGAL SECURITY

Project P and J revenue bonds are secured for the first 20 years by take-or-pay power sales contracts with PowerSouth (Project P) and JEA (Project J). After the 20th year, 39 of MEAG's 49 participants are then obligated to pay debt service and O&M on a take-or-pay basis. Project M bonds are secured by the take-or-pay contractual support of 29 of MEAG Power's participants. For each of Project M, P, and J, the underlying contracts are validated in Georgia courts and the contracts are enforecable. Each Project has a fully funded maximum annual debt service reserve for its bonds.

PROFILE

MEAG Power has a 22.7% ownership interest (500.3MW) in the 2,204 MW Vogtle 3 and 4 project that is under construction and is located adjacent to Vogtle Nuclear Units 1 and 2, near Augusta, Georgia. MEAG Power has broken its ownership into three projects M (33.871% of the 22.7% ownership), Project P (24.955% ) and Project J (41.175%) for the purpose of balancing resources and requirements and reducing its construction and operating risk by entering into separate 20-year project participant power sale contracts with JEA and Power South, respectively.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Joint Action Agencies published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniel Aschenbach
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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