New York, June 21, 2021 -- Moody's Investors Service has assigned a Baa1 rating to the Municipal Electric Authority of Georgia's (MEAG Power) planned issuance of approximately $135 million of Plant Vogtle Units 3&4 Project J Bonds, Series 2021A. The bonds are expected to be issued in July 2021, but the actual amount of issuance could change subject to market conditions. The Series 2021A bonds will rank pari passu with about $1.95 billion of MEAG Power's other Project J revenue bonds which are also rated Baa1 and about $672 million of DOE Guaranteed Loans outstanding at May 31, 2021. The outlook is positive.
RATINGS RATIONALE
Today's rating assignment reflects the credit quality of JEA, FL - Electric Enterprise ("JEA", A2 Positive), who is the sole source of revenues for MEAG Project J for the first 20 years of principal and interest on each series of bonds, through a court validated take-or-pay (TOP) contract that MEAG has with JEA to unconditionally fund O&M and debt service costs. Also considered is the importance of fuel diversity that the carbon neutral nuclear generation provides and that the Vogtle Units 3&4 will represent about 13% of JEA's total capacity when the plant is operational. The rating also acknowledges that capacity and energy revert to MEAG Power in year 21 when O&M and debt service costs will be borne by 39 MEAG Power municipal participants with a currently estimated weighted average credit quality of A2. During this time, the Project J bonds further benefit from the additional security provided by the general obligation (GO) full faith and credit pledge of its participants.
Tempering the strength of the credit profile, Vogtle Units 3&4 continue to face increased costs associated with construction delays. In a recent testimony by the Construction Monitor in June 2021 to the GPSC regarding the Vogtle Construction Monitoring Report 24 (VCM 24), the Construction Monitor stated that forecasted in-service dates for Vogtle Units 3&4 would be mid-2022 and mid- to late-2023, respectively, due to, among other matters, poor construction productivity and production, including delayed system turnover. Additional construction costs associated with the delay would exceed Georgia Power Company's ("GPC", Baa1 Stable) 2018 construction budget of $17.1 billion for all co-owners, by around $2.0 billion. Since 2018, GPC had increased the Vogtle Units 3&4 construction budget, including contingency, by approximately $816 million for all co-owners (see below). The Vogtle Unit 3&4 Project Entities pro rata portion of the remaining $1.2 billion of additional in-service construction cost if it is incurred and all project-level contingency amounts are utilized would be approximately $272 million. In that case, the Vogtle Units 3&4 Project Entities may require additional financing to fund increases in the in-service construction budget and additional financing needs.
Per the VCM 24 filed in February 2021 by GPC, the in-service date for Unit 3 was to have been delayed to December 2021 rather than November of this year, with an estimated cost increase of $385 million, and Unit 4's in service date was previously anticipated for November 2022. Since then, the in-service date for Unit 3 was changed to January 2022 and additional cost increase estimates of $106 million have also been incurred escalating the total additional cost of the entire project to $491 million and the total cost to above $6.6 billion ($7.1 billion including reserve funding). The MEAG project entities will be responsible for 22.7% of the $491 million cost increase, or approximately $111 million in additional costs. Project M will be allocated approximately $37.8 million of the $111 million corresponding with their 33.87% ownership of MEAG's share in the project Vogtle Units 3 & 4.
The total project maintains $383 million in contingencies, while $100 million of contingency will be held by the Vogtle Units 3&4 Project Entities. The $100 million which will be funded with proceeds of the 2021 offering remains unassigned and available, somewhat mitigating the concern for additional cost increases that may require further debt funding and resulting higher rates passed onto customers. MEAG Power notes that their existing contingencies would be sufficient to fund costs associated with a delay of the in-service dates for both Unit 3 and Unit 4 until the latter part of the first fiscal quarter of 2022 and 2023, respectively, which is credit positive, but not as long as the Construction Monitor's testimony of mid-2022 and mid-late 2023. Partially mitigating the current and possible additional borrowings are the lower realized financing interest rates are 2.34% less than the projected initial 5.91% rate, providing a significant cost benefit to the MEAG projects.
There are challenges associated with necessary productivity improvements and remediation of prior work. In addition to productivity levels and the pace of activity completion at the site having been impacted by coronavirus related cases, the project continues to face challenges including higher than expected absenteeism, overall construction and subcontractor labor productivity (management of contractors and vendors, supervision of craft labor); system turnover and testing activities; and electrical equipment and commodity installation. In January 2021, the start of the hot functional testing and fuel load for Unit 3 were delayed to late April 2021 from February 2021 and to the third quarter of 2021 from June 2021, respectively.
Despite the delays, the project continues to progress towards completion. Unit 3 achieved the start of its final testing phase, the hot functional test, while unit 4 construction is entering its critical period and recently achieved major milestones including the installation of the shield building roof and passive safety cooling water tank while also commencing integrated flush activities. As of March 2021, the total project is an estimated 92% complete and, despite the recent issues, all parties remain dedicated to the completion of the project.
Project J's credit profile further reflects the benefits of the settlement agreement between MEAG and JEA which was reached on July 30th, 2020 and executed on August 13th, 2020, resolving all disputed issues relating to the Vogtle Units 3&4, and the Amended & Restated Power Purchase Agreement (PPA) dated as of December 31, 2014 (the Project J PPA) including acceptance of the court's determination that the Project J PPA was binding and enforceable upon the parties, and additional compensation obligation to MEAG Power from JEA, while also giving JEA a right of first refusal, subject to the rights granted to the Project J Participants in their Power Sales Contracts, to purchase any entitlement share of a Project J participant in the 21st year following commercial operation (COD) of the Vogtle Units 3&4.
RATING OUTLOOK
The positive outlook considers the positive outlook at JEA, whose PPA with MEAG Power provides the sole source of repayment for the MEAG Project J bonds for the first 20 years of principal and interest on each series of bonds. The positive outlook also reflects the continued expectation that, despite new construction delays which, under the most recent Construction Monitor's testimony, could delay Unit 3 & 4 in-service dates until possibly at least mid-2022 and mid-to-late 2023 respectively. MEAG - Project J remains largely protected from significant cost increases as a result of sizable remaining contingency which will last through the latter part of the first fiscal quarter of 2022 and 2023 for Units 3&4 respectively, with limited potential additional borrowing required.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
- An improvement in JEA's credit profile could exert positive pressure on the rating which will be largely influenced by the progress made towards Vogtle 3&4's reaching commercial operations and attaining successful operations
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- A negative action could result if there is any material decrease in currently strong regulatory, political, public and co-owner support for the Vogtle project
- Any further significant construction delays in the Vogtle project that substantially increases the project costs leading to an impairment or abandonment decision by the co-owners
LEGAL SECURITY
The Project J bonds are secured by a pledge of the Bondholder's Trust Estate under the Project J Bond resolution which includes proceeds from the sale of Project J bonds and a pledge of the Shared Trust Estate under the Project J Bond resolution on parity basis with debt service on the Project J DOE guaranteed loan, which includes revenues derived from take-or-pay Project J power purchase agreements between MEAG Power and JEA and power sales contracts between MEAG Power and the Project J participants.
The payments are required whether or not the project is constructed or operable. A fully funded maximum annual debt service reserve is available for Project J.
Under the PPA, JEA will pay (a) all operating costs of Project J attributable to each of Vogtle Units 3&4 for the first 20 years after commercial operation of each unit and (b) the first 20 years of debt service costs of Project J attributable to each of Vogtle Units 3&4. After the 20-year period during which JEA is responsible for the payment of operating and debt service costs, those costs become the obligations of the 39 MEAG Power Project J participants which have that have an A2 weighted average rating. If payment is not made from the revenues of a MEAG Power Project J Participant's electric system, the MEAG Power Project J participant is required to include in its general revenue or appropriation measure or annual tax levy amounts sufficient to make the payment required under its Project J power sales contract
For Project J, the underlying contracts were validated in the Superior Court of Fulton, County, Georgia in the case of the State of Georgia vs. MEAG Power et al, Civil Action No. 2008 CV 159297 by judgment November 18, 2008; on January 19, 2010 and April 20, 2015.
USE OF PROCEEDS
The Plant Vogtle Units 3&4 Project J Bonds, Series 2021A will be issued to finance a portion of the Cost of Acquisition and Construction of the Project J Entity's Ownership Interest, provide a portion of the money required to refund the outstanding Bonds, fund a capitalized interest account on the Series 2021A Bonds through December 31, 2021 and a portion of the interest accruing through November 30, 2022, fund the Series 2021A Debt Service Reserve Account and to pay related costs of issuance.
PROFILE
MEAG Power has a 22.7% ownership interest (500.3 MW) in the 2,204 MW Vogtle Nuclear 3 and 4 Project (Vogtle 3&4) which 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: Project M (33.87% of the 22.7% ownership), Project P (24.955% of the 22.7% ownership) and Project J (41.175% of the 22.7% ownership) 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 PowerSouth Energy Cooperative ("PowerSouth", A3 Stable) and JEA, respectively.
METHODOLOGY
The principal methodology used in this rating was US Municipal Joint Action Agencies Methodology published in August 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1207102. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
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