Fitch Rates Oglethorpe Power 2014A Bonds 'A'; Affirms Bonds at 'A' & CP at 'F1'; Outlook Negative

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to Oglethorpe Power Corporation's (OPC) $250 million first mortgage bonds, series 2014A, which are scheduled to price via negotiation in June 2014. Proceeds will be used for the long-term financing of general and environmental capital expenditures of existing generation and to redeem a portion of short-term debt.

In addition, Fitch has affirmed OPC's $2.55 billion first mortgage bonds (taxable) and $981 million pollution control revenue bonds (tax-exempt). Fitch has also affirmed OPC's authorized $1.265 billion commercial paper (CP) notes at 'F1'.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by a first mortgage lien on substantially all the cooperative's owned tangible and certain intangible assets. The CP notes, when issued, are unsecured obligations of OPC.

KEY RATING DRIVERS

SOLID INDUSTRY POSITION: OPC is the largest generation and transmission (G&T) electric cooperative in the nation, providing wholesale power supply to 38 members who collectively serve 1.8 million customer meters and 4.1 million people. Power is supplied pursuant to joint and several, take-or-pay power sales contracts that extend to Dec. 31, 2050.

STATUS OF NUCLEAR PROGRAM: The Negative Outlook reflects concerns that the confluence of higher nuclear project construction costs, delayed commercial operation and on-going contractor litigation could reduce OPC's financial and operating flexibility to levels no longer consistent with the current rating. OPC recently closed on a $3.057 billion Department of Energy (DOE) guaranteed loan for the Vogtle project, which is viewed as constructive.

SUPPORTIVE FINANCIAL POLICIES: OPC's board has adopted supportive policies designed to bolster its financial profile during its sizable capital program. Fitch views OPC's targeted margins for interest ratio (MFI) of 1.14x, compared with a 1.10x requirement under the mortgage indenture, and its ability to recover costs, including fuel and purchased power, in a timely manner, favorably.

FINANCIAL METRICS AND LEVERAGE TRAIL MEDIANS: Fitch-calculated ratios for OPC, in totality, are below average for its rating category. While debt service coverage was a reasonable 1.44 in 2013, total debt to FADS (13.5x) remains elevated and equity to capitalization (8.8%) continues below average. Liquidity metrics returned to more acceptable levels in 2013, from reduced levels the year before.

LOW FUNDING RISK: OPC's access to the low-cost Rural Utilities Service (RUS) funds, the DOE guaranteed loan program and ample credit lines largely mitigate construction-related funding risk.

RATING SENSITIVITIES

POTENTIAL FOR STABLE OUTLOOK: Vogtle-related issues remain a critical factor in Fitch's analysis of OPC. Greater certainty of meeting construction timelines and achieving cost estimates could support reinstatement of the Stable Outlook.

DETERIORATION OF FINANCIAL PRACTICES AND RATIOS: A weakening of financial policies and initiatives that have supported financial metrics in recent years, would be viewed negatively.

CREDIT PROFILE

OPC is the largest G&T cooperative in the U.S. in terms of assets ($9.095 billion at Dec. 30, 2013) and energy generation (21,072 GWH in 2013). OPC's fleet of generating units totals 7,747 MW of summer-planning reserve capacity, including 712 MW of combustion turbines (Smarr EMC assets) and 1,240 MW at the Smith Facility, which is currently being used to sell power off-system until 2016. In 2013, OPC supplied 51% of the members' retail energy requirements.

Megawatt-hour (MWH) generation and purchased power by fuel source in 2013 was: nuclear (46.8%), coal (28.6%) and natural gas (24.6%). OPC's share of the Rocky Mountain Pumped Storage Hydro facility (780 MW, 11%) provides additional capacity and fuel diversity, but effectively supplies little power.

VOGTLE PROJECT

The most significant component of the OPC capital plan is its participation in the development of two additional units (units #3 and #4) at the existing Plant Vogtle site. The units will use the new Westinghouse AP1000 technology and, combined, these new units will provide OPC with 660 MW of additional capacity.

Construction activity has been on-going at the site since 2009 and accelerated following the NRC approval of the final AP 1000 reactor design in February 2012. OPC and the co-owners previously revised the expected commercial operation dates for the units from April 2016 and 2017 to the fourth quarter of 2017 and 2018, respectively, and increased the estimated total cost of the OPC's project share from $4.2 billion to $4.5 billion (including allowance for funds during construction and contingencies). Commercial responsibility for the revised commercial operation dates and additional costs remain in dispute. OPC's share of the amount specified in the contractor's claim is $280 million.

SIZEABLE CONSTRUCTION BUDGET

As of Dec. 31, 2013, OPC's investment in the new Vogtle units totaled $2.1 billion. In addition to the $725 million initial advance under its DOE loan agreement, at a fixed interest rate of 3.867% through Feb. 20, 2044, OPC previously issued $1.4 billion of taxable first mortgage bonds; and the utility expects that it will finance any additional project costs in the capital markets, in excess of the DOE funding.

OPC's total projected capital expenditures for 2013-2016 remain sizable and are currently estimated at $2.34 billion. The estimate assumes 85% will relate to future and existing generation, 13% for nuclear fuel and the rest for environmental compliance and general plant. Environmental compliance projects principally relate to the coal-fired plants Scherer and Wansley.

FINANCIAL PROFILE STEADY

Net margins totaled $41.5 million in 2013, which allowed OPC to successfully achieve the 1.14 margins for interest ratio approved by the board. Net margins at OPC continue to gradually improve reflecting the cooperative's strategy of increasing earnings to offset the impact of construction-related borrowings. Fitch calculated debt service coverage (DSC) rose to 1.44x in 2013, up from 1.32x in 2012, but still remains below previous levels. The board approved an MFI ratio of 1.14x for 2014, in line with previous years' target. However, even with this coverage policy, the G&T will likely continue to experience a reduced equity ratio and high debt-to-FADS for several more years due to heavy borrowings. Members' financial results are satisfactory.

DEBT PROFILE

At March 31, 2014, OPC had $6.9 billion of long-term debt outstanding under its first mortgage indenture. At completion of Vogtle, OPC expects to have $9.2 billion of debt outstanding. Short-term borrowings fell considerably in 2013 to $279.4 million from $569.5 million the year before, and as a percentage of total debt outstanding.

COMMERCIAL PAPER PROGRAM

OPC's commercial paper (CP) notes are authorized up to $1.265 billion. OPC had $269.7 million of CP outstanding at the end of March 31, 2014. The CP notes rank pari passu with all other unsecured and unsubordinated indebtedness of OPC. Net proceeds from the sale of notes are used to meet working capital requirements and for general corporate purposes. Maximum maturity is 270 days. At March 31, 2014, total available liquid resources divided by total maximum potential liquidity requirement equaled 1.50x.

The CP notes are primarily supported by high-quality, highly liquid assets in the form of OPC's own cash and investments, and access to the cooperative's $1.265 billion syndicated line of credit. The credit facility can be used for general corporate purposes, issuing letters of credit and backing up the CP. The credit facility has a current expiration date of June 8, 2015.

Additional information is available at 'www.fitchratings.com'.

The rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);

--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

U.S. Public Power Peer Study -- June 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Peer Study Addendum -- February 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833191

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com