Fitch Rates Georgia Power's Senior Notes 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Georgia Power Company's (Georgia Power) issuance of $500 million series 2015A 1.95% senior notes due Dec. 1, 2018. The notes are senior, unsecured obligations of Georgia Power. The Rating Outlook is Stable.

The net proceeds from the offering will be used to repay the upcoming maturity of $250 million series Z 5.25% senior notes due Dec. 15, 2015 and to repay all or a portion of Georgia Power's outstanding short-term indebtedness and for general corporate purposes, including the continuous construction program at the company.

Georgia Power's ratings are supported by the solid financial profile of the integrated utility which benefits from constructive regulation in Georgia that limits regulatory lag. Currently, the utility is in the midst of a significant capital program that includes the construction of two new nuclear units at the Vogtle site. The execution risk associated with this significant project and the attendant external financing needs are also considered in the ratings. The Stable Outlook reflects the expectation that the company will continue to receive constructive regulatory treatment including recovery of the construction work in progress (CWIP) financing costs on the new Vogtle units.

KEY RATING DRIVERS

Resolution of Pending Litigation: Fitch views the recent resolution of the pending litigation between Vogtle owners and EPC contractors, changes in the EPC agreement, and the contractor changes, as a positive development for Georgia Power. Based on its ownership interest, Georgia Power will pay approximately $350 million to resolve the pending litigation versus the contractors' outstanding claims of $714 million related to the first 21 months of the construction delay. In return, Georgia Power was able to secure certain favorable amendments to the original EPC agreement that significantly limits the circumstances that the contractors could claim as material changes to the nuclear regulatory law, thereby, reducing the likelihood of future disputes. The modified EPC agreement also confirms the in-service dates as June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4.

Fitch also views Westinghouse's acquisition of the Stone & Webster nuclear construction business from Chicago Bridge & Iron Company N.V. (CB&I, not rated by Fitch) and the potential engagement of Flour Corporation ('A-'/Stable Outlook) as a subcontractor favorably. Now that Westinghouse has assumed the role of the primary contractor, Fitch's concerns regarding inter-creditor disputes and CB&I's credit worthiness have diminished. While the Shaw Group's guarantee of certain Stone & Webster obligations will terminate, Toshiba Corporation (the parent) will continue to guarantee certain Westinghouse obligations.

High Project Execution Risk: The new Vogtle units are experiencing a significant delay in the construction schedule and the timeline has slipped 39 months from the originally proposed April 2016 and April 2017 completion dates. The Georgia Public Service Commission (GPSC) has not been inclined to recertify the original costs or schedule until the first unit reaches substantial completion. This induces regulatory uncertainty if costs escalate significantly. The EPC contract is largely fixed, however, Georgia Power will continue to incur approximately $10 million per month of owner's costs and $30 million per month of financing costs that would need to be recovered from ratepayers. The construction delay is not causing any ratings pressure for Georgia Power at this time. Fitch expects that any adjustments to the overall project costs will be deemed prudent and recoverable by the PSC. Georgia Power sees no change to its assessment of a 6%-8% impact on customer rates as a result of the construction delay and this should minimize the regulatory risk, in Fitch's opinion.

Constructive Regulation: Georgia Power's ratings are supported by the solid financial profile of the integrated utility which benefits from constructive regulation in Georgia that limits regulatory lag. Georgia Power's rate case outcome in December 2013 provides for a three-year rate certainty and reflects an authorized ROE of 10.95% that is above industry average. The ability to recover the CWIP financing costs on the new Vogtle units has alleviated pressure on credit metrics. Fitch expects Georgia Power to file a general rate case in 2016 for new rates to be effective January 2017.

High Environment Capex: Georgia Power's annual capex is forecast to be in the $2.1 billion - $2.4 billion range over 2015 - 2017 and is primarily driven by Georgia Power's share of Vogtle costs. Georgia Power environmental capex is winding down, and the company anticipates spending approximately $750 million over 2015 - 2017, mostly for compliance with the Mercury and Air Toxics Standards (MATS) rule. While Georgia regulations do not allow for automatic recovery of environmental costs, Georgia Power has historically been granted adequate rate relief on its environmental capex.

Modest Weakening of Credit Metrics: Fitch anticipates a modest deterioration in Georgia Power's credit metrics until 2017, reflecting the pressure from a large construction program. Fitch forecasts Georgia Power's adjusted debt/EBITDAR and FFO-adjusted leverage to be approximately 3.4x and 4.0x, respectively, in 2017. The financial forecasts assume a constructive outcome in Georgia Power's next rate case filing for new rates effective January 2017 that allows Georgia Power to earn an ROE close to the current authorized levels.

KEY RATING ASSUMPTIONS

--1.5% increase in electricity sales;

--Base rate increases of $136 million effective Jan 1, 2015;

--Nuclear Construction Cost Recovery (NCCR) tariff increases of 0.3% in 2015, and between 0.5% - 1% over 2016 - 2017;

--Environmental Compliance Cost Recovery (ECCR) tariff increase of $22.7 million in 2015 and $120 million in 2016;

--Vogtle 3 & 4 in-service in 2019 and 2020.

RATING SENSITIVITIES

Positive: Positive rating actions for Georgia Power are not anticipated at this time.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Material cost and/or schedule escalation for Vogtle units and any adjustments to the overall project costs not deemed recoverable by the Georgia PSC;

--Faltering regulatory support in Georgia regarding the Vogtle units and unfavorable outcome in the next general rate case to be filed mid 2016; and

--FFO adjusted leverage weakens to 4.25x or higher on a sustained basis.

Date of Relevant Rating Committee: June 5, 2015.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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Contacts

Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Julie Jiang
Director
+1-212-908-0708
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Julie Jiang
Director
+1-212-908-0708
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com