Fitch Ratings has assigned an ‘A+’ rating to Georgia Power Company’s (GPC) issuance of $400 million series 2012B 2.85% senior notes due May 15, 2022.
In addition, Fitch rates the additional $350 million added on to the series 2012A notes ‘A+’. This is part of the same series as the $750 million 4.30% senior notes due March 15, 2042, which were issued on March 6, 2012. Both these notes are senior, unsecured obligations of GPC.
The Rating Outlook is Stable.
Proceeds from the two offerings will be used for the proposed redemption of all or a portion of GPC’s $300 million series 2007D 6.375% Senior Notes due July 15, 2047, to reduce short-term borrowings that stood at approximately $436 million as of May 7, 2012, and for general corporate purposes, including the continuous construction program at the company.
GPC’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 of the pre-approved projects including recovery of costs during the construction period.
Key Rating Drivers
Improved Credit Metrics: GPC’s revenue increases resulting from the December 2010 base rate settlement and bonus depreciation have resulted in significant strengthening of cash flow credit measures. Funds from operations (FFO) interest coverage ratio was 7.3 times (x) for the year ended Dec. 31, 2011, and FFO/debt was 26%. Fitch anticipates a gradual decline in GPC’s financial ratios for 2012 and 2013 under the three-year rate settlement but expects the utility to remain in sound financial condition.
Supportive Regulation: A constructive three-year accounting settlement was reached in Georgia in December 2010 that provided a 2011 rate increase of $562 million and additional rate adjustments in 2012 – 2013. The nuclear cost recovery mechanism and other cost recovery mechanisms are working smoothly. Supportive regulation by the Georgia Public Service Commission (GPSC) is essential to maintain the current ratings in light of the ongoing nuclear construction and high capital budget.
Nuclear Construction Risk: Successful execution of nuclear plant construction is key to maintaining rating stability. In February, the Nuclear Regulatory Commission approved the issuance of the combined construction and operating license for Plant Vogtle nuclear units 3 and 4, which is a significant milestone. While it is still in the early phases of construction, the project is on time and on budget. Significant project cost overruns that cannot be recovered in rates or unexpected long deferral periods for project costs would be adverse credit factors.
High Capital Spending: Capital projects, in addition to GPC’s $6.1 billion share of Vogtle costs, include up to 2,500 MWs of gas-fired combined cycle capacity at Plant McDonough that will be used to replace retiring coal fired capacity. Coal-fired power plants will require ongoing spending for environmental compliance. GPC’s capital expenditures (capex) are forecasted at approximately $2 billion per annum, or more than three times depreciation, for the next few years. This is a high level relative to peer electric utilities.
Positive rating action is considered unlikely while the Vogtle project is underway. On the other hand, cost overruns or delays in the Vogtle project could pressure cash flow and the ratings. In addition, any adverse change in GPC’s relations with the GPSC, which are currently not anticipated, would also likely lead to negative rating action.