Fitch Rates Georgia Power Company's Senior Notes 'BBB+'
Wednesday, May 10th, 2023
Fitch Ratings has assigned a 'BBB+' rating to Georgia Power Company's $750 million series 2023A 4.65% senior notes due May 16, 2028 and $1.0 billion series 2023B 4.95% senior notes due May 17, 2033. Georgia Power intends to use the net proceeds from these issuances to repay $200 million outstanding under an uncommitted credit facility, repay all or a portion of its CP borrowings and for general corporate purposes.
The Issuer Default Rating (IDR) for Georgia Power is 'BBB' with a Stable Rating Outlook. The ratings reflect stable and predictable cash flow generation of Georgia Power's regulated electric utility operations, constructive regulation in Georgia and robust growth across its service territory. The ratings also capture the still elevated, albeit diminishing, execution risks regarding the construction and testing of Vogtle 3 and 4 nuclear units. Vogtle 3 unit is expected to enter in-service in the second quarter of 2023 and Unit before then end of the first quarter of 2024.
KEY RATING DRIVERS
Vogtle Construction Execution Risk: The execution risks associated with the construction and testing of Vogtle 3 and 4 nuclear units continue to remain high, albeit these risks are abating as Unit 3 undergoes start up and commissioning activities preparing to commence operations in May or June of 2023. Unit 4 is expected to be operational in late 4Q23 or 1Q24. The availability of craft labor at Unit 4, construction productivity and outcomes of testing activities remain key to keep the schedule on track.
The capital costs to complete the two units is currently $10.6 billion, which is above the $7.3 billion costs deemed reasonable per a prior order by the Georgia Public Service Commission (PSC). The prudency proceeding on cost recovery will commence during Unit 4 fuel load. A further delay in the in-service dates could result in additional capital costs of approximately $15 million per month for Unit 3, and approximately $35 million per month for Unit 4, as well as related financing costs.
Constructive Resolution of Co-Owners Dispute: Fitch views the settlement Georgia Power reached with Municipal Electric Authority of Georgia (MEAG) regarding the dispute over cost sharing and tendering provisions as constructive. Under the terms of the settlement, MEAG will not exercise the tender option and retain the full ownership interest in Vogtle 3 and 4 units. Georgia Power will pay MEAG $75 million to reflect the cost-sharing provision based on current capital cost forecast. For costs above the current forecasts, Georgia Power will bear 20% of MEAG's costs with no further adjustment for force majeure costs. Georgia Power and MEAG also agreed to dismiss the pending litigation between the two parties.
This settlement does not have any impact on the ongoing litigation proceedings with the other two co-owners, Oglethorpe Power Corporation and the City of Dalton. Both co-owners have exercised their tender options.
Georgia Power has recorded $407 million of pretax charges to date associated with the cost sharing and tender provisions with the co-owners. It may have to bear an additional $345 million of costs under the co-owners' interpretation of sharing and tender provisions based on the current estimated project costs. Georgia Power will not be able to recover these incremental costs from retail customers.
Constructive Rate Order: Georgia Power received a constructive outcome in its 2022 base rate case, which provided for base rate increases of $216 million, $377 million, and $403 million effective Jan. 1 of 2023, 2024, and 2025, respectively. The proposed rate increases are based on a retail ROE midpoint of 10.5% with a ROE range of 9.5% - 11.9% and equity ratio of 56%. For earnings above 11.9% retail ROE, 40% will be applied to accelerated write-down of regulatory assets, 40% will be refunded to customers and 20% retained by Georgia Power.
Financial Metrics to Strengthen: Georgia Power's FFO leverage weakened in 2022 to 6.8x largely driven by $2.2 billion of under-recovered fuel balance. The company has reached an agreement with the Georgia Public Service Commission Staff that will allow a three -year recovery of the deferred fuel costs beginning June 1, 2023. This, along with base rate increases in accordance with the December 2022 rate order, should lead to an improvement in Georgia Power's leverage metrics. Fitch expects FFO leverage to improve to mid-3.0x in 2024 once both the Vogtle Units are in-service, which should pave the path for future upward ratings movement.
Robust Sales Growth: Electricity sales in Georgia Power's service territory have recovered well, reaching pre-pandemic levels in 2022. Georgia economy continues to perform well benefiting from strong population growth and a favorable business climate. Weather-adjusted residential and commercial sales increased by 2.2% and 2.5%, respectively, in the first quarter of 2023 compared with the comparable period in 2022. However, industrial sales have begun to weaken, especially in certain sectors such as textiles, rubber and chemicals. During the first quarter of 2023, weather-adjusted industrial sales decreased by 2.1% when compared to the corresponding period in 2022.
Georgia Power is weakly positioned with respect to its integrated electric utility peers such as Virginia Electric Power Company (VEPCo; A-/Stable) and Oklahoma Gas and Electric Company (OG&E; A-/Stable) due to the execution risks surrounding the completion of the Vogtle 3 and 4 units. Continued costs or schedule escalations, which cannot be ruled out, could test the regulatory environment in Georgia, which otherwise has had a long track record of being constructive and predictable for its utilities and has been a key driver of Georgia Power's ratings. Both VEPCo and OG&E operate in regulatory jurisdictions that Fitch consider credit supportive.
The near-term FFO leverage metrics for Georgia Power are elevated due to fuel under-recovery. Fitch expects Georgia Power's FFO leverage to improve to mid-3.0x once both the Vogtle Units are in-service. This compares with forecasted FFO leverage metrics of mid-3.0x at VEPCo and 4.0x at OG&E.
Fitch's key assumptions within the rating case for Georgia Power include:
--Vogtle 3 and 4 construction costs and schedule per the latest estimates;
--Rate increases as reflected in the December 2022 PSC order;
--Recovery of under-recovered fuel expenses over a three-year period; and
--Retail sales growth of 0.5% - 1.0% over 2023-2024.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Positive rating actions are unlikely until Vogtle Unit 3 is placed in-service.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Cancellation of the Vogtle project;
--Further material cost or schedule escalation for Vogtle 3 and 4 units;
--Any material adjustments to the overall project costs not deemed recoverable by the Georgia PSC or absorbed by Georgia Power;
--Deterioration in the regulatory environment in Georgia;
--FFO leverage sustaining above 5.0x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Georgia Power has adequate access to liquidity, in Fitch's view. The company had unused committed credit arrangements with banks of approximately $1.7 billion as of March 31, 2023. The credit facilities expire in 2026 and have a 65% debt/cap covenant. The credit arrangements provide liquidity support to Georgia Power's CP program and approximately $819 million was dedicated to funding potential purchase obligations related to variable-rate pollution control revenue bonds as of March 31, 2023.
Georgia Power may also meet short-term cash needs through a subsidiary of parent, The Southern Company, organized to issue and sell CP for the benefit of Georgia Power and other affiliates. Near-term debt maturities are manageable, in Fitch's view. Under a loan guarantee agreement with the Department of Energy (DOE), the department will guarantee borrowings by Georgia Power under a multi-advance credit facility with the Federal Financing Bank in return for a first-priority lien on Georgia Power's 45.7% ownership in the Vogtle 3 and 4 units.
In March 2019, Georgia Power entered into an amended and restated loan guarantee agreement with the DOE that allows for up to approximately $5.13 billion of borrowings to fund the construction of Vogtle 3 and 4. Georgia Power had borrowed $5.13 billion under the loan guarantee program as of March 31, 2023.
Georgia Power is an integrated electric utility that provides retail electric service to approximately 2.7 million customers within the State of Georgia. The utility also provides wholesale electric service to public power entities and non-affiliated utilities.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch provides equity credit to hybrids in accordance with Fitch's applicable criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.