Fitch Rates Georgia Dev Auth's (Oglethorpe Power Corp) $212.76MM PCRs 2013A
'A'; Outlook to Negative
NEW YORK -- April 5, 2013
Fitch Ratings has assigned an 'A' rating to the following state of Georgia
Development Authority bonds to be issued on behalf of Oglethorpe Power
--$40.53 million Development Authority of Appling County pollution control
revenue (PCR) bonds (OPC Hatch Project) series 2013A;
--$114.565 million Development Authority of Burke County PCR bonds (OPC Vogtle
Project) series 2013A;
--$57.665 million Development Authority of Monroe County PCR bonds (OPC
Scherer Project) series 2013A.
The PCR bonds are expected to price the week of April 15. Proceeds will be
used to refund short-term indebtedness incurred to refinance bonds previously
issued to finance the costs of pollution control facilities.
Fitch also affirms the 'A' rating on the following outstanding OPC bonds:
--$2.55 billion first mortgage bonds, various series;
--$517.34 million unenhanced pollution control revenue bonds, various series.
The Outlook on all bonds has been revised to Negative from Stable and reflects
Fitch's concern that further delays and higher costs related to the Vogtle
nuclear expansion project could weaken the cooperative's operating and
financial profile beyond original expectations.
The 2013A bonds will be secured by a first mortgage lien on substantially all
the cooperative's owned tangible and certain intangible assets.
KEY RATING DRIVERS
STRONG COOPERATIVE FUNDAMENTALS: OPC is among the largest electric
cooperatives in the U.S., providing wholesale power supply to 38 members who
collectively serve 1.8 million customers and 4.1 million people throughout
Georgia. Power is supplied pursuant to joint and several, take-or-pay power
sales contracts that extend to Dec. 31, 2050.
NUCLEAR CONSTRUCTION PROGRAM STRAINS: Recent revisions to the Vogtle
completion schedule and budget are captured in the rating. However, future
challenges to completing construction, accessing low-cost financing and
resolving contractor litigation remain.
INCREASINGLY EXPENSIVE RESOURCE: The Vogtle expansion is emerging as an
increasingly expensive resource vis-a-vis other alternatives, which could
compromise the cooperative's rate flexibility. Positively, lower than expected
interest rates and natural gas costs have moderated the net effect of
Vogtle-related costs on OPC's forecasted wholesale rates.
SUPPORTIVE FINANCIAL POLICIES: OPC has adopted supportive financial policies
and bolstered its financial profile through the early years of its sizable
construction program, which should continue to mitigate the impact of related
borrowings. Fitch views OPC's targeted margins for interest ratio (1.14 times
[x]), and its historically timely recovery of costs, favorably.
WEAKER FINANCIAL METRICS IN 2012: Fitch-calculated funds available for debt
service (FADS) was lower in 2012 weakening metrics for debt service coverage
(1.32x) and total debt to FADS (12.0x) against projected levels. Liquidity
metrics were also lower in 2012 reflecting construction expenditures and
borrowing, but remain robust.
LOW FUNDING RISK: OPC's access to the low-cost Rural Utilities Service (RUS)
and Department of Energy (DOE) guaranteed loan programs is expected to
mitigate construction-related funding risk, but terms of the DOE's $3 billion
commitment are yet to be finalized and accepted. Fitch expects that
alternative financing would be available if necessary, but at considerably
NUCLEAR PROJECT DEVELOPMENTS: Higher Vogtle project costs related to
construction or financing that reduce OPC's financial and operating
flexibility would likely result in a downgrade. Conversely, evidence of strong
progress toward project completion and more predictable costs could stabilize
WEAKENING OF FINANCIAL POLICIES: Any weakening of the financial policies and
initiatives that have supported the cooperative's financial metrics in recent
years would be viewed negatively by Fitch and could pressure the rating.
DIVERSIFIED PORTFOLIO SUPPLIES PARTIAL MEMBER REQUIREMENTS
OPC supplies its members with energy from a diversified portfolio, which
includes ownership interests totaling 7,059 MW in 31 generating units,
including natural gas-fired (50% of capacity), coal-fired (22%), nuclear (17%)
and hydroelectric capacity (11%). In 2012, OPC supplied 57% of its members
total energy requirements. The OPC members satisfy their energy requirements
above the amounts purchased from OPC with purchases from other suppliers.
CONCERNS OVER VOGTLE COST INCREASES AND CONSTRUCTION DELAYS
OPC is participating in the development of the 2,204 MW Vogtle expansion
project. Construction has been on-going since 2009 and accelerated following
the NRC approval of the final AP 1000 reactor design and issuance of the COL
in February 2012. However, OPC and the co-owners recently revised the expected
commercial operation dates for the units from April 2016 and 2017, to the
fourth quarter of 2017 and 2018, respectively. OPC's total estimated cost of
the project was also increased from $4.2 billion to $4.5 billion, as a result
of delays in the COL approval process and challenges related to the initial
construction activity. Litigation between the co-owners and the contractor
over the responsibility of certain costs related to the timing of the design
approval and COL issuance is also continuing and could result in further
revisions to the forecast.
Fitch is aware of the magnitude and complexity of the Vogtle project and has
factored the projected effect of potential delays and costs increases into its
current rating. The Outlook revision reflects Fitch's concern that the current
confluence of higher construction costs, delayed commercial operation,
on-going contractor litigation and uncertain access to low-cost financing
against a backdrop of low natural-gas, low regional energy demand and low
power prices may reduce OPC's financial and operating flexibility to levels no
longer consistent with the current rating.
The effect of the higher project costs on the estimated unit cost of power is
not expected to be material. However, unit costs are now projected to be above
earlier estimates and well above the current market. Unit cost estimates also
assume reasonably strong capacity factors. Weaker operating performance and
higher further increases in fixed costs would drive unit costs to become
Mitigating Fitch's concerns regarding potential further construction delays or
cost increases are (i) the prior experience of the co-owners in constructing
and operating the existing Plant Vogtle and Hatch nuclear units and (ii) the
terms of the engineering, procurement, and construction contract with
Westinghouse Electric Company, LLC and Stone & Webster, Inc. Fitch also
acknowledges the solid accomplishments made to date and that the approval of
certain license amendments and the pouring of the nuclear island base mat
concrete last month were important milestones for the project.
HIGHER LEVERAGE BUT STRONG LIQUIDITY
Leverage metrics have weakened in recent years following the 2011 acquisition
by OPC of the Thomas A. Smith Facility (formerly the Murray Energy Facility),
a 1,250 MW natural gas-fired facility, and lower FADS in 2012. FADS declined
in 2012 from $598 million to $555 million, while debt service and total debt
both increased thereby weakening Fitch-calculated debt service coverage from
to 1.3x from 1.6x and total debt/FADS from 10.8x to 12.0x.
Higher leverage metrics, were anticipated over the near term following the
Smith Facility acquisition, however, the long-term benefits will be
offsetting. OPC's adherence to its financial policies should improve FADS and
moderate leverage despite projected borrowings, but unanticipated challenges
related to the Vogtle could weaken results.
Cash on hand declined from 197 days to 137 days during 2012, but remained
robust overall along with total liquidity (637 days). The cooperative
maintains access to over $1.9 billion in credit facilities.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this
action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Dec. 18, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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