Fitch Affirms Georgia Power's IDR at 'A', Outlook Stable

Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) and security ratings for Georgia Power Company with a Stable Rating Outlook. Fitch's rating assessment follows yesterday's announcement by the company that the contractors for the Vogtle 3 & 4 units are expecting a delay in the construction schedule, which would push the in-service dates of the two units by an additional 18 months. The EPC contract is largely fixed and Georgia Power believes that the contractors are responsible for the incremental construction costs arising from the delay. Georgia Power will continue to incur approximately $10 million per month of owner's costs (which includes oversight costs, compliance costs, and property taxes among other cost) and $30 million per month of financing costs until the units are placed into service.

The construction delay, while a significant unfavorable development for the construction of Vogtle 3 and 4 units, is not causing any ratings pressure for Georgia Power at this time. Georgia Power has not accepted the revised schedule and believes mitigation efforts are possible to narrow the delay.

The terms of the EPC contract largely insulate Georgia Power from the increases in construction costs. This is in contrast to South Carolina Electric & Gas Company's (SCE&G, IDR: 'BBB+') contract with the same contractors for Summer units 2 & 3. SCE&G's contract has fixed, firm and indexed components and as a result, had announced a preliminary increase of $660 million in construction costs for its 55% ownership in the two units due to their construction delay. Fitch had revised SCE&G's Rating Outlook to Negative from Stable following the announcement of the delay in construction schedule. To the extent that Georgia Power can claim and recover liquidation damages from its contractors from the delay in the guaranteed substantial completion dates, it can partially mitigate the projected $720 million increase in owners and financing costs as well as any liability arising from the resolution of the contested amount ($425 million) for the prior delay. It is Fitch's assumption that Georgia Power will seek to recover the incremental costs from ratepayers.

Georgia Power is planning to update the construction schedule for the nuclear units in its next Vogtle Construction Monitoring (VCM) report to be filed on Feb. 27, 2015. The VCM proceedings will be key to gauge the Public Service Commission (PSC) reaction to the extended schedule and economic viability of the Vogtle units after the latest increase in the owners and financing costs. In the prior VCM proceedings, the PSC Staff has concurred with Georgia Power's assessment that the nuclear units remain economic in each of the 12-, 24-, 48- and 60-month delay scenarios. 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.

The latest construction delay has no bearing on the Dept. of Energy's loan guarantee; the loan can be drawn through Dec. 31, 2020 subject to a cap of $3.465 million. The units will remain eligible for production tax credits as long as the units are in service by Dec. 31, 2020.

KEY RATING DRIVERS:

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. The Vogtle 3 & 4 nuclear units have been recovering Capital Work-in-Progress (CWIP) financing costs through a tracker since 2011. Georgia Power's rate case outcome in December 2013 provides for a three-year rate certainty and authorizes rate increases based upon 10.95% ROE. However, the PSC stipulation that requires Georgia Power not to request any further revision in the costs or the schedule of the Vogtle units till the first unit attains substantial completion induces regulatory uncertainty and could become a key source of rating concern as the construction expenditures approach the original certified amount. Fitch expects that any adjustments to the overall project costs will be deemed recoverable by the PSC. Significant project cost overruns that cannot be recovered in rates or unexpected long deferral periods for project cost recovery would be adverse credit factors.

Project Execution Risk: Even prior to the construction delay announced yesterday, the Vogtle units were running behind the originally PSC approved schedule by 21 months and had seen an escalation in capital costs of $381 million. These cost and schedule changes are primarily associated with delays in receiving approval of the Design Control Document (DCD) and contractor delays in completing the Unit 3 basemat concrete. Georgia Power and the other owners of the Vogtle 3 and 4 units are engaged in litigation with the contractors over these increased construction costs. Georgia Power has not ruled out further delays in construction as the contractor continues to face challenges in the fabrication, assembly and delivery of the shield building and structural modules.

High Environment Capex: Georgia Power's annual capex is forecast to be in the $2 billion-$2.6 billion range over 2015-2016, or approximately 3x depreciation. This is high relative to peer utilities and is primarily driven by Georgia Power's share of Vogtle costs. In addition, Georgia Power anticipates spending approximately $500 million in environmental capex over 2015-016 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.

Credit Metrics to Weaken: Georgia Power's credit metrics are strong and compare well with other 'A' rated peers. However, Fitch anticipates a modest decline in the company's credit metrics until 2016 reflecting the pressure from a large construction program. Fitch forecasts Georgia Power's adjusted debt to EBITDAR and FFO adjusted leverage to be approximately 3.4x and 4x, respectively, in 2016.

RATING SENSITIVITIES

Positive: Positive rating actions seem unlikely in the next 12-18 months given the ongoing construction of the Vogtle nuclear units and the associated risks of material costs and schedule overruns. Georgia Power's credit metrics could likely weaken through this long construction cycle.

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

-- Further significant cost overruns or delays in the Vogtle project amid Georgia Power's inability to file for re-certification of costs;

-- Project cost overruns that cannot be recovered in rates or unexpected long deferral periods for cost recovery;

-- While currently not anticipated, any adverse change in Georgia Power's relations with the Georgia PSC.

Fitch affirms the following ratings with a Stable Outlook:

Georgia Power Company

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1';

--Senior unsecured notes at 'A+/F1';

--Pollution control revenue bonds at 'A+' and 'F1';

--Preferred securities at 'A-'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage'(May 28, 2014);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'(Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Utilities'(Nov. 18, 2014);

--'Rating U.S. Utilities, Power and Gas Companies'(March 11, 2014).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978974

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