Agreement to finish Georgia reactors triggers downgrades

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Uncertainty about future costs to complete two nuclear reactors in Georgia resulted in rating downgrades on the obligations of four Southeast public power agencies, including securities not tied to the reactor project.

S&P Global Ratings on Friday lowered most of the bond ratings of the Municipal Electric Authority of Georgia, Oglethorpe Power in Georgia, JEA – a Jacksonville, Florida utility – and Alabama’s PowerSouth Energy Corp. by one notch.

At the same time, S&P affirmed the ratings on the companies heading up the project, Southern Co. and its subsidiary Georgia Power, even though they assumed more financial risk in the
Sept. 26 agreement between the co-owners that allowed construction on the project at Plant Vogtle to continue.

Dalton, Georgia’s combined utility debt was placed on review to assess its exposure to the new costs for building reactors 3 and 4 at Plant Vogtle.

S&P said it believes that the decision of the public power co-owners to amend the Vogtle joint ownership agreement will continue to expose them “to potentially material cost escalations as they proceed with the projects,” according to reports by S&P analysts Jeffrey M. Panger and David N. Bodek. JEA and PowerSouth, which each have power purchase agreements with MEAG,, are also exposed to the cost escalations, the analysts said.

Combined, the public power owners – Oglethorpe, MEAG and Dalton – own 54.3% of the reactors. Investor-owned Georgia Power owns 45.7%.

“Georgia Power Co., the largest of the co-owners, retains the right to cancel the projects if completion costs exceed prescribed thresholds,” Bodek said. “Should it do so, the municipal co-owners could end up with stranded investments.”

The downgrades included lowering Oglethorpe’s issuer credit rating and senior secured debt ratings to BBB-plus from A-minus, and lowering MEAG’s senior debt rating to A from A-plus and its subordinate-lien debt rating to A-minus from A, respectively.

MEAG Power President Jim Fuller said he was disappointed by S&P’s decision, although it was not a surprise because some S&P’s ratings were a notch higher than Fitch Ratings and Moody's Investors Service.

“We do not expect that this will have a material effect on MEAG Power’s cost of capital,” he said. “We continue to believe that the MEAG Power board made the correct decision in voting to move forward with the Vogtle 3 & 4 project as the ramifications for project cancellation were far more impactful.”

Fuller also said the terms of the new agreement, which provide safeguards for the co-owners against future cost increases, are viewed by Moody’s as having a credit positive effect.

Moody’s assigns A2 ratings to MEAG’s Project J and M bonds, and a Baa2 to Project P bonds, debt issued to finance MEAG’s share of the reactors. Fitch assigns an A rating to the J and M bonds, and an A-minus to the P bonds.

On Monday, Moody’s said the new owners’ agreement to continue work on the nuclear generation facility was a credit positive for Oglethorpe and MEAG because it provides several forms of mitigation and cost shifting in the event that future construction costs exceed the current revised budget or that current litigation between MEAG and JEA affects future capital market access for MEAG.

MEAG and JEA filed lawsuits against each other Sept. 12. MEAG is attempting to enforce a power purchase agreement with JEA, which filed its own lawsuit in an attempt to void the agreement.

While S&P downgraded the two of the three public power co-owners of the Vogtle project, it took Southern Co. and Georgia Power off CreditWatch negative and affirmed Southern’s A-minus issuer credit rating and Georgia Power’s A-minus senior unsecured rating.

The decision to continue construction of the two units includes key amendments to the existing joint ownership agreement, including a provision that future construction cost estimates will no longer be considered constitute an adverse event, said Obioma Ugboaja.

The recent $2.3 billion cost increase announced in August was an adverse event that required the co-owners to vote on whether to continue with construction.

“We expect [Georgia Power’s] parent, Southern Co., will maintain sufficient financial flexibility, including its continued access to the equity markets to respond to specific cost overruns, with a focus towards preserving its credit quality,” Ugboaja said.

All of S&P’s ratings for the project’s co-owners as well as JEA and PowerSouth have negative outlooks.

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