Fitch Rates Oglethorpe Power 2016A Bonds 'A', Affirms Outstanding Bonds & CP; Outlook Negative
OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following bonds issued by Oglethorpe Power Corporation's (OPC):
--$250 million first mortgage bonds, series 2016A.
The bonds are scheduled to price via negotiation in April 2016. Proceeds will be used to finance expenditures related to Plant Vogtle Units No. 3 and No. 4 and Smith Energy Facility.
In addition, Fitch has affirmed its 'A' rating on OPC's $2.8 billion first mortgage bonds (taxable) and $981 million pollution control revenue bonds (tax-exempt) issued by various issuers. Fitch has also affirmed OPC's authorized $1 billion commercial paper (CP) notes at 'F1'.
The Rating Outlook is Negative.
The bonds are secured by a first mortgage lien on substantially all the cooperative's owned tangible and certain intangible assets. The CP notes, when issued, are unsecured obligations of OPC.
KEY RATING DRIVERS
SOLID INDUSTRY POSITION: OPC is the largest generation and transmission (G&T) electric cooperative in the nation, providing wholesale power supply to 38 members who collectively serve 1.9 million customer meters and 4.2 million people. Power is supplied pursuant to joint and several, take-or-pay power sales contracts that extend to Dec. 31, 2050, beyond the life of all outstanding debt.
NUCLEAR CONSTRUCTION CHALLENGES: The Negative Outlook reflects Fitch's concern that additional construction delays and/or cost overruns related to the Vogtle nuclear project expansion could result in future rate pressures and reduced financial and operating flexibility no longer consistent with the current rating. Challenges to date have already driven OPC's share of project costs from $4.2 billion to $5 billion and in-service dates from 2016/2017 to 2019/2020.
NUCLEAR CONTRACTOR CONCERNS: Although Fitch views positively the recent consolidation of the Vogtle contractors (Westinghouse Electric Company LLC and Stone & Webster, Inc.), as well as a settlement between the contractors and co-owners, increasing concerns over the weakening credit profile of Toshiba Corporation (not rated by Fitch) are also driving the continuance of the Negative Outlook. Toshiba is the majority owner of Westinghouse and has guaranteed certain Westinghouse obligations. Letters of credit mitigate some of the risk.
SUPPORTIVE FINANCIAL POLICIES: OPC's board has adopted supportive policies designed to bolster its financial profile during its sizable capital program. Fitch views favorably OPC's targeted margins for interest ratio (MFI) of 1.14x, robust liquidity, and its ability and willingness to recover costs, including fuel and purchased power in a timely manner. Despite higher leverage, OPC's coverage and liquidity metrics remain solid.
LOW FUNDING RISK: OPC's access to low-cost Rural Utilities Service (RUS) funds, the Department of Energy (DOE) guaranteed loan program and ample credit lines help mitigate construction-related funding risk.
ADVERSE NUCLEAR DEVELOPMENTS: Further adverse developments related to the development of the Vogtle Nuclear Units 3 and 4, including sizable cost overruns, extensive delays or contractor insolvency, that result in rate pressures and ultimately lead to erosion in Oglethorpe Power Corporation's financial metrics, the competitiveness of its power supply and the credit quality of the participating member cooperatives could result in a rating downgrade.
POTENTIAL FOR STABLE OUTLOOK: Evidence that the Vogtle expansion project is likely to be completed within the current time and cost parameters and that the credit quality of the Vogtle contractor and its guarantor has improved could stabilize the Outlook.
OPC is the largest G&T cooperative in the U.S. in terms of assets ($10 billion at Dec. 31, 2015) and energy generation (22,551 GWH in 2015). OPC provides wholesale electric service to its 38 member cooperatives located throughout Georgia. Collectively the OPC members serve a vast region covering approximately 38,000 square miles (65% of the state's land area) and encompassing 151 of the state's 159 counties. The member service territory exhibits considerable size, strength, breadth and diversity, which Fitch views very favorably.
OPC's fleet of generating units totals 7,785 MW of summer planning reserve capacity, including 718 MW of combustion turbines (Smarr EMC assets), and is well diversified. Megawatt-hour (MWH) generation and purchased power by fuel source in 2015 was: nuclear (42%), natural gas (30%) and coal (23%). OPC's share of the Rocky Mountain Pumped Storage Hydro facility (817 MW, 5%) provides additional capacity and fuel diversity, but effectively supplies little power. In 2015, OPC supplied 48% of the members' retail energy requirements.
VOGTLE NUCLEAR PROJECT
OPC is participating in the Vogtle nuclear expansion project along with the current co-owners. Units No. 3 and No. 4 are being developed pursuant to an engineering, procurement and construction (EPC) agreement with Westinghouse and Stone & Webster, using the Westinghouse AP1000 technology. On Dec. 31, 2015, Westinghouse acquired Stone & Webster, consolidating the related responsibilities and liabilities. The project will provide OPC with 660 MWs of additional capacity once complete.
The Vogtle project has been subject to extensive delays and cost overruns, which is a concern for Fitch and the primary factor driving OPC's Negative Outlook. Originally expected to be completed June 2016 and June 2017, Units No. 3 and No. 4 are now scheduled to enter commercial operation in June 2019 and June 2020, respectively, largely as a result of challenges related to design approval, issuance of the construction and operating license, module fabrication and general construction activities. The total budget for OPC's 30% share of the units, including capital costs, allowance for funds used during construction and some contingency is now $5 billion, up from initial estimates of $4.2 billion.
Fitch views the acquisition of Stone & Webster and the recent settlement agreement between the co-owners and Westinghouse as positive for OPC. Importantly, the agreement effectively resolves all outstanding claims between the co-owners and the contractor and restricts the contractor's ability to seek further increases in the contract price. Moreover, with Westinghouse assuming the role of the primary contractor, concerns regarding inter-contractor disputes, which have plagued the project, should lessen.
However, Fitch has become increasingly concerned with the weakening credit profile of Toshiba, which is the majority owner of Westinghouse and has guaranteed certain Westinghouse obligations. Toshiba's credit rating has been lowered to well below investment grade by the other two rating agencies and prolonged financial weakness or insolvency could compromise project development and/or Toshiba's ability to perform under its guarantee. Given the amended terms of the EPC contract, and the increased responsibility for the contractors to bear cost overruns, performance under the guarantee could become increasingly important to the co-owners.
Westinghouse has provided letters of credit from two banks totaling $920 million to the co-owners in support of its obligations, as required under the EPC contract, partially mitigating Fitch's concern.
SIZEABLE CONSTRUCTION BUDGET
OPC's capital-expansion plan remains sizable. The current plan is cumulatively sized at $3.67 billion for period 2016-2021 and will continue to be dominated by Vogtle-related expenditures ($2.49 billion). The remaining expenditures will include additions and replacements to the existing fleet ($920 million) as well environmental projects at the coal-fired Wansley and Scherer units ($257 million). Although both Wansley and Scherer are compliant with most prevailing regulations, expenditures related to coal ash disposal and water treatment will be necessary. Aside from the new Vogtle units, no additional generating units or capacity is planned over the forecast period.
External funding requirements related to the capital plan, remain significant. OPC estimates for the period of 2016-2021, more than $5 billion in long-term financing will be required to fund the capital requirements, repay short-term borrowings, and meet scheduled maturities. Long-term first mortgage bonds, long-term bank loans and borrowings available through the RUS loan program will help fund the bulk of its capital requirements, while future advances under the DOE loan guarantee program are projected to fund nearly 80% of the remaining Vogtle project capital requirements. OPC's strategy to broadly diversify its funding sources benefits the cooperative.
FINANCIAL PROFILE STEADY
Operating performance at OPC remained stable in 2015, reflecting the cooperative's consistent rate-setting strategy and capitalization of interest related to the Vogtle expansion project. Operating and net income were both largely consistent with the prior year at $257 million and $48 million, respectively. Fitch-calculated debt service, adjusted for capitalized interest, was slightly lower at 1.44x (versus 1.48x in 2014), but also consistent with performance since 2013.
Despite increased debt outstanding ($7.84 billion versus $7.51 billion), leverage also remained in-line with metrics since 2013. The ratio of debt/funds available for debt service (FADS) rose slightly to 12.9x from 12.6x, but debt/capitalization improved to 90.2% from 90.5%. The stable ratios largely reflect OPC's consistent rate-setting, which has gradually improved FADS and net income to offset increased borrowings.
Leverage is forecast to rise through 2018 to approximately 14.2x as borrowings outpace growth in earnings and cash flow before declining to a more reasonable 9.0x in 2021. The median for similar Fitch-rated borrowers in the 'A' category was 9.14x in 2014.
Liquidity ratios remained strong and relatively stable at year-end 2015. Cash on hand was reported at 96 days ($213 million) and available borrowing capacity totaled $1.23 billion (544 days). These robust ratios reflect OPC's strategy of maintaining borrowing capacity sufficient to complete its planned construction program.
COMMERCIAL PAPER PROGRAM
OPC's CP notes are authorized up to $1 billion. OPC had $261 million of CP outstanding at the end of Dec. 31, 2015. The CP notes rank pari passu with all other unsecured indebtedness of OPC. Net proceeds from the sale of notes are used to meet working capital requirements and for general corporate purposes. Maximum maturity is 270 days. At Dec. 31, 2015, total available liquid resources divided by total maximum potential liquidity requirement equaled 1.57x.
The CP notes are primarily supported by high-quality, highly liquid assets in the form of OPC's own cash and investments, and access to the cooperative's $1.21 billion syndicated line of credit. The credit facility can be used for general corporate purposes, issuing letters of credit and backing up the CP program. The credit facility has a current expiration date of March 31, 2020.