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Rating Action:

Moody's affirms Georgia Power at A3 negative; affirms Southern at Baa2 stable

05 Jan 2018

Approximately $20 billion of debt securities affirmed

New York, January 05, 2018 -- Moody's Investors Service affirmed the ratings of Georgia Power Company (Georgia Power), including its A3 senior unsecured and Issuer Rating, Baa1 junior subordinate rating, and VMIG-2 short-term pollution control revenue bond rating. The rating outlook remains negative.

Moody's affirmed the ratings of its parent company, The Southern Company (Southern), including its Baa2 senior unsecured rating and Prime-2 short-term rating for commercial paper, with a stable outlook. Moody's also affirmed the ratings of Southern Electric Generating Company (50% owned by Georgia Power), including its A1 senior unsecured rating, with a stable outlook.

RATINGS RATIONALE

"The affirmation of Georgia Power's ratings is prompted by the unanimous Georgia Public Service Commission (GPSC) approval of the utility's recommendation that it continue construction of the Vogtle new nuclear power project, the receipt by the utility of $1.7 billion of completion guarantee funds from Toshiba Corporation, and the continued support of Georgia Power's three Vogtle project co-owners", said Michael G. Haggarty, Associate Managing Director. "The affirmation also reflects the relatively modest customer rate increases required for the project (just over 5% thus far and between 10% and 12% in total) and the manageable size of the project for a utility of the size and scale of Georgia Power, particularly considering its position within the Southern corporate family", added Haggarty.

On 21 December 2017, by a 5-0 margin, the GPSC accepted Georgia Power's August 2017 recommendation that it complete the Vogtle nuclear project, which had been jeopardized by the bankruptcy of the project's EPC contractor Westinghouse Electric Corporation LLC (unrated) in March 2017 and the financial challenges of Westinghouse's parent company, Toshiba Corporation (Caa1 stable).

In its decision, the GPSC verified and approved $542 million of costs incurred under the 17th Vogtle Construction Monitoring Report (through 30 June 2017) and agreed that the revised $7.3 billion of Vogtle projected capital costs ($8.8 billion net of the Toshiba guarantee payments and customer refunds) and projected in service dates (November 2021 and 2022) are reasonable. The GPSC also agreed that the revised capital cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, which is consistent with a previous December 2016 regulatory settlement with the GPSC on Vogtle costs. Under that settlement agreement, $5.68 billion of Vogtle capital costs incurred are presumed to be reasonable and prudent, with the burden of proof on any party challenging these costs.

Since the Westinghouse bankruptcy, Georgia Power and its co-owners have largely managed and successfully mitigated many of the issues that arose from losing its EPC contractor. For example, Georgia Power affiliate Southern Nuclear Operating Company, Inc. (Southern Nuclear, unrated) has taken over project management responsibilities and has engaged Bechtel Corporation as construction contractor to complete the project. Bechtel was the lead construction contractor on the Tennessee Valley Authority's (Aaa stable) Watts Bar 2 nuclear plant, the only other nuclear plant recently constructed in the US, which came on line in 2016.

In addition, the US Department of Energy (DOE), which has provided loan guarantees to Georgia Power and two of the other co-owners, did not accelerate these loan guarantees as some has feared, but instead has conditionally offered additional loan guarantees for the project, which would provide some modest additional cost savings. Finally, Toshiba not only agreed to honor its $3.68 billion of completion guarantees for the project ($1.7 billion for Georgia Power), but paid it entirely in 2017, bolstering liquidity and alleviating some of the project's cost pressure.

The GPSC decision did include some penalties on Georgia Power's return on equity (ROE), with the ROE used to determine the utility's Nuclear Construction Cost Recovery Tariff falling to 8.3% from 10% effective 1 January 2020 and again to 5.3% or the utility's average cost of long-term debt (whichever is higher) beginning 1 January 2021. In addition, the ROE used for AFUDC on the project is reduced to the utility's average cost of long-term debt from 10%. The penalties are largely lifted once a nuclear unit is placed into service. There are some ROE incentives to finish the project ahead of schedule in the form of an ROE reduction of 10 bps per month beginning 1 June 2021 (Unit 3) and 1 June 2022 (Unit 4). Finally, the GPSC required Georgia Power to refund approximately $188 million of the Toshiba guarantee funds to customers. We expect these ROE penalties to have a minimal impact on Georgia Power's cash flow coverage metrics.

Rating Outlook

The rating outlook on Georgia Power remains negative, reflecting the ongoing transition of project management responsibilities to affiliate Southern Nuclear and new construction contractor Bechtel Corporation and the challenges they face in maintaining productivity levels and in meeting the new cost and schedule targets. Moody's will closely monitor construction progress under these new contractors.

The negative outlook also reflects uncertainty over the future of nuclear production tax credits for the project, which were not included in the tax legislation recently passed by the US Congress, but may be incorporated in subsequent legislation and still be available for the project. The GPSC has indicated that it could reconsider its approval if these tax credits, with a present value of approximately $800 million for Georgia Power, are not available for the project.

Finally, the negative outlook reflects the still conditional nature of the DOE commitment to provide up to about $1.67 billion of additional guaranteed loans to Georgia Power for the project. Georgia Power expects the DOE commitment to be finalized and signed during the first half of 2018.

Factors that Could Lead to an Upgrade

The negative outlook limits the likelihood of a rating upgrade over the near term, particularly during the construction of the Vogtle project. However, an upgrade could be considered over the longer term if the Vogtle project is successfully completed and comes on line, a supportive prudency determination is made on project costs by the GPSC, and when there is clarity on non-Vogtle related rates beyond the expiration of the utility's current Alternate Rate Plan at the end of 2019.

Factors that Could Lead to a Downgrade

A downgrade of Georgia Power could occur if there are further delays or cost increases on the Vogtle project, if material Vogtle costs are not approved by the GPSC or found to be imprudent, if there is a decrease in regulatory or partner support for the project, or there is a sustained decrease in Georgia Power's financial metrics, including CFO pre-working capital to debt materially below the 20% range.

The affirmation of Southern's ratings with a stable outlook considers the size, scale, and diversity of the company's overall business following the acquisition of a natural gas local distribution company and other natural gas assets in 2016 and the growth of subsidiary Southern Power Company's (Baa1 stable) largely contracted renewable energy business.

Georgia Power remains Southern's largest subsidiary and the biggest source of dividends. Nevertheless, the credit strength and overall growth of the company's other businesses has reduced the relative impact of Georgia Power and the Vogtle new nuclear construction project on the parent and overall organization. Although parent company debt increased significantly following these natural gas acquisitions, Southern is appropriately positioned at its current Baa2 rating level considering our projection of a CFO pre-working capital to debt ratio of approximately 15%.

The affirmation of the ratings Southern Electric Generating Company (A1 senior unsecured, A2 Issuer Rating), which is 50% owned by Georgia Power and 50% owned by Alabama Power Company (A1 senior unsecured, stable), reflects the unconditional guaranty of its debt by Alabama Power.

Outlook Actions:

Issuer: Georgia Power Company

Outlook, maintained at Negative

Issuer: The Southern Company

Outlook, maintained at Stable

Issuer: Southern Elect Generating Co

Outlook, maintained at Stable

Affirmations:

..Issuer: Appling County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Bartow County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Burke County Development Authority, GA

....Revenue Bonds, Affirmed A3

....Revenue Bonds, Affirmed VMIG 2

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Coweta County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: EFFINGHAM COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Floyd County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Georgia Power Company

.... Issuer Rating, Affirmed A3

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa1

....Senior Unsecured Shelf, Affirmed (P)A3

....Junior Subordinate Shelf, Affirmed (P)Baa1

....Preferred Shelf, Affirmed (P)Baa2

....Preference Shelf, Affirmed (P)Baa2

....Senior Unsecured Bank Credit Facility, Affirmed A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: Heard County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Monroe County Development Authority, GA

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

....Senior Unsecured Revenue Bonds, Affirmed A3

..Issuer: Southern Company (The)

.... Commercial Paper, Affirmed P-2

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Junior Subordinate Shelf, Affirmed (P)Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Senior Unsecured Bank Credit Facility, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Southern Elect Generating Co

.... Issuer Rating, Affirmed A2

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: Wilsonville (Town of) AL, I.D.B.

....Senior Unsecured Revenue Bonds, Affirmed A1

....Underlying Senior Unsecured Revenue Bonds, Affirmed A1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Southern Company is a utility holding company headquartered in Atlanta, Georgia and the parent company of utility subsidiaries Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Southern Company Gas, Southern Gas Capital, Northern Illinois Gas Company, Southern Electric Generating Company, wholesale power company Southern Power Company, and commercial paper issuer Southern Company Funding Corporation.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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