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Rating Action:

Moody's confirms Georgia Power's Baa1 rating; affirms Southern at Baa2 and Alabama Power at A1, outlooks are stable

28 Sep 2018

Over $30 billion of debt and credit facilities affected

New York, September 28, 2018 -- Moody's Investors Service, (Moody's) confirmed the long-term ratings of Georgia Power Company (Georgia Power) including its senior unsecured rating at Baa1 and affirmed Georgia Power's VMIG-2 short-term industrial revenue bond rating. Moody's also affirmed the ratings of The Southern Company (Southern) and Alabama Power Company (Alabama Power) including Southern's Baa2 senior unsecured rating and Prime-2 commercial paper rating and Alabama Power's A1 Issuer and senior unsecured ratings and its Prime-1 commercial paper rating. The rating outlooks are stable. This concludes the review initiated on 8 August 2018, which was prompted by the co-owners right, under the December 2017 amended ownership agreement, to opt-out of the Vogtle project that was triggered by the $2.3 billion cost increase announced last month.

In other rating actions, Moody's affirmed the ratings of Alabama Power Capital Trust V, including its A2 preferred stock rating, and the ratings of Southern Electric Generating Company (jointly owned by Georgia Power and Alabama Power) including its A2 Issuer rating and backed senior unsecured rating. The rating outlook for both entities is stable.

Please refer to complete list of rating actions below.

RATINGS RATIONALE

"The confirmation of Georgia Power's rating was driven by the co-owners vote, particularly the project's largest co-owners, Oglethorpe Power Corporation and MEAG Power, to continue with the construction of the Vogtle new nuclear power plants," said Jeff Cassella, Senior Credit Officer. "Additional delays and cost over-runs are likely, but are not expected to rise to a level where the credit profile is materially impacted further," added Cassella.

On Wednesday, the co-owners voted and agreed to continue construction of Plant Vogtle Units 3 & 4. The vote was originally expected on or before Monday, 24 September 2018, but the final vote was delayed after Oglethorpe Power Corporation (Baa1 senior secured, negative) requested certain conditions including a cost cap, which Georgia Power was unwilling to accept. While an agreement, which included some cost sharing mechanisms was ultimately reached, the concerns raised by the co-owners represent a material credit negative for the project going forward.

The new agreement includes several provisions designed to align the co-owner's commitment to the project in exchange for an incremental transfer of control and risk to Georgia Power. For example, a vote by co-owners holding 90% of the ownership interest in Vogtle Units 3 & 4 is no longer required when there is an increase in the construction cost estimate, which previously was considered a 'project adverse event (PAE).' Instead, Georgia Power has the unilateral right to cancel the project if faced with unreasonably high cost increases. Additionally, a PAE involving cost disallowances by the Georgia Public Service Commission (GPSC) must meet a certain minimum threshold before requiring a vote by co-owners to continue.

Georgia Power's Baa1 rating reflects elevated business risk as it continues with construction of Vogtle Units 3&4. This elevated business risk has been mitigated thus far by a supportive regulatory and political environment. The project has experienced several delays and cost increases over the last few years and faces a period of low natural gas prices for an extended period of time. But the project also benefits from the strong regulatory support of the Georgia Public Service Commission (GPSC). Georgia Power's financial metrics are lower than historical levels but will remain supportive of the rating due to the increased equity ratio recently authorized by the GPSC following the passage of federal tax reform. We expect Georgia Power's ratio of cash flow from operations pre-working capital (CFO pre-W/C) to debt to be in the 19-20% range going forward.

On 8 August 2018, Moody's downgraded Georgia Power's ratings following the $1.1 billion additional increase in the utility's share of Vogtle new nuclear project costs. The increase materialized only 8 months after a revised cost estimate and construction schedule was reviewed and approved by state regulators, demonstrating the ongoing challenges and execution risk associated with the continued construction of the project. Although the additional costs will be covered by approximately $800 million of new equity issuances at the parent, Southern, the higher cost estimate risks damaging the ongoing support from regulators given it was revised so soon after they vetted and approved an earlier estimate.

The projected cost increase of $1.1 billion ($0.8 billion after tax) for Georgia Power's share was primarily the result of revised cost estimates for labor with the emphasis on improving craft personnel productivity and production in an attempt to adhere to the timing of the in-service dates of November 2021 (Unit 3) and November 2022 (Unit 4). This came at a time when we estimated that construction of the project is just over 50% complete. The ability to attract and retain the appropriate craft labor is critical to the progression and ultimate completion of the Vogtle project.

The affirmation of Southern's Baa2 rating reflects management's pro-active efforts to strengthen the company's balance sheet through equity issuances and asset sales, and the largely credit supportive actions taken by most of its state regulators in response to cash flow pressure at the utilities resulting from the passage of federal tax reform. We view these positive developments as largely offsetting the latest negative developments at Georgia Power and the Vogtle project and sufficient to affirm Southern's rating at Baa2. In addition, while Georgia Power is still a key driver of Southern's ratings and credit profile, its importance to the parent has steadily diminished following the acquisition of AGL Resources (now Southern Company Gas) in 2016 and the growth of subsidiary Southern Power Company (Baa1 stable) over the last few years.

The affirmation of Alabama Power's A1 rating reflects Alabama's credit supportive regulatory environment, including its timely cost recovery provisions and strong but somewhat variable cash flow coverage metrics that have been slightly weak for its credit quality in recent years. It also reflects the largely supportive response on the part of Alabama Power's regulators to mitigate the impact of federal tax reform legislation on the utility's financial metrics.

The affirmation of the ratings of Southern Electric Generating Company, which is jointly-owned (50/50) by Georgia Power and Alabama Power, reflects the unconditional guaranty of its debt by Alabama Power. The affirmation of the Alabama Power Capital Trust V's ratings also reflects the unconditional guarantee provided by Alabama Power.

Alabama Power's rating also considers the utility's comparatively low risk business profile as one of the few major vertically integrated electric utilities in the Southeast without the need for significant new baseload generation over the next several years, although it is adding some renewables. However, Alabama Power does have relatively high carbon transition risk because its fuel mix is heavily dependent on coal and natural gas while including some nuclear and hydro capacity. We expect that capital expenditures will remain high over the next few years, mostly due to environmental compliance and generation system maintenance.

Rating Outlook

The stable rating outlook on Southern reflects the generally credit supportive regulatory environments in which most of its regulated electric and gas utilities operate; the scale and diversity of its business; and the potential inflow of cash from assets sales and new equity issuances that will bolster the company's balance sheet and financial profile. The stable outlook assumes Southern's ratio of CFO pre-W/C to debt will be in the 14-15% range going forward and that Southern will not increase parent company leverage further from current levels.

Georgia Power's stable outlook reflects our view that the Vogtle cost increases and schedule delays announced thus far are manageable at its current Baa1 rating level; that strong regulatory and political support for the project will continue and the utility will recover all prudently incurred Vogtle related costs on a timely basis; that the overall regulatory framework in Georgia will remain credit supportive; and that financial metrics will remain at levels that support the rating including a ratio of CFO pre-W/C to debt of about 19-20%.

Alabama Power's stable rating outlook incorporates our expectation that the Alabama regulatory environment will continue to remain credit supportive with timely cost recovery mechanisms, and that the company will effectively manage its elevated capex and maintain stable financial metrics including a ratio of CFO pre-W/C to debt in the low-to-mid 20% range, albeit weak for the rating.

Factors that could lead to an upgrade

An upgrade of Southern's rating is unlikely while it faces regulatory, financial and execution risk at the Vogtle new nuclear project and management continues to take actions to strengthen the company's financial profile. Southern's rating could be upgraded if there is a substantial reduction of parent company debt; if the Vogtle plant reaches commercial operation without significant additional delays or cost increases; if one or more of its major utilities is upgraded (Alabama Power, Georgia Power, or Southern Gas); or if consolidated credit metrics improve materially, including a ratio of CFO pre-W/C to debt in the high teens range.

An upgrade of Georgia Power is unlikely while the company continues to face challenges associated with the Vogtle project. Georgia Power's rating could be upgraded if the Vogtle plant reaches commercial operation without further cost increases or schedule delays; if there continues to be credit supportive regulation in Georgia; and if financial metrics show sustained improvement, including a ratio of CFO pre-W/C to debt in the low 20% range.

Alabama Power's ratings could be considered for an upgrade if the regulatory framework in Alabama remains credit supportive and there is a sustained improvement in key financial ratios closer to our parameters for a Aa rating, including a ratio of CFO pre-W/C to debt above 30%.

Factors that could lead to a downgrade

Southern's rating could be downgraded if Georgia Power is downgraded below Baa1; if either of its other major subsidiaries (Alabama Power or Southern Gas) is downgraded; if there is a material debt financed acquisition further increasing parent company leverage; if there are additional delays or cost increases at the Vogtle nuclear project; or if consolidated coverage metrics show a decline, including a ratio of CFO pre-W/C to debt below 15% on a sustained basis.

A downgrade of Georgia Power could occur if there are additional delays or cost increases at the Vogtle project; if material project costs are deemed imprudent or recovery is denied, delayed, or otherwise restricted by the GPSC; if there is a decrease in the level of regulatory, political, public, or partner support for the project; if construction on the project is stopped or slows considerably; or if financial metrics are expected to decline for an extended period, including a ratio of CFO pre-W/C to debt below 17%.

Alabama Power's ratings could be downgraded if there is an adverse change in the regulatory framework for utilities in Alabama, if there is a substantial increase in environmental or other costs that are not recoverable, if the parent Southern Company is downgraded, or if the company's financial metrics deteriorate for an extended period, including a ratio of CFO pre-W/C to debt in the low 20% range.

Outlook Actions:

..Issuer: Alabama Power Capital Trust V

....Outlook, Changed To Stable From Negative

..Issuer: Alabama Power Company

....Outlook, Changed To Stable From Negative

..Issuer: Georgia Power Company

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Southern Company (The)

....Outlook, Changed To Stable From Negative

..Issuer: Southern Elect Generating Co

....Outlook, Changed To Stable From Negative

Confirmations:

..Issuer: Appling County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Bartow County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Burke County Development Authority, GA

....Revenue Bonds, Confirmed at Baa1

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Coweta County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: EFFINGHAM COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY,

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Floyd County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Georgia Power Company

.... Issuer Rating, Confirmed at Baa1

....Junior Subordinated Regular Bond/Debenture, Confirmed at Baa2

... Junior Subordinated Shelf, Confirmed at (P)Baa2

....Preferred Shelf, Confirmed at (P)Baa3

....Preference Shelf, Confirmed at (P)Baa3

....Senior Unsecured Shelf, Confirmed at (P)Baa1

....Senior Unsecured Bank Credit Facility, Confirmed at Baa1

....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa1

..Issuer: Heard County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

..Issuer: Monroe County Development Authority, GA

....Senior Unsecured Revenue Bonds, Confirmed at Baa1

Affirmations:

..Issuer: Alabama Power Capital Trust V

....Pref. Stock Preferred Stock, Affirmed A2

..Issuer: Alabama Power Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A1

....Preferred Shelf, Affirmed (P)A3

....Preference Shelf, Affirmed (P)A3

....Senior Unsecured Shelf, Affirmed (P)A1

....Pref. Stock Preferred Stock, Affirmed A3

....Senior Unsecured Bank Credit Facility, Affirmed A1

....Senior Unsecured Commercial Paper, Affirmed P-1

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

..Issuer: Appling County Development Authority, GA

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

..Issuer: Bartow County Development Authority, GA

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

..Issuer: Burke County Development Authority, GA

....Revenue Bonds, Affirmed VMIG 2

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

..Issuer: Columbia (Town of) AL, Industrial Dev. Board

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: Coweta County Development Authority, GA

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

..Issuer: EFFINGHAM COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY,

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

..Issuer: Eutaw (City of) AL, Industrial Dev. Board

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: Floyd County Development Authority, GA

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

..Issuer: Heard County Development Authority, GA

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

..Issuer: Mobile (City of) AL, I.D.B.

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: Monroe County Development Authority, GA

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

..Issuer: Southern Company (The)

.... Commercial Paper, Affirmed P-2

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

....Junior Subordinated 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: Walker County Econ & Ind Dev Authority

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: West Jefferson (Town of) AL, Ind. Devel. Bd.

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

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

....Senior Unsecured Revenue Bonds, Affirmed A1

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

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

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.

Headquartered in Atlanta, GA, The Southern Company is a utility holding company that owns four vertically integrated regulated electric utilities: Georgia Power Company, Alabama Power Company, Mississippi Power Company and Gulf Power Company. Southern also owns several natural gas local distribution companies under its Southern Company Gas subsidiary and is engaged in competitive electricity generation through Southern Power Company.

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.

Jeffrey F. Cassella
VP-Sr Credit Officer
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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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