The increased cost of building two nuclear reactors in Georgia could result in rating downgrades for the Municipal Electric Authority of Georgia and Oglethorpe Power Corp.
Fitch Ratings placed its A and A-minus ratings on MEAG’s bonds on Rating Watch Negative Friday, affecting $5.17 billion of outstanding debt. Oglethorpe’s A-minus rating on $3.9 billion of outstanding obligations was also placed on Rating Watch Negative.
The watch covers long-term liabilities for both public power agencies, in addition to debt issued for the new reactors. Fitch said it expects to resolve the watch status in the next six months, and will downgrade the ratings if it determines that the financial flexibility of either agency has diminished.
Fitch’s action follows last week’s unexpected announcement by Georgia Power Co., an investor-owned utility leading the construction of nuclear units 3 and 4 at Plant Vogtle, that the completion cost is expected to increase by more than $2 billion. In December, the Georgia Public Service Commission voted to allow the project to move forward at an estimated cost of $25 billion.
“The rapid timing of this cost escalation together with its magnitude, is particularly disappointing, given that the co-owners last budget was developed during summer 2017 and ostensibly reflected in-depth analysis and review,” said analyst Kathy Masterson.
Masterson said Fitch revised the rating outlook to stable for both MEAG and Oglethorpe earlier this year, on the “belief that the 2017 revised cost estimate was reliable.”
“The Negative Watch further reflects ongoing construction risk at the project and Fitch's skepticism about the resilience of the revised project estimate and the potential for continued budget and timing slippage,” she said.
Construction of the project is less than 50% complete, while the overall project, including engineering and procurement, is 67% complete.
An agreement between the project’s co-owners – GPC, Oglethorpe, MEAG and the city of Dalton – will require that 90% of them vote to continue construction. That vote is expected to be taken in the next two months after a final estimate of the increase is prepared.
GPC disclosed the estimated increase in its financial report Wednesday, and said its share is about $1.1 billion. GPC, which owns 45.6% of the project, will write off a portion of the debt instead of charging it to customers.
The other owners will share in the higher costs according to their ownership stakes. Oglethorpe owns 30% of the twin reactors while MEAG owns 22.7% and Dalton owns 1.6%.
Oglethorpe President and CEO Mike Smith said he expects the need for the corporation to adjust its budget will be “muted” because of a $490 million contingency built into its $7 billion budget.
In a 10-K filing with the Securities and Exchange Commission filed Friday, Oglethorpe said that it has borrowed $1.76 billion from a Department of Energy federal loan guarantee program and issued $1.4 billion of first mortgage bonds to fund its current share of the Vogtle project.
Oglethorpe said it is performing its due diligence under Project Adverse Events in the co-owner agreement as a result of the new budget forecast by GPC.
Fitch’s Rating Watch Negative applies to Oglethorpe’s $858.2 million of pollution control bonds issued by the Development Authorities of Appling, Burke, Heard and Monroe counties; and $3.05 billion first mortgage bonds.
MEAG had $2.9 billion of Project J, M and P Vogtle revenue bonds and $1.2 billion of U.S. Department of Energy loan guarantees outstanding as of Dec. 31, 2017.
In addition to the Vogtle bonds, Fitch’s Rating Watch Negative also includes $263.8 million in project one senior bonds; $1.4 billion project one subordinate bonds; $80.5 million general resolution projects senior bonds; $405.3 million general resolution projects subordinated bonds; and $154.7 million combined cycle project bonds.
The estimated completion dates for the project have not changed due to the projected increase in budget. Unit 3 is expected to be complete in November 2021 and Unit 4 by November 2022.
