Fitch: Vogtle Settlement Alleviates Near-term Risk for Georgia Power

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings views the agreement reached by Georgia Power Company with the Georgia Public Service Commission Staff regarding Vogtle Units 3 and 4 as constructive and supportive of its Long-Term Issuer Default Rating of 'A'/Stable Outlook. While the settlement leads to a modest negative impact to Georgia Power's credit metrics over our forecast period, the certainty achieved as to the recovery of project costs that have materially escalated above the original certified amount is a key positive.

The settlement establishes reasonableness and prudence of currently estimated costs and schedule, plus a contingency. The settlement does not prescribe a cost cap, which is a material positive. However, a cut in currently established authorized return on equity (ROE) and stiff reductions in ROE for cost and schedule overruns until the units are in service ensures that customers' share of any potential overruns is minimized.

The settlement establishes prudence of approximately $3.3 billion in costs that have been incurred through year-end 2015 and already approved through the 14th Vogtle Construction Monitoring (VCM) proceedings. In addition, the costs arising from last December's settlement with the project's EPC contractors of approximately $350 million are deemed prudent. Furthermore, currently estimated project costs of $5.44 billion plus a contingency of $240 million are presumed reasonable and prudent. The burden of proof shall be on the party challenging such costs.

If the project costs exceed $5.68 billion, Georgia Power will have the burden of proof to show that cost overruns are prudent and eligible for recovery in rates. The largely fixed nature of the EPC contract and the recent amendments to the contract somewhat mitigates the risk of significant project escalation and litigation costs. However, Georgia Power will incur approximately $10 million per month of owner's costs (which includes oversight costs, compliance costs, and property taxes among other cost) and $27 million per month of financing costs until the units are placed into service. The current in-service dates as per the EPC agreement are June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4.

The original certified costs of $4.418 billion were not amended. This implies that the cash recovery of the financing costs through the Nuclear Construction Cost Recovery (NCCR) tariff will be on the certified amount and AFUDC will be used on the construction costs above that. The ROE was reduced to 10.0% from 10.95%, for the purpose of calculating the NCCR tariff and AFUDC up to the project costs of $5.44 billion, and Georgia Power's average cost of long-term debt will be used as the ROE to calculate AFUDC on amounts over $5.44 billion. If Georgia Power's authorized ROE, currently set at 10.95%, is changed in a future rate case, the ROE for NCCR and AFUDC calculations will change to the new ROE less 95 bps.

The settlement assumes that the Vogtle units 3 and 4 will be placed into retail base rates on Dec. 31, 2020 or the commercial operational date (COD), whichever is later. If the COD exceeds Dec. 31, 2020, the ROE used to calculate the NCCR will be reduced by an additional 300 bps and the ROE used to calculate AFUDC will be Georgia Power's average cost of long-term debt until COD.

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