TEXT-Fitch affirms Oglethorpe Power's commercial paper at 'F1'
Aug 9 - Fitch Ratings has affirmed the 'F1' rating on Oglethorpe Power Corporation's (OPC) commercial paper (CP) notes, authorized at up to $1.265 billion. SECURITY The CP notes are unsecured obligations of OPC. KEY RATING DRIVERS SHORT-TERM RATING: The 'F1' rating is primarily supported by high-quality, highly liquid assets in the form of OPC's own cash and investments, and access to the cooperative's $1.265 billion syndicated line of credit. LARGE DIVERSIFIED MEMBERSHIP: OPC is among the largest electric cooperatives in the U.S. OPC's 39 members serve 1.8 million consumers representing 4.1 million people throughout 151 of the 159 counties in Georgia. LONG-TERM WHOLESALE CONTRACTS: Power is supplied by OPC to its members pursuant to take-or-pay power sales contracts that extend to Dec. 31, 2050 and have historically allowed for the timely recovery of energy costs, including fuel and purchased power. SIZABLE CONSTRUCTION PROGRAM: OPC's rating reflects its multi-billion capital expansion program, and the impact that the significant amount of related debt will have on the cooperative's financial metrics and wholesale cost of power. NUCLEAR CONSTRUCTION UNDERWAY: OPC's expenditure plan includes the sizable Plant Vogtle nuclear expansion project (OPC's share: $4.2 billion), which Fitch views as risky and complex. The Nuclear Regulatory Commission (NRC) issued the construction and operating license (COL) for the project on Feb. 10, 2012 allowing full construction to begin. STRONGER FINANCIAL METRICS: OPC continues to bolster its financial profile through the early years of its sizable construction program, which will mitigate the impact of related borrowings. Fitch views OPC's targeted margins for interest ratio (1.14 times ) and current metrics for equity (9% of capitalization), cash on hand (195 days) and liquidity (727 days) as instrumental to the current rating. LOW FUNDING RISK: OPC's funding risk is mitigated by the cooperative's access to the low-cost Rural Utilities Service (RUS) loan program for eligible expenditures and the anticipated funding for up to 70% of the Plant Vogtle project costs through the Department of Energy (DOE) guaranteed loan program. Material changes in either program could be a concern, though they are not anticipated. WHAT COULD TRIGGER A RATING ACTION Weakening of Financial Policies: Fitch would view negatively any weakening of the financial policies and initiatives that have supported the cooperative's financial metrics in recent years. Adverse Nuclear Developments: Adverse developments related to the Vogtle construction that weaken the cooperative's current and forecasted metrics could lead to downward pressure on the rating or outlook. CREDIT SUMMARY: AMONG THE LARGEST U.S COOPERATIVES OPC is the largest generation and transmission (G&T) cooperative in the U.S. in terms of assets and energy sales. OPC consists of 39 member owners and currently provides wholesale power supply to 38 of its member-owners, each a retail electric distribution cooperative. OPC's members in turn provide retail electric service to roughly 1.8 million customers (4.1 million residents) located predominately throughout rural Georgia. OPC is headquartered in Tucker, Georgia. DIVERSIFIED PORTFOLIO SUPPLIES PARTIAL MEMBER REQUIREMENTS OPC supplies its members with energy from a well diversified portfolio, which includes ownership interests totaling 7,078 MW in 30 generating units, including natural gas-fired (50% of capacity), coal-fired (22%), nuclear (17%) and hydroelectric capacity (11%). In 2011, OPC supplied 52% of its members total energy requirements. The OPC members satisfy their energy requirements above the amounts purchased from OPC with purchases from other suppliers. STRONG WHOLESALE POWER CONTRACTS OPC members purchase power pursuant to long-term, take-or-pay wholesale power contracts that extend through Dec. 31, 2050, after the final maturity of existing debt. The wholesale power contracts obligate OPC members jointly and severally to pay rates (based on their fixed allocation of resources) sufficient to recover all the costs of owning and operating its power supply business. VOGTLE PROJECT WILL NOT MATERIALLY IMPACT RATES OPC is participating in the development of the 2,204 MW Vogtle expansion project. Based on the current financing plan, Fitch does not believe that the project will materially impact, or jeopardize the competitiveness of, OPC's wholesale power rates as the new Vogtle units will account for only a small portion of the cooperative's total power supply. HIGHER LEVERAGE BUT STRONG LIQUIDITY Leverage metrics weakened slightly in 2011 following the acquisition of the Thomas A. Smith Facility (formerly the Murray Energy Facility), a 1,250 MW natural gas-fired facility, but remained solid. Funds available for debt service increased in 2011 from $533 million to $589 million, but an increase in debt service requirements led to a decline in Fitch-calculated debt service coverage from 1.74x in 2011 to 1.60x in 2012. Funding for the Smith Facility acquisition and Vogtle construction increased total debt meaningfully during fiscal 2011 from $5.44 billion to $6.48 billion, weakening debt to FADS from 10.2x to 11.0x and the ratio of equity to capitalization from 9.9% to 8.9%. Weaker financial metrics over the near term, were anticipated following the Smith Facility acquisition, however, the long-term benefits will be offsetting. The acquisition reduced anticipated capital expenditures by $1.2 billion. Cash on hand declined from 310 days to 195 days during 2011, but remained robust overall. Total liquidity however was significantly enhanced with the upsizing of the cooperative's primary credit facility from $475 million to $1.275 billion. The larger facility helped improve liquidity from 636 days to 727 days despite an increase in short-term debt ($461 million vs. $306 million). COMMERCIAL PAPER PROGRAM The commercial paper program is supported by the $1.275 billion credit facility. The facility includes a syndicate of 14 financial institutions, the largest of which are Bank of America, CoBank, SunTrust Bank, Wells Fargo, and Royal Bank of Canada. The credit facility can be used for general corporate purposes, issuing letters of credit and backing up the commercial paper program. The credit facility expires on June 8, 2015. OPC is not authorized to issue commercial paper in excess of available capacity under the credit facility, the total amount of which is reduced by any outstanding letters of credit against the credit facility (totaling $136 million at June 30, 2012). In addition to the credit facility, OPC had liquid reserves of approximately $410 million as of June 30, 2012 that could be used to support the CP program, if needed. At June 30, 2012, OPC had $648 million in outstanding CP notes. For additional information on the rating, see Fitch's report, 'Oglethorpe Power Corporation', dated Sept. 2, 2011. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope. Applicable Criteria and Related Research: --'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012); --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Public Power Rating Criteria' (Jan. 11, 2012). Applicable Criteria and Related Research: Criteria for Assigning Short-Term Ratings Based on Internal Liquidity Revenue-Supported Rating Criteria U.S. Public Power Rating Criteria
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