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Rating Action: Moody's changes rating outlook on Dalton, Georgia Combined Utility to negative; affirms A2 rating

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04/25/2017 | 12:15pm CEST

Release date- 24042017 - Moody's Investors Service has changed the City of Dalton, Georgia's Combined Utility Enterprise rating outlook to negative while affirming the utility's A2 Issuer rating.

The negative rating outlook reflects the increased risks to the city utility of substantially higher construction costs at Vogtle Nuclear Units 3 and 4 (Vogtle 3 & 4) given the recent bankruptcy filing by Westinghouse Electric Company LLC. Westinghouse has an Engineering, Procurement Construction (EPC) contract for the construction of Vogtle 3 &4 and the city utility has a 1.6% ownership interest in the project.

With the bankruptcy filing by Westinghouse, we expect the fixed price EPC contract for Vogtle 3 & 4 to be rejected as part of the court proceeding. A related concern is the financial condition of parent company Toshiba Corporation (Toshiba; Caa1, negative) and whether it has the wherewithal to fully honor its sizeable parental guarantee that now backstops the EPC. Because of these developments, there is a higher likelihood that the costs to complete Vogtle 3 & 4 will increase even further adding new requirements for the city utility to fund. The Vogtle 3 &4 owners, led by majority owner Georgia Power Company (GPC: A3 negative) have signed an interim agreement with Westinghouse for the company to continue as the primary contractor until April 28. The project owners are evaluating their alternatives, including the potential for completing the project themselves, or engaging alternative contractors, which in all likelihood would result in higher risk and additional costs for Dalton and its retail customers. Moody's affirmation of the A2 Issuer rating for Dalton assumes the guarantee from Toshiba remains in place and that Toshiba continues as a going concern.

An additional concern for the utility's is the reliance by the city's General Fund on the combined utility transfers of utility surplus funds. In FY 2016, the transfer represented about 7% of Dalton's combined utility revenues; however, this transfer represents 33% of the city's General Fund revenues. This dependence by the general government could place pressure on retail rates as the utility sets policy to manage the higher costs related to the Vogtle 3 & 4 project construction.

Rating Outlook

The negative rating outlook incorporates a view that Westinghouse's chapter 11 bankruptcy, calls into question their ability to complete the Vogtle 3 & 4 project. This will, in turn create disruptions to construction progress and result in a rejection of the fixed price EPC contract and additional costs to complete the project, which in our opinion will trigger greater nuclear construction risk and costs borne by Dalton and its customers.

Factors that Could Lead to an Upgrade

Limited prospects exists for an upgrade while uncertainties around construction remain.

Factors that Could Lead to a Downgrade

Measurable consistent decline in liquidity

Significant increase in costs associated with Vogtle 3&4 construction that compromise the utility's financial and competitive position

Significant contraction in the concentrated customer base and deterioration of financial position

Recent Developments:

The owners of the Vogtle Nuclear Unit 3 and 4 project are now evaluating cost estimates and the construction schedule and are expected to report results of that assessment on April 28. Given the complexities, the assessment period could be extended.

Legal Security

No bonds outstanding

Obligor Profile

City of Dalton, Georgia Combined Utility. The utility provides electric, water, wastewater, natural gas services and information services to about 73,000 customers located in the city and in the Whitfield County area.

Methodology

The principal methodology used in this rating was US Public Power Electric Utilities with Generation Ownership Exposure published in March 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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.

Daniel Aschenbach

Lead Analyst

Project Finance

Moody's Investors Service, Inc.

7 World Trade Center

250 Greenwich Street

New York 10007

US

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

Angelo Sabatelle

Additional Contact

Project Finance

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

Releasing Office:

Moody's Investors Service, Inc.

250 Greenwich Street

New York, NY 10007

U.S.A

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

(c) 2017 Electronic News Publishing -, source ENP Newswire

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Financials ($)
Sales 2017 3 800 M
EBIT 2017 1 627 M
Net income 2017 1 005 M
Debt 2017 1 491 M
Yield 2017 1,32%
P/E ratio 2017 22,68
P/E ratio 2018 20,68
EV / Sales 2017 6,31x
EV / Sales 2018 5,92x
Capitalization 22 483 M
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Mean consensus HOLD
Number of Analysts 14
Average target price 114 $
Spread / Average Target -3,1%
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Raymond W. McDaniel President, Chief Executive Officer & Director
Henry K. McKinnell Chairman
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Tony Stoupas Chief Information Officer & Senior Vice President
Basil L. Anderson Independent Director
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