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.
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
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.
No bonds outstanding
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.
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.
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