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Vogtle, a whale of a decision for Southern Co.

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Vogtle, a whale of a decision for Southern Co.

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* Southern Co.'s Georgia Power Co. on Aug. 2 increased the estimated cumulative capital costs of its share (45.7%) of Vogtle units 3 and 4 to between $6.7 billion and $7.4 billion. Net additional capital costs to complete the project are now an estimated $1 billion — $1.7 billion higher than an earlier estimate. Construction and capital cost estimates have risen more than 60% since 2010, while financing costs have doubled (see graph below). Toshiba, the parent of the contractor hired to complete the project, has "guaranteed" $1.7 billion of Georgia Power's costs to complete it.

* Georgia Power is expected to make a recommendation by Aug. 31 as to whether it plans to complete the project. The decision could have significant risk/reward implications for the utility and its parent company, potentially affecting capital budgeting decisions and future earnings growth.

* To date, the Georgia Public Service Commission has certified $5.68 billion in costs for Georgia Power's share of the project, including a contingency of $240 million above Georgia Power's previous $5.44 billion forecast. That cost threshold has been deemed reasonable and presumed prudent by the PSC. Georgia Power indicates Vogtle construction work in progress, or CWIP, at $4.5 billion as of June 30, of which $4.42 billion is earning a cash return until the asset is placed into service. The PSC is scheduled to meet Aug. 15 to certify additional incurred costs.

* Should Southern decide not to complete construction and abandon the Vogtle project, it expects to earn a full cost of capital return on the CWIP spent to date $4.5 billion as of June 30. The actual return would be determined by state regulators under this scenario. Southern's preliminary cancellation cost estimate is $6.3 billion, comprising the $4.5 billion CWIP balance, $1.4 billion in after-tax financing costs collected and $400 million in costs to terminate the construction contracts and secure the nuclear construction site.

* A go-forward decision offers considerably more uncertainty. The PSC has not certified costs beyond about $5.68 billion, and those costs could be borne by ratepayers or Southern's shareholders, depending on the regulatory treatment. The burden of prudency of such costs is on Georgia Power. Further downside risks are present should costs continue to escalate.

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Should the company abandon the project, it could be forced to reduce its long-term growth forecast, barring additional capital investments that might support growth objectives. If the Vogtle project moves ahead, the PSC must determine the rate treatment of the incremental costs, among other decisions. Under the PSC settlement, the return on equity used to calculate the nuclear construction cost recovery tariff is reduced to 7% from 10% if, as is expected, the project's in-service date is beyond Dec. 31, 2020. Moreover, federal nuclear production tax credits require both units to be in service before 2021, though Congress is considering legislation to abandon the deadline. These factors could lead to some lumpiness in Southern's earnings beginning in 2021. Once the plant is in service and included in the rate base, it would be authorized an ROE based on the outcome of Georgia Power's next general rate case, scheduled to be filed in June 2019.

Regardless of the go or no-go decision, Southern management recently reaffirmed its 8-cents-per-share annual dividend growth guidance for 2017 and beyond, highlighting strong performance across its utility group. Future dividend actions by the board of directors depend on future earnings, capital requirements and the company's financial condition.

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