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Analysts see 'potential for long-term pressure' on Southern after Vogtle vote

SNL Image

Workers at the Alvin W. Vogtle nuclear plant in Waynesboro, Ga.

Source: Georgia Power Co.

While many analysts view the regulatory vote allowing continued construction at the Vogtle nuclear project as a positive development for Georgia Power Co., some see what one described as "potential for long-term pressure" on parent Southern Co.

Industry observers said the Georgia Public Service Commission's unanimous approval Dec. 21 of Georgia Power's revised cost and schedule estimates to complete two new reactors was an expected, favorable outcome. But while the utility got the green light to keep going at Vogtle, several issues loom on the horizon.

"The decision to continue at Vogtle is positive in the short run but has potential for long-term pressure," RBC Capital Markets analyst Shelby Tucker wrote in a Dec. 21 note.

Among key concerns is the possibility of weakened earnings growth at Southern over the next several years as the units are built, which are scheduled to go online in November 2021 and November 2022.

Southern "might not regain its full theoretical earnings power" until 2023 or 2024, until both reactors are in service and the PSC's prudence review of Georgia Power's project costs is complete, Evercore ISI analyst Greg Gordon wrote in a Dec. 22 note.

Commissioners confirmed that assessment would not occur until the units reach commercial operation. Gordon said that as long as the utility delivers the expansion in accordance with the new terms, the likelihood of a significant disallowance in cost recovery "is lowered materially."

Tucker highlighted those "carrots and sticks," in the words of PSC Commissioner Tim Echols, in a Dec. 21 note. Echols and his colleagues voted to lower Georgia Power's return on equity for the Vogtle venture, and Tucker said that move could hamper Southern's 5% long-term growth trajectory in the event of another schedule delay.

Vogtle is already half a decade behind schedule and billions of dollars over budget.

According to Tucker, a significant holdup would result in a $94 million hit to Southern's earnings, or 9 cents per share. He added that a large cost increase would likely be borne by Southern, not ratepayers, and earnings would be impacted 5 cents per share if approximately $1 billion was added to the budget.

"We would not expect the [PSC] to be as constructive in the event of a cost increase," Tucker wrote.

Production tax credits question

"Clearly [Southern] is on the hook for construction risk on the new schedule," Gordon said, adding that further costs could be taken on if nuclear production tax credits, or PTCs, are not renewed by Congress.

PSC Chairman Stan Wise closed the Dec. 21 meeting with a "personal appeal" to federal lawmakers. "Our decision today is based on the assumption that the PTCs will be extended. It has been in the balance sheets since the beginning," he said.

Commissioners agreed to the condition that if PTCs end up not being passed, they "may reconsider the decision to go forward." The same stipulation applies if other conditions change or if the assumptions outlined in Georgia Power's most recent Vogtle report change.

Wise said new PTCs would be worth $800 million and thanked Georgia's senators, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell for their work.

McConnell said in a Dec. 22 news conference that he, Ryan and President Donald Trump will meet in the first week of January to discuss the 2018 legislative agenda. A spokeswoman for the Senate Finance Committee did not comment in time for publication on when the panel would take up the tax extenders bill.

As has been the case for years, analysts still see Vogtle as a risky overhang to Southern's earnings, despite recent positive developments.

"The decision appears to be positive for credit quality, but our negative outlook on Southern and its utility subsidiaries is tied to the possibility that the project could go forward without the same regulatory support for eventual cost recovery as there was before the bankruptcy of the project constructor," S&P Global Ratings analyst Todd Shipman wrote in a Dec. 21 note.

Fitch Ratings analyst Kathy Masterson said in a Dec. 22 note that her agency may now resolve its ratings watch designations for the four public power utilities with exposure to financial risk from Vogtle: co-owners Oglethorpe Power Corp., the Municipal Electric Authority of Georgia and two utilities under contract to purchase power, PowerSouth Energy Cooperative and JEA. "However, the effect on credit quality will depend on each utility's updated financial plan reflecting the new cost to [complete] the project, anticipated borrowing requirements and expected financial margins once the costs are included in customer rates," she wrote.

"In the medium term, Fitch expects cost uncertainty and construction risk for these issuers to remain high until the project is completed," Masterson added.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.