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Analysts weigh impacts of Westinghouse bankruptcy on Southern, SCANA

With Westinghouse Electric Co. LLC filing for Chapter 11 bankruptcy, analysts see impacts to Southern Co. and SCANA Corp. ranging from minimal disruption to abandonment of their nuclear projects altogether, depending on how the reorganization of Toshiba Corp.'s troubled nuclear construction unit plays out.

Westinghouse is the main contractor for the development of two new nuclear reactors at the V.C. Summer facility in South Carolina and two new reactors at the Alvin W. Vogtle Nuclear Plant in Georgia using its AP1000 design. Southern subsidiary Georgia Power Co. is leading development and owns the largest share of the new Vogtle units, along with co-owners Oglethorpe Power Corp., the Municipal Electric Authority of Georgia and Dalton Utilities.

Summer co-owners SCANA and Santee Cooper, known legally as South Carolina Public Service Authority, announced March 29 that they had reached an agreement with Westinghouse to continue work on the nuclear facility.

Regarding Vogtle, CreditSights reported in a March 28 note that Southern executives are asserting that the company believes Toshiba is "on the hook" for its guarantee of Westinghouse's possible multi-billion dollar-obligations.

But Southern's assistant treasurer, Todd Perkins, told CreditSights that "abandonment is on the table if the economics do not make sense," according to the report. While CreditSights said it was initially "astonished" at this revelation, its analysts characterized such a statement as a negotiation tactic by Southern. "If Southern threatens abandonment regulators might be less likely to excessively ding [Georgia Power] and contractors may be more likely to work towards a solution when negotiating incremental costs," CreditSights' analysts wrote. "Moral of the story is all stakeholders will have to work together if they want Southern to be on board with completing Vogtle."

CreditSights said Southern will still have recourse post-bankruptcy, as the firm expects Toshiba to honor its guarantee for Westinghouse's obligations.

Evercore ISI sees Southern as having approximately $1.8 billion of exposure on Vogtle's remaining cost under the current estimate, before further cost escalation, according to a March 27 report. Evercore cited Southern's $5.68 billion in approved costs and $3.90 billion spent through 2016. This leaves roughly $1.8 billion of remaining cost to complete Vogtle under the current estimate. Since Southern is a 46% owner of the Vogtle project, the company should also be covered by that percentage of a $920 million letter of credit by Toshiba for the project and 46% of what Evercore estimates to be Toshiba's $3.5 billion corporate guarantee, which totals roughly more than $2 billion in additional financial cover.

Evercore calculated Southern will experience a 7-cent per-share dilution, per $1 billion in incremental construction expenses borne by shareholders, if the company issues equity to fund the cost overrun.

Jefferies LLC analysts described Southern as relatively well-positioned amid a Westinghouse bankruptcy with "several paths to get the plant completed without any significant write-downs," according to a March 27 note. The firm's analysts cited subcontractor Fluor Corp.'s "vested interest" in completing the project, and said it wouldn't have much of an ability to price gouge Southern.

Another reason Jefferies sees Vogtle as moving forward is the support of Georgia's Public Service Commission. "[W]e struggle to see it changing anytime soon," Jefferies analyst Anthony Crowdell wrote, citing Vogtle's receipt of a prudence determination and Georgia law permitting utilities to get a return on a prudent investment. Jefferies also sees Southern's stock as 10% undervalued, and described the market assumption of a worst-case scenario for Vogtle as "unreasonable."

UBS Securities LLC analyst Julien Dumoulin-Smith asserted in a March 27 report that it expects Westinghouse to "neither walk from contract and/or stop work." The firm believes Wall Street to have confused Vogtle's incremental cash costs relative to the total $6 billion writedown disclosed.

"Bottom line, we see a clear incentive for Toshiba to limit incurring the immediate liquidity need to address the $6 [billion] parental guarantees, continuing work on the project to limit cost inflation for all partners and limit impacts to its balance sheet," Dumoulin-Smith wrote. "By filing Westinghouse for restructuring, Toshiba could limit its need to fund incremental cost increases and potentially delays any eventual payment of the guarantee — if at all if executed appropriately with new [debtor-in-possession] lenders."

Earlier in the week, Guggenheim Securities, LLC posited that Westinghouse's bankruptcy means a "greater likelihood" of SCANA abandoning nuclear construction, "which could make [SCANA] the most attractive M&A candidate within our coverage." Guggenheim analyst Shahriar Pourreza named Duke Energy Corp. and Dominion Resources Inc. as potential suitors if the South Carolina utility were to back away from nuclear, and in the March 27 report described SCANA's shares as one of the "cheaper" small-to-mid-cap utilities in the sector. If SCANA were to abandon Summer, according to Guggenheim, its shares might quickly begin to reflect an M&A premium.

"South Carolina set the most constructive back-drop we've seen for nuclear development by enacting their [Base Load Review Act], which not only gives us confidence in [SCANA]'s ability to recover costs to date ... but also entails an abandonment clause," Pourreza wrote.