Morningstar | Southern Announces Vogtle Cost Increase of $1.1 Billion; Reducing Our FVE to $49. See Updated Analyst Note from 08 Aug 2018
We are reducing our fair value estimate to $49 per share from $51 after Southern Co. announced that its estimated share of the cost for the two new nuclear units at Vogtle had increased by $1.1 billion, resulting in the need to issue an additional $800 million of equity. The $1.1 billion includes approximately $700 million of base capital cost increase for which Georgia Power does not intend to seek recovery from regulators. The other $400 million is contingency, which might be recovered if spent. Southern management believed absorbing the $700 million would maintain the momentum of the project instead of waiting for Georgia regulators to approve the higher amount.Although painful for shareholders, we believe the decision to not seek recovery of the base capital increase was the correct one. Georgia regulation is one of the most constructive for shareholders in the country, and we believe that relationship is worth protecting.
All the news was not bad, as Southern’s base utility businesses and unregulated operations at Southern Power and Southern Company Gas are performing ahead of forecast for the year. Southern increased and narrowed its 2018 adjusted earnings per share guidance range to $2.95-$3.05 from $2.80-$2.95. In addition, management reaffirmed its 4%-6% long-term EPS growth guidance from the 2018 original EPS guidance of $2.87. Our earnings estimates result in 5% growth from the original guidance.
The other update that gave us confidence that the new units at Vogtle should perform well after construction is complete is that four similar Westinghouse AP1000 units in China are in startup phase and performing as expected. The extra cost to complete Vogtle appears to be driven by a shortage of qualified electricians and pipefitters, as staffing levels are less than 90% of plan. Ironically, the strong economy benefiting Southern’s utility and nonutility businesses appears to be a headwind for Vogtle.
Southern is a holding company. Through its subsidiaries, Alabama Power Company, Georgia Power Company, and Mississippi Power Company, the company is engaged in the generation, transmission, distribution, and purchase of electricity and the sale of electric service in Alabama, Georgia, and Mississippi. The company's Southern Power Company subsidiary develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. The company's Southern Company Gas subsidiary is an energy services holding company whose primary business is the distribution of natural gas in Illinois, Georgia, Virginia, and Tennessee.
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