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Morningstar | Transactions Reduce Southern's Equity Needs; China Nukes Increase Our Confidence in Vogtle Schedule

We are increasing our fair value estimate to $50 from $49 per share after Southern Co. reported solid 2018 third-quarter earnings, raised 2018 guidance, updated the status of the Vogtle nuclear project, and indicated equity needs through 2022 would be reduced with asset and tax equity sales. Third-quarter EPS were $1.14 versus $1.12 in the same period last year.

Announced agreements to sell the Mankato gas-fired plant in Minnesota for $650 million and proceeds of $1.2 billion from third-party tax equity financing arrangements for Southern Power’s wind portfolio further reduced Southern’s previously planned $7 billion of equity issuances by $1.4 billion. Equity needs through 2022 are now estimated to be only $2.4 billion above normal equity issued for the DRIP and employee compensation.

Our fair value estimate increase was driven by management’s comments that these transactions are expected to be accretive to earnings and projected long-term EPS annual growth trajectory remains 4%-6%. We had expected the tax equity transaction would be modestly dilutive, and the Mankato sale was not on our radar screen. We have increased our EPS estimates to reflect the update, but our EPS growth estimates remain within Southern’s guidance range.

Vogtle’s revised schedule and budget announced at the second-quarter earnings call remains unchanged. Construction is now 58% complete and all major milestones have been met, supporting the accelerated schedule. Two of the four Westinghouse AP1000 units in China have achieved commercial operation and the two others are synced to the power grid with commercial operation expected by year-end. The China experience increases our confidence that Southern can meet the revised schedule and budget.