Morningstar | Vogtle Construction Continues; Southern to Share Modestly More Risk if Further Cost Overruns. See Updated Analyst Note from 27 Sep 2018
We are reaffirming our fair value estimate of $49 per share after Southern Company announced an agreement with its other three project co-owners to continue construction of the two new nuclear units at Vogtle. The agreement results in Southern sharing a larger percentage of any future cost overruns if actual costs exceed the revised estimate disclosed on Aug. 8, 2018, by more than $800 million.The August revised estimate increased Southern’s share by $1.1 billion, to $8.4 billion, and we reduced our fair value estimate by $2 per share at that time. Under the new agreement, if total project costs are $2.1 billion higher than the August estimate, Southern’s share would be $1.14 billion, or 54.3% of the cost overrun, instead of $960 million, or 45.7% of its actual ownership in the project. In addition, the other Vogtle owners would have a one-time option to tender a portion of their ownership interest to Georgia Power for the costs over $2.1 billion.
We believe the extra $180 million if construction costs are $2.1 billion higher than the latest estimate and the put options given to the other owners are a better outcome than abandoning the project and potentially suffering a fate similar to Scana in South Carolina. Although we think parties in South Carolina will reach a compromise, many in the state have suggested regulators should deny recovery even with state law specifically allowing recovery of Scana’s abandoned nuclear units. We believe Southern would face similar regulatory risk if it abandoned the Vogtle project.
We have no reason at this time to believe the new units can’t be completed on the schedule and budget outlined in August. However, the modestly higher portion of potential cost overruns that would be shouldered by Southern under the new agreement does decrease our bear case fair value estimate by $1 per share. However, our uncertainty ratting remains low even with our bear case fair value estimate declining to $42 per share.
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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