The new Unit 3 of Southern Co. subsidiary Georgia Power's |
Southern Co. is edging closer to removing significant uncertainty from its balance sheet as the first of two new units at its Alvin W. Vogtle Nuclear Plant reached commercial operation, the company announced July 31, nearly 17 years after launching the expansion effort.
"We're just thrilled to have the opportunity to move toward getting these units online and getting this project behind us and then focus on this company and getting the valuation we think we deserve," Southern President and CEO Chris Womack said in a recent interview with S&P Global Commodity Insights.
Cash generated from bringing both Vogtle units 3 and 4 into commercial service, the removal of some years-long penalties due to delays and cost overruns, and finally realizing the full value of the expansion are net positives for the company, Womack said. "It gives us great cards to play as we look into the future to achieve all of our earnings targets." The company has a long-term adjusted earnings per share growth target of 5% to 7%.
The two-unit Vogtle expansion, one of the largest infrastructure investments in the US power sector over the last two decades, is expected to add more than 2,200 MW of generating capacity once the second unit reaches commercial operation in late fourth-quarter 2023 or the first quarter of 2024. Unit 3 enters commercial operation after Southern utility subsidiary Georgia Power Co. in June delayed the in-service date to remediate a degraded hydrogen seal discovered during startup and preoperational testing.
Commercial operation is a requirement before the company can begin recovering costs from ratepayers. That milestone will give Southern the ability to reassess its capital budget and other opportunities, Womack said.
The original two units at the Vogtle plant in Burke County, Ga., just south of Augusta, Ga., began operating in the late 1980s. Georgia Power owns the largest share of both the existing units and the new ones, at 45.7%. Other owners are Oglethorpe Power Corp., which supplies power to Georgia electric cooperatives, at about 30%, though it is looking to exercise an option to reduce that share to cut costs; the Municipal Electric Authority of Georgia, which supplies power to 49 public power entities in Georgia, at 22.7%; and the city of Dalton, Ga., at 1.6%. Southern Nuclear Operating Co. Inc. will operate the new units on behalf of the co-owners.
"We have a wonderful opportunity to achieve our financial targets, our earnings targets, really extend this growth out to the future," added Womack, a former Georgia Power CEO who took over as president and CEO of Southern in May.
Southern is likely to allocate more cash to its dividend as the project clears final hurdles, according to Morningstar analyst Travis Miller.
"Southern has lagged most of the other utilities in dividend growth recently," Miller said, adding that he expects Southern to maintain a dividend growth rate more in line with its peers. Southern's current quarterly dividend is 70 cents per share.
But it may be some time before those benefits manifest, Miller said, estimating such changes are likely to occur in late 2024 or 2025 as cash flow picks up and regulatory penalties lift.
"Southern stock performance has really suffered relative to the rest of the industry over the last 10 years," Miller said in an interview. "Longtime Southern shareholders are used to better returns than what they've gotten during the last decade."
Mizuho Securities USA in April upgraded shares of Southern from "neutral" to "buy."
"We believe [Southern] could garner a double-digit [price-to-earnings] premium, similar to its pre-Kemper and pre-Vogtle construction days," Mizuho wrote, referring also to a carbon capture project in Mississippi the company abandoned in 2017.
Credit ratings
Bringing both new Vogtle units online will significantly reduce financial risk for the company, which has seen a hit to its credit quality, said Gabe Grosberg, senior director of North American regulated utilities global infrastructure ratings for S&P Global Ratings.
Southern has a BBB+ rating and Stable outlook from S&P Global Ratings, after a one-notch downgrade in October 2021.
While S&P Global Ratings has cited continued delays for the Vogtle expansion as contributing to downgrades for the company, the current rating "could still take on some degree of additional costs," Grosberg said in an interview.
Once the two additional units are in service and reflected in rates, Southern Executive Vice President and CFO Dan Tucker said in April the company expects an improvement to operating cash flow of about $700 million, "and thus improvement in [funds from operations] from an FFO to debt perspective." Tucker said the objective is to have all Southern regulated utilities in the A credit ratings category and the parent company at BBB+.
Commercial operation for Vogtle Unit 3 is a significant milestone, but "we'd still want to see how events play out, how costs are recovered," Grosberg said. "Getting through this enormous project and its sizeable risks, as the two downgrades over the past decade demonstrate, is certainly supportive of credit quality."
Once both new units achieve commercial operation, S&P Global Ratings will focus on subsequent rate case filings to "ensure they support credit quality," Grosberg said. "That's definitely a good point in time for us to review."
 The cooling tower for Unit 3 of the |
Cost recovery
As Vogtle Unit 4 begins fuel load, following receipt of a 103(g) finding from the US Nuclear Regulatory Commission, the Georgia Public Service Commission is set to begin the prudency review for the entire expansion project — determining how much Georgia Power can recover from ratepayers. Georgia Power's cost estimate for its share of the total project capital cost was $10.6 billion as of the company's most recent annual Form 10-K filing.
Oglethorpe Power's budget for its interest in the two units, meanwhile, is $8.1 billion as of March 31, according to its most recent Form 10-K filing.
Total cost estimates for the Vogtle additions are difficult to determine given variables like financing costs across the multiple owners, as well as $3.7 billion provided as a result of the bankruptcy of Westinghouse Electric Co. LLC, the original builder, but some estimates top $30 billion.
Georgia Power will likely propose a prudency review in excess of the $7.3 billion previously determined reasonable in an earlier settlement with the PSC, according to S&P Global Commodity Insights Senior Research Analyst Dan Lowrey. Georgia Power's request is expected to be less than its total share of costs, Lowrey said.
Georgia Power has already said it would not file for recovery of some costs, including the nearly $700 million its project partners won in a legal battle over cost sharing, Lowrey said.
"Georgia Power has already written off a lot related to this project," Lowrey added. "There are certain costs I'm sure the PSC won't question, namely costs borne as a result of extraordinary circumstances brought about by the COVID-19 pandemic."
Judging by the outcome of the prudency review for Vogtle's first two units, and given the overall constructive regulatory environment in Georgia, including multiple cost-recovery mechanisms, strong support for generation construction and above-average returns on equity authorized for utilities, Lowrey said he expects a "fairly constructive outcome" to the review.
While it remains a challenge for regulators across the country to balance macroeconomics and the pressure on customer bills against utility cost recovery and capex plans, Lowrey and Grosberg said they did not expect significant pushback from Georgia regulators, who have historically supported the project.
"I would consider any pushback from the PSC to be mainly for show, especially given a special election is supposed to be scheduled for two commissioners this year," Lowrey said, pointing to a December 2022 rate-case decision where commissioners granted nearly all the revenue Georgia Power sought in the form of a multiyear rate increase of nearly $1 billion.
Asked about the potential burden on customers, former CEO Tom Fanning, who now serves as chairman of Southern's board of directors, said in May that Southern and Georgia Power, along with other partners in the project, will carry the expansion expenses. Southern has written off more than $3 billion, Fanning said.
The Vogtle expansion reaching the finish line signals to the broader nuclear industry "that it's doable. We did something big and we were gonna get it done right," Womack said. The new Vogtle units are the first new nuclear capacity in the US since the Tennessee Valley Authority reached commercial operation of unit 2 at its Watts Bar Nuclear plant in 2016, but that unit was originally developed in the early 1970s and abandoned while under construction in 1985. Construction was restarted in 2007.
"It's important, I think, for this country to be a leader, not just follow China and Russia, but show in this country how important nuclear is from an energy independence standpoint [and] also from a portfolio standpoint and the role that nuclear must play as we go forward," Womack said. The two new Vogtle units will replace some of the coal- and gas-fired power plants Georgia Power intends to retire by 2028.
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