Georgia Power's Looming Decision On The Vogtle Nuclear Project

The following post was written by research groups within our energy offering, including Regulatory Research Associates, or RRA. For further information on the full reports, please request a call.

Southern Co's Georgia Power Co. (GP) on August 2 disclosed its share of the construction cost for the Vogtle Units 3 and 4 nuclear project had climbed an estimated $1 billion to $1.7 billion higher. The utility said it was evaluating the economic viability of the project and would make a go or no-go recommendation to the Georgia Public Service Commission by the end of August.

Meanwhile construction on the massive project continues with the first 1.4 million-pound steam generator placed into Unit 3 of the plant. On August 15, the Georgia Public Service Commission approved and verified $222 million in additional construction costs incurred by Georgia Power Co., during the second half of 2016 at Vogtle. Georgia Power is required to file a Vogtle construction monitoring, or VCM, report with the PSC every six months.

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At the time that the sixteenth VCM was filed, the forecast in-service dates were December 2019 and September 2020 for Units 3 and 4, respectively. However, in its second-quarter earnings release on August 2, 2017, Southern had adjusted those dates, with Unit 3 expected to be placed in-service between February 2021 and March 2022, and Unit 4 between February 2022 and March 2023. This has implications for federal nuclear production tax credits as well as regulatory ratemaking.

By August 31, 2017, as part of its seventeeth VCM filing, covering the period January 2017 through June 2017, GP has indicated that it will include a "go/no-go" proposal regarding whether to continue with Vogtle construction. As explained in the second-quarter earnings call, several factors are being taken into account, including the potential for stranded costs, the value of the Toshiba parental guarantee, the potential tax benefits and the long-term relationship with the Georgia General Assembly and the PSC.

Georgia Powers cost projections for construction of Vogtle Units

GP owns 45.7% of Vogtle Units 3 and 4. The other owners of the two units and their percentage ownership interests are: Oglethorpe Power Corp., 30%; the Municipal Electric Authority of Georgia, 22.7%; and Dalton Utilities, 1.6%.

GP spent $3.9 billion on construction and capital costs at Vogtle from 2009 through 2016. Financing costs during that time were $1.26 billion, making the total project cost for GP then $5.16 billion. As filed in the sixteenth VCM, for the sixth months ending December 2016, the current forecast is $7.7 billion ($5.4 billion in construction and capital costs and $2.3 billion in financing). This is $1.6 billion over the forecast costs in the first VCM, for June 2009, which forecast $6.1 billion ($4.4 in construction and capital costs and $1.6 in financing).

Since the end of 2016, however, estimated costs have grown further with construction and capital costs projected at $6.7 billion to $7.4 billion for Georgia Power. The go, no-go decision could have significant risk/reward implications for the utility and its parent company, potentially affecting capital budgeting decisions and future earnings growth.

Should Southern decide not to complete construction and abandon the Vogtle project, it expects to earn a full cost of capital return on the CWIP spent to date — $4.5 billion as of June 30. The actual return would be determined by state regulators under this scenario.

A go-forward decision offers considerably more uncertainty. The PSC has not certified costs beyond about $5.68 billion, and those costs could be borne by ratepayers or Southern's shareholders, depending on the regulatory treatment. The burden of prudency of such costs is on Georgia Power. Further downside risks are present should costs continue to escalate.

Vogtle 2 & 3 cost estimates and current regulatory treatment

Already a client? For further coverage on the issue, check out the following reports:

RRA Regulatory Focus: Vogtle on my mind — Key assessments forthcoming for Georgia Power

RRA Regulatory Focus: Ga. commission approves, verifies additional Vogtle construction costs

RRA Financial Focus: Vogtle, a whale of a decision for Southern Co.

Apr 28, 2017