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Georgia PSC OKs Vogtle Spending

EXC SO

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Georgia Power — the largest subsidiary of Southern Company (SO - Analyst Report) — has received approval from the Georgia Public Service Commission (PSC) to invest in the construction of Plant Vogtle units 3 and 4. The approval is for the period starting July 1, 2011 through December 31, 2011.

Vogtle Electric Generating Plant (or Plant Vogtle) — located near Waynesboro in Burke County, Georgia — has been registering safety and technological developments. The manufacturing costs of both the units of this nuclear power facility are being monitored by the PSC.
   
The facility has already received important advancements on turbine islands, cooling towers and nuclear islands, while further upgrades will continue in the nuclear island, turbine building and module assemblies in the upcoming months. Significant components will likely reach the location by the year-end or by early next year. Unit 3 is expected to commence operation in 2016 and Unit 4 is scheduled for 2017.

The plant is jointly owned by Georgia Power, Oglethorpe Power Corporation, Municipal Electric Authority of Georgia and Dalton Utilities with 45.7%, 30%, 22.7% and 1.6% stakes, respectively. Another affiliate of Southern Company, Southern Nuclear, is regulating the construction and will operate the two units for Georgia Power and its associate partners.

Headquartered in Atlanta, Georgia, Southern Company is the second largest generator of electricity in the nation behind Exelon Corp. (EXC - Analyst Report), serving both regulated and competitive markets across the Southeastern U.S. We consider the Southeast to be one of the better regions to operate an electric utility, due to the higher-than-average natural population growth, the strong and diverse regional economy, constructive regulation and comparatively tight power markets. These characteristics provide a solid basis for Southern Company’s regulated business, which is expected to comprise roughly 90% of its consolidated earnings over the next few years.

However, we remain skeptical regarding Southern Company’s $14 billion investment for the construction of two new reactors at the company’s existing nuclear site in Vogtle, Georgia. With a fair chance of cost overruns and likely modifications to fully address the safety risks following the meltdown at Japan's Fukushima plant last year after a devastating earthquake and tsunami, the project cost could easily come to around $20 billion. This will substantially increase Southern Company’s leverage and deteriorate its credit metrics.

Additionally, the increasing capital intensity of its operations may result in reduced returns going forward. Hence, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation. The company also retains a Zacks #3 Rank (short-term Hold rating).

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