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Southern Company Inks Deal to Take Over the Vogtle Project

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Electric utility firm The Southern Company (SO - Free Report) recently entered into a tentative agreement with Japan’s Toshiba Corp’s U.S. nuclear unit, Westinghouse Electric Company. Per the deal, Southern Company will take over the project management of a nuclear power plant from Westinghouse. Southern Company’s largest subsidiary, Georgia Power, as well its other unit, Southern Nuclear, will continue with the construction work of two nuclear reactors at its Vogtle power plant.

What’s Behind the Deal?

Westinghouse is the major construction contractor and designer of the two nuclear reactors at Vogtle power plant and two more at another power plant that is operated by Scana Corporation . However, Westinghouse had filed for bankruptcy in late March, casting a shadow over the nuclear industry. This was because the company’s corporate parent, Toshiba recently suffered huge losses owing to Westinghouse’s troubled projects in Georgia and South California.

What Lies Ahead?

With Westinghouse exiting the Vogtle project as part of the bankruptcy proceedings, Southern Company has been considering all options for the increasingly tangled $20 billion nuclear project. For instance, the utility has been looking for a new contractor to take charge for the completion of the project or converting the project to another type of power plant. Atlanta based Southern Company even considered to shut down the work at the Vogtle plant, which in turn would force around 6,000 people out of work.  However, Southern Company has decided to proceed with the project and complete its full-scale schedule and cost-to-complete analysis with the other co-owners of the project namely, Oglethorpe Power, MEAG Power and Dalton Utilities.

The existing interim contract between Southern company and Westinghouse will be extended to Jun 3. This will help both the parties to finalize the terms of the new deal which will come into effect once the existing one is rejected during the bankruptcy proceedings.

Georgia Power, which owns a 45.7 % stake in the Vogtle project, has been spending about $50 million per month to continue with the expansion of the project. The project is being bankrolled with more than $8 billion in federal loans and loan guarantees. Georgia Power believes that the project has already exceeded the budget by $3 billion and is unlikely to be completed before the end of 2020.

Meanwhile, Westinghouse chapter 11 bankruptcy filing has been proceeding at a slow rate with the company requesting for an extension of deadline until May 26 to file full schedule of its assets and liabilities. The company has also decided to exit the loss making business of building reactors and is focusing on service and commissioning work.

Zacks Rank and Key Picks

Southern Company is one of the largest and best-managed electric utility holding companies in the U.S. The firm dominates the power business across the southeastern region. The utility currently carries a Zacks Rank #4 (Sell).

Southern Company’s shares have rallied almost 3% over the last six months, underperforming the Zacks categorized Utility- Electric Power industry’s gain of around 10%. 

Better-ranked players from the same industry include Pampa Energia S.A. (PAM - Free Report) and RWE Aktiengesellschaft (RWEOY - Free Report) . Both the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pampa Energia is expected to report year-over-year growth of 38,200% in its earnings in 2017.

RWE is expected to report year-over-year growth of 42.45% in its earnings in 2017.

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