Vogtle Units No. 3 and No. 4 Construction Project	6 Months Ended
Jun. 30, 2018
Vogtle Units No. 3 and No. 4 Construction Project
Vogtle Units No. 3 and No. 4 Construction Project	(L) Vogtle Units No. 3 and No. 4 Construction Project. We, Georgia Power, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, doing business as Dalton Utilities (collectively, the Co-owners) are parties to an Ownership Participation Agreement that, along with other agreements, governs our participation in two additional nuclear units at Plant Vogtle, Units No. 3 and No. 4. The Co-owners appointed Georgia Power to act as agent under this agreement. Our ownership interest and proportionate share of the cost to construct these units is 30%. Pursuant to this agreement, Georgia Power has designated Southern Nuclear Operating Company, Inc. as its agent for licensing, engineering, procurement, contract management, construction and pre-operation services. In 2008, Georgia Power, acting for itself and as agent for the Co-owners, entered into an Engineering, Procurement and Construction Agreement (the EPC Agreement) with Westinghouse Electric Company LLC and Stone & Webster, Inc., which was subsequently acquired by Westinghouse and changed its name to WECTEC Global Project Services Inc. (collectively, Westinghouse). Pursuant to the EPC Agreement, Westinghouse agreed to design, engineer, procure, construct and test two 1,100 megawatt nuclear units using the Westinghouse AP1000 technology and related facilities at Plant Vogtle. Until March 2017, construction on Units No. 3 and No. 4 continued under the substantially fixed price EPC Agreement. In March 2017, Westinghouse filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, Georgia Power, acting for itself and as agent for the other Co-owners, entered into an Interim Assessment Agreement with Westinghouse and WECTEC Staffing Services LLC to provide for a continuation of work at Vogtle Units No. 3 and No. 4. The Interim Assessment Agreement expired in July 2017 upon the effective date of the Services Agreement. Effective in July 2017, Georgia Power, acting for itself and as agent for the other Co-owners, and Westinghouse entered into a services agreement (the Services Agreement), pursuant to which Westinghouse is providing facility design and engineering services, procurement and technical support and staff augmentation on a time and materials cost basis. The Services Agreement will continue until the start-up and testing of Vogtle Units No. 3 and No. 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Co-owners upon 30 days' written notice. In October 2017, Georgia Power, acting for itself and as agent for the other Co-owners, entered into a construction completion agreement with Bechtel Power Corporation, pursuant to which Bechtel serves as the primary contractor for the remaining construction activities for Vogtle Units No. 3 and No. 4 (the Bechtel Agreement). The Bechtel Agreement is a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Co-owner is severally, and not jointly, liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Co-owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Co-owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including, certain Co-owner suspensions of work, certain breaches of the Bechtel Agreement by the Co-owners, Co-owner insolvency and certain other events. Pursuant to the loan guarantee agreement between us and the Department of Energy, we are required to obtain the Department of Energy's approval of the Bechtel Agreement prior to obtaining any further advances under the loan guarantee agreement. In November 2017, the Co-owners entered into an amendment to their joint ownership agreements for Vogtle Units No. 3 and No. 4 (as amended, the Joint Ownership Agreements) to provide for, among other conditions, additional Co-owner approval requirements. Pursuant to the Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction, or can vote to suspend construction, if certain adverse events occur, including: (i) the bankruptcy of Toshiba Corporation; (ii) termination or rejection in bankruptcy of certain agreements, including the Services Agreement or the Bechtel Agreement; (iii) the Georgia Public Service Commission or Georgia Power determines that any of Georgia Power's costs relating to the construction of Vogtle Units No. 3 and No. 4 will not be recovered in retail rates; or (iv) an increase in the construction budget contained in Georgia Power's seventeenth Vogtle construction monitoring (VCM) report of more than $1,000,000,000 or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Joint Ownership Agreements, the required approval of holders of ownership interests in Vogtle Units No. 3 and No. 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement. On December 21, 2017, the Georgia Public Service Commission took a series of actions related to the construction of Vogtle Units No. 3 and No. 4 and issued its related order on January 11, 2018. Among other actions, the Public Service Commission (i) accepted Georgia Power's recommendation to continue construction of Vogtle Units No. 3 and No. 4, with Southern Nuclear Operating Company, Inc. serving as construction manager and Bechtel as primary contractor and (ii) approved the revised schedule placing Unit No. 3 in service in November 2021 and Unit No. 4 in service in November 2022. In its January 11, 2018 order, the Public Service Commission stated if certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Public Service Commission reserved the right to reconsider the decision to continue construction. Parties have filed two petitions with the Fulton County Superior Court appealing the Georgia Public Service Commission's January 11, 2018 order. Georgia Power has stated that it believes these appeals have no merit; however, an adverse outcome in either appeal could have a material impact on our financial condition and results of operations. Georgia Power has advised us that it recently became aware that the estimated future Vogtle project costs were projected to exceed the corresponding budgeted amounts. Upon discovery of these variances, the Co-owners requested Southern Nuclear perform a full cost analysis and reforecast of the cost to complete the project and engaged a third party to independently assess this analysis, forecast, and existing project controls for identifying budget variances. The capital costs estimated to complete construction are expected to increase by approximately $1.5 billion (our 30% share estimated at approximately $450 million). The increases are primarily due to changed assumptions related to the finalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, craft labor incentives, as well as the related levels of project management, oversight and support, including field supervision and engineering support, required to complete the project. We, and the other Co-owners, are evaluating these increased capital costs along with a project-level contingency in a preliminary amount of approximately $800 million (our 30% share estimated at $240 million). We are also evaluating whether an additional Oglethorpe contingency is warranted as is consistent with our conservative budgeting practices. Further, improvements to the project control environment have been implemented and additional improvements will continue to be evaluated. We are currently in the process of evaluating the estimated increases to the project budget. The impact of these additional project costs on our budget will be substantially mitigated by approximately $500 million of contingency included in our existing budget. We are in the process of preparing a revised budget that would include capital costs, allowance for funds used during construction, our allocation of the project-level contingency as well as a potential, separate Oglethorpe contingency. If construction on the project continues, we anticipate that our project budget may increase from $7.0 billion to a range of $7.25 billion to $7.5 billion. A revised project budget will affect the timing and amount of the projected capital expenditures related to the Vogtle project previously disclosed, although the timing of such expenditures remains uncertain. Georgia Power has stated that it does not intend to seek rate recovery for its proportionate share of the additional capital costs in its nineteenth VCM report to be filed with the Georgia Public Service Commission. As a result of Georgia Power's decision not to seek rate recovery of its allocation of these costs and the increased construction budget, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction. The Co-owners are expected to conduct these votes in the third quarter of 2018, and each of Georgia Power, Oglethorpe and MEAG will have to affirmatively vote to continue construction. If the Co-owners vote to move forward, they will also approve a revised project budget. As of June 30, 2018, our total investment in the additional Vogtle units was approximately $3,396,731,000. In the event that fewer than 90% of the Co-owners determine to continue construction, we and the other Co-owners will assess options for the Vogtle project. If the investment were to be written off, we would seek regulatory accounting treatment to amortize the investment over a long-term period, which requires the approval of our board of directors, and we would submit the regulatory accounting treatment details to the Rural Utilities Service for its approval. The scheduled in-service dates of November 2021 and November 2022 for Vogtle Units No. 3 and No. 4, respectively, are not expected to change in connection with these budget revisions. However, any extension of the project schedule is currently estimated to result in additional base capital costs of approximately $30 million per month based on our ownership interests and allowance for funds used during construction of approximately $12.5 million per month per unit. Subsequent to Westinghouse's bankruptcy filing, a number of subcontractors to Westinghouse alleged non-payment by Westinghouse for amounts owed for work performed on Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent for the Co-owners, has taken actions to remove liens on the site filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, actions against Westinghouse and the Co-owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and payment of other Westinghouse pre-petition accounts payable have been paid or accrued as of June 30, 2018. We have a $3,057,069,461 federal loan guarantee from the Department of Energy, under which we have borrowed $1,764,658,000 as of June 30, 2018. Pursuant to the terms of the loan guarantee agreement, no further advances are permitted pending satisfaction of certain conditions. On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to $1,619,679,706 of additional guaranteed funding under the loan guarantee agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of the additional loan guarantee by the Department of Energy cannot be assured and is subject to an amendment and restatement of the loan guarantee agreement and satisfaction of other conditions, including the Co-owners vote to continue construction. For additional information regarding conditions for future advances, potential repayment over a five-year period, covenants and events of default under the loan guarantee agreement with the Department of Energy, see Note K. We have also financed an additional $1,387,000,000 of the capital costs of the Vogtle units through capital market debt issuances. We anticipate financing any project costs not financed with Department of Energy in the capital markets. The timing and availability of funds under the Department of Energy loan guarantee will guide our decisions as to the timing of any capital markets offerings. As construction continues, risks remain that construction-related challenges, including management of contractors, subcontractors, and vendors, labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly and/or installation, including any required engineering changes, of plant systems, structures and components, or other issues could further impact the projected schedule and cost. Monthly construction production targets required to maintain the current project schedule increase significantly later in 2018 through 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be deployed. Aspects of the Westinghouse AP1000 design are based on new technologies that are just beginning initial operation in the global nuclear industry at this scale. There have been technical and procedural challenges to the construction and licensing of Vogtle Units No. 3 and No. 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the Nuclear Regulatory Commission that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the Nuclear Regulatory Commission. Various design and other licensing-based compliance matters, including the timely resolution of inspections, tests, analyses, and acceptance criteria and the related approvals by the Nuclear Regulatory Commission, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be further delays in the project schedule that could result in increased costs to the Co-owners. The ultimate outcome of these matters cannot be determined at this time.

(L) Vogtle Units No. 3 and No. 4 Construction Project. We, Georgia Power, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, doing business as Dalton Utilities (collectively, the Co-owners) are parties to an Ownership Participation Agreement that, along with other agreements, governs our participation in two additional nuclear units at Plant Vogtle, Units No. 3 and No. 4. The Co-owners appointed Georgia Power to act as agent under this agreement. Our ownership interest and proportionate share of the cost to construct these units is 30%. Pursuant to this agreement, Georgia Power has designated Southern Nuclear Operating Company, Inc. as its agent for licensing, engineering, procurement, contract management, construction and pre-operation services.

In 2008, Georgia Power, acting for itself and as agent for the Co-owners, entered into an Engineering, Procurement and Construction Agreement (the EPC Agreement) with Westinghouse Electric Company LLC and Stone & Webster, Inc., which was subsequently acquired by Westinghouse and changed its name to WECTEC Global Project Services Inc. (collectively, Westinghouse). Pursuant to the EPC Agreement, Westinghouse agreed to design, engineer, procure, construct and test two 1,100 megawatt nuclear units using the Westinghouse AP1000 technology and related facilities at Plant Vogtle.

Until March 2017, construction on Units No. 3 and No. 4 continued under the substantially fixed price EPC Agreement. In March 2017, Westinghouse filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, Georgia Power, acting for itself and as agent for the other Co-owners, entered into an Interim Assessment Agreement with Westinghouse and WECTEC Staffing Services LLC to provide for a continuation of work at Vogtle Units No. 3 and No. 4. The Interim Assessment Agreement expired in July 2017 upon the effective date of the Services Agreement.

Effective in July 2017, Georgia Power, acting for itself and as agent for the other Co-owners, and Westinghouse entered into a services agreement (the Services Agreement), pursuant to which Westinghouse is providing facility design and engineering services, procurement and technical support and staff augmentation on a time and materials cost basis. The Services Agreement will continue until the start-up and testing of Vogtle Units No. 3 and No. 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Co-owners upon 30 days' written notice.

In October 2017, Georgia Power, acting for itself and as agent for the other Co-owners, entered into a construction completion agreement with Bechtel Power Corporation, pursuant to which Bechtel serves as the primary contractor for the remaining construction activities for Vogtle Units No. 3 and No. 4 (the Bechtel Agreement). The Bechtel Agreement is a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Co-owner is severally, and not jointly, liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement.

The Co-owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Co-owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including, certain Co-owner suspensions of work, certain breaches of the Bechtel Agreement by the Co-owners, Co-owner insolvency and certain other events. Pursuant to the loan guarantee agreement between us and the Department of Energy, we are required to obtain the Department of Energy's approval of the Bechtel Agreement prior to obtaining any further advances under the loan guarantee agreement.

In November 2017, the Co-owners entered into an amendment to their joint ownership agreements for Vogtle Units No. 3 and No. 4 (as amended, the Joint Ownership Agreements) to provide for, among other conditions, additional Co-owner approval requirements. Pursuant to the Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction, or can vote to suspend construction, if certain adverse events occur, including: (i) the bankruptcy of Toshiba Corporation; (ii) termination or rejection in bankruptcy of certain agreements, including the Services Agreement or the Bechtel Agreement; (iii) the Georgia Public Service Commission or Georgia Power determines that any of Georgia Power's costs relating to the construction of Vogtle Units No. 3 and No. 4 will not be recovered in retail rates; or (iv) an increase in the construction budget contained in Georgia Power's seventeenth Vogtle construction monitoring (VCM) report of more than $1,000,000,000 or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Joint Ownership Agreements, the required approval of holders of ownership interests in Vogtle Units No. 3 and No. 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.

On December 21, 2017, the Georgia Public Service Commission took a series of actions related to the construction of Vogtle Units No. 3 and No. 4 and issued its related order on January 11, 2018. Among other actions, the Public Service Commission (i) accepted Georgia Power's recommendation to continue construction of Vogtle Units No. 3 and No. 4, with Southern Nuclear Operating Company, Inc. serving as construction manager and Bechtel as primary contractor and (ii) approved the revised schedule placing Unit No. 3 in service in November 2021 and Unit No. 4 in service in November 2022. In its January 11, 2018 order, the Public Service Commission stated if certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Public Service Commission reserved the right to reconsider the decision to continue construction. Parties have filed two petitions with the Fulton County Superior Court appealing the Georgia Public Service Commission's January 11, 2018 order. Georgia Power has stated that it believes these appeals have no merit; however, an adverse outcome in either appeal could have a material impact on our financial condition and results of operations.

Georgia Power has advised us that it recently became aware that the estimated future Vogtle project costs were projected to exceed the corresponding budgeted amounts. Upon discovery of these variances, the Co-owners requested Southern Nuclear perform a full cost analysis and reforecast of the cost to complete the project and engaged a third party to independently assess this analysis, forecast, and existing project controls for identifying budget variances. The capital costs estimated to complete construction are expected to increase by approximately $1.5 billion (our 30% share estimated at approximately $450 million). The increases are primarily due to changed assumptions related to the finalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, craft labor incentives, as well as the related levels of project management, oversight and support, including field supervision and engineering support, required to complete the project. We, and the other Co-owners, are evaluating these increased capital costs along with a project-level contingency in a preliminary amount of approximately $800 million (our 30% share estimated at $240 million). We are also evaluating whether an additional Oglethorpe contingency is warranted as is consistent with our conservative budgeting practices. Further, improvements to the project control environment have been implemented and additional improvements will continue to be evaluated.

We are currently in the process of evaluating the estimated increases to the project budget. The impact of these additional project costs on our budget will be substantially mitigated by approximately $500 million of contingency included in our existing budget. We are in the process of preparing a revised budget that would include capital costs, allowance for funds used during construction, our allocation of the project-level contingency as well as a potential, separate Oglethorpe contingency. If construction on the project continues, we anticipate that our project budget may increase from $7.0 billion to a range of $7.25 billion to $7.5 billion. A revised project budget will affect the timing and amount of the projected capital expenditures related to the Vogtle project previously disclosed, although the timing of such expenditures remains uncertain.

Georgia Power has stated that it does not intend to seek rate recovery for its proportionate share of the additional capital costs in its nineteenth VCM report to be filed with the Georgia Public Service Commission. As a result of Georgia Power's decision not to seek rate recovery of its allocation of these costs and the increased construction budget, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction. The Co-owners are expected to conduct these votes in the third quarter of 2018, and each of Georgia Power, Oglethorpe and MEAG will have to affirmatively vote to continue construction. If the Co-owners vote to move forward, they will also approve a revised project budget.

As of June 30, 2018, our total investment in the additional Vogtle units was approximately $3,396,731,000. In the event that fewer than 90% of the Co-owners determine to continue construction, we and the other Co-owners will assess options for the Vogtle project. If the investment were to be written off, we would seek regulatory accounting treatment to amortize the investment over a long-term period, which requires the approval of our board of directors, and we would submit the regulatory accounting treatment details to the Rural Utilities Service for its approval.

The scheduled in-service dates of November 2021 and November 2022 for Vogtle Units No. 3 and No. 4, respectively, are not expected to change in connection with these budget revisions. However, any extension of the project schedule is currently estimated to result in additional base capital costs of approximately $30 million per month based on our ownership interests and allowance for funds used during construction of approximately $12.5 million per month per unit.

Subsequent to Westinghouse's bankruptcy filing, a number of subcontractors to Westinghouse alleged non-payment by Westinghouse for amounts owed for work performed on Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent for the Co-owners, has taken actions to remove liens on the site filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, actions against Westinghouse and the Co-owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and payment of other Westinghouse pre-petition accounts payable have been paid or accrued as of June 30, 2018.

We have a $3,057,069,461 federal loan guarantee from the Department of Energy, under which we have borrowed $1,764,658,000 as of June 30, 2018. Pursuant to the terms of the loan guarantee agreement, no further advances are permitted pending satisfaction of certain conditions. On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to $1,619,679,706 of additional guaranteed funding under the loan guarantee agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of the additional loan guarantee by the Department of Energy cannot be assured and is subject to an amendment and restatement of the loan guarantee agreement and satisfaction of other conditions, including the Co-owners vote to continue construction. For additional information regarding conditions for future advances, potential repayment over a five-year period, covenants and events of default under the loan guarantee agreement with the Department of Energy, see Note K.

We have also financed an additional $1,387,000,000 of the capital costs of the Vogtle units through capital market debt issuances. We anticipate financing any project costs not financed with Department of Energy in the capital markets. The timing and availability of funds under the Department of Energy loan guarantee will guide our decisions as to the timing of any capital markets offerings.

As construction continues, risks remain that construction-related challenges, including management of contractors, subcontractors, and vendors, labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly and/or installation, including any required engineering changes, of plant systems, structures and components, or other issues could further impact the projected schedule and cost. Monthly construction production targets required to maintain the current project schedule increase significantly later in 2018 through 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be deployed. Aspects of the Westinghouse AP1000 design are based on new technologies that are just beginning initial operation in the global nuclear industry at this scale.

There have been technical and procedural challenges to the construction and licensing of Vogtle Units No. 3 and No. 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the Nuclear Regulatory Commission that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the Nuclear Regulatory Commission. Various design and other licensing-based compliance matters, including the timely resolution of inspections, tests, analyses, and acceptance criteria and the related approvals by the Nuclear Regulatory Commission, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be further delays in the project schedule that could result in increased costs to the Co-owners.

The ultimate outcome of these matters cannot be determined at this time.