Four Chinese nuclear reactors are getting set to go on line, and the process so far has gone relatively smoothly. That's not just good news for giant U.S. utility The Southern Company (SO -0.50%) -- it's incredible news. Here's what you need to know to understand why Southern Company is paying very close attention to developments in China these days.
A bright future
China is in the process of building out its nuclear power infrastructure, with 19 reactors currently under construction. These new power plants will help satisfy the country's need for electricity as its citizens continue to rise up the socioeconomic ladder and demand ever more power. In April, fuel was loaded into a new nuclear reactor that uses a completely new design, effectively testing the power plant for the very first time.
Southern Company representatives have been on hand to monitor the progress. At this point, there are four reactors using this new design in the very early stages of start-up. And every single one of them is vital for Southern Company because these plants used the same new design, the Westinghouse-designed AP1000 nuclear reactor, as Southern is using at its Vogtle plant in Georgia. Until this point, the AP1000 design hadn't been tested in a real-life situation because none had been completed.
So far Southern's Vogtle nuclear project has generated pretty awful news headlines. The project has faced major delays and cost overruns, and in 2017, Westinghouse, which was building the reactor for Southern, declared bankruptcy. There was a real risk that Vogtle would get mothballed completely at that point. But Southern was able to keep the project going, switching to a new contractor (Bechtel).
A successful start-up in China would be particularly good news right now, since Southern had to increase its cost estimate for Vogtle again in the second quarter, this time by $1.1 billion, partly because of a shortage of skilled labor. That cost was shouldered solely by shareholders as Southern chose to take a one-time charge to cover the expense instead of asking for rate relief from regulators. The charge pushed second-quarter earnings to a loss of $0.15 a share. Without the charge, Southern would have earned $0.80 a share. That's another painful hit for shareholders, but the long-term benefit of preserving positive relationships with regulators in a heavily regulated industry was probably worth it.
The successful start-up of those Chinese AP1000 reactors, meanwhile, will help to assuage concerns that Southern's Vogtle project is a total waste of money. Moreover, Southern gets to learn by watching the process, providing a rough guide of what it can expect in a few years when it starts up its own AP1000 reactors. That, with any luck, will make the process go more smoothly for Southern. If something goes wrong in China, however, investors should expect Southern's stock to take a hit on the news. But even problems will be a net benefit, since they will give Southern a leg up on preventing such setbacks.
All eyes on China
China's efforts to start four AP1000 reactors aren't going to make or break Southern in a direct way. But they are hugely important projects for the U.S. utility just the same. If you own Southern, you should be watching those Chinese reactors just like Southern is. They will give an important read on the company's ability to succeed at its already costly and delayed Vogtle project. With the price tag for this huge project still heading higher, any good news would be welcome news, especially since Southern's attempt to build a first-of-its-kind "clean coal" power plant fell well short of expectations.