Please ensure Javascript is enabled for purposes of website accessibility

Nuclear Success in China Is a Good Sign for This U.S. Company

By Reuben Gregg Brewer – Updated Apr 10, 2019 at 1:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Southern Company is hoping to use lessons learned in China to bring its own nuclear construction project to a successful close.

Giant U.S. utility The Southern Company (SO 3.39%) is offering investors a robust dividend yield of 4.4%. That's toward the high end of the utility industry, and for a very good reason -- cost overruns and delays at the company's Vogtle nuclear construction project in Georgia have been a drag on financial performance. However, with similar reactors now up and running in China, Southern hopes it can use the lessons it has learned from the Chinese nuclear start-ups to bring its own projects online without further problems. And the news is looking pretty good at this point.

Not the best start

Building a nuclear power plant from the ground up is an expensive and time-consuming effort. And the execution history in the nuclear space isn't great. Southern, for example, built two power plants at the Vogtle facility in the late 1980s, with costs going from an estimate of around $2 billion to nearly $9 billion by the time construction was complete. 

Nuclear power plants from a distance

Image source: Getty Images.

This time around, when Southern started down the path of adding two new nuclear power units at its Vogtle facility, there was a great deal of uncertainty about the technology it had chosen. At the time, the Westinghouse AP1000 reactors that Southern was building had never been used before.

With the cost overruns in the late 1980s as background, investors were justifiably displeased by the early construction results. Vogtle quickly fell behind schedule and was hit with material cost overruns. And then Southern's contractor, Westinghouse, declared bankruptcy, putting the entire project in doubt. Southern stepped in to take control of the project and salvage its investment, but at this point, the cost has roughly doubled from the original estimates. It's no wonder investors are a little leery of Southern's stock.

Check out the latest earnings call transcript for The Southern Company.

The updates are getting better

The negative view here was highlighted in the second quarter of 2018, when Southern announced yet another uptick in the price. Despite the company taking the reins, which was supposed to lead to improving results, shareholders were forced to stomach a $1.1 billion charge. This time, though, it faced material pushback from its partners in the project. To save the deal, Southern agreed to take on more of the costs should there be any further price increases. Southern has a lot riding on its Vogtle construction project.

SO Dividend Yield (TTM) Chart

SO Dividend Yield (TTM) data by YCharts.

The fourth quarter provided some solid news. The company believes it is on schedule to hit its November 2021 and November 2022 in-service dates for its two new nuclear units. That's thanks to things like improved efficiency driven by positive employment and retention trends. Employment trends were a notable concern on the company's third-quarter conference call, but at this point, it has more applicants than it can process. It's also been thinking outside the box, such as using less-skilled labor to do simple tasks (like pulling cables), while focusing more skilled laborers on tasks only they can complete (for example, having electricians focus on connecting cables and not pulling them).   

Southern looks like it's gearing up for a strong finish at the Vogtle project, which is where China comes into play. As Westinghouse AP1000 reactors have been brought online in that country over the last year, Southern has been there to watch the process. In fact, during the fourth-quarter conference call, CEO Thomas Fanning made a number of important remarks, including, "We have the units in China working well. So we know the technology works." Although that sounds simple, it is an important fact that wasn't actually clear prior to the Chinese plants going live.   

But more important to the future for Southern, the CEO also noted that, "We have seen what they've done at Sandman and Haiyang. We've taken best practices..." That will allow the utility to "optimize workflows and process." And that makes it even more likely that Southern hits the in-service targets for the Vogtle plants. This is vital, because missing those dates will mean more costs, which Southern and its shareholders will have to eat.   

That said, Southern is currently doing a regular-period review of its progress and will shortly provide an updated timeline for completion. Although management didn't make any promises, the tone of the fourth-quarter conference call suggested that it believes it may be able to bring the plants online early. The driving factors in the timeline update will likely be the company's own execution and its ability to capitalize on what it learned from the Chinese start-ups. Although it is hard to call the Vogtle project, which is way over budget and painfully delayed, a positive, it is starting to look like the outcome will be better than investors fear.

It will get done

With Southern having taken on more of the risk of cost overruns and delays at Vogtle, it looks almost certain that these nuclear projects will be completed. The recent success in getting the projects running smoothly is further good news. But the best news right now is probably that the Westinghouse AP1000 reactors that are live in China are working, and Southern was there to watch them go live. That should help the U.S. utility ensure that there is a positive outcome for its big nuclear build after suffering through so many troubles. There's still a lot to get done, but with China leading the way, investors who have been on the sidelines because of Vogtle might want to reassess Southern Company and its generous 4.4% yield.

Reuben Gregg Brewer owns shares of Southern Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.