Giant U.S. utility Southern Company (NYSE:SO) has been working on a big project, and historically it's been something of a pain point for investors. Cost overruns and project delays have marred the company's efforts to build two nuclear power plants at its Vogtle facility. At the nadir, the company's contractor Westinghouse declared bankruptcy, forcing Southern to take over. Which helps explain why updates on Vogtle quickly take over earnings calls. That was doubly true in the first quarter, since Southern was reporting on a comprehensive review of the project it had just completed. Here's what management had to say about its nuclear ambitions.
The general gist of the comprehensive project review completed in the first quarter was that Southern Company believes it has gotten Vogtle back on track. That's a good thing, of course, but the details are important. And they reach beyond U.S. borders.
Southern Company is building its reactors with technology that has yet to be tried in the United States. In fact, until just a few months ago the technology had yet to be tried anywhere on Earth. But that's not the case anymore, with China bringing on the Westinghouse AP1000 reactors it has been building. So far there have been no issues in China that would cause any worries at Southern's Vogtle project. The only problem was with a part (specifically a pump fastener) that really had nothing to do with the overall integrity of the reactor.
More important, Southern has been on-site in China the whole time, watching the start-up process. That's allowed the U.S. utility to see the process firsthand, which it believes will help smooth the way as Southern reaches the start-up point for its own reactors in 2021 and 2022. Don't underestimate the value of the successful start-ups in China, as they prove out the reactor technology and provide a valuable roadmap that simply didn't exist before. The uncertainty surrounding the two Vogtle plants is vastly reduced by the successful start-ups in China.
Boots on the ground
That said, there's still a long way to go before the target start dates in November of 2021 and 2022 for the two Vogtle units. But things have been going increasingly well for Southern, with the update leading to no changes in the estimated remaining costs and very strong construction results.
For example, Southern has been averaging 130,000 weekly hours worked at the Vogtle site since the beginning of the year. While it was having trouble finding qualified workers at one point last year, it's no longer a problem, and staffing has been strong. The company reports it has more people looking to work than jobs available, which suggests that it will be able to reach its target of 160,000 weekly hours worked without too much difficulty. It was already up to 140,000 hours during certain weeks by the time it reported earnings in early May.
Fitting those additional bodies onto the site won't be a problem, either, because the current work breakup is 70% first shift/30% second shift. That split leaves plenty of room to add workers, with Southern expecting to get the break down to perhaps as low as 55%/45%.
At this point Southern believes the overall project is around 77% complete. Direct construction of Vogtle 3, the first of the two units being built, will be close to 90% by the end of the year at the current rate of construction. In fact, Southern has laid out a series of key milestones to watch. The first big target, initial energization, has already been completed. Essentially, they plugged in all the electrical equipment (the control room, for example) so it can be tested.
There are five more major milestones before the plant gets up and running in 2021. However, the company's scheduled start date is in November. That's what Southern has promised regulators. But based on the success it has been having since taking over construction, the utility believes it has a six-month cushion for that date. That gives it room to deal with any issues that might arise, or it could allow the company to beat the target in-service date if construction continues to move ahead smoothly.
No problems here
At the end of the day, Southern's earnings weren't the big news from the company's first-quarter 2019 earnings conference call. It was really all about the Vogtle update that management had said was coming when it reported full-year 2018 results. And, thankfully for investors, the update was pretty good. The once-troubled project does indeed look to be back on track. Although there's still a long way to go before the new Vogtle units are up and running, at this point there doesn't appear to be any reason to fear negative surprises. That's a pleasant change of direction on a very important capital project.