In the second quarter, U.S. electric and gas utility Southern Company's (NYSE:SO) adjusted earnings came in at $0.80 per share, flat from the same period in 2018. Analysts asked some questions about the earnings performance during the quarterly conference call, but the bigger focus was on Southern's giant nuclear power construction project. Here's why it's so important and what's going on today.
Regulated utilities have to request rate hikes from regulators. That's the trade-off for being granted a monopoly in the areas they serve. To get those rate hikes approved, utilities generally invest in their businesses to improve operating performance and ensure a reliable supply of power. Southern is no different from its peers in this regard.
However, Southern is doing something that no other U.S. utility is doing today: It's building a nuclear power plant. This is no small effort and it hasn't been going very well. The project, known as Vogtle, is delayed and over budget. And at this point, Southern has basically agreed to foot the bill for any further cost hikes. This is why Southern's Vogtle construction update takes center stage during each and every earnings conference call lately. For shareholders, who have suffered through what has been a very difficult construction process, the news has been getting better and better since Southern took over from now-bankrupt Westinghouse, its former contractor.
Boots on the ground
For the past few quarters, CEO Thomas Fanning has been laying out efficiency targets using "earned hours per week" as a key benchmark. The company's target is to get to a peak of 160,000 earned hours in late 2019, and it is slowly inching toward that number, hitting 145,000 in July. This is basically a reference to the number of people working on the project. It is important because Southern is aiming to get each of the two nuclear plants it is building at the Vogtle site completed six months ahead of schedule.
That's the goal, but the real hope is that the extra time it builds now will give it more freedom to deal with any problems that may arise later. It's more like a buffer (the company also has a financial reserve set up, just in case it needs some extra cash). The takeaway from the quarter, though, is a good one because Fanning remains confident that Southern will achieve its staffing goals. Still, it won't be easy. This is a large project and finding enough skilled workers in a tight labor market is likely to be hard. Moreover, an increasing number of people are being put to work at night, since only so many employees can fit in a given space at one time. But so far, Southern is on target with its efficiency targets -- even if it has had to be a little creative to get there.
Hitting the bull's-eye
The results from focusing on earned hours have been impressive. The first nuclear plant, which is scheduled to come on line in late 2021, is 79% complete. The actual physical construction of the unit is expected to be 90% complete by the end of 2019.
The biggest milestone achieved at this point, outside of the efficiency targets, was the successful initial energization of the plant in early May. Although this sounds pretty impressive, it's really just shifting the plant from running on temporary power to permanent power. Effectively, Southern plugged the plant in. While that may not sound exciting, it's a huge deal. If this step hadn't been achieved, the nuclear unit would have been dead in the water and no further testing could have taken place.
Now Southern can start looking at the next big goal: the integrated flush. This is basically taking place right now and, simplifying things a great deal, involves cleaning the plant's core systems. Things get left laying around on construction sites and making sure that they all get cleaned up is a big deal. Nuclear power plants are large and complex; one errant screw or some grease where grease shouldn't be could do a great deal of damage down the line. While this is another boring goal, it will be the big news when Southern reports third-quarter earnings, as successful completion will get the company set for a bigger one.
By the end of the year, Southern hopes to begin open vessel testing. This will verify that "water flows between the primary systems and the reactor vessel and that the pumps, motors, valves, pipes and other system components function as designed." It's just one of many system tests that needs to take place, but it will basically be the first time the company assesses the plant's core functionality. Look for updates during the third and fourth quarters on this.
At the same time that this is going on, Southern will also be preparing the control room. This isn't as exciting, since it involves things like installing lights, ventilation, and safety equipment. But it sets up the company up to test the control room, which will happen next year and really brings the entire plant together. Third- and fourth-quarter updates here will be vital to watch as well.
Keep your eyes open
Although there is still a long way to go before Southern starts operating the first of the two nuclear units it is building at Vogtle, it is making important progress. The key milestones it's hitting today are kind of mundane, but vital to ensure the project gets done on time and without any more headaches.
From here, though, the testing and preparation efforts start to get more and more important. Paying cursory attention to the Vogtle project up until now was probably all that was needed to keep up to date. At this point, though, you need to focus your attention because the stakes are rising fast.