Giant U.S. utility The Southern Company (NYSE:SO) is doing something that no other domestic electric company is even willing to try right now: It is building a pair of nuclear power plants. The only other company that was trying to build a nuclear plant domestically ended up bailing on the project, and then selling itself to a competitor in the aftermath. So when Southern's earnings roll around, the big story is always the progress it is making on the Vogtle nuclear power project. The third-quarter update was generally good, but there's one issue that investors should be watching.
Southern has been responsible for overseeing the construction of two nuclear power plants at its Vogtle facility since its former project manager (Westinghouse) declared bankruptcy. Southern was able to weather that storm, but has materially increased its project-related risk. At this point, Southern and its shareholders are largely on the hook for any additional price overruns or construction delays.
There haven't been any big hits since Southern took over, but it is worth noting that the project was originally expected to be done by 2016 and cost around $14 billion. At this point, the two nuclear power plants aren't expected to be up and running until late 2021 and 2022, and the cost is projected to be roughly twice the original estimate.
So while Southern has done a decent job of turning things around here, it would be hard to call the Vogtle project a grand success. With several years to go before completion, it's also easy to see why investors are paying very close attention to the progress. Not only is the cost of completing Vogtle material, but the history here suggests that problems aren't unusual.
Two issues to watch
Overall, the news is good right now. Both reactors are still progressing largely as planned, and Southern expects to hit the in-service dates it has laid out. In fact, it is hoping to beat its target dates by as much as six months at this point. The first of the two nuclear plants, Vogtle 3, has successfully achieved a number of key milestones, including initial energization (effectively plugging it into a permanent power source) and starting the integrated flush (checking that all of the pipes are clean). The company is currently testing the control room to make sure everything there works, and conducting "open vessel" testing (examining the functionality of a key part of the nuclear apparatus). According to Southern, Vogtle 3 is roughly 77% complete (remember this number).
So far, so good. But here's the thing: Southern put aside a roughly $800 million contingency account to deal with future cost overruns. That was a prudent move given the history of the project. Southern reported in the third quarter that, for the first time, it had to use $30 million of that cash. During the third-quarter earnings call, CEO Thomas Fanning noted that, "This minor amount of $30 million that we just pulled out now represent costs that really relate to compensations that we put in place to attract and retain especially electrical workers on the site."
Essentially, Southern has been having a tough time finding enough skilled employees. That's not surprising, given that unemployment is at such low levels today. But it has a material impact on the progress that Vogtle is making. While Southern believes it is still on schedule to hit the in-service dates on both Vogtle 3 and 4, it appears to be a little behind its plan on Vogtle 3. According to the company's timeline, the first of the two reactors should be a touch over 80% done by this point. (You can see this in the graph below, where the green line is slightly below the blue one.)
Southern has that six-month leeway built into its plans, so there's room for error. And recent productivity has been strong -- the company was able to hit its target of 160,000 work hours for the first time in October. Management is also getting creative, if you will, hiring from as far away as Canada, increasing night shift hours, and using less skilled labor to do things like lay cable (freeing up electricians to do more skilled work, like completing electrical connections).
Essentially, Southern sees the problem and is adjusting to deal with it. At this point, there's no particular need to worry. But that doesn't mean you should forget about the labor issue. If it persists, the six-month leeway built into the timeline could become increasingly important.
Mostly all clear
At the end of the day, Southern's Vogtle project remains largely on track. With big, complex capital investments like this, subject to multi-year timelines, there's almost always issues. But Vogtle, unfortunately, has had a lot of issues. So what might normally be seen as a relatively modest problem has an outsized importance because nervous investors could easily see it as the start of a bigger issue.
That said, it's not yet time to get overly worried. But if you own Southern, the staffing issue, along with its impact on the construction timeline, deserves to be monitored.