The Southern Company (NYSE:SO), one of the largest electric and gas utilities in the United States, had a decent year in 2019. Solid operating performance and good earnings (noting that the impact of asset sales left earnings lower for the year) were nice to see when the company reported. However, that wasn't the news most investors wanted to hear. The big story, again, was progress at the company's Vogtle nuclear construction project.
Staying on track
It wasn't too long ago that the entire Vogtle project was at risk of being shut down following the bankruptcy of Westinghouse. That company was hired to run the Vogtle project, which it didn't do very well -- it was behind schedule and over budget when it threw in the towel as a company. Peer SCANA, which had also hired Westinghouse as a nuclear contractor on a big construction project, chose to cancel its nuclear build. That eventually led to financial and regulatory troubles and, not too long after that, SCANA was swallowed up by Dominion Energy.
Southern took a vastly different route, choosing to take over management of the Vogtle project. It was an aggressive move that got even more aggressive when the giant utility basically agreed with its financial partners that it would foot the cost of any further cost overruns. At this point, Vogtle's future is entirely in the hands of Southern, for better or for worse.
That's why investors are mildly interested in quarterly financial results, but far more concerned with the quarterly Vogtle update. And so far, things are still largely on track.
A deeper dive
Southern hit a number of key milestones in 2019, including initial energization, integrated flush, open-vessel testing, and testing of the main control room of Vogtle 3 (the first of two plants being built). Although initial energization sounds fancy, it really just means they plugged the plant in to a power source so they could see if all the equipment worked -- it has nothing to do with generating electricity. However, this allows the giant utility to do the vital testing needed to ensure that everything is working as expected. At this point, Southern estimates that the total project, which includes both nuclear plants, is roughly 84% complete. And, just as important, there are no major problems to report.
Looking at the bigger picture, based on recent execution levels, Vogtle 3 is still on schedule to start up ahead of its November 2021 start date. Vogtle 4, meanwhile, is also ahead of its planned November 2022 start date. That gives Southern valuable leeway in case it does hit any snags along the way. These are incredibly complex projects that require a lot of things to happen simultaneously. If just one thing falls behind, the entire project could stall. Failing to get everything done at the same time, in fact, is one of the biggest worries for Southern's leadership team.
On Southern's fourth-quarter 2019 conference call, CEO Thomas Fanning highlighted that the company was currently completing around 2% of the project each month. That progress, he believed, could slow by about 35% and the utility would still be able to hit the November dates highlighted above. He noted in the call that, "The new aggressive site plan that's refined schedule assumes 2%. We could drop all the way down to 1.3% by hot functional test and still achieve the November schedule." Anything better than a 1.3% completion rate and Southern will finish ahead of time, which is actually the goal here -- early start up.
Although 2020 won't see either of the two nuclear plants produce electricity, there are some pretty big milestones to watch for. Vogtle 3 is the test case, and the more important of the two plants today. Watch for cold hydro testing to start in June. Following that will be hot functional testing in August. And, finally, fuel load in November. The more Southern learns from Vogtle 3, the smoother Vogtle 4 should go.
The specifics of each of these steps aren't all that important -- the first two are to make sure everything works right, and the last is, well, putting nuclear fuel into what is expected to be a fully functioning nuclear power plant. More important are the dates, which are "aggressive" schedule goals. If Southern hits these dates, it is on track to finish ahead of schedule. If it misses them, the final start-up could slip back to the November 2021 date -- which would still be a good outcome, just not as good as getting it done ahead of time. The current "aggressive" schedule is to start Vogtle 3 by May 2021.
Another good review
Since Southern took over, the Vogtle project it has been going very well. That's a welcome change from what was taking shape under Westinghouse. That said, there's still a lot of important work to be done yet. The fourth-quarter 2019 update bolstered the notion that Southern will get this project done ahead of schedule. There won't be any new milestones to hit until the second half of 2020, but at this point there's no need to worry that Southern's Vogtle nuclear build is in trouble again.