There are only two new nuclear power plants being built in the United States, and they both belong to The Southern Company (NYSE:SO). The giant utility's Vogtle project (which accounts for both nuclear plants) is the "last man standing" after peer SCANA mothballed its nuclear ambitions and, after the fallout of that decision, was bought by Dominion Energy. Southern, however, has been taking an aggressive approach with the project, looking to finish ahead of the currently scheduled completion date. With the spread of COVID-19, that choice looks increasingly prescient.
It's been ugly
There's no way to sugar coat it: Southern's Vogtle project has faced big headwinds. In fact, it was already over budget and behind schedule when its original contractor, Westinghouse, declared bankruptcy. That event was what resulted in SCANA's decision to stop construction on its own nuclear power plant. Regulators and customers were not pleased with SCANA's choice. The financial hit, meanwhile, pushed it into Dominion Energy's arms not too long afterwards.
Southern charted a different course. It stepped in and took over for Westinghouse, basically agreeing to take on the cost of any future price increases. Since that point, progress has been relatively smooth. Not perfectly smooth -- these are massive construction projects with a lot of moving parts. In fact, getting everything to come together at the same time is one of the big worry points for Southern's CEO Thomas Fanning. But, on the whole, Southern's Vogtle project has been moving forward at a good clip and largely as expected.
That said, there are actually two dates to watch. Regulators expect Vogtle 3, the first of the two nuclear plants, to be up and running by November of 2021. Vogtle 4 is expected to be operational one year later. That, however, isn't the second key date -- Southern's goal is to get Vogtle 3 completed by May of 2021, with Vogtle 4 done in May of 2022. Effectively, the utility is building in a six-month buffer in case something goes wrong or the project's progress slows for some reason.
Why take such an aggressive approach? CEO Fanning summed it up during Southern's fourth-quarter 2019 earnings conference call:
For example, we believe that accomplishing as much as we can as fast as we can is an enormous risk mitigator. You've heard us use the expression before, Fail Fast. We'd like to get our hands on major equipment and major systems and test them as early as we can, two big benefits. When we do that, we let in the opportunity for these systems when problems invariably occur that they don't impact our critical path, one; two, that we can minimize cost as a result of those things; and three, that we gain lessons learned that we can apply to other systems throughout the plant.
Essentially, pushing the envelope like this by working toward a deadline that's six months ahead of what regulators expect gives Southern breathing room. It can deal with some headwinds and still get the project completed as regulators expect. And if it gets done sooner, well, everyone ends up happy: The nuclear plants will be running, and Southern will trim the overall cost of the project.
This mentality was already in place before COVID-19, and was working quite well for Southern. Update after update provided more good news. Not perfect news, of course -- the company has had some troubles at times finding enough workers to meet its aggressive targets. But it has boosted pay for some key skill sets (like electricians) and been creative with work assignments, including running two shifts and limiting higher skilled workers to higher skilled jobs (running cable, for example, can be done by less skilled workers, while connecting cables cannot).
With COVID-19 now in the mix, however, the extra time built in because of the "fail fast" mentality is going to be increasingly important. Along with announcing the completion of an important milestone in late March (putting the top on the nuclear containment vessel at Vogtle 4), the company was also forced to address its efforts to deal with the coronavirus. It has set up an onsite clinic, is testing workers, and is attempting to keep people away from each other as much as possible. It is doing the right things, which isn't surprising. But the stakes are material because one of the utility's key targets is earned hours per week.
Earned hours per week is basically a roll-up measure of how many people are working on the site. The company's goal was to hit a peak of 160,000 earned hours per week. It hasn't been easy getting to that number, as the need to raise wages to attract additional skilled laborers implies. Now, with COVID-19 involved, it could be even more difficult to achieve the productively goals Southern has set out. Complicating the matter is social distancing, which could slow progress if workers aren't able to work as closely as they once had. So far the company has not announced any material delays because of the virus. But Fanning has to be pleased that Southern's fail fast approach has afforded it some extra leeway.
A new factor to monitor
Over the last couple of years the biggest update at each quarterly conference call has been the progress made on Vogtle. That will remain true until the two nuclear units are complete. However, the next update (and perhaps one or two more beyond it) will be especially important as Southern deals with the impact of COVID-19. Indeed, a widespread outbreak at the Vogtle site could, theoretically at least, bring progress to a standstill. While that's clearly a worst-case scenario, investors should pay extra attention to the hours earned figure when Southern reports first-quarter 2020 earnings. It will be the first indication of the impact that COVID-19 is having on Vogtle's progress.