The Southern Company (SO -0.85%) is undertaking something that no other U.S. utility is doing. It is building two nuclear power plants near Augusta, Georgia, that will provide it with decades of carbon-free energy production. The process has not been smooth, but in early 2023 the utility hit a very important milestone that should set 2024 up to be a great year.
A long and winding road
Building large nuclear power plants is not an easy task because they are complex and costly. Southern's path to completing Vogtle 3 and 4, the two new nuclear power plants it is building (collectively known as Vogtle), has been exceptionally hard. Not only has the project faced long delays and massive cost overruns, but the main contractor actually went bankrupt along the way (forcing Southern to take over that role). That Vogtle is even being worked on at this point is almost a minor miracle given that the contractor bankruptcy resulted in utility peer SCANA simply giving up on its own nuclear project. The ensuing financial impact led to SCANA being acquired by Dominion Energy.
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That, however, is history. The current story around Vogtle is decidedly better. For example, on April 1 Southern announced that "The generator at Vogtle Unit 3 has generated electricity for the first time, and the unit has successfully synchronized and connected to the electric grid." That puts the first of the two reactors just inches away from the finish line. Meanwhile, Vogtle 4 has started hot functional testing, which is basically the early stages of getting it onto the grid as well. Southern is using the lessons from starting Vogtle 3 to help speed up Vogtle 4, so there's a very real hope that the second unit's start-up process goes more smoothly than the first.
The current plan is for Vogtle 3 to be fully up and running by May or June of 2023. Vogtle 4's start is planned for the end of 2023, with the worst-case scenario at this point being a rollover into the first quarter of 2024. This is the end of a journey that started in 2009. At least that was when construction got underway -- planning started years in advance of the groundbreaking.
What comes next
There will be sizable benefits for Southern when this project is completed. For starters, a major overhang on the stock will be lifted as investors won't be worried about the uncertainty of such a large and long-term project. Then there are the construction costs, which aren't nearly as material as they once were. But they still go away, freeing up capital for other capital investment projects in Southern's $43 billion five-year investment plan. Notably, that $43 billion excludes Vogtle.
These are definite positives and key benefits of seeing Vogtle completed. But the most important benefit is really that Vogtle 3 and 4 will start to generate cash flow. Southern estimates that, following the completion of Vogtle 4, the utility will generate an additional $700 million of cash flow. That's money that can be put toward debt reduction and the aforementioned capital spending plans and returned to shareholders via dividend increases.
Southern has continued to hike its dividend annually while building Vogtle, despite the setbacks, extending its annual streak to 22 consecutive years. That said, it has been doing so at a fairly modest clip of roughly $0.08 per year over the last five years or so. That amounts to about 3% per annum, which basically keeps pace with the historical rate of inflation growth. But an uptick, even to just 5% per year, would be a huge benefit to dividend-focused shareholders. While that decision is up to the board and subject to other operating factors, not having the Vogtle overhang will finally allow for much broader discussions on the dividend topic.
More to be done
The Vogtle project isn't done yet, with management estimating that a three-month delay at Vogtle 3 would cost an additional $45 million and lead to an earnings drag of $0.02 per share. A similar delay at Vogtle 4 would cost an extra $105 million and be a $0.05 per share headwind. So investors still need to watch Vogtle carefully. But the news out of the project is increasingly positive, and it looks like the worst case is a first quarter 2024 completion date for Vogtle 4. If that deadline is hit, 2024 will be a very good year for Southern, and possibly its dividend-oriented shareholders.
