Southern Company (SO) continues its odyssey to bring new nuclear construction over the finish line at the Vogtle site in Georgia, notes Roger Conrad, editor of Conrad's Utility Investor.
Vogtle skeptics are legion, most notably the “local monitor” commissioned by the staff of the Georgia Public Utility Commission.
They’ve alleged Southern is no longer on pace to complete the two reactors by the statutory deadlines of November 2021 and November 2021, and that the cost will exceed the currently budgeted $17.1 billion.
Stakes are high, since the utility would absorb the financial blow under its revised agreement with project co-owners. And Southern has adjusted workflow to shield employees from Covid-19 spread, boosting its contingency reserve by $115 million last month.
Overall pandemic costs were 10 cents a share in Q2, with mild weather costing 3 cents. Nonetheless, Southern’s overall earnings shrank just -2.5 percent thanks to effective cost cutting.
Management affirmed previous 2020 earnings guidance of $3.10 to $3.22 per share. And regulatory mechanisms should allow eventual recovery of Covid-19 related costs.
Most important, management has a convincing case for an early to mid 2021 startup at Vogtle Unit 3, which is 90 percent complete. That starts with successful Cold Hydro testing now slated for September-October, followed by Hot Functional testing later in Q4.
We’ll be watching these benchmarks closely. But during the Q2 earnings call, CEO Thomas Fanning stated a “construction completion” rate of 1 percent a month is “consistent” with the November 2021 deadline.
That compares with 2 percent to meet its current March 2021 goal and a recent 1.5 percent rate, which would mean a summer startup.
That means there’s a sizeable grace period before delays are meaningful enough for a major financial impact. And when Vogtle does enter service, we should see the discount vanish quickly between Southern’s valuation of 17 times expected 2020 earnings per share and the Dow Jones Utility Average’s 20.5 times. Buy up to $60.
