I recently wrote a detailed article on why I believe utility mammoth, Southern Company (SO) is a great defensive income stock.
Southern Company currently sports a beta so low (0.10) that it might put you to sleep, which is precisely why some investors have ponied up cash to own the stock: they want boring, stable, consistent income.
While I received many comments filled with positive feedback from fellow readers and investors, one item of business that continued to raise its head in the comment section was the Vogtle Nuclear Plant project and how its budget is overrun and behind schedule.
Although, besides the nuclear "thorn" in the sides of shareholders, most, if not all that commented were very happy long-term holders. In fact, I even spoke in person to a shareholder of the steady-eddy utility after the article was published, and his thoughts were conclusive with most other shareholders...
That is, when I asked him if he would ever sell his holding, the look on his face was as if I had just asked him to kick a kitten into a wood chipper.
Follow along below as I unpack this Vogtle Nuclear issue and offer a long-term perspective. If you haven't had a chance to read my original article, click here for the quick read as it will give more perspective to what is written below.
Nuclear Power in the United States
Although not often known, nuclear energy is the cleanest, most reliable and cost-effective fuel source available today. Because nuclear power plants do not burn fuel, they do not produce greenhouse gas emissions. By reliably providing power 24 per day, nuclear energy is an important part of the energy mix necessary to meet electricity demand. In fact, it currently accounts for about 20% of the nation's energy production, and its relevance increasingly grows as America transitions to a lower-carbon energy future.
The United States is the world's largest producer of nuclear power, accounting for more than 30% of worldwide nuclear generation of electricity. The country has 99 nuclear power reactors in 30 states, operated by 30 different power companies, and in 2016 they produced 805 TWh. Since 2001 these plants have achieved an average capacity factor of over 90%, generating up to 807 TWh per year. To give you an idea of the improvements made within the industry, the average capacity factor has risen from 50% in the early 1970s, to 70% in 1991, and it passed 90% in 2002, remaining at around this level since. In 2016 it was a record 92.5%, compared with wind 34.7% (EIA data). The industry invests about $7.5 billion per year in maintenance and upgrades of the plants, however, average nuclear generation costs have come down from $40/MWh in 2012 to $34/MWh in 2016.
Now that we've covered the basics of nuclear power in the United States, let's move on to the Vogtle Plant specifically.
Vogtle Nuclear Plant Overview
The Alvin W. Vogtle Electric Generating Plant, also known as "Plant Vogtle" is currently a 2 unit nuclear power plant located in Burke County, near Waynesboro, GA.
Units 1 and 2 were completed in 1987 and 1989, respectively. Each unit has a gross electricity generation capacity of 1,215 MW, for a combined capacity of 2,430 MW. The twin natural-draft cooling towers are 548 ft. tall and provide cooling to the plant's main condensers. In 2009, the Nuclear Regulatory Commission (NRC) renewed the licenses for both units for an additional 20 years to 1/16/2047 for Unit 1, and 2/9/2049 for Unit 2.
Two additional units utilizing Westinghouse AP1000 reactors are currently under construction and were the first new ones to be licensed and to begin construction in the U.S. since 1978. The units have suffered several delays and cost overruns which is what we'll dig into in a moment.
The plant ownership breakdown is as follows:
Southern Company subsidiary, Georgia Power (45.7%), Oglethorpe Power Corporation (30%), Municipal Electric Authority of Georgia (22.7%) and Dalton Utilities (1.6%)
Putting the Budget Concerns into Perspective
Contrary to popular consensus, Southern Company is not likely to have what I call an "out-of-money-experience" when it comes to Vogtle 3 & 4 construction.
Admittedly, anytime a headline reads Billions with a "B", I can understand why some shareholders may get a bit jittery. Although one factor I'd like to mention right up front is actually the ownership allocation listed above.
See, many investors either forget or don't realize that Southern Company (via Georgia Power) isn't the "only show in town" when it comes to writing the check for this project. So when you see headlines such as "$25 billion nuclear projects at Georgia's troubled Plant Vogtle to continue", keep in mind that we as shareholders are only on the hook for just over 45% of these numbers.
At this point you might be saying to yourself:
"Okay thanks for the assurance but $11.4 billion still doesn't sound warm and fuzzy."
Well, let's take this further...
Historically, cost overruns associated with nuclear plant construction has been the norm as it was also an issue with the original reactors at Vogtle. The cost of building the existing reactors at the site jumped from $660 million to nearly $9 billion by the time they started producing power in the late 1980s.
Why do I mention this? While just like you, I'm not a fan of the overruns, and I'm not trying to downplay the significance of them either, but what I am trying to do is grab the rope and pull the worries of some shareholders out of the clouds and back down to reality.
So while the original cost of the project (when first approved in 2012) was $14 billion, it now stands at roughly $25 billion which is not quite double. Now, again I'm with you here, it's still a lot of money, but compared to the overruns of the original two reactors ($660 million to $9 billion) makes reactor 3 & 4 look like child's play.
Another factor in this situation is that under state law, Georgia Power's customers will ultimately reimburse the state-regulated monopoly for the flagship plant as they pay their monthly electricity bills. That law allows Georgia Power to charge its customers now for the interest it pays on the borrowed money needed for the project.
"As an energy commissioner, I understand the energy/climate issues and the tradeoffs of the day. That is why I drive an electric car and put solar thermal on my Winterville home," said Echols, in an email. "Yet, I really want to finish this new nuclear plant -- the only one of its kind in North America. It is important for base-load reliability, national security and climate goals."
-said Tim Echols, Commissioner of The Georgia Public Service Commission, regarding the unanimously approved motion in December 2017 that allowed for continued construction of the Vogtle nuclear expansion project after the bankruptcy of Westinghouse Electric Company.
The company filed for Chapter 11 bankruptcy losses from its two U.S. nuclear construction projects. The U.S. government has given $8.3 billion of loan guarantees to help finance construction of the Vogtle reactors and a way forward to completing the plant has been agreed upon. On July 31, 2017 Southern Company division, Southern Nuclear, officially took over construction from Westinghouse and opened a bid for a new construction management contract to manage the day-to-day work on the site. Southern received bids from both Fluor and Bechtel. On August 31, 2017, Southern announced its decision to move forward with Bechtel to be the day-to-day construction manager for the remainder of the project. Bechtel will replace Fluor, who will no longer be involved in the project.
Why The Delays and Cost Overruns to Begin With?
In 2012, when the project was approved, regulators tried to make nuclear reactors easier to build, encouraging the use of off-the-shelf designs that could get approval in advance. New construction techniques were supposed to require less in-the-field assembly, making building quicker and reducing human error.
But later that same year, the reactors had run into over $800 million in extra charges related to licensing delays alone in addition to more in-the-field assembly than originally planned.
By May 2015, regulators said there was a "high probability" that construction would be delayed even longer than the three years already announced by the owners, according to an analysis obtained by The Associated Press.
Where Does The Construction Progress Stand Now?
Since August 2017, the construction progress is as follows:
- Placement of two 1.4 million-pound steam generators for Unit 3
- Placement of the 60-foot-tall AP1000 pressurizer compartment for Unit 4
- Placement of the second of four accumulator tanks (part of the AP1000passive core cooling system)
- Placement of the CA33 floor module inside the Unit 3 containment vessel
- Placement of the 148-foot, 300-ton de-aerator inside the Unit 4 turbine building
- On January 22, 2018, the Unit 3 pressurizer was installed within the containment vessel.
In addition, just a few weeks ago on March 29, 2018, the Unit 4 reactor vessel was placed inside the Unit 4 containment vessel.
In the February 2018 Vogtle Construction Monitoring Report (VCM), GPSC approved November 2021 and November 2022 as the target in-service dates for Units 3 & 4 respectively. The report notes that the project is being completed on an accelerated schedule and is currently tracking ahead of the 2021 & 2022 in-service target dates.
To truly put this massive project into perspective, I invite all readers to click here to view the hi-res photos available of the construction progress to date.
In addition, The Senate Finance Committee is reportedly working on a separate bill that would guarantee the entire estimated $23 billion in costs for Vogtle.
While this has yet to come to fruition, construction has continued uninterrupted at Vogtle following Westinghouse's bankruptcy, with Southern Nuclear taking over as project manager at the site and Bechtel managing construction this equates to more than 5,000 people working at the site.
The company has done a great job in documenting the progress as of late by adding aerial videos and time-lapse media found here.
So while the delay and cost overruns are not good for anyone, with the project being subsidized by the state and paid for by the end utility users, the shareholders of Southern Company are more insulated from these risks than some would initially realize. Although I want to be clear that while this article wasn't meant to release all worry of the project overall, I wanted to write this in order to put additional perspective and share sources of information that some investors may have not previously analyzed or considered.
For the time being, the Southern Company stock price is subject to what I call "headline risk", which is essentially anytime a news article from a major media outlet is published about the Vogtle project, this could affect the stock price by increasing the amount of sellers in the market.
I invite you to take the emotion out of said "headlines" and look at the overall long-term picture here. In the meantime, I plan to watch the stock for additional buying opportunities (like the one we have now) as I continue to add to my position. Don't kick the kitten into the wood chipper.
Disclosure: I am/we are long SO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.