Here is a big surprise. Two minutes into Tuesday's earnings call, Southern Company (SO) claimed its new nuclear plants were more than 40% complete. They were referring to their two, first-of-a-kind 1,154-megawatt nuclear giants.
"The full outlines of both nuclear islands have been completed to grade level and overall construction on the units is more than 40% complete."
In what appears to confirm their claim, investors can review Southern's website and see dozens of photos that showing construction progress on a month-by month basis, including impressive lifts of pre-constructed rebar and the placement of massive amounts of concrete. They also have an entire page dedicated to fun facts about their two new Vogtle units.
Here is a fun fact. It is not true. Southern's new Vogtle units are not even 20% complete. In fact, serious nuclear construction has yet to begin.
Southern's contractor is a subsidiary of Chicago Bridge & Iron (CBI). CB&I is also the engineering, procurement and construction contractor for the duplicate project for SCANA (SCG). Each project has an estimated cost at completion of approximately $15 billion, for a combined investment of $30 billion.
To claim any project is more than 40% complete means owners and constructors must first have a clear understanding of the project's scope, schedule and cost. Then managers can report progress against benchmarks using traditional earned value methods.
At the same time Southern was claiming a 40% complete, they were also claiming they had notified state regulators that their construction schedules slipped and cost estimates.
So, while management was moving goal posts out by a year and $209 million, the company claims their construction progress is almost halfway done. This combination seems like a stretch.
In fact, anyone having nuclear construction experience and looking at the company's progress might find Southern's 40% claim ludicrous. For many, it appears Southern has a long way to go before they even reach 25% complete.
How could this discrepancy arise?
When Southern and SCANA decided to buy new nuclear plants, they settled on a packaged deal from CB&I and Toshiba's Westinghouse Electric. When Southern awarded the huge contract for Vogtle's engineering, procurement and construction to CB&I, they believed most of the design and engineering was previously completed, modularized and approved by the Nuclear Regulatory Commission. For Southern, the definition of "contract scope" likely meant most of the plant's engineering had been completed. From their point of view, most engineering was "out of scope," at least out of their scope.
From CB&I's point of view, their scope was much larger. Before starting construction, they had to complete engineering and seek NRC design certification for their first-of-a-kind AP1000 reactor. How much of CB&I's pre-engineering work crept into Southern's earned value announcement is for anyone to guess.
While progress may look impressive to inexperienced executives and the public, the civil construction currently underway is nowhere near complete. Today, with construction supposedly 40% complete, there are no nuclear buildings above grade. Even non-nuclear turbine pedestals have yet to be built.
It is understandable some are confused. When it comes to nuclear construction, the public have no meaningful reference to make judgment. They think concrete is just concrete. They watched dozens of new office buildings go up quickly and they naturally assume nuclear power plants are similar. They are wrong.
Setting aside concrete challenges, for the Southern the harder work of stuffing finished buildings with nuclear-grade equipment, piping and electrical connections has yet to begun. History tells us that as nuclear projects progress, the degree of difficulty increases and construction complexity can become overwhelming.
Just ask CMS Energy (CMS) and Duke Energy (DUK). Both utilities nearly finished their nuclear construction (Midland and Marble Hill). Their main control boards were lit and turbines were rotating on turning gear. In both cases, the utility ended up abandoning construction and scrapped a perfectly good nuclear project (Midland was converted to a gas boiler).
Ask Southern. In the same earnings call, they discussed their other first-of-a-kind project. This coal project also has cost and schedule surprises:
Our current cost estimates for the project has increased, based primarily on matters related to piping. While disappointed with the estimated cost increases, we remain accountable to customers. We will not seek recovery of these increased costs.
With respect to their massive nuclear construction project, Southern's claim that construction is more than 40% complete," lacks credibility. Their track record with Kemper reinforces the concern.
Investors need to exercise caution. The company's assets are largely protected by cost recovery agreements with the State of Georgia. But if investors are attracted to new first-of-a-kind nuclear units, they may want to reconsider.