Southern Company sees supply chain at Vogtle nuclear expansion unaffected by pandemic

Southern Company has had no supply chain disruptions as a result of the novel coronavirus pandemic, and does not expect to have any, CEO Thomas Fanning said during a first-quarter 2020 earnings call Thursday.

After adjusting for one-time events such as the revenue and tax impact of the sale of certain assets, Southern Company reported earnings of 78 cents/share in Q1, compared with 70 cents/share in Q1 2019. S&P Global Capital IQ had estimated this quarter's earnings would be 79 cents/share.

"Southern Company's strong start to 2020 will be beneficial as we look to overcome sales impacts from the coronavirus" pandemic, Fanning said. "To date, our operational performance during this challenging time has been exceptional, and we have not experienced — nor do we anticipate — any significant supply chain disruptions for our utilities or construction efforts."

The utility holding company's Q1 operating revenues just topped $5 billion, down from Q1 2019's $5.4 billion, "primarily due to lower fuel costs," Southern Company said in a statement on the earnings.

In Q1, natural gas at the Transco Zone 4 pricing point averaged $1.835/MMBtu, compared with $2.839/MMBtu in the year-ago period.

In bilateral trading, Into Southern day-ahead on-peak indexes averaged $19.60/MWh in Q1, down from $28.29/MWh in Q1 2019.

But Southern Company's electricity unit sales were also down in the quarter, about 2%, to 44.3 GWh, from 45.2 GWh in Q1 2019.

And unit sales have been on a downward trajectory for a couple of years, with a negative 0.85 slope to quarterly unit sales results since 2018. Year-on-year quarterly unit sales declines have averaged 6.4% since January 2019.

In the earnings presentation, Southern estimated social distancing and stay-at-home policies introduced due to the pandemic curbed retail sales in second quarter of 2020 by more than 10% in the week that ended April 17, but most other weeks, including the week that ended April 24, the decrease ranged from about 6.5% to less than 8%.

RETAIL SALES IMPACT

For all of 2020, Southern Company estimates the pandemic could hit its retail sales by $250 million to $400 million, on a weather-normalized basis, with the largest decrease in the commercial sector at about 5% to 10%, then industrial consumption at 4% to 8%, while residential demand is expected to rise by about 1% to 3%. The overall effect could cut retail sales by 2% to 5%, said Andrew Evans, chief financial officer.

These 2020 outlook numbers assume stay-at-home policies are phased out by mid-summer and a "modest economic recovery" occurs over the rest of the year.

"We don't expect COVID-19 to affect our long-term results," Evans said.

Fanning added: "COVID-19 will undoubtedly have an impact on the US economy and our company."

But he said the company plans to handle the impact through "aggressive and thoughtful cost control."

CONSTRUCTION CUTBACK

One key factor in Southern's longer term outlook is the construction of the Vogtle nuclear plant site's Units 3 and 4, which are required by regulators to start up in November 2021 and November 2022, respectively. The project is about five years behind its original schedule and has exceeded the initial $14 billion budget by more than $10 billion as the result of first-of-a-kind design, licensing and construction issues.

Southern Nuclear manages construction for the group of plant owners that includes its sister company Georgia Power (45.7%), Oglethorpe Power (30%), the Municipal Energy Agency of Georgia (22.7%) and Dalton Utilities (1.6%).

In mid-April, Southern Nuclear reduced the construction workforce by about 20% to mitigate the spread of the coronavirus at the project.

"The current action takes us back to our prior target of May 2022" to have both units operating, Fanning said.

Southern had previously targeted having Vogtle-3 start up in May 2021 and Vogtle-4 to start up in March 2022, but now has moved the latter target to May 2022.

"Essentially, we have seen so far a loss of about 10 to 14 days' [progress]," Fanning said. "We anticipate another two weeks to be lost."

However, Fanning said he still believes achieving the May 2021 and 2022 targets are "reasonable" objectives.

Open vessel testing was completed as of 1 pm ET Thursday, Fanning said, and project managers have implemented social distancing policies, eliminated close-quarter break areas and enlarged other break areas. Southern Nuclear has also installed medical facilities at the site to facilitate testing and sent those who test positive for the novel coronavirus – and those who have been in close contact with such people – home with pay, Fanning said.