Does Your Utility Stock Own a Nuclear Power Plant?

Includes: AEP, DUK, ED, EIX, ETR, EXC, FE, SO
by: George Fisher
I just finished researching an article reviewing nuclear powerhouse Exelon (NYSE:EXC) that offered me the opportunity to consider more closely the US nuclear power sector. It brought up an interesting thought: how many investors know if their electric utility has nuclear power assets. There are 104 nuclear plants operating in the US; does your utility own one, two, or three, or more?
To find out who owns what, a quick Google search took me to NEI website. The Nuclear Energy Institute is an industry association and an interesting place for nuclear power information. From their website: “The Nuclear Energy Institute (NEI) was founded in 1994 from the merger of several nuclear energy industry organizations, the oldest of which was created in 1953.” On their site is a list of US nuclear power plants that includes facility name, operator, owner and holding company owner, percentage owned by the holding company, and MW capacity. It is sortable by holding company and is offered as an excel spreadsheet.
While it is far too early to speculate with any certainty the impact of the Japan nuclear crisis will have on the structure of nuclear power generation in the US, the beginnings of a few broad brushstrokes would seem appropriate. Investors should probably think about the influence of nuclear power ownership as it relates to their utility positions. Holding nuclear power assets, its structure, and amount of nuclear exposure now becomes an important criterion to add to the usual PE, regulatory climate, dividend growth, and yield.
The landscape of the nuclear business in the US has changed, but its final design is far from certain. There will be less building of nuclear plants, there will be more regulations, and construction and operating costs will increase. The Gov of Illinois has already set the tone that nuclear power plants are open game for higher taxes to “recoup higher inspection costs”. What citizen would be against increased taxes on profits from nuclear plants, similar to the windfall oil profits tax of yesteryear (and whose reappearance is coming soon). The Gov of NY is calling for the closure of Entergy facilities in his state.

It is important for investors to segregate merchant nuclear power producers from regulated producers. Expensive upgrades, construction delay costs, and forced facility shutdown expenses may be part of future regulated rate decisions and these expenses could be recouped from consumers and businesses through higher electric rates. Merchant producers, on the other hand, are unregulated and market prices set their rates, increasing the risk of offsetting higher expenses.

35% of US nuclear power plants are either currently in the process of being re-licensed for an additional 20 years of operation or are anticipated to file an application shortly. It would be a safe bet that the re-license process just got a bit more difficult, and approval delays will become commonplace as new regulations are developed and instituted. Utilities operating facilities with longer time until re-license is necessary are at a distinct advantage.
The NEI site provides a list of 62 facilities that received 20 year re-licensing approval, 20 that are pending, and 17 that are anticipated to apply soon.
There is also the undercurrent of political goals relating to the use and the cost of competitive fuels for electric power generation. Last week, the EPA announced more stringent emission standards for power plants that will reduce the availability of coal-fired electricity. Those that cannot economically meet these upgrades will shut down. Coal-fired power generators believe that over the next decade 10% of total US electricity production is at risk of being eliminated due to the cost of higher EPA standards. The political answer to making up this shortfall in national capacity had been more low-cost nuclear and higher cost solar and wind.
The changing landscape may take the addition more nuclear capacity as a replacement for coal right off the table.
Barrons’ published an article this week titled “Some Nuclear Fallout Reaches US Shores”. With the current weakness in utility shares, the article advocates buying the utility sector based on valuations and yield. A table was presented offering popular stock's fundamental numbers and “nuclear exposure”. Looking at the opposite ends of the nuclear exposure spectrum, the following are companies listed as None, Small, or Large:
None: Con Ed (NYSE:ED)
Small: American Electric Power (NYSE:AEP), Duke Energy (NYSE:DUK), Edison Int’l (NYSE:EIX), First Energy (NYSE:FE), Southern Co (NYSE:SO)
Large: Entergy (NYSE:ETR), Exelon (EXC)
It should be important for investors to understand the new matrix of nuclear power assets in their electric utility mix. While events in Japan are still fluid, and the impact on US nuclear power generation will be months and months unfolding, investors should begin evaluating the amount of nuclear power generation they want to have.
Be prepared to see nuclear power in the media for an extended period of time, and much of the headlines will probably be negative.
My utility selections include one on each end of the nuclear exposure spectrum.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
Disclosure: I am long EXC, AEP.
Additional disclosure: Author has been a shareholder of AEP since 2009 and EXC since 2011