Southern Company: Investors Can't Afford A $14 Billion Dollar Reactor

Mar.21.12 | About: Southern Company (SO)

Southern Company (NYSE:SO) is a major utility in the Southeastern United States. Southern Company owns approximately 42,000 megawatts of electric generation, and over 6 billion dollars worth of transmission lines and equipment. I would like to talk today about an additional 2,200 megawatts of generation that Southern Company has started to build at the Vogtle style, Units 3 and 4. The reactors are estimated to cost $14 billion, and with the usual nuclear cost overruns, and possible modifications from the events in Japan, this could easily become a $20-25 billion project. Is this a project that a $38 billion market cap company can handle?

I am a firm believer in nuclear power, as I worked in the industry for 6 years. I am excited as a fan of nuclear that we are investing in this technology again, but I do not feel the same way as an investor. Looking at the history, I have read articles highlighting the nuclear boom, then bust of the 1970s, and I believe that the risk of building a new reactor currently is just too much risk for a single company to bear.

Many companies then either finished their reactors with significant cost overruns, in many cases building their nuclear units cost more than the company was worth at the time, or they decided to scrap the project, getting no return on their investment. Plants like Cherokee and Zimmer were partially built, wasting hundreds of millions (even billions) of dollars for their respective utilities.

Other sites and utilities have spent even more, such as the Bellefonte facility in Alabama that TVA owns. TVA spent 6 billion dollars, only to cancel the project in 1988. TVA went a step farther in 2005, saying they were going to build two AP1000 units at the Bellefonte side, the same reactor that Southern Company is building. TVA backed off these plans and has actually decided to start reconstruction of Bellefonte 1, which has essentially been mothballed for 15 years. However, this is now being delayed due to cost overruns and time delays at another site that TVA is trying to bring back from the dead, Watts Bar 2.

Southern Company does have some things going for them, such as a regulated customer base in the South, they will be allowed some recovery of the price of new generation facilities and there is an increasing demand for power. They also have a loan guarantee from the government, though that amount is currently only 8.3 billion to cover losses.

Total net income for SO was $2.27 billion for 2011. The EPS for SO shows slight increases for the next two years, from 2.55 in 2011 to 2.67 in 2012 to 2.82 in 2013. SO will need all this profit and more for any chance to retain positive cash flow throughout this project.

Conclusion: Southern Company is a solid utility stock, and one of the few that is showing earnings growth over the next two years. However, it is just sliding down from a 52 week high and the "virgin" exposure to nuclear could drag this stock and maybe its healthy 4.3% dividend down with it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.