Higher Scrutiny May Power Down Nuclear Stocks

by Susan J. Aluise | April 4, 2011 1:00 pm

Nuclear operators in the U.S. could face headwinds as the escalating disaster at the Fukushima I plant in Japan focuses more attention on the safety records and risk factors at American plants. 

That could be a tough break for companies like Progress Energy (NYSE:PGN[1]), Duke Energy (NYSE:DUK[2]), Exelon (NYSE:EXC[3]) and Entergy (NYSE:ETR[4]) — all of which had reactors involved in safety or security incidents last year. 

Still, the market is a hopeful place and investors seem willing to give operators the benefit of the doubt in the short term — unless and until it can be demonstrated that a serious disaster like the one playing out in Japan realistically could happen here.  

Although shares of the companies fell off a cliff on March 17 as the severity of the Fukushima I disaster became known, they had bounced back by last Friday.  Progress and Duke had fully recovered their March 11 share prices, closing at $46.73 and $18.42, respectively.  Exelon and Entergy, which both lost about 9% from March 11-17, had recovered about half that amount by last Friday.

Despite the bounce-back in share prices, nuclear operators still face significant challenges in the coming weeks and months.  The Nuclear Regulatory Commission already has placed three plants on its watch list as requiring additional regulatory oversight: Progress Energy’s H.B. Robinson plant in South Carolina, Omaha Public Power’s Fort Calhoun plant in Nebraska and Wolf Creek Nuclear’s Wolf Creek plant in Kansas.

Also, the NRC named six senior managers and staff to a task force that will take a closer look at whether the agency’s regulations, enforcement programs and other capabilities are tough enough in the wake of the lessons learned from Japan.

And the NRC isn’t the only watchdog with nuclear plant operators in the crosshairs: a report by the Union of Concerned Scientists recently broke down the 14 “near-misses” reported by the NRC in 2010 involving safety and security problems. 

These included the most serious incident last year at the aforementioned H.B. Robinson plant, which suffered a near-miss when a high-voltage power cable failed and started on fire, causing an unintended reactor shutdown. Equipment breakdowns and operator errors further exacerbated the problem – several hours after the fire had been extinguished, workers re-energized the cable and started a second fire.

Broader debate over these incidents already is having a chilling effect on the U.S. nuclear energy revival.  NRG Energy (NYSE:NRG[5]) has stopped initial construction on a nuclear plant in Texas because of difficulty securing a federal loan guarantee.  It didn’t help that Tokyo Electric Power Co., operator of the crippled Fukushima I plant in Japan, had committed to invest more than $100 million to the NRG project.  Constellation Energy’s (NYSE:CEG[6]) planned third reactor at Calvert Cliffs also has been placed on hold.

Although two companies, Southern (NYSE:SO[7]) and Scana (NYSE:SCG[8]), are still moving forward with new reactor construction plans and could be licensed as early as November, those predictions may prove to be overly optimistic in today’s political climate.

Bottom Line: Nuclear plant operators will be facing higher costs in the very near future due to increased oversight from federal regulators.  Many groups, including the UCS, have taken aim at industry regulators recently as well, alleging a culture of lax supervision and enforcement.  For the sake of vindication, the NRC may well be forced to sharpen its teeth.  That means plants seeking license renewals in the near term face the possibility of delays and more rigorous safety audits — all of which could devour earnings and depress share prices.

As of this writing, Susan J. Aluise did not hold a stake in any of the stocks mentioned here.

  1. PGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=PGN
  2. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  3. EXC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXC
  4. ETR: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETR
  5. NRG: http://studio-5.financialcontent.com/investplace/quote?Symbol=NRG
  6. CEG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEG
  7. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO
  8. SCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCG

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