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Southern Company’s Nuclear Reactor Plan Clears First Hurdles

But NRC license approval unlikely before 2012


Gearing up for rising clean energy demand over the next two decades, the Southern Company (NYSE:SO) is angling for fast federal approval to build the first new nuclear reactors in the U.S. since 1973. Since nuclear energy is both cost-effective and cleaner than coal, investment in next generation nuclear reactors made sense for the utility, lawmakers and shareholders.

Besides, the $14 billion project to build two new-design Westinghouse AP1000 nuclear reactors at Southern’s Plant Vogtle site in Georgia not only has the support of President Barack Obama, but $8 billion in federal loan guarantees to sweeten the deal. But what once seemed like a slam-dunk approval to let the company break ground on its two new Plant Vogtle reactors this fall likely will be delayed by the fallout — literal and political — from a disaster that occurred five months ago and 7,000 miles away.

But even after the March 11 earthquake and tsunami crippled the Fukushima I nuclear plant in Japan, the Nuclear Regulatory Commission still is on track to approve Southern Company’s two new reactors — although construction approval likely will be delayed until early 2012.

The utility recently cleared a couple of hurdles in the approval process for Plant Vogtle units 3 and 4. Last week, the NRC determined its new Westinghouse AP1000 design meets current federal and state safety requirements. After the Fukushima I disaster, NRC Chairman Gregory Jaczko had expressed concerns that Westinghouse, a unit of Japan-based Toshiba (PINK:TOSBF), had failed to properly measure the impact that earthquakes, tornadoes or other disasters could have on the new design.

Officials approved the plan after Westinghouse addressed those concerns. So far, the NRC has turned a deaf ear to anti-nuclear and other environmental activists who are urging the agency to halt new plant approvals like this one, as well as re-licensing older reactors.

Southern also scored a win with the Georgia Public Utility Commission, which nixed a plan to shave off any cost overruns on the nuke plant from company earnings. Commissioners did retain the right to disallow construction costs in the future if the project runs significantly over budget. Company officials have assured the commission and investors that the project is on track and on budget.

Meanwhile, higher energy sales drove up Southern’s second-quarter earnings by 18% to $619 million (71 cents per share) from $526 million (62 cents per share) for the same quarter in 2010. Revenue rose 7.5% to $4.52 billion.

With healthy sales growth and approval of its nuclear plants likely, there’s a lot to love about SO — for steady growth and solid income. SO just set a new 52-week high of $40.87 on July 21 and at $39.41, the utility is trading nearly 12% above its 52-week low of $35.19 last August. With a market cap of $33.80 billion, the company’s price/earnings-to-growth ratio is a heavy 2.57, indicating that the stock is overvalued.

Still, its return on equity is a decent 11.51% and it pays a healthy dividend yield of 4.90%. Leverage is a challenge: The company has total cash of $443 million compared to $20.77 billion in total debt. But as a public utility, it does have the ability to raise rates. All in all, not a bad stock to buy now for the dividends and hold for the promise of long-term growth when those new nuclear plants come online.

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

Article printed from InvestorPlace Media,

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