Why Southern Company’s Dirty Secret Is Shared by the Whole Industry

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Market Trends

A good energy investor needs to know how and when to read between the lines. This is especially true when hearing from the folks in charge…

Back on May 3, Thomas Fanning was on CNBC’s weekday morning show, Squawk Box. Fanning, the CEO of Southern Company (NYSE: SO), painted a nice picture of the utility company, talking about its earnings and renewable energy initiatives…

But it’s what he didn’t talk about that grabbed my attention. It’s terrible news for one specific group of investors.

Southern Company has a noose around its neck… and it’s getting tighter.

I’m talking about the company’s expansion project at Plant Vogtle near Waynesboro, Georgia. The expansion is supposed to add two more nuclear units – No. 3 and No. 4.

The units are far from complete… and the project is billions of dollars in the red.

But it gets worse: Customers and investors may be stuck with the bill. It’s likely the units will never operate.

Why? That’s a story Fanning didn’t tell the mainstream media… and it underscores the dirty secret the entire sector faces.

What You Didn’t Hear on Squawk Box

Westinghouse Electric Company is the supplier for the reactors for the two additional units at Vogtle and two more in South Carolina.

But on March 29, Westinghouse filed for bankruptcy protection.

It’s not clear whether Westinghouse will ever be able to finish building reactors for Vogtle or any other American nuclear projects…

Westinghouse, once a proud symbol of America’s nuclear power supremacy, is now a disaster. Its parent company, Toshiba Corp. (OTC: TOSYY), is scrambling to plug big losses tied to the additional units at Vogtle.

A frustrated Fanning flew to Japan to meet with Toshiba CEO Satoshi Tsunakawa. Fanning asked Tsunakawa to “confirm Toshiba’s moral commitment” to finishing the Vogtle project.

Toshiba booked a net loss of $9.9 billion for its 2017 fiscal year. The company had to spin off some business units to protect itself from Westinghouse’s problems.

Tsunakawa now says, “[Toshiba has] all but completely pulled out of the nuclear business overseas.” He also said he feels “great responsibility” for the Westinghouse disaster.

April Fools

The scheduled date for the two new Vogtle units to come online was April 1, 2017.

But the joke was on Southern Company: The units were only 36% complete by then.

Back in 2016, the Georgia Public Service Commission held a hearing. Testimony showed the cost to finish Vogtle was skyrocketing.

Southern Company is now asking Toshiba for $3.7 billion to help it finish the third and fourth Vogtle units.

It’s unlikely Toshiba will agree to this. Even if it does, it still may not be enough. Initial construction estimates of $14 billion could jump as high as $21 billion.

Think that’s surprising? It’s not. Nuclear power plant construction has a long history of missed deadlines and cost overruns. And Vogtle is already a part of that history.

Construction on Vogtle’s first two units began in 1971. It finished… 18 years later – a decade past the scheduled completion date.

The final price tag? Ten times the original estimate… a staggering $9 billion.

Even more sobering, Vogtle’s third and fourth units will likely never be profitable when – or if – they’re finished.

Another Nail in Nuclear’s Coffin

Sadly, the story of Vogtle is not unique. The problems with nuclear plants are many…

They take a decade to permit and at least a decade to build. Cost overruns affect more than 97% of nuclear projects. On average, these projects cost a staggering 117% more than expected.

Westinghouse is $9.8 billion in debt. The company is dwindling.

If you look elsewhere, the story is much the same…

General Electric (NYSE: GE) makes nuclear reactors. But it’s not actively pursuing new business.

France’s nuclear reactor in Normandy was supposed to cost $3.3 billion and to come online in 2012. Now, it won’t produce power until 2018 at the earliest… and it will cost at least $11.3 billion.

The only hope for nuclear may lie in China. The Chinese are choking on pollution from coal-fired plants and want to replace them with nuclear plants. Twenty-one nuclear plants are under construction, with more waiting in the wings to start.

But even they are running into problems. The Chinese want to give the green light to eight reactors in 2017. Wonder who’s working on those…

You guessed it: Westinghouse.

Reading Between the Lines

Unsurprisingly, Fanning didn’t talk on TV about the mishaps his company is seeing at Vogtle. But it’s hardly an indictment of Southern Company alone.

Nuclear power, while free of greenhouse gas emissions, has a unique set of problems… Not to mention the challenges of storing or disposing spent reactor fuel for 20,000 years or so.

If anything, it’s yet another reason we should strive for 100% renewable energy sources for electricity and transportation.

And here’s the best part: We have the technology to do this now. The only barriers are political and social ones.

Moving to renewables will create tens of thousands of new jobs. It will also go a long way toward stabilizing energy prices.

The good news is that thousands of companies are already supporting the march toward 100% renewable energy… it’s Fessler’s First Law of Technology in action: Technology marches on.

We’ll get there without nuclear… and a lot faster than anyone thinks we will.

As Fessler’s Second Law of Technology states, “When it comes to technology, change happens much faster than anyone expects.”

Good investing,

Dave

P.S. Next week in Energy & Resources Digest, I’m going to talk a bit more about the staggering growth that’s going on in renewable energy… and share some ideas about how to invest in the sector.

But if you can’t wait until then, here’s some good news for you: I’ve got a number of creative plays in the energy market – including one that’s up almost 150% in less than a year!

With the way renewables are growing faster than anyone expects, gains like this are just the start. Learn more right here.