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When Exelon (NYSE: EXC ) , the largest U.S. nuclear plant operator, reports second-quarter earnings on Monday, most investors probably don't care whether the company met Wall Street's expectations. As long as the dividend remains unchanged and the merger with Constellation Energy (NYSE: CEG ) remains on track, they will be happy.
For some utility executives, this is a reminder of the bad old days before the industry was deregulated starting in the 1990s. At the time, the industry hoped to attract a new set of investors that were looking for growth and not just a safe dividend play. The industry has come full circle and has once again become the ultimate widow-and-orphan stock.
Chicago-based Exelon and other nuclear power plant operators including Southern (NYSE: SO ) , Duke Energy (NYSE: DUK ) , Public Service Enterprise Group (NYSE: PEG ) , and Entergy (NYSE: ETR ) , are under a cloud -- a nonradioactive one -- thanks to the meltdowns in Japan in March. Wall Street is not enamored of the sector, and investors haven't done too well either -- the Market Vectors Nuclear Energy (NYSE: NLR ) exchange-traded fund has tumbled more than 15% this year.
Then there are the endless headaches that lie ahead. The Nuclear Regulatory Commission ordered a review of nuclear reactor safety in the wake of the tragedy in Japan and recently released a report calling for sweeping changes to ensure that plants can handle multiple reactor emergencies.
That means two things: New plants are going to take longer to build, and older ones will become more expensive to operate. To be clear, the U.S. needs nuclear power, which currently supplies about 20% of the country's power generation. Renewable energy supplies are not plentiful enough nor are they cost effective to make up the difference. America is stuck with nuclear power.
Indian Point problem
For instance, New York Gov. Andrew Cuomo is leading the charge to shut Entergy's Indian Point plant because of a host of environmental concerns and its close proximity to New York City. Indian Point generates about 25% of the power used by New York City and neighboring Westchester County. Replacing that amount of power would be costly and present its own set of environmental challenges, particularly if it is generated by natural gas. Nationally, the U.S. Department of Energy projects that U.S. electricity demand will rise 24% by 2035, according to the Nuclear Energy Institute, a trade group.
Lower costs and loan guarantees
One reason why nuclear power is competitive is that states allowed power companies to refinance their debts at lower interest rates while the industry was being regulated. Suddenly, plants that were slated to be mothballed got new leases on life. However, there are limits to how far companies will go. Last year, Exelon said it would shutter the 45-year-old Oyster Creek plant in 2019 near Philadelphia rather than build cooling towers demanded by New Jersey regulators in exchange for their blessing to permit America's oldest reactor to continue to operate. Oyster Creek, which received an NRC license extension in 2009, has a design that's similar to the ones used by the plants in Japan where the accidents occurred.
The nuclear renaissance that people spoke about before the Japan disaster is over. According to Reuters, U.S. regulators are expected to approve four new reactors later this year though the outlook for others is doubtful. For one thing, they are expensive. Estimates provided by the NEI range from $4 billion in today's dollars to $22.5 billion in 2022. NRC officials are also conducting a new reactor design of a Westinghouse nuclear reactor.
Last year, President Barack Obama announced that the federal government would provide $8.3 billion in conditional loan guarantees to Atlanta-based Southern to build two reactors at its Plant Vogtle in Burke, Ga. The reactors are scheduled to be finished in 2016 and 2017. Earlier this month, Southern executives warned Georgia regulators that delays and cost overruns were possible. Given the industry's long-standing issues on completing projects on time and under budget, odds are fairly good that costs for the plants will be higher than expected.
The Foolish bottom line
Not only are there secular trends facing the industry, but the near-term outlook is also bleak. Retail electricity sales fell 2.6% during the first three months of the year, according to the Energy Information Administration. And that could be just the beginning.
In short, stay away from nuclear stocks unless you are hungry for a dividend check.