Category: Energy

Obama's call for nuclear power will not protect risky nuclear investments

Despite President Obama’s call for the development of nuclear power in the State of the Union address, events in Florida, Vermont and as far away Abu Dhabi make clear that the Obama administration can not protect nuclear investors. Even with federal government support, other factors, such as cost overruns, state regulation, nuclear waste storage, decommissioning cost, and the hit portfolios would take in the event of a nuclear accident, combine to make nuclear an awful investment.

Despite the green energy rhetoric the Obama seems to prefer the two most environmentally harmful sources of energy — nuclear and coal.

The Obama administration seems uninterested in the cleanest fossil fuel alternative — natural gas, and are doing only token projects with regard to solar and wind energy. But despite Obama’s  call for building more nuclear power plants those considering investing should be wary.

As recent events summarized below make clear, nuclear power continues to be plagued by problems, and remains a bad investment idea.

Advisory downgrades Florida Power and Light to “sell” after cancellation of nuclear project

The Florida Public Utility Commission rejected Florida Power and Light’s (FPL) request for a major electricity rate increase, which would have paid for the construction of two Toshiba-Westinghouse nuclear reactors at its Turkey Point nuclear power plant near Miami. FPL responded by halting plans to build the two nuclear reactors.

Although state law authorized the Public Utility Commission to bill ratepayers in advance to build nuclear reactors, years before any electricity is actually delivered the Utility Commission decided to refuse FPL’s effort to burden ratepayers with the financial risks. of building new reactors, while offering little to none of the projected profits in return.

Entergy’s Vermont Yankee nuclear reactor facing problems

Radiation levels at least 40 times higher than that permitted for drinking water were found in a monitoring well at the Vermont Yankee nuclear power plant. Although no drinking water samples have shown contamination the evidence that radiation has escaped into ground water have endangered not only the health and environment, but efforts to obtain an extension of the plants operating license. The extension may be denied because rising radiation levels indicate radioactive water is leaking and contaminating the soil. The rising radiation levels have so spooked state residents that the state’s health department have been posting updates almost daily on the monitoring efforts.

If Vermont Yankee is denied the extension it will be the first such denial since 1989, when residents of Sacramento voted to close the Rancho Seco nuclear plant owned by a municipal utility in California. Although such decisions are usually decided by the federal government’s Nuclear Regulatory Commission, state agencies have played an increasing role in recent years.

Since Entergy bought Vermont Yankee in 2002, it has shown itself to be incompetent at running nuclear facilities. In 2007 a cooling tower at Vermont Yankee literally collapsed. A vice president for Entergy lied to state officials, telling them the Vermont Yankee plant did not have underground piping that carried radioactive water, when in fact it did. And the likelihood of further yet to be disclosed problems are believed to be the motivating factor in Entergy’s efforts to obtain permission to spin off Vermont Yankee and five other nuclear plants, and thus limit Entergy’s legal liability.

Areva loses an investor and a reactor deal with Abu Dhabi

The French oil company, Total, has canceled plans to invest in Areva after the French nuclear company lost a bid to build two new reactors in Abu Dhabi, United Arab Emirates. Total’s director general also questioned if EPR – Areva’s flagship new reactor – could be built less expensively without compromising safety following a joint statement by the Finnish, British and French nuclear safety bodies, stating the EPR’s control and safety systems should be changed to avoid both failing at once. Areva has been struggling financially because the EPR nuclear design has been subject to postponement and cancellations in major markets like the U.S. and China because of unsafe design.

Don’t bet your portfolio on nuclear investments

 

With oil prices down significantly from the time when they topped $100 a barrel it is easy to forget the atmosphere in 2005. That year, high energy prices led Congress to add $18.5 billion in loan guarantees for nuclear construction to the 2005 energy law.

 There are 104 nuclear reactors operating in the United States. All were ordered before the 1979 Three Mile Island accident. Since that time not a single U.S. nuclear reactor has been built.

Because the lower cost of generating nuclear electricity seems economically advantageous, some investment newsletters, such as Roger Conrad’s  Utility Forecaster,  urge investment in nuclear related stocks. In offering such advice, proponents of nuclear investing have often been negligent in failing to warn investors of potential problems.

In 2005 the business section of the NY Times cautioned “…investors should understand that betting on nuclear entails risk beyond the stock market’s usual shimmies and shakes. Domestic [nuclear] plants have operated without a major incident since Three Mile Island, but another big stumble, in the United States or abroad, could hobble the industry.”

After Three Mile Island, nuclear stocks plunged; it took years for many to recover. Several utilities were not permitted to open and operate completed nuclear plants, meaning the entire cost of construction was lost. The fact that serious talk of building additional nuclear plants was not raised for over 30 years speaks volumes.

Investment newsletters promoting nuclear do a disservice to investors who need to understand the potential risk, along with the potential upside. This article examines several recent developments investors should consider before contaminating their portfolio with stocks in nuclear companies.

DWINDLING GOVERNMENT SUPPORT

The nuclear industry relies heavily on government subsidies to be profitable, and it is becoming abundantly clear that government support for the nuclear industry is fading fast, with federal support evaporating on everything from loan guarantees, to design approvals, to nuclear waste disposal.

  • President Obama’s removal of $50 billion in further loan guarantees from his stimulus bill signals the new administration may be having second thoughts on nuclear expansion.
  • Funding to open the Yucca Mountain Nuclear Waste facility has been cut to a level that assures it will not be opening in the foreseeable future.
  • Industry hopes that approval of standardized designs to speed up construction and result in significant cost savings have been disappointed, with the Nuclear Regulator Commission yet to approve two design proposals. (An advanced design submitted by Westinghouse, and another design by Areva).
  • At the state government level, the industry succeeded in having regulators in the states of Georgia and Florida raise electric rates so consumers pay for construction before it begins, but when Missouri refused a pre-construction rate increase, Ameren UE abandoned plans to build a new nuclear plant
  • In Maryland, Constellation Energy may be facing a 10% rate cut to compensate consumers for the Utilities proposed nuclear power venture.

COST OVERRUNS, DELAYS AND CANCELLATIONS

Nor is lack of government support the only problem. Cost overruns and construction delays continue to plague the industry.

  • Exelon canceled plans to build a new nuclear plant in Texas.
  • Ontario Providence in Canada has suspended plans to build new nuclear reactors
  • Ameren UE suspended plans to build a plant in Missouri.

Indeed, of 45 nuclear plants being built around the world, 22 have encountered construction delays.

Recently Areva learned how damaging nuclear development projects could be, when construction problems with a Finland nuclear reactor not only caused a steep drop in company earnings, but had a cascading effect, both undermining Areva’s efforts to get Nuclear Regulatory Commission approval for the reactor design in the U.S., and in leading to the cancellation of a nuclear reactor of the same design in France.

Cancellations can be worse than delays, especially if construction has begun or been completed. In such cases regulators may not allow investors to recover the cost of a project that does not go on-line. In this regard it is important to remember that although it is extremely rare for a regulated utility to undergo bankruptcy, one of the few such bankruptcies on record is that of WHOOPS, a Washington State utility that went out of business because of the high cost of nuclear power. The high cost of construction, operation, caring for the nuclear reactor once it ceases to operate, and on-site storage of nuclear waste can all negatively impact profitability.

STILL NO STORAGE SOLUTION FOR NUCLEAR WASTE

The U.S. Department of Energy was to begin accepting spent fuel at the Yucca Mountain repository in January, 1998. Now, after over a decade of delay, it appears the Obama administration is getting ready to kill the project . In March the Obama Administration fulfilled a campaign promise by proposing to cut most funds for the Yucca Mountain nuclear waste project. In July, the U.S. Senate went even further, reducing Obama’s proposed $56 million in funding for a Yucca Mountain study to $29 million, sapping the Nuclear Regulatory Commission of funds needed for review of the application to approve the waste repository.

Energy Department officials have confirmed it’s the administration’s policy that Yucca Mountain never be used. “I’m convinced that for the foreseeable future, for the next 50 to 100 years, we’ll simply store the spent fuel rods on site,”  Senator Reid told reporters. That would pose a severe problem for the nuclear industry, which must bear the cost of monitoring, maintenance and operation of the steel-lined pools and steel concrete casks near the reactors, where the waste has been accumulating for decades.

Considering that there are so many other good investment ideas, is it really wise to contaminate your portfolio with nuclear?

 Below is a partial list of companies that build nuclear reactors:

  • Areva
  • General Electric
  • Toshiba (through it’s Westinghouse division)


The following utilities use nuclear power to generate electricity:

  • Ameren (AEE)
  • CEG
  • CenterPoint Energy (CNP)
  • Central Vt. Pub Service (CV)
  • Dominion (D)
  • Duke (DUK)
  • Entergy (ETR)
  • Exelon (EXC)
  • FirstEnergy (FE)
  • FPL
  • Progress Energy (PGN)
  • Public Service Enterprise Group (PEG)
  • Pinnacle West (PNW)
  • SCANA (SGC)
  • Southern Company ((SO)
  • Westar Energy (WO)
  • Xcel (XEL)
  • Elec de France (ECIFF)
  • ENEL (Italy)
  • RWE (Bulgaria)

Pipelines to profit: Investing in high-yielding Master Limited Partnerships

Master Limited Partnerships (MLPs) are high yielding exchange-traded instruments. As partnerships, they must return all earnings to the partners each year, resulting in a much bigger pay out than most dividend bearing stocks. The yields are called “distributions” not “dividends” and instead of owning “shares” you own “units.” To become a partner you simply purchase units like any other stock through your discount broker (it makes no sense for the average investor to use anything but a discount broker).

To qualify as a MLP under IRS rules, a business must earn 90% of its income from dividends, interest, real estate or natural resources. The majority of MLPs are in the energy business, with most operating natural gas pipelines. Some of which engage in “midstream services” including gathering, pumping, compressing, and refining petroleum or natural gas, and the separation of natural gas into Natural Gas Liquids, such as propane.

After construction is complete, except for occasional repairs or nominal maintenance costs, operating expenses are minimal. Because pipelines are storage and transportation services, they are profitable regardless of fluctuating commodity prices. Consistent need for energy also means pipelines are a recession-resistant investment, providing a consistent stream of income, year in and out, just like utility companies. In fact, rating agencies value pipelines like fixed income investments. But pipelines have several advantages over fixed income products and utilities, including tax deferred status, potential for growth and increasing yields.

This is not to imply pipelines are risk free. Pipelines are expensive to build. High interest rates can cause delays or loss of profits. And although commodity prices rarely affect MLPs that are primarily involved in storage and transportation, some of them can be affected by market risk associated with fluctuating commodity prices. Oil wells and gas fields have a limited capacity, and when the well or field runs dry, so can the value of the investment. To grow, these businesses must build additional pipelines and make new acquisitions

So how does one know which are good investments? Excessively high yield is often a red flag. Is the company, for example, paying out over 100%? If so, that is obviously not sustainable, and could indicate a distribution cut is on the horizon. I believe in fundamental over technical analysis, but I find financial reports difficult to understand, am not good with numbers and can’t do the analysis myself. But I don’t need to. Professional analysts already rate these companies, so I subscribe to trustworthy newsletters and use their recommendations as a starting point.

Next I compare the opinions of the analysts on brokers’ web sites, each broker usually offering several. It’s not necessary to understand everything. What I look at is if there is general agreement on the quality of the stock, as well as the reasons given for any negative recommendations. In examining the annual report, I pay particular attention to what the report says about capacity of proven reserves, as well as new acquisitions.

Looking at recent news related to the stock can be also be helpful. There is usually a link to such information on the Internet along with the company profile, either on brokers’ web sites or on an Internet site such as Yahoo Finance. When reading about investments it is important to distinguish between factual information versus hype about future projections. This is especially important not only in considering what investments to make, but in considering which newsletters to trust, as well in evaluating the advice. Evaluating investment newsletters though, is a separate topic which I hope to address in a future post…

Some Master Limited Partnerships I like:

UPDATE:  I practice socially responsible investing. As long as most energy generated comes from fossil fuels natural gas has the lowest impact in terms of  both air pollution and carbon footprint. However, as information accumulates it seems clear the new fracking technology used to drill for natural gas poses a serious threat to our water. Under the circumstances I no longer recommend investing in companies that engage in drilling for natural gas.

Furthermore,  the recommendations stated below were made in August of 2009. As I update this entry I note that presently the stock price has increased significantly from the date when the recommendations were made. These particular investments no longer pay the high yields they did when the recommendations were made.  The increased cost of purchasing these companies at today’s prices makes them far less profitable to buy today. Stated simply, even if I were not concerned about the environmental dangers  I would not recommend these stocks at the present higher prices and lower yields, because they simply are not as profitable if you buy them at today’s prices than they were on at the time I originally recommended them. Remember all investing advice is time sensitive in that things change.

Enterprise Products Partners (EPD) currently yielding 7.9% (has growth potential).

Mark West Energy (MWE) currently yielding 12.1% (exposure to greater profits if commodity prices increase).

Terra Nitrogen (TNH) currently yielding 8.2%  (non-energy pipeline transporting liquid fertilizer to agricultural communities). It’s a good one, but I suggest buying at $102 or less.

Two non-pipeline MLPs that are like utilities:

Amerigas (APU) currently yielding 9.6%, is a buy up to $34.

Suburban Propane (SPH) currently yielding 8.1%, was recently recommended in a newsletter that has always made me money.

NOTE: “currently yielding” refers to the date I wrote this entry. Yields change with market price of the stock, you can check yield at the time of purchase.

Image | WordPress Themes