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Southern Comfort

Critics argue defaults are more likely in renewable energy technologies, not nuclear power. They are wrong.

Nuclear defaults happened in the past. Under the Rural Electrification Administration (REA), the federal government guaranteed $948 million to Wabash Valley Power Association, a non-profit cooperative utility. Wabash Valley used the proceeds to invest in a 17% share of the Marble Hill Nuclear Power Facility. Public Service Company of Indiana PSI, which is now part of Duke Energy (DUK - Get Report), owned the other 83% share. Marble Hill's construction costs escalated. Cost increases and schedule delays forced PSI to abandon construction in 1984. Unfortunately, PSI's decision wiped out shareholders and forced Wabash Valley into default. Like Solyndra, Wabash Valley faced years of federal investigations and legal threats.

The difference is Southern's balance sheet is strong. If it needs to, Southern can raise additional cash and manage modest cost overruns. And Vogtle will likely face cost overruns and schedule delays.

While potential cost overruns and scheduled delays could be painful, it is unlikely it will be devastating to Southern's shareholders or rate payers. After a few years of operations, Plant Vogtle will prove to be an incredibly valuable asset. Not just for Georgia, but also for the nation.

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Southern's aggressiveness is bold. When completed, the company's four-unit nuclear facility will become the nation's largest and most modern nuclear power facility. At approximately 4,660 megawatts, Plant Vogtle will provide Georgia with continuous power at very low production costs. In the long term, this plant will be cheap.

Investors have to give Southern some credit. Where others hesitated, Southern aggressively pursued innovative technologies. Today, Southern is the only utility willing to take a chance with clean coal technologies. This year, Southern's integrated gasification combined cycle (IGCC) project should enter commercial service. This is truly high technology; it can make coal cleaner than natural gas.

At the same time, Southern is building a first-of-a-kind IGCC. The company is taking a leadership position with a first-of-a-kind nuclear power plant. Vogtle 3 and 4 are the nation's first next-generation nuclear power plants.

Only Scana (SCG - Get Report) is willing to build a similar plant. NextEra Energy (NEE - Get Report), Duke, Dominion Resources (D - Get Report) and their state regulators decided to wait it out; they are deferring their nuclear construction to another decade.

Notwithstanding the good news, Southern currently has an unhealthy payout ratio. Nevertheless, on the earnings call, management said they remain committed to growing the dividend. "While dividend increases are subject to Board approval, the implied payout ratios associated with a $0.07 per year increase are reasonable within the context of our strong cash flow, business model and constructive regulatory jurisdictions."

This week, as the rest of the nation realizes they may have over committed to natural gas, Southern's future looks brighter. Its portfolio of generating plants will likely become the envy of the nation. Southern has no peers.

At the time of publication, Glenn Williams had no positions in any of the stocks mentioned.


Glenn Williams has more than 30 years of experience in power and fuels, including design, engineering, construction, startup and operations of large-scale power projects. He has had direct involvement with coal plants, natural gas facilities, and approximately half of the nation's nuclear power facilities and designs energy strategies for regulated and unregulated energy organizations. He received a bachelor's degree in electrical engineering from Northeastern University and a master's degree in technology management from the University of Maryland.

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