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Citi has a special report on the impact of the Japan nuclear crisis on the US industry:Nuclear power plants on the “relicensing bubble” appear to be the most at risk plants from a political/regulatory scrutiny standpoint. In our view, Entergy is the most at-risk name under this scenario, as their two merchant plants at Vermont Yankee and Indian Point were undergoing significant political/regulatory relicensing risk prior to the Japanese disaster.
The only two pre-existing nuclear plants that are in significant earthquake zones are Diablo Canyon (PCG) near San Luis Obispo north of Santa Barbara, and San Onofre (EIX) between San Diego and Los Angeles. Both plants are regulated assets, such that increased regulation and forced incremental redundancies in theory would be positive for their utilities since additional capex would be additional rate base, and additional O&M expenses would be passed through to rate payers. However, recent news headlines surrounding the San Bruno explosion could result in greater political scrutiny and additional risk of stranded costs from greater regulatory scrutiny. Overall, we believe the California utilities do not present a strong tradable idea at this juncture as a result of the Japanese news.
Other disasters likely to affect nuclear plants are hurricanes and terrorist acts. For terrorist acts, all utilities saw additional forced security requirements following 9/11 and Japan is not likely to alter that spending. For hurricanes, all nuclear plants in the US that are exposed to hurricane weather patterns are regulated except for two plants: Comanche Peak (TXU) and South Texas Point (NRG), both in Texas. Both plants survived Hurricane Rita unscathed. Other hurricane-area plants are owned by SO, SCG, NEE, DUK/PGN, but these assets are all regulated. No nuclear plant has ever been damaged materially by a tornado.
One winner from the crisis will be Calpine:
Longer term, this could accelerate retirement of older nuclear plants and continue to shift towards natural gas based generation. Although extremely long term in nature, this could benefit Calpine (CPN.N; US$15.28; 1H) as it builds and operates natural gas fired power plants.
And one potential loser:
Exelon (EXC.N; US$43.16; 2M) is the largest nuclear operator in the US, and is largely merchant. Its fleet is located mainly in the US Midwest, where we see little possibility of natural disasters affecting its nuclear fleet to the same degree as what was just witnessed in Japan. We currently view EXC as being near fairly valued, so a drop in share price would not necessarily lead to an attractive buying opportunity. That said, we see no material reason why Exelon’s fundamental outlook has changed as a result of either the disaster or any rational US political fallout since Exelon’s fleet is exposed to neither earthquakes nor tsunamis.
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