Morningstar Magazine - October/November 2017 - 62

Strategies

Actionable Stock Ideas for Nuclear
Economic
Moat

Name

more than 5,000 millirems per year based
on NRC guidelines.

Moat
Fair Value Current Uncertainty Morningstar Dividend
Market
Trend Estimate ($) Price ($) Rating
Rating
Yield Cap ($Bil)

Scana SCG

Narrow Stable

64

59.85 Medium

QQQ

3.97

8.51

Southern Co. SO

Narrow Stable

50

49.16 Low

QQQ

4.64

49.40

Scana and Southern Company trade at sharp discounts to peers. The stock prices are in line with our fair
value estimates, while U.S. utilities trade at a 10% premium to our fair value estimates on a median
basis. Some of this discount is justified given the risks related to their nuclear projects. But we believe
regulators will allow Scana and Southern Company to recover substantially all construction costs
from customers, a view the market does not fully accept. If valuations stay at these levels and regulators
continue to support the projects, the stocks will be good buying opportunities.

Economic
Moat

Name

FirstEnergy FE

None

Moat
Fair Value Current Uncertainty Morningstar Dividend
Market
Trend Estimate ($) Price ($) Rating
Rating
Yield Cap ($Bil)

Stable

34

32.52 Medium

QQQ

4.43

14.40

FirstEnergy faces concerns that FirstEnergy Solutions, or FES, will file bankruptcy and creditors will
make claims against its parent. FES' three nuclear plants-two in Ohio and one in Pennsylvania-
are struggling because of cheap shale gas. We assume these states do not provide financial support and
that FES files for bankruptcy. Our fair value estimate includes $1 billion of settlement payments
from FirstEnergy to FES creditors. After FES' bankruptcy, FirstEnergy would be a fully regulated utility
with solid growth from its distribution and transmission businesses.

Economic
Moat

Name

Dominion Energy D

Wide

Moat
Fair Value Current Uncertainty Morningstar Dividend
Market
Trend Estimate ($) Price ($) Rating
Rating
Yield Cap ($Bil)

Stable

85

78.19 Low

QQQQ

3.79

50.17

Dominion Energy's wide-moat growth projects-notably, the Cove Point LNG facility and the Atlantic
Coast Pipeline-combined with an exemplary management team and conservative strategy make
it a top pick. We expect wide-moat businesses, including its Millstone nuclear plant, to generate about
half of Dominion's operating earnings by 2021. Virginia's constructive regulation and demand
growth give Dominion more investment opportunities. Nuclear uprates could be a key growth area.
The market underappreciates Dominion's potential 10% annual dividend and earnings growth, which
should deliver attractive total returns for the foreseeable future.
Economic
Moat

Name

Exelon EXC

Moat
Fair Value Current Uncertainty Morningstar Dividend
Market
Trend Estimate ($) Price ($) Rating
Rating
Yield Cap ($Bil)

Narrow Stable

33

37.60 Medium

QQ

3.46

36.01

Although the stock looks overvalued, Exelon is the only U.S. utility with a call option on nuclear
power and a standout ESG pick for its history of safe operations, corporate governance, and effective
waste management. With the nation's largest nuclear fleet, higher commodity prices and tighter
emissions regulations are all upside for Exelon. We estimate a 10% move in long-term power prices could
create $4 per share of value. Exelon also has the scale to grow through low-cost uprates and the
political clout to protect its at-risk plants. We think the premium in its stock price is due to an inflated
valuation for its regulated business. If rising interest rates and inflation take down all regulated utilities'
valuations, higher profitability at Exelon's nuclear fleet could make it a relative outperformer.
Source: Morningstar. Data as of 09/05/2017.

62

Morningstar October/November 2017

Nuclear Accidents Rare

Nuclear radiation leaks are rare and typically
within a normal range of base radiation exposure.
The three worst nuclear power accidents
worldwide-Three Mile Island (U.S.); Fukushima
Daiichi (Japan); and Chernobyl (Ukraine)-
resulted in varying levels of radiation exposure
The only major U.S. nuclear safety breach
occurred at the Three Mile Island nuclear plant in
Middletown, Pa., on March 28, 1979. A
combination of human error, design deficiencies,
and component failures caused the accident.
During the accident, residents within a five-mile
radius of the nuclear plant were evacuated.
Estimates show nearby residents received an
average radiation dose of 8 millirem, or about the
same as taking a round-trip flight from New York to
Los Angeles. Even the most exposed people
experienced only about half the radiation as a
head CT scan.
In 2011, a 9.0 magnitude earthquake struck
offshore Japan, creating a 15-meter high tsunami
that hit Tokyo Electric Power Co.'s Fukushima
Daiichi plant units 1-4. The nuclear reactors
and containment structures held up well. However,
12 of the plant's 13 backup power generators failed,
causing operators to lose the ability to maintain
proper reactor cooling and water circulation. More
than 100,000 people were evacuated from the
surrounding area. To date, no deaths have been
directly attributed to Fukushima. Estimates for the
average radiation dose for individuals within the
20-kilometer evacuation area were 20 millirems,
or about 3% of normal annual radiation exposure.
The highest measured radiation dose among
Fukushima workers was well below radiation
poisoning levels but still above the annual dose
with links to increased cancer risk.
The most damaging nuclear accident occurred in
Chernobyl, Ukraine, in 1986. It is the only
documented commercial nuclear power accident
to cause radiation-exposure fatalities. A flawed
reactor design that only Eastern Bloc
countries used at the time and significant human
error caused the disaster. Two operators died



Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017

Contents
Morningstar Magazine - October/November 2017 - Cover1
Morningstar Magazine - October/November 2017 - Cover2
Morningstar Magazine - October/November 2017 - 1
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Morningstar Magazine - October/November 2017 - Contents
Morningstar Magazine - October/November 2017 - 4
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