Nuclear Dream Turns Into $25 Billion Quagmire for CEO
(Bloomberg) -- Tom Fanning is the only energy executive in America willing to bet billions on nuclear power.
The chief executive officer of utility giant Southern Co. is renowned for his boundless optimism, which he generously spreads around. He’s chair of the Federal Reserve Bank of Atlanta, co-leader of one industry group and a former chairman of another. He’s a frequent visitor to Washington, where he’s met with Vice President Mike Pence, Scott Pruitt of the Environmental Protection Agency and old friend Energy Secretary Rick Perry. Fanning is often a guest of TV business news, where he’s spoken glowingly about “clean coal’’ and nuclear.
There’s just one problem. His company isn’t doing that well.
Southern’s Vogtle nuclear plant in Georgia, the first U.S. nuclear project to be licensed in three decades, went through a near-death experience as total estimated costs doubled to more than $25 billion. The plan survives with the help of $12 billion in federal loan guarantees. Southern also pulled the plug this year on its ambitious “clean coal’’ project in Kemper County, Mississippi, taking a $2.8 billion pretax charge that contributed to its biggest quarterly loss in a quarter century.
Southern’s total return has increased 86 percent since Fanning took over in December 2010. But the S&P 500 Utilities Index return rose 137 percent and the S&P 500 return jumped 156 percent in the same period.
Fanning and his utility are approaching a crossroads, the same fork in the road that energy producers and distributors face around the world. As the planet warms and thousands of jobs hang in the balance, it’s critical they direct investments to energy sources that best serve both present and future.
He picked nuclear.
The 60-year-old CEO leads a company buffeted by some of the biggest changes in the industry since Thomas Edison. A glut of natural gas flowing from shale formations has caused electricity prices to plummet, forcing coal and nuclear plants to shut. Demand for power has yet to recover since the Great Recession, thanks to gains in efficiency and customers’ increasing use of rooftop solar panels and other decentralizing technologies.
Under his watch, Fanning said Southern has reduced reliance on coal to about 30 percent from 60 percent, increased its use of renewable and hydropower sources to 9 percent and expanded its access to natural gas by buying distributor AGL Resources. Southern also acquired a company, PowerSecure International, which builds backup grids and installs and manages solar projects.
The CEO’s admirers say designs for the “clean coal’’ and nuclear plants were set in motion before Fanning took over and he’s done his best to shepherd them. In an interview, Fanning agreed.
“I came in after those decisions, and have been accountable for executing on that,’’ he said. “I would argue mega-projects like Vogtle and Kemper are pretty hard to do.’’
Nuclear and coal-fired power plants would get a boost under a Trump administration plan. The Federal Energy Regulatory Commission would allow electricity customers to be charged more in order to bail out struggling power generators, which would be rewarded for keeping fuel on site. Proponents say it would make the energy grid more resilient. Critics say it would be expensive and solve a nonexistent problem.
Fanning has harnessed his energy and his connections to become one of the most high-profile executives in the energy business. But his optimism has sometimes annoyed investors.
In Good Shape
Last year, Fanning told them that Southern was in “as good a shape as we’ve been in some years’’ and that its $7.5 billion “clean coal’’ project, backed by the Energy Department and thought to pave the way toward a cleaner-burning future for the coal industry, was moving along “beautifully.’’
Instead, the Kemper startup effort was plagued by delays and construction snafus and Southern abandoned it. Southern still faces lawsuits from various parties that claim improper disclosure about the project.
“I appreciate him wanting to be optimistic and positive, but I think it’s incumbent upon the shareholders, including the shareholders inside the boardroom, to make sure he’s realistic,’’ said Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System.
Fanning waxes positive about nuclear power despite some daunting trends. The average age of U.S. commercial reactors is about 36 years old, according to the Energy Information Administration. Since the 1990s, nuclear has generated about 20 percent of the power Americans use, but the percentage is expected to decline. In the past seven years, six nuclear power plants have announced early retirements, mostly for economic reasons.
A big nuclear bet has some utility investors shying away from Southern for now.
“We think there are probably better opportunities elsewhere,” said John Bartlett, vice president and portfolio manager for Reaves Asset Management, which has about $3.2 billion in utility and energy assets under management.
East of Atlanta
Southern, which owns 45.7 percent of the Vogtle project, is building two new reactors about 175 miles (280 kilometers) east of Atlanta, where two nuclear units already operate. More than 6,000 workers are involved in constructing the facility, which will have 800 permanent employees. The new units are expected to be finished by November 2022. They’ll produce enough power for 500,000 homes and businesses. The loan guarantees were set in motion under the administration of George W. Bush and first granted to Southern while Barack Obama was president.
Critics, including consumer and environmental groups, argue that the Vogtle plant no longer makes sense because there are cheaper and cleaner options available.
“Even as every other utility realized the extreme risks to their shareholders and customers and correctly decided to stop the financial bleeding, Southern stubbornly presses forward,” Stephen Smith, executive director for the Southern Alliance for Clean Energy, said in a statement.
In a filing earlier this month, staff of the Georgia Public Service Commission said the Vogtle plant is “no longer economic” and the economic benefit would be “negative $1.6 billion.”
The Vogtle nuclear reactors still have a chance to succeed. After builder Westinghouse Electric Co., a unit of Toshiba Corp., went bankrupt earlier this year, partly due to cost overruns at Vogtle, Southern agreed to take over construction. Fanning has said that the project is vital to the country’s national security. The company is awaiting approval from Georgia regulators to complete it. A decision is expected Dec. 21.
Ever the optimist, Fanning flew all the way to Japan to try to convince Toshiba to stick with Vogtle -- even as Westinghouse unit was going under.
“I think we’ve got a really good path forward,” Fanning said.
Some in the industry see that kind of effort as needed to take on a challenge like building new nuclear reactors in the post-Fukushima age.
Fanning’s “optimism, his energy are exactly what they need to get through it,” said American Electric Power Co. Chief Executive Nick Akins, who served with Fanning on the board of the Edison Electric Institute.
The issues with both Vogtle and Kemper could have been foreseen, said David Schlissel, a director of the Institute for Energy Economics and Financial Analysis, a sustainable-energy research group. Schlissel said he testified to regulators that there were going to be problems with a first-of-its-kind plant with untested technology.
“There were warning signs,” he said. “There were red lights flashing, telling them not to drive onto the train tracks.”
Fanning, a former high school football player, said he needs little sleep and skips breakfast and lunch while drinking coffee nonstop. His career at Atlanta-based Southern has spanned more than 30 years. He’s held 15 different positions and did a stint in Australia. Before becoming CEO, Fanning served as chief operating officer and chief financial officer.
Fanning’s pay has come under scrutiny from some investors. A group of shareholders, including CalSTRS, recommended voting against Fanning’s and other compensation packages for 2016, citing failed oversight of Vogtle and Kemper. Nearly 40 percent of investors voted against the package, according to the company.
Since 2010, Fanning’s total annual compensation has risen 163 percent to $15.8 million from $6 million, according to data compiled by Bloomberg. His annual bonus cash payouts have been above target every year except 2013, with an average of about $1.87 million, according to a Bloomberg analysis.
Fanning said his pay has been “impacted significantly by under-performance.” During his tenure as CEO, he’s taken home about $40.1 million, not including pension contributions, or about 70 percent of his total compensation reported in proxy filings, according to a Bloomberg analysis.
Fanning said that under his watch Southern has been able to increase its dividends every year. Southern shares have risen since the company announced Aug. 31 that it will seek permission from Georgia regulators to continue building the two reactors at Vogtle, Fanning said. On Dec. 5, Southern said Toshiba will speed up $3.2 billion in penalty payments for the project, reducing costs to customers.
Fanning’s ties to President Donald Trump’s administration appear to have helped Southern with its nuclear ambitions. In September, the Energy Department announced $3.7 billion in additional loan guarantees for Southern’s reactor project, sending Southern’s stock higher.
“They’ve just been very engaged and very helpful,” Fanning said of the administration.
Under Fanning, Southern has faced a world of challenge. “Some of it was within the control of the company,’’ said Shahriar Pourreza, a utility analyst for Guggenheim Securities, “and some of it wasn’t.”
©2017 Bloomberg L.P.