New Life for Nuclear

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There's not much patience or really appetite to take on the risk for a project of that magnitude for that time frame. And that's why we're excited about the small modular reactors. It's similar nuclear technology, but it's in smaller chunks.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Lynn Good. She's the CEO of Duke Energy, the big electric and gas utility and a major player in nuclear power. Listeners, readers sometimes ask me why the U.S. isn't building more nuclear plants. In this episode, we'll talk with Lynn about that and more. And we'll hear from the CEO of Trex, a maker of composite building materials, about the latest shift in home improvement demand. Listening in is our audio producer Jackson. Hi, Jackson.

Hi, Jack.

Hey, listen, I do not want to get too into the weeds on nuclear science during this episode. I'm going to keep it high level. I don't plan to say much about bundling fuel rods together to form reactor cores, or how in light water reactors, the water can serve as both a coolant and the moderator. I won't get into how the moderator slows the neutrons that are produced by fission in order to sustain a chain reaction. Let's just keep it casual, you know. Everyone can follow.

Are you reading Wikipedia?

I mean, first, that's hurtful. And second, it's a page called Nuclear 101 from the Department of Energy. And if I'm being honest, it feels more like a 201. I just wanted to try to say some smart stuff, but it didn't go that well.

Well, we'll sign you up for some discussion sections.

Moving on. A nuclear emergency siren went off down the street from my home earlier this year, which was nothing to be alarmed about. My town's about 40 miles north of Midtown Manhattan, and it's close to another town with a nuclear power plant. There are 172 emergency sirens within a 10-mile radius of the plant, and they have to be tested every so often, and the tests are announced ahead of time, and the sirens are quite loud, which is unusual in an otherwise woodsy and calm setting. Here's something else that's unusual. There's no more nuclear power. The plant was shut down for good ahead of schedule last year. Folks advocating for the shutdown said it was too risky to have a nuclear plant that close to such a big city. One group that advocates for protecting the Hudson River called Riverkeeper said there could be a terrorist attack or an earthquake. They also said the plant's antiquated cooling system kills a lot of fish. There were other arguments. You might agree or disagree with them. But there were also some economic realities. Across the U.S., many nuclear power plants have struggled to compete on costs with plants fired with cheap, abundant natural gas. Also, the cost of solar and wind power has come way down. So, the owner of the plant near me agreed to shut it down. And two things have happened as a result. First, carbon emissions have gone up. This wasn't a plant that could be replaced right away with solar panels. It generated a quarter of the electricity for New York City. The lost power had to be replaced with natural gas. Second, the price of natural gas shot higher. That's partly due to power generation and partly to increased exports of liquefied natural gas, especially as Russia's invasion of Ukraine roiled energy markets. In addition to increased supply charges, the local electric company has filed a case with its regulator to raise electricity charges by more than 17%. The area already has some of the highest electricity costs in the country. Now, I mention all of this because although wind and solar power tend to dominate the clean energy discussion, nuclear power is larger than either of them. But there are almost no new U.S. nuclear projects. China has 17. India has 6. The average age of the 90-some U.S. nuclear plants is close to 40, which is how long many are licensed to run. That raises the question of whether America is headed for a nuclear retirement rush. To prevent that from happening, the Inflation Reduction Act, which includes all sorts of tax breaks for solar power, electric vehicles, and other greenhouse gas-fighting investments, also includes tax credits designed to keep existing nuclear plants running. I had a chance recently to speak with a woman who runs America's largest regulated nuclear power business. Lynn Good is CEO of Duke Energy, which distributes electricity and natural gas in the Southeast and Midwest, and has solar and wind assets. I asked Lynn, why isn't America building any more nuclear plants?

The technology that is out there now for new nuclear is what I would call large-scale nuclear. So you're building it at 1,000, 2,000 megawatts. And that number may not mean anything, but it costs a lot. It takes a long time. Billions of dollars, years, up to a decade. And in this world, particularly in the US, where it's private capital that's being used to construct these plants, there's not much patience or really appetite to take on the risk for a project of that magnitude for that timeframe. And that's why we're excited about the small modular reactors. It's similar nuclear technology, but it's in smaller chunks, 200 to 300 megawatts. And it's called modular because the construction process can be accomplished in large measure outside of the field and then brought to the field. It should make construction more timely so that the combination of price and schedule is something that could be more predictable.

Proponents say that small reactors can be made safer than traditional reactors in ways that bring down their costs. They also say that these reactors could one day be manufactured largely in factories before being assembled on site. That would also bring down costs and reduce delays. I'm not sure whether smaller reactors would have attracted less opposition in my area than large ones, but Lynn sees two types of locations that she thinks would be ideal.

So I think about in my service territory, placing them in a retired coal facility, in the location of a retired coal facility, could be a terrific way to make use of existing transmission infrastructure. Also, potentially within the footprint that I own for a large-scale nuclear plant, the security footprint, etc., is already there.

Lynn says you'd have to place these plants only where communities are ready to accept them. She says there's strong support in the Carolinas, where Duke's customers get about half their power from nuclear. I asked when something like small modular reactors might conceivably go into commercial operation.

I would say late '20s into the early '30s. There are a couple of demonstration projects in the US, one on the small modular reactor I'm talking about, but also on something called advanced nuclear, which is a new form of nuclear technology coupled with storage. So that you have greater dispatchability. You can cause the plant to operate when you need it to. We're a believer that a lot of investment piloting demonstration projects should be focused in this decade so that we're getting to that commercial scale down the price curve. We're building enough of them that we feel like we have confidence on price and schedule. That would make them viable for the 2030s. So an advocate for robust R&D investment in this decade so that the technology is available in the next decade.

Duke should benefit from the nuclear tax credits that are embedded in the Inflation Reduction Act. I asked Lynn to explain how those tax credits benefit the rest of us.

There are a number of nuclear plants located in markets that are difficult for them to be financially viable. So what the tax credits are intended to do in the commercial market is really to underpin those plants for the next 9 years to say they're an important part of our journey to a low-carbon future. Let's make sure we're not closing them prematurely.

Nuclear is only part of Duke's clean energy plan. The company uses the acronym ZELFER to describe a range of technologies it supports. I asked about that. I was a little bit off on the acronym. Duke is using an acronym ZEFER. ZEFER. It sounds like it could be like a wizard from one of the Harry Potter stories or something like that. But I know, I know the Z is zero emission.

Yes.

And I know that one piece of it is the advanced nuclear that you've talked about.

So it's zero-emitting load-following. So it's actually ZELFR.

I missed the L. It sounds even more like a wizard. Go ahead.

Go ahead.

Right out of Hogwarts. So zero-emitting load-following resource. And so that's just, you know, kind of our acronym to say there's value to a resource that we can control to follow the usage that our customers demand so that when they get up in the morning on a, you know, wintry morning at 7 AM, turn on the coffee machine, make the lunch for their children going to school, that I have a resource that I can turn on when they need it.

That's the load following part. That means that it's there when I want it, not when the sun decides to shine and the wind decides to blow.

That's right. I can control it. That's the role that fossil fuels play today. I followed load with gas plants. I followed load with coal plants. I don't follow load with nuclear. I turn nuclear on and leave it on. I don't follow load with my solar. I take the power when the sun is shining. I might put a battery with it and I can move it 4 hours. A lithium battery today has that capability. So what we're looking for is let's find that technology that is not only zero-emitting but has the characteristics that can follow load. An example would be hydrogen running in a gas turbine, or gas and hydrogen blended together. A storage technology that is more than 4 hours, it gives me the ability to move power over a longer period of time. Think about nuclear coupled with molten salt storage, so that I can keep that reactor running all the time. When it's not needed to serve load, it stores the power, and then when my customers need it, I can discharge the battery. It's those types of technologies that we're advocating for more research and development so that when I get to that last 20% of carbon reduction, 30% that I need to achieve, I have a tool because today I don't have one.

Duke owns a big stake in solar and wind generation. At the time of its latest earnings report, it said it was initiating a strategic review of those assets. That's usually code for, we'll sell it if we can get a good price. Many companies are now investing aggressively in solar and wind. I asked Lynn why she thinks it might be a good time to sell.

Duke Energy has a couple of attributes to it. 95% of what we do, Jack, is regulated natural gas and electricity, where electricity is by far the largest. We also operate local distribution companies. And 5% is a commercial renewables business where we have been in the business over the last decade plus of building solar and wind all over the US. Now, as I look at the utilities that we are operating in, there are clear points of view about how to transition the generation fleet to a cleaner future. And so our investments in the regulated business are accelerating. And as a result of that, we think it's appropriate to step back, make some choices, and really look at placing that commercial business, which is also capable of growing, in the hands of a strategic buyer that'll be able to focus on that growth while we are focused on the acceleration and investment in our regulated utilities.

So I shouldn't be reading into this as some kind of economic judgment about the solar and wind business, the economics there. Still an attractive business, just a small piece for you, and you'd rather spend the money in your regulated business. Have I got that right?

Jack, I think that's exactly right. And our commitment to renewables, our commitment commitment to carbon reduction is unchanged. And so this is just a choice, you know, capital allocation. Where do I spend the money? Where do I believe that I have the greatest opportunity to earn a return consistent with what our shareholders expect, our customers require? And that's what we're really trying to accomplish with this review.

I asked Lynn whether electricity is still a growth market for Duke. She says yes, especially with all the people moving into her coverage areas. And the move toward electrification, for example, replacing gasoline cars with battery-powered ones. Duke shares have a 3.7% dividend yield, and the company's long-term goal is to grow earnings per share by 5 to 7% a year. Together, those are meant to provide potential for 10%+ yearly returns over time, but of course, actual returns could be much lower or higher. One last thing. I asked Lynn to tell me about new technology that Duke is using to become more efficient.

Drones would be a great example for us. In order to monitor, observe, and maintain a solar farm, we will fly a drone over the farm to give us a visual of how the farm is producing power. We know how it should look. We compare the photograph to what we know a functioning solar farm should look like. And if we see an anomaly, that's no— that's when we know to dispatch someone for repair. When a hurricane blows through and often there are trees down, you can't get vehicles around, we can fly a drone. We're using robots for inspections in a nuclear power plant, for example. We can dispatch a robot to take advantage of their characteristics to do certain inspections. The last thing I'd mention is we're working on a partnership with Microsoft and Accenture to use satellite technology to find methane leaks. So they can pass the satellite over with imagery, show us all, all the way down to a meter where we might have a methane leak so that we can dispatch repairs timely. And that's part of our commitment to get to net zero methane by 2030.

Thank you, Lynn. Coming up, what, if anything, can a guidance surprise from a decking company called Trex tell us about the health of the home improvement market? And upcoming results for the likes of Home Depot and Lowe's. That's next after this quick break.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Welcome back, Jackson. Anything to add before we move forward into lumber?

Well, I just came across this Wikipedia page, list of unsolved problems in philosophy.

You've been hitting the button again, the button that takes you to the random Wikipedia page.

Yes, I have.

Okay, go ahead. Unsolved philosophy.

This is one of them here. It's known as the Sorites paradox.

First of all, I have a very good feeling about this. I'm solving it. Go ahead.

This is otherwise known as the paradox of the heap. The question is, is a bale of hay still a bale of hay if you remove one straw?

Yes.

All right. So if so, is it still a bale of hay if you remove another straw?

Yes.

And if you, if you continue this way, right, you'll eventually deplete the entire bale of hay. And the question is, at what point is it no longer a bale of hay?

It's a bit, it's a bale. It's strung together. It's got to be, has to be boxy. If it's still somewhat boxy, it's a bale. If you hand me a heap, I'm going to say, look, I didn't ask you for a heap of hay.

I think you solved it.

Right?

I'll have to edit this page and put this in the solved philosophy paradoxes Wikipedia page.

Let's call it the Streetwise Solution. Lumber has been bananas over the past few years. We've talked about this before on this podcast. One benchmark contract for 2x4s— that's a cut of wood used by builders— went from less than $400 before the pandemic to over $1,600 by spring of last year, and then less than $500 by the end of summer last year. Then back over $1,400 early this year, and more recently just under $600. Lumber yards and stores have struggled to accurately predict demand. I spoke recently with Brian Fairbanks, the CEO of a company called Trex, which I guess you could say competes with lumber. If you want to build something for outside like a deck, you can use pressure-treated lumber, which holds up to the elements for longer than regular wood, but You know what, I'll let Brian explain.

And along with that purchase comes many years of hassle with fading, staining, scratching, the annual maintenance that you need to do on a wood deck. And then generally after 10 to say 12 years, probably looking at replacing that deck due to the rot that occurs on it. With a Trex deck, you're buying a deck that will last 25+ years. Some of our first-generation products launched back in the early 1990s are still doing great in various commercial as well as residential environments.

So that's the pitch. Trex decking costs more than wood, but the company says it lasts a lot longer. It's made from mostly recycled materials like wood scraps and the plastic you get from repurposing old shopping bags. The company sells through Home Depot, Lowe's, and other stores that cater to builders And it just reported quarterly financial results and shares tumbled 15%. That seems related to company guidance.

What we're continuing to see is a good underlying strength of the consumer, but our channel has built inventory basically to support a 15 to 20% type growth, which is what we've seen over the past couple of years. We expect that inventory will come out in the second half of the year, but the underlying sales of both decking and railing will remain at elevated levels.

A company like Trex records revenues as it sells products to stores, not when those stores resell those products to their customers. So if stores are selling more inventory than they're replacing, Trex is losing a piece of its revenues, at least until the stores get inventories down to the level they want. I asked Brian if he thinks the second half slowdown should be seen as a clue to what's going on in the housing market. He doesn't.

We're not particularly linked to the new home cycle, particularly. It's more around the remodeling spend. With higher interest rates and higher cost of homeownership today, we are seeing people stay in their existing homes longer, and the ability to be able to remodel and Add either indoor space or add outdoor space with a very effectively priced Trex deck is a way that you can add value to the home as well as improve the livability of it.

I asked Brian if he thinks the same type of pattern might be playing out across the industry. He does.

Yeah, we've gone through unprecedented times and growth over the past couple of years, first in 2020 as people were staying home, and in 2021 filling the channels as capacity came online. That's not something that is specific to the Trex company only. We've seen this across many different remodeling-type products, and even for that matter, new construction-type products out there. So no, I wouldn't be surprised if you hear other organizations report the same sort of things.

Home Depot is slated to report quarterly results this coming Tuesday. Followed by Lowe's on Wednesday. Bryan says that he's recently seen inflation moderate, although he hasn't seen costs come down, and he continues to be optimistic about long-term growth. The company is building a new plant in Little Rock, Arkansas, to serve the middle of the country in addition to the two plants it has now, one in the east and another in the west.

We see that the Trex brand name can reach beyond both decking and railing. But at least as we look out over the medium term today, composite decking accounts for about 25% of the overall decking industry on a linear foot basis. We see the opportunity to grow to 45 to 50% of the overall industry. That will be our primary focus as we move forward. Market research told us at 2 times the price of wood, we could convert that wood buyer into a composite buyer. So we're 3 years into that strategy. Since that time, we've converted about 600 to 700 basis points of market share to composites, and we expect that we'll be able to continue doing that 200-plus basis points per year going forward.

Thank you, Brian and Lynn, and thank all of you for listening. Jackson Cantrell is our producer. Subscribe to the podcast, rate it, review it, If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.