BAD NUKES MAY BE GOOD BETS Investors could score big gains by taking a chance on utilities that got lost building nuclear power plants.
By JOHN J. CURRAN RESEARCH ASSOCIATES Joshua Mendes and Andrew Evan Serwer

(FORTUNE Magazine) – Investors looking for a double scoop of capital gains have been finding it in doubly troubled nuclear utilities -- companies that not only own nuclear power plants but also have had severe enough problems with them to reduce or eliminate some dividends. Even General Public Utilities, owner of Three Mile Island, the granddaddy of nuclear nightmares, has seen its stock shoot up nearly 150% over the past two years. Analysts think there are more big gains in these stocks to come. Most of the utilities are still mired in problems. Some have yet to finish building nuclear plants. Others with completed plants are waiting for permission to turn them on or for the rate increases they need to pay for them. Analysts who like the stocks are quick to caution that down-and-out nuclear utilities, ''the bottom of the barrels,'' as one analyst calls them, are not conservative investments. Many of the stocks pay no dividend, so the return, if any, will come as their problems are resolved. Still, analysts feel that the potential payoff on some of these stocks is too good to pass up. Even today the outlook for General Public Utilities will give most investors pause. The March 1979 mishap at Three Mile Island drove the stock down nearly 80% and cast a cloud over all nuclear utilities. But its rebound from less than $4 per share in 1981 to $19 recently has investors and analysts taking a closer look. Three Mile Island nuclear unit No. 2, the one that leaked contaminated steam, is still mothballed. Nuclear unit No. 1 was also shut down at the same time. Late last year the Nuclear Regulatory Commission finally permitted the utility to put unit No. 1 back into service. Daniele Seitz, a utility analyst at Smith Barney, thinks the company's recent price run-up presages yet another. At $19 per share, she says, General Public Utilities is still not selling at book value. Even after subtracting the value of unit No. 2, she figures, the company's book value should be $25 per share by the end of 1986. That's more than 30% above the current stock price. For Middle South Utilities, which supplies power to Arkansas, Louisiana, Mississippi, and Missouri, the problem has been not nuclear mishaps but regulators, who have denied the utility permission to recover the costs of its Waterford No. 3 and Grand Gulf No. 1 units. Faced with delays in rate increases, the utility paid no dividends in the fourth quarter of 1985. But new rate agreements with state regulators for both plants should improve Middle South's cash position dramatically. Mark Luftig, a utility analyst at Salomon Brothers, expects that by midyear Middle South should be able to restore at least part of the dividend. The big 1985 loss reported by Consumers Power (see table) is only a small part of the Michigan-based utility's problems. It is stuck with a partly completed nuclear plant at Midland; construction stopped for lack of funds after the utility had spent $4.1 billion. As a result the utility took a fourth-quarter pretax write-down of $490 million but still intends to make up the remaining $3.6 billion. That could sound like wishful thinking, but Ernest Liu, an analyst at Goldman Sachs, thinks the utility's new chairman, William T. McCormick Jr., may have a workable plan. ''A couple of billion can be recovered through rate increases,'' says Liu, ''and the remaining $1.6 billion can be made up by converting Midland into a fossil fuel plant.'' If the plan succeeds, and Liu thinks it will, he foresees $1 to $1.50 per share in earnings by 1988 and restoration of the utility's dividend. In that scenario, Liu says Consumers Power's stock could rise 50%. Cost overruns at the still incomplete Seabrook nuclear plant in New Hampshire have clobbered the stocks of five of the utilities that have invested in the $5-billion project. Public Service of New Hampshire has the biggest share, a 35.6% interest; United Illuminating, which serves southern Connecticut, owns 17.5%. Both stocks have been hurt, but both should benefit a lot when the first unit goes on line, perhaps this year. Though both utilities may have to eat much of the big cost overrun, Fulton Holmes, an analyst at Thomson McKinnon, thinks Public Service of New Hampshire is worth a bet. Once it resumes paying dividends, which he expects will happen % within two years, Holmes thinks the stock price could begin marching back up to the $20 it commanded back in 1983. United Illuminating will be looking to Connecticut regulators for permission to recover its investment in Seabrook. Luftig at Salomon Brothers thinks they will come through. The utility's management evidently does too: it jacked its fourth-quarter dividend 16%. Kansas City Gas & Electric also has a dividend on the mend. Though the new Wolf Creek nuclear plant is problem-free, state regulators have permitted the utility to recover only part of its $1-billion-plus share of the construction costs. But Liu at Goldman Sachs says the company will now be able to depreciate the rest of its investment in the plant. Though the dividend was slashed 50% after an adverse court decision on cost recovery, Liu expects the dividend to be back to full strength by 1987. That could make the stock a high-voltage performer.