Promising Ways to Invest in Nuclear Energy
After simmering on the back burner for decades, generators of nuclear-powered electricity are all fired up.
It's been more than 20 years since Three Mile Island and Chernobyl, and nuclear power's long winter is finally beginning to thaw. Rising prices for oil and natural gas are making atomic energy seem cheap by comparison, and global-warming concerns are prompting reconsideration of clean-burning nuclear power. After a decade in which no nuclear-powered electric generating stations came online in the U.S., 31 new reactors are on the drawing boards.
The amount of electricity the U.S. uses is expected to rise 50% by 2030, the Department of Energy forecasts. To meet this new demand while keeping a lid on pollutants spewed by fossil-fuel plants, utilities are again eyeing nuclear power. Overseas, the same scenario is playing out on a grander scale. Worldwide electricity consumption is expected to double by 2030 as more and more residents of developing nations become able to afford TVs, computers and air conditioners. Currently, 28 reactors are under construction in China, India, Russia and elsewhere. The London-based World Energy Council says that meeting new demand for electricity while reducing the current level of emissions will require tripling the world's nuclear-plant capacity by 2050.
Although many crucial issues -- such as how to dispose of toxic byproducts -- must be resolved, nuclear power is clearly assuming a higher profile. Investor interest is rising as well. The bad news is that most companies involved in building new plants are privately held or trade only in foreign markets. An exception is General Electric (symbol GE), a major provider of boiling water reactors, which are found in 81 of the world's 442 nuclear plants. However, GE's energy business represents only about 10% of its $160 billion in annual revenues, and nuclear is only a portion of that. Moreover, GE recently agreed to pool its nuclear business in a joint venture with Japan's Hitachi.
There are two more-direct ways to invest in nuclear power: through utilities with big fleets of reliable, low-cost nuclear plants and through companies that mine and process uranium.
Nuclear generating stations' advantage over fossil-fuel plants becomes clear when you compare their costs of operation and upkeep. Nuclear plants cost about 1.72 cents per kilowatt-hour to operate, according to the Nuclear Energy Institute, an industry group. Compare that with 2.21 cents for coal plants, 7.51 cents for gas and 8.09 cents for oil. The difference is attributable primarily to fuel costs, which account for 78% to 94% of the tab for producing electricity at fossil-fuel plants but only 26% at nuclear plants. So even though the price of uranium, which powers nuclear plants, has risen sharply, it has far less impact on overall costs. "Because of rising gas and coal prices, nuclear has become a big cash machine for utilities," says Roger Conrad, editor of the newsletter Utility Forecaster.
A Brief History of Nuclear Power
1896 Antoine Becquerel discovers radioactivity.
1942 Scientists at the University of Chicago create the first self-sustaining nuclear reaction.
1951 An experimental nuclear reactor in Arco, Idaho, produces enough electricity to power four light bulbs.
1954 The Atomic Energy Act authorizes development of nuclear energy for civilian use.
1957 First commercial nuclear-powered generating station is built in Shippingport, Pa.
1979 Mechanical failure and human error cause loss of coolant from the reactor core at the Three Mile Island power plant, near Middletown, Pa.
1986 Chernobyl disaster occurs in Ukraine, then part of the Soviet Union. Contamination from the radioactive fallout spreads to 58,000 square miles.
1996 Last nuclear plant in the U.S., Watts Bar-1, in Spring City, Tenn., comes online.
2003 Dominion Power and Exelon file applications to build nuclear facilities in Virginia and Illinois, respectively. The facilities would be the first new reactors since 1996.
But it is enormously expensive to build nuclear plants: They cost as much as $2,000 per kilowatt-hour of output, compared with up to $1,500 for coal plants and $800 for gas plants, according to the International Energy Agency. So that's another argument for investing in companies that already own nuclear facilities. It takes years to clear regulatory hurdles for a new nuclear plant, build it and obtain a license for it to operate. "The advantage of owning nuclear today is that new competition is probably ten years away, at least," says John Kohli, manager of the Franklin Utilities fund.
Utility firms that are able to generate lots of cheap, nuclear-powered electricity and sell it on the open market have an even greater advantage. Entergy, for example, provides electricity to 2.7 million customers in four southern states. The business is heavily regulated, and profits are limited to what state overseers allow. But the New Orleans-based firm also owns five nuclear plants in the Northeast that sell power primarily to wholesale customers and are largely unregulated. The merchant-power business provides 14% of Entergy's revenues, but in the third quarter of 2006 it accounted for 28% of operating profits.
And as rising gas and oil prices push up the cost of power from competing plants, Entergy will be able to charge more for future output. Goldman Sachs analyst Michael Lapides estimates that every $1 increase in the price of gas (now about $8 per million British thermal units) could boost Entergy's earnings per share by roughly 11%. He thinks Entergy (ETR) could earn almost $8.50 per share in 2010, compared with an expected $4.80 in 2006.
Entergy's regulated utility business, however, may be holding down the stock, which fetched $91 in mid December. Hurricane Katrina caused $1.5 billion of damage to the company's facilities and forced its New Orleans utility business into Chapter 11 bankruptcy reorganization. It remains unclear how much of the repair cost will be covered by insurance, rate increases and federal assistance.
The stock is near an all-time high, but, Lapides says, it's still cheaper than rivals' shares on a price-to-earnings basis. Further gains in the stock could come from progress in the bankruptcy case and a possible large-scale share buyback.
Like Entergy, Chicago-based Exelon is getting a big boost in profits from its largely nuclear-powered wholesale energy business. Exelon (EXC) operates two large utilities serving 5.2 million customers in Illinois and Pennsylvania. A third business, Exelon Nuclear, has interests in 17 atomic reactors, making Exelon the nation's largest nuclear-plant operator. The merchant-power business is expected to account for 65% of operating profits in 2007, up from 50% in '06, says Standard & Poor's analyst Justin McCann.
But Exelon's shares, recently $61, have encountered some turbulence. A merger with Public Service Enterprise Group was scuttled after regulators in New Jersey, where PSE is based, balked. And Illinois regulators recently decided to allow just $8 million of a requested $317 million rate hike for Exelon's Chicago utility. Illinois regulators also want to extend an expiring rate freeze, which could force Exelon to buy power at market rates and sell it to customers at a loss.
Still, S&P's McCann says, the stock could be worth $70 in a year. He anticipates operating profits in 2007 of $4.55 per share, up 37% from 2006 earnings, thanks in part to higher wholesale prices and profit margins in merchant energy.
A riskier but potentially more rewarding way to invest in nuclear energy is through uranium. Its price has soared because of rising demand and years of under-investment by mining firms. In addition, surplus government uranium from weapons stockpiles, which in recent decades supplemented the supply, is running thin. Today, uranium costs $63 a pound, up from $12 three years ago. Fadi Shadid, an analyst at investment bank Friedman Billings Ramsey, expects the demand for uranium to exceed supply by 10% annually through 2015 and looks for prices to hit $80 a pound within the next few years.
That's why he is still bullish on Cameco (CCJ), a Canadian uranium miner, despite the more than sevenfold increase in its share price since 2003.
Nuclear utilities buy uranium under long-term contracts, and Shadid estimates that Cameco currently realizes about $21 per pound for its output. About 30% of the company's contracts will end in 2008, just as prices are peaking, he says. In addition, Cameco has a new mine coming online, and when it reaches full production in 2010, it will boost the company's uranium output by 50%. Shadid sees earnings per share rising from about $1.10 in 2006 to $4.17 in 2011. The stock, recently $40, could be worth $46 in a year, he says.
Shadid also likes USEC, which operates the only uranium-enrichment facility in the U.S. Enrichment is a process that increases the potency of natural uranium. USEC's plant, in Paducah, Ky., uses an energy-intensive enrichment process, called gaseous diffusion, that many consider outmoded. But a Piketon, Ohio, plant that uses centrifugal separation, a newer method, is expected to begin operations in 2009.
The Piketon plant is commercially unproven, however, and the project's cost, $2.5 billion, is more than twice the company's market value and will depress earnings for several years. The stock (USU), recently $13, is down 16% since January 2006. But as the new technology gains credibility, Shadid says, investors will warm to USEC's shares. He thinks they could be worth $22 in a year.