Markets & Finance

A U.S. Nuclear Power Renaissance


No accidents since 1979, environmental concerns over coal and gas, what's not to like about nukes? Here are some ways to play the new interest

From Standard & Poor's Equity ResearchDuring the past three decades, nuclear power has held a less than enviable place in the mind of the American public. Targeted by environmentalists concerned about the dangers of storing spent radioactive fuel, the nuclear power industry also earned the scorn of investors and power customers in the 1980s after several high-profile construction projects went bust, sticking lenders and customers with the bill.

That has changed. The U.S. nuclear power industry has been virtually accident-free since the meltdown of Three Mile Island Unit 2 in March, 1979, and mounting concerns over the environmental effects of greenhouse gas emissions have led activists to shift their attacks to coal-fired generators and the large amount of carbon dioxide they emit. Meanwhile, rising and increasingly volatile natural gas prices have made the economics of using it to generate electricity less attractive and, more important, less predictable.

Additionally, the old two-step process for approving new nuclear plants created a risk that a developer could get a license to build a plant, but then not receive a license to operate the plant once it was completed. The Nuclear Regulatory Commission has implemented a new streamlined process that combines the construction and operating licenses into one, eliminating that risk and reducing the overall cost of obtaining a license.

Competitive Platform for Generating Electricity

With electricity demand rising every year and the latest energy bill providing generous incentives for nuclear generation, the allure of building a new nuclear power plant is proving irresistible. Last week, New Jersey independent power producer NRG Energy (NRG; $43) filed the first application in almost 30 years to build a new nuclear power plant in the U.S., and other new reactors are in the works as well: The NRC expects to receive 21 applications for 32 reactors over the next two years.

"If companies can keep the price per kilowatt of capacity at relatively low levels, then nuclear power provides a competitive platform down the road for generating electricity," says Christopher Muir, equity analyst at Standard & Poor's covering independent power producers. "Most of these companies have been talking about building new nuclear plants for several years now. NRG was the first one to put something forward, and I think that there's going to be several more before the end of the year."

NRG will reap substantial benefits from being the first to the line with a full application from special incentives granted to the first set of applicants, Muir says. "[But] that's a long way off and shouldn't affect the stock at this point." Even so, NRG is still an attractive stock, he says, as are several other independent power producers—companies that own generating stations and sell their power in the wholesale market instead of supplying it to an affiliated distributor under regulated prices.

Fixed Costs Comparable to Coal

S&P has buy ratings on NRG and independent power producers Dynegy (DYN; $9), AES (AES; $20.31), Constellation Energy Group (CEG; $86), and Mirant (MIR; $40). (Constellation's joint venture with French nuclear reactor manufacturer Areva is expected to submit an application in 2008 for a new reactor.) Current electric power prices "are strong enough to generate interest in building new baseload generation—units that run even during nonpeak demand periods—including nuclear," Muir says.

Part of the reason for that is that the fixed costs of building new nuclear power generation units are now comparable to that of coal-fired generation when the cost of removing carbon dioxide is factored in. NRG's new reactors will cost about $2,200 per kilowatt of output capacity, while the cost of a technologically advanced coal plant that gasifies the coal before combustion and stores the carbon dioxide underground is about $2,135 per kilowatt, according to U.S. Energy Dept. figures.

While power generators themselves may not see any immediate rewards from a revival of the U.S. nuclear power industry, S&P thinks companies that design and build nuclear power plants definitely will benefit, now and for many years into the future. One of those companies is General Electric (GE; $42), which designed the reactor that NRG is proposing to build. Toshiba, which holds a majority stake in reactor designer Westinghouse Electric and has built several of the reactors that NRG wants, is managing the project.

A Boon to Construction

"The nuclear reactors being built in the U.S. will benefit GE," says Richard Tortoriello, equity analyst with S&P, adding that they will also benefit Hitachi, which is partnering with GE (GE) in Japan and the U.S. to build and maintain new nuclear plants. (S&P has a strong buy rating on GE.) At the same time, several nuclear power plants are already under construction outside the U.S., and more are planned, providing an even bigger prospect, Tortoriello says. "[While] U.S. nuclear power opportunities will certainly help profitability," he says, "for now, I think the international opportunities are greater."

Another group of stocks that will benefit from the nuclear renaissance is construction companies, who stand to win large contracts for engineering and construction work that will be needed. Toshiba hired Fluor (FLR; $148), based in Irving, Tex., to provide engineering, procurement, and construction services during the first phase of the project. S&P has a buy rating on Fluor.

A Fund to Look At

Fluor and other large construction companies, "Should benefit from the nuclear projects over the next 20 years," says Stewart Scharf, S&P equity analyst covering construction and engineering stocks. One company in particular to benefit will be Shaw Group (SGR; $60), which already works for 95% of existing U.S. nuclear power plants and owns 20% of Westinghouse. As part of that investment, Shaw has the right to provide construction services for projects using Westinghouse's new AP1000 reactor—four of which will be built in China and possibly dozens more around the world. S&P has a hold rating on Shaw.

Those looking for an easy way to participate in the global development of nuclear power may want to consider shares of Market Vectors Nuclear Energy ETF Trust, an exchange-traded fund that began trading in August, 2007, and holds shares of many overseas companies that are active in the nuclear power industry and are not listed in the U.S.


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