MSN Money, May 4, 2006


With 50 new nuclear reactors expected to go online by 2020, potential winners abound in this once-beleaguered field. Here are some of the best plays.

By Michael Brush

Last week, when President Bush urged the nation to take action to deal with rising energy costs, his comments confirmed what many experts have been saying all along: It's time to go nuclear.

And thanks to record gas prices and looming fossil-fuel shortages -- not to mention an expected big spike in the demand for electricity in the next decade -- a nuclear renaissance may indeed be at hand.

"It is not a matter of if, but when," says Dan Keuter, the vice president for nuclear business development at Entergy (ETR, news, msgs), a power company. "We are very bullish on the outlook for nuclear power."

Because global electricity consumption will double in the next 25 years -- while reserves of fossil fuels begin to run dry -- experts believe at least 50 new nuclear power plants will be up and running by 2020. Most of the plants will be built in China and India, but ground could be broken on three or four plants in the U.S. in as little as five years. It has been three decades since a nuclear plant was built in this country. Start investing with $100.

One way for investors to play the growing use of nuclear power -- and other alternatives to fossil fuel like wind and solar power -- is to own shares of equipment producers like General Electric (GE, news, msgs). It isn't exactly a pure play. But it stands to benefit from double-digit revenue growth in these areas.

Near-term, the best way to play nuclear power is to hold shares of electrical utilities that own the most nuclear plants. Power companies like Exelon (EXC, news, msgs), Entergy, and Dominion Resources (D, news, msgs) had the foresight to snap up dozens of nuclear plants on the cheap in recent years. Now they have a cost advantage as the price of natural gas, coal and oil shoot higher, squeezing competitors that make most of their electricity from fossil fuels.

Another approach -- for long-term investors -- is to buy shares of uranium mining and enrichment companies like Cameco (CCJ, news, msgs) and USEC (USU, news, msgs).

Before we get to the details on these plays, here's a look at why we are on the verge of a nuclear renaissance.

Governments turn to the nuclear option

The International Energy Agency thinks global electricity consumption will double by 2030. Given the limited supplies of fossil fuels, many governments realize they'll need to be switching on nuclear power plants to meet that demand. France -- the extreme case -- already gets 80% of its power from nuclear plants.

But the global average is more like 16%. To change that, countries around the world are rethinking nuclear energy. Finland, for example, is breaking ground on a new nuclear power plant. China plans to fire up at least two new reactors a year for the next 15 years.

In the U.S., President Bush clearly wants nuclear energy to play a major role in weaning the country off fossil fuels. He recently proposed ordering government agencies to compensate power operators for regulatory delays.

A new generation of nuclear power plants will be safer

The next generation of nuclear reactors will be safer than the ones we have now. The chief difference: The way they deliver huge amounts of water to contain the core in case of a meltdown. Older reactors use a series of pumps, valves and pipes that rely on humans and electricity to work. Newer reactors will have big tanks above the reactor ready to simply dump water on the core in case there's a problem. Despite fatal mishaps abroad, reactors in the U.S. have never killed or injured civilians, says Keuter of Entergy.

There's another advantage that makes nuclear power a more secure energy source, says Caroline Slama, author of a comprehensive guide to investing in nuclear energy published by Societe Generale Group and SG Cowen late last year. Uranium is produced in politically stable regions such as Canada and Australia. But gas and oil come mainly from less stable regions.

Nuclear power may be cheaper

Comparing the costs of the different fuels used to power turbines can be tricky -- because you have to make so many assumptions. But nuclear energy will be cheaper if you make a few reasonable educated guesses.

First, because they are expensive to build, nuclear plants would have to operate near capacity levels to get the most bang for the buck. Next, competing fuels like natural gas would have to remain expensive. Finally, if governments tax carbon emissions at power plants using fossil fuels -- a likely option -- nuclear energy will be comparatively cheap, points out John Holdren, a professor of environmental policy at Harvard University.

Other renewable sources not enough

With the help of government subsidies, power companies have experimented with "renewable" energy sources like wind and solar power for years. So far, they're not convinced there's a bright future in the near term. Part of the problem with wind power is that turbines only run about 35% of the time. So it is hard to generate enough electricity to cover costs in a way that makes the power cheap enough to compete, says Helen Howes, the vice president of environment, health and safety at Exelon.

Ironically, given that many environmentalists oppose nuclear energy, atomic power may be the best way to cut down on so-called greenhouse- gas emissions, which may cause global warming.

If global nuclear capacity tripled by 2050, that would cut the expected increase in carbon emissions by a fourth, says a 2003 Massachusetts Institute of Technology study called "the Future of Nuclear Power."

The timeline

So what will be built, where, and when? By far, the biggest growth will come in China and India. Plans for boosting nuclear capacity suggest we'll see 29 new plants in China over the next 15 years and 17 new ones in India, says Peter Wells, marketing manager for GE Energy's nuclear business.

In the U.S., several power companies are hoping to finish site selection for plants this summer. Applications will go in by 2008 and construction could start in 2010. The plants would be finished four or five years later. Expect three or four new plants in this first phase of construction.

One obstacle: Energy policy makers will have to overcome political opposition to DOE plans to store nuclear waste inside Yucca Mountain, in Nevada. "Before building a new plant and creating additional waste, we need to know the long-term strategy for the waste," says Marilyn Kray, the vice president of nuclear development at Exelon.

Here's a brief look at how to play the nuclear renaissance as an investor.

Utilities: Nuclear pays now

Forward-thinking utilities like Entergy snapped up lots of nuclear power plants in recent years. Now that natural gas, coal and oil are so much more expensive, payday has arrived. "It definitely gives us an advantage," says Entergy's Keuter, who's in charge of buying nuclear plants for the utility. "Our cost of electricity is substantially less than the competition."

According to the Federal Energy Regulatory Commission, nuclear power cost 1.72 cents per kilowatt hour in 2003, while gas and oil cost above 5.5 cents. Coal cost about 1.8 cents.

Roger Conrad, editor of the investment newsletter Utility Forecaster, says our nation's 103 nuclear power plants are concentrated in the hands of six utility companies -- which has made those companies good investments. "They are a huge profit center for these companies," says Conrad.

Here are the three with the most nuclear reactors, along with Conrad's buy limit for the stocks: Entergy (under $70 per share), Exelon (under $46) and Dominion Resources (under $72). Three others with the most nuclear power plants are Southern Company (SO, news, msgs) (Conrad's buy limit: under $30), Constellation Energy Group (CEG, news, msgs) (under $45) and FPL Group (FPL, news, msgs) (under $40).

Uranium companies: Playing a price jump

Cameco, a Canadian mining company, has about 17% of the global market for uranium. Uranium prices tripled to $24 per pound recently when Russia reversed plans to release nuclear warheads for commercial uranium extraction. Cameco will have to wait three or for years to see the benefits, since it currently operates under long-term contracts.

Figuring out how to invest in uranium enrichment is simple: There's only one publicly traded company that does it, USEC. Barriers to entry in the business are high, since the technology behind enriching uranium remains classified. The company is developing a new enrichment technology that should reduce costs considerably, says Steven Wingfield, who handles USEC investor relations.

General Electric: More than just nuclear

GE is a blunt way to play the nuclear and renewable energy themes because its units in those areas net around $4 billion in sales, small compared to the company's $152 billion in annual revenue.

GE is a leader in equipment and services used in nuclear power generation. The company generates about $1.5 billion in revenue a year here. It expects this market to grow about 5% a year over in the medium term.

Thanks to generous tax credits for the development of wind-powered electricity, that side of GE's energy business is going gangbusters. Wind-turbine sales should generate $2.25 billion this year. The company expects double-digit growth in this market for several years. "We see very strong demand for our products and services," says Mark Little, the vice president of power generation for GE Energy. "The demand is so strong, if we could make more turbines we would sell more."

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.