Flipping Nuclear Power Back On

CORPORATE TITANS FLUSH WITH POWER can veer into some strange purchases. Gilded shower curtains. Sculpted light switches. And, it turns out, even yellowcake uranium: Before credit really got crunched, now-bankrupt Lehman Brothers picked up about a half million pounds of nuclear feedstock. It was probably bad timing (considering how prices have fallen), but not necessarily a bad investment idea.

Nuclear-power generation is experiencing a revival. While there hasn't been a new plant started since the Three Mile Island fiasco in 1979 (www.eia.doe.gov/emeu/aer/txt/ptb0901... ), the Nuclear Regulatory Commission (www.nrc.gov) is currently processing applications for 26 new facilities, which amounts to only half the capacity needed for nuclear to continue meeting 20% of America's energy needs.

Using Energy Information Administration's (www.eia.doe.gov) projections that U.S. electricity demand will grow 50% over the next 30 years, NRC Commissioner Kristine Svinicki figures that America will need the equivalent of 50 new 1,000-megawatt nuclear-power plants just to maintain the status quo (www.nrc.gov/reading-rm/doc-collectio... ).

More importantly for investors, while America has mixed feelings about this non-carbon-emitting energy source, other industrialized countries are stepping up their decades-old nuclear commitment; 75% of France's electricity is nuclear-generated. More than 60 new nuclear plants should come online overseas by 2015 (http://nuclear.tamu.edu/features/fea... ).

Activity here and overseas should help Lehman's uranium position, but there are easier ways to go nuclear than buying radioactive feedstock. "Go upstream to companies that collect regular income from plant construction, maintenance and fuel supply," suggests Morningstar ELF Strategist Paul Justice (www.morningstar.com).

Companies like Cameco (ticker: CCJ), BHP Billiton (BHP), Rio Tinto (RTP) and U.S. Energy (USEG) mine and/or trade uranium, although its value contribution to their shares is overshadowed by the many more popular metals these firms also trade. USEC (USU) processes it for use, and Fluor (FLR), Jacobs Engineering (JEC), France's Areva (CEI.France) and The Shaw Group (SGR) build and maintain both processing facilities and power plants.

Entergy (ETR) is America's second largest provider of nuclear power behind Chicago-based Exelon (EXC). But nuclear energy also figures prominently in the portfolios of a dozen other large electric utilities (www.eia.doe.gov/cneaf/nuclear/page/a... ) —including Constellation Energy (CEG), Duke Energy (DUK), FPL Group (FPL) and Southern Company (SO), which Barron's recently recommended ("The Blossoming of Nuclear Power," January 12, 2009). They use nuclear-, gas- and coal fired plants to meet baseload demand for uninterrupted power over the energy grid, while increasing capacity in renewable sources—from geothermal and hydro power to wind and solar farms. Generally, investors in these utilities get solid balance sheets; relatively low debt (for capital-expenditure-oriented utilities); reliable cash flows from regulated service areas; growth in their commercial divisions; and sizable yields ("Low Cost Energy," January 12, 2009).

And these outfits are strong enough to ride out current flagging energy demand, and are positioned to benefit when electricity use picks up again, no matter which energy source becomes ascendent.

Exelon's just-completed first quarter exemplifies the strategy. Amid slumping demand and increased customer delinquencies, it increased net income 23% on only a 4.5% top-line improvement by cutting costs and increasing nuclear utilization (www.exeloncorp.com/aboutus/news/pres... ).

The company delivered quarterly earnings at the high end of guidance, and has reaffirmed full-year guidance.

Noting its wide economic moat and 4.4% yield, Morningstar Senior Analyst Travis Miller recently gave Exelon shares a five star rating, when they were trading around $45, and he pegged air value at $76.

Despite being politically unpopular, nuclear utilities like Exelon could actually profit if a carbon-tax system is introduced, says Miller, and are lobbying Congress to get a cap-and-trade system that doesn't undermine their regulated monopolies. Besides the utilities mentioned, he likes American Electric Power (AEP) and Public Service Enterprise Group (PEG), but is cool on Constellation Energy.

Three nuclear-oriented exchange traded funds let investors spread risk across the uranium and nuclear-power industries. Morningstar's Justice and ELF Digest (www.etfdigest.com) Publisher David Fry favor Van Eck Associate's (www.vaneck.com) Market Vectors Nuclear Energy ETF (NLR). Justice notes that NLR has exploited "first-mover advantage" to capture about 15 times the assets of second mover Barclays' (http://us.ishares.com) iShares S&P Global Nuclear Energy (NUCL), thus offering investors a tighter bid/ask spread.

On the Web, free blogs NEI Nuclear Notes (http://neinuclearnotes.blogspot.com) and Fuel Cycle Week (http://fuelcycle.blogspot.com) provide in-depth nuclear coverage with an emphasis on the political dimension. Nuclear Street (http://nuclearstreet.com), Idaho Samizdat (http://djysrv.blogspot.com) and Atomic Insights (http://atomicinsights.blogspot.com) deliver alternative and often very technical viewpoints for nuclear wonks.

EIA (www.eia.doe.gov/fuelnuclear.html), the Federal Energy Regulatory Commission (www.ferc.gov) and industry trade group Nuclear Energy Institute (www.nei.org/resourcesandstats) are wellsprings of comparative data on a variety of power sources. But careful study is needed to make sense of these competing commodity markets. For example, nuclear enjoys the advantage of being our lowest-cost power source (www.nei.org/filefolder/US_Electricit... ). But include power-plant capital costs, and that advantage tips toward natural gas—based on a complex set of assumptions (www.ferc.gov/legal/staffreports/06-1... ).

Energy investing isn't for anyone without the time or inclination to do careful research