Tuesday, November 13, 2012

How to Celebrate Nuclear Energy’s Big Win

Since Japan�s earthquake and tsunami and the resulting Fukushima reactor disaster, the nuclear energy industry certainly has taken it on the chin. The meltdown at the nuclear plant has become synonymous with renewed anxiety about the safety and ethics of atomic energy. To that end, a variety of nations, such as Germany and Switzerland, have begun plans to wind down their nuclear operations and stall new reactor projects.

Some analysts and market pundits have called these reactions the end of the �nuclear renaissance.� However, they might want to rethink their positions. A recent landmark decision could usher in a resurgence of nuclear energy growth here in the United States.

Waiting for Decades

For the first time in nearly 34 years, the U.S. Nuclear Regulatory Commission has approved licenses for the construction of two new nuclear reactors within the nation�s borders. The regulating body voted 4-to-1 on Thursday to award utility Southern Company (NYSE:SO) a license to build two Westinghouse AP 1000 reactors at its Vogtle plant near Augusta, Ga. The last nuclear plant to be given a license by NRC was back in 1978, just more than a year before the Three Mile Island reactor accident in Pennsylvania. Although new nuclear power plants have come online in the U.S. during the past 20 years, the plants received their initial permits prior to 1978. After Three Mile Island, the NRC adopted more stringent safety standards, construction costs for nuclear plants skyrocketed and the number of new plants dwindled to zero.

For the nuclear power industry, the recent decision by the NRC to approve a new project is monumental. Currently, 13 utilities including Scana (NYSE:SCG), Exelon (NYSE:EXC) and Duke Energy (NYSE:DUK) have applied for construction and operating licenses to build 25 new reactors. Southern�s approval could serve as a “starting gun” to getting these projects going.

Giving the state of the economy and the relatively cheap baseload power that nuclear energy provides, the appeal of approving and building these multiyear-long projects certainly holds merit. The Obama administration, through the Department of Energy, granted Southern an $8.3 billion federal loan guarantee for building the new two reactors as an incentive. If the project goes well, about 3,500 new employees could be working at the plant within two years. Congress remains vocal on adding new nuclear capacity to America�s grid. Republican Sen. Lamar Alexander, in response to Southern�s approval, urged the NRC to �act promptly on the applications awaiting approval for 14 reactors of the same model,” according toThe New York Times.

On the flip side, the cost to build a new nuclear plant is something to consider. Currently, these expenses exceed traditional natural gas plants and some other renewable alternatives. A typical natural gas plant costs about $1 billion to build 1 GW worth of generation capacity. Southern�s nuclear plant will cost $14 billion for just 2.2 GW of generation power. The price tag for laying the foundation and water pipelines leading into the reactor alone is around $4 billion. In addition, the shale gas revolution has led to much lower input costs for natural gas plants. These high costs were one of main reasons behind NRG Energy‘s (NYSE:NRG) decision to cancel its nuclear ambitions last year.

Playing the NRC Verdict

While nuclear reactors likely won�t start popping up all across the country, the NRC�s approval of Southern�s project can be seen as a major win for the industry. The obvious play would be the utility itself. However, that might not be the best route for investors.

While Southern is a quality utility that pays great dividends, the news of the reactor approval has been telegraphed into the power producer�s shares for some time now. The stock barely budged when the NRC�s verdict was announced last Thursday. In addition, nuclear reactors have a history of high cost overruns. Tennessee�s Watts Bar reactor, which currently is under construction, is behind schedule and costs already are “significantly exceeding” previous building estimates of $2.5 billion.

Given the historical challenges when building a project of this size, Southern�s earnings results during the next few quarters could be poor. While the utility’s strong dividend isn�t in danger, any drag on earnings could affect the firm�s share price. For investors, there are better ways to play the NRC�s ruling and the potential return to the nuclear age.

Odds are, more of these pending licenses will get approved and prospectively built. The Market Vectors Nuclear Energy ETF (NYSE:NLR) offers a global �catch-all� option for passive investors. The fund tracks 24 different firms associated with the nuclear industry including Vogtle builder Shaw Group (NASDAQ:SHAW) and AP 1000 reactor designer Toshiba (PINK:TOSBF). Overall, the ETF has performed poorly since the Fukushima disaster, but it could see some extended gains as the U.S. re-enters the nuclear age.

Perhaps the best way to play the United States’ nuclear fleet is through the companies that supply the needed uranium fuel. Any new reactor construction certainly will increase demand, and even if this project somehow falls through, the nation�s current 104 reactors still need to be fueled. Canadian miner Cameco (NYSE:CCJ) should be investors’ top choice and currently holds around 16% of the world�s reserves.

Cameco’s latest outlook sees long-term uranium demand growing as construction of new reactors in China will overshadow the decommissioning of plants in Japan and Europe. Any additional U.S. reactor building activity will be icing on the cake for the firm. CCJ shares offer a 1.7% dividend and trade at a forward P/E of 17.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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