A Healthier Glow for Nuclear Power?

http://www.fool.com/news/commentary/2005/commentary05060802.htm

By Stephen D. Simpson, CFA
06/08/2005

"It's pronounced nu-cu-lar." -- Homer Simpson

For decades now, any notion of expanding our national use of nuclear power has been dead on arrival. For those few souls intrepid enough to suggest a new plant, a blizzard of regulations, protests, and lawsuits often render the idea all but irrelevant. But that could be about to change.

The present administration is certainly more "nuclear friendly" than others in the past, and many operators seem willing to try to get new facilities approved. What's more, the power grid in many parts of this country is shaky, and new electrical capacity has to be added to replace aging facilities and keep up with growing power demands.

The brief case for nuclear power
New power generation in the U.S. in recent decades has most often meant coal or gas-fired plants, supplemented by hydroelectric facilities and the occasional wind farm.

Unfortunately, all of these options have drawbacks.

Fossil fuel plants have two obvious problems -- pollution and reliance on finite sources of fuel. While progress is being made on the pollution side, recent price history with coal and natural gas highlights the potential threat of supply shortages. Hydroelectric power is an option only where geography permits, and there are growing environmental worries about the impact of dams on waterways. So, too, with wind power -- it's clean and effective, but not viable everywhere.

Nuclear power, then, appears to be a viable option today for expanding electrical capacity without simultaneously increasing our national reliance on hydrocarbons. With this in mind, let's now consider various aspects of this industry in greater depth.

Safety and pollution
Nuclear power -- more than perhaps any other industry -- draws immediate public concern regarding safety and pollution. People are understandably worried about future accidents like Three Mile Island and Chernobyl, but dwelling on the danger overshadows a significant fact: Engineers learned a great deal from those accidents, and as a result, newer plants are far safer.

Also, whether people acknowledge it or not, safety arguments always come down to relative risks -- what's acceptable and what isn't. Hundreds of people die in coal-mining accidents around the world on an annual basis, and it's virtually impossible to quantify the health risks of burning tons of hydrocarbons each year. Nuclear incidents can be horrible, but let's not pretend that the alternatives are risk-free.

Terrorism and theft are also valid concerns, but nuclear facilities are exceptionally secure -- protected with tons of concrete and steel -- and there are many other targets more vulnerable than a nuclear power plant. What's more, theft of nuclear waste is not as much of a security risk as alarmists believe, since nuclear power plants don't use weapons-grade material.

Like safety, pollution is a series of tradeoffs. Nuclear waste is highly toxic, but burning hydrocarbons releases more than 25 billion pounds of carbon dioxide into the atmosphere every year, to say nothing of sulfur, ammonia, and other pollutants. By comparison, an efficient nuclear reactor, where fuel rods are reprocessed, would produce about 1 cubic meter of waste. So what's your preference -- a smaller amount of isolatable pollution, or a much larger amount of diffuse, nearly invisible pollution?

The economics of nuclear power
From a simple operational standpoint, nuclear fission is a considerably more efficient means of power generation than burning fossil fuels. Fissioning uranium unleashes massively more power than burning a like amount of coal.

A study commissioned by TVO, a Finnish electric company, found that nuclear power is almost half as cheap as coal and about two-thirds the price of gas-fired plants. Of course, the numbers depend on assumptions like initial plant costs and anticipated regulatory costs, but you see the point: Nuclear power can be cheap.

Finally, uranium is still a relatively plentiful resource in the world. What's more, much of the world's uranium is in Canada and Australia -- friendly, stable countries that don't present the threats of instability that OPEC and emerging markets do.

Who stands to benefit?
If or when nuclear power gets a second lease on life in America, numerous companies stand to benefit. Below, I've attempted to consider some of the leading companies within some of the major segments of the industry. As is always the case here at The Motley Fool, this discussion represents a starting point for your own research efforts. Theme investing is always tricky, so you'd do well to make sure that any company you consider can survive and thrive in the absence of any meaningful change in the U.S. nuclear power industry.

What's more, there are literally dozens of publicly traded companies tied to the nuclear power industry, so what follows is only an initial sampling of what's out there:

1. Miners:
RioTinto(NYSE: RTP)
BHP Billiton(NYSE: BHP)
Uranium has to be mined out of the ground before use. But although many companies mine uranium, it's a small part of the mining industry in general. An increase in nuclear power in America would provide a small boost to miners like Rio Tinto, but the impact wouldn't be very significant at present.

That's not quite the case with BHP Billiton, though. Assuming that its acquisition of WMCResources closes as planned, BHP Billiton will hold almost 40% of the world's known uranium deposits. Uranium still appears to be just a piece of a much larger pie for the company, but investors looking for a uranium miner should definitely take a closer look at BHP Billiton.

2. Processors:
Cameco(NYSE: CCJ)
USEC(NYSE: USU)
Regular old uranium isn't especially useful on its own. Just as coal and gas both need to be processed before use in power plants, uranium needs to be processed into a form that utilities can use in their reactors.

Canadian company Cameco is not only the largest miner of uranium -- it's also a major converter and processor. In simple terms, Cameco takes uranium ore, concentrates it, and then refines and converts it into forms like uranium dioxide and uranium hexafluoride. The concentrates are then sold to utilities, which, in turn, contract with enrichers and fabricators to create the fuel pellets for their reactors.

USEC, once a U.S. government corporation, is a leading supplier of low-enriched uranium for commercial power plants and pays a pretty fair dividend to boot. USEC may soon face the end of an agreement to reprocess uranium from Soviet nuclear weapons, so a sustained build-out of new nuclear plants would certainly be a boon to the company.

3. Equipment/Plant Builders
General Electric(NYSE: GE)
Washington Group(Nasdaq: WGII)
McDermott(NYSE: MDR)
If there are to be more nuclear plants in this country, somebody will have to build the facilities and the equipment that goes inside. Once again, nuclear power is only a fairly modest part of these overall businesses, so investors must make sure they are comfortable with the business as a whole.

Not surprisingly, if it involves power, GE is involved. GE's nuclear business provides turbines, parts, software, and instrumentation for nuclear power plants. Along a similar line, McDermott offers generators, heat exchangers, and other plant parts for the industry.

Washington Group is a bit different -- it focuses on design, construction, maintenance, and support of nuclear energy facilities. Not only does Washington Group contract to build plants (more than 35,000 megawatts to date), but it also works with processing and waste facilities.

4. Utilities
Exelon
Entergy
Dominion Resources
It stands to reason that if there is an economic incentive to building nuclear plants, those who use nuclear plants also stand to gain from their expanded use. Since nuclear plants can offer more power for less money, the utilities that operate them should see some advantage.

Exelon, Entergy, and Dominion are among the largest operators of nuclear plants in America. Perhaps it's just a coincidence, but each of these three nuclear-heavy utilities has a profit margin and dividend yield above the industry average -- and all but Entergy have above-market returns on equity as well. All three are worthy of further analysis, but I'm devoting most of my time in the direction of Exelon and Dominion.

An avenue to fuel cells?
In what would be a fantastic irony, nuclear power -- the scourge of the environmental movement -- may yet have some role to play in the adoption and success of fuel cells. One of the problems with most fuel cell designs is that they require pure hydrogen to produce electricity. Fuel cell advocates claim that hydrogen is the most abundant element in the universe, but the hydrogen in the sun or Eagle Nebula isn't exactly accessible.

On Earth, there is very little free hydrogen. Most of it is locked away in rocks, hydrocarbons, and water -- and it takes energy to get it out. The technology to liberate that hydrogen is readily available, but it requires electricity (about 50 kWh to liberate 1 kg of hydrogen from water). That electricity, in turn, requires a source, such as a hydrocarbon-burning power plant.

Consequently, burning hydrocarbons to produce electricity to produce free hydrogen to produce electricity doesn't necessarily cut pollution as much as advertised -- it simply moves it from onboard a vehicle to a power plant or reforming plant. With nuclear power, though, large amounts of hydrogen could be produced with comparatively less waste and pollution.

Conclusion
Simply put, the future of nuclear power in this country is still dicey. There are compelling economic and energy efficiency arguments, but there are equally compelling issues of safety, practicality, and public acceptance. In any situation where the arguments become fueled more by emotion than rationality, almost anything can happen.

It's interesting to note that many of the companies mentioned will benefit no matter what happens. If nuclear power proves unacceptable, more coal will be mined, more gas will be pumped, and more plants will still need to be built. And all but Cameco and USEC will still have a role to play. One way or another, the U.S. needs more power, and that demand is going to be met.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

[cdn-nucl-l] The Motley Fool on nuclear power

A Healthier Glow for Nuclear Power?