Friday, December 28, 2007

Nuclear Utility Race

Alternative energy is given quite a bit of attention these days as the pressures of high oil prices and national security concerns make foreign oil imports less attractive. The environmental consequences of burning fossil fuels and using petroleum-based products are apparently finally registering with policy makers and consumers. Consequently, investors have been pouring over biofuels of all kinds, including new ways to use coal. Wind and solar power seems to be finally coming into commercial stage.

What about the other “clean” energy source? Nuclear energy generation has been around for decades - long enough for some plants to be decommissioned for old age.

Utilities around the country must be asking the same question. The
Nuclear Regulatory Commission reports there are now 21 applications pending for 32 new nuclear reactor units. The NRC provides a nice chart showing the applications and their progress through the regulatory review process.

The spike in nuclear energy plant applications is raising fewer eyebrows than it might have twenty years ago. Some of the earlier hysteria over the dangers of nuclear energy have fallen away, leaving more logical – and more manageable - objections. Local communities have a legitimate concern about the safe operation of nuclear plants in their back yard. However, now an experienced plant operator should be able to point to a track record to demonstrate their ability to safely operate a plant.

What is striking about the NRC’s list of pending applications is the number of new sites.
Duke Energy (DUK: NYSE), NuStart Energy Development (private consortium of nine utilities), Progress Energy (PGN: NYSE), Alternate Energy Holdings (AEHI: OTC/PK), and Mid-American Energy Holdings Co. (only bonds are public).

Progress Energy, the NuStart consortium and Alternate Energy also have applications pending for add-on units at existing plant sites. Others apparently expanding include:
Dominion (D: NYSE), Scana’s South Carolina Electric & Gas (SCG: NYSE), NRG Energy (NRG: NYSE), Southern’s Nuclear Operating Company (SO: NYSE), Entergy Corp. (ETR: NYSE), PPL Corp. (PPL: NYSE), Ameren Corp. (AEE: NYSE), DTE Energy (DTE: NYSE), and UniStar Nuclear Energy, a utility joint venture of Constellation Energy (CEG: NYSE) and EDF Group (EDFEF: OTC/PK).

This might appear to be a veritable cornucopia of investment opportunity for those who want to play the renaissance of nuclear energy. Keep in mind that most of these large utilities have a variety of energy generation sources, including that nasty coal and some questionable wind and solar projects that have yet to produce significant power. This suggests there is a bit more to evaluating a good “nuke” stock than looking at a list of plant applications.

To simplify the task, it might be worthwhile to prioritize this group of nuclear generators in basic financial terms. Take a look at which one is cheapest and which one offers the highest dividend rate. South Carolina E&G (SCG) trades at 15.8 times forward earnings. With a 4.14% dividend yield SCG also looks attractive. However, at 5.07% Progress Energy (PGN) has the highest dividend yield in the group. PGN shares are just a bit more expensive in terms of a multiple of earnings - 17.1 times. Unfortunately, both companies lag in terms of return on equity, which averages 16% for the group (PGN’s ROE is 9.7% and SCG’s is 10.4%). Dominion management is squeezing the most from its equity base with a ROE of 23%. The dividend yield on D shares is only 3.3% but on a PE basis the stock is just below the group average PE of 18.4 times. Of course, its debt to equity ratio of 1.40 is above the industry average ratio near 1.20.

If further investigation proves these three companies have strong nuclear programs to add to their existing generation, then current prices levels may be a great place to start positions. That investigation is for another post!

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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