Surprise: Nuclear Business is a Winner

Issue 4 and Volume 104.

Mergers and buyouts, often resulting in new companies with non-descriptive, high-tech-sounding names, abound in many industries these days. The consolidations include sectors as diverse as autos, drugs and communications. The most vigorous industries seem to be at the forefront of this trend, with computer, internet, wireless and software companies leading the charge. It surprises many people that the nuclear industry, long assumed to be dead, is very much involved in this dynamic process.

Nuclear equipment manufacturers are merging, in part, for the same reasons auto manufacturers are: worldwide production capacity has outstripped demand. On the positive side, however, the global nuclear service business continues at a good pace. The merged companies can better exploit these service opportunities by using their combined expertise to efficiently provide a broader range of services for a broader range of plants. In the nuclear industry, as in many others, the knowledge business now trumps the manufacturing business.

For example, BNFL Inc., formerly known as British Nuclear Fuels Limited, swallowed up Westinghouse’s nuclear business two years ago and now has similarly positioned itself to take over ABB’s worldwide commercial nuclear power business. The company will be able to provide either Westinghouse PWR or ABB BWR technology. Framatome and Siemens have also announced that they intend to merge their nuclear businesses. Cogema plays a role in this as well since they are a key industrial shareholder in Framatome. And General Electric is combining its nuclear fuel operations with those of Hitachi and Toshiba. All of these combinations aim at increasing efficiency and broadening market exposure.

Nuclear utilities in the U.S. are also playing a significant role in this rapidly changing business environment. Several of them are exploiting opportunities right in their own backyards: they have identified nuclear power plant operations as one of their business strengths, and have moved to capitalize on these strengths.

Far from being a dinosaur, “a well-run nuclear plant of sufficient size can be extremely competitive with any generation option on a going-forward basis,” according to Don Hintz, Entergy’s president. Speaking at last December’s PowerGen International conference, Hintz predicted that “the nation’s nuclear industry will move toward a few national nuclear companies that can achieve much higher levels of efficiency in operation. … Who would have thought, even a couple of years ago, that nuclear operations would be not only a core business, but also a growth strategy for a major U.S. utility company?”

Who, indeed? But that’s exactly what’s happening, and Hintz’ company is a prime example. Entergy, which has historically operated six reactors at five sites, announced that it wants to acquire five more units by 2005. The company is well on its way to that goal with its recent purchases of Pilgrim, Fitzpatrick and Indian Point 3.

But Entergy is not the only company which sees that money can be made by superior operation of nuclear plants. For much the same reason, UNICOM and PECO, with their 14 nukes, merged in September. Carolina Power & Light and Florida Progress are combining, with their total of five operating reactors. AmerGen, a joint venture between PECO and British Energy, has agreed to purchase Oyster Creek, TMI-1, Vermont Yankee and Clinton. And AmerGen’s proposed purchase of Nine-Mile Point is being disputed by one of the plant’s current owners only because that company would prefer to retain ownership and turn the plant’s operation over to Entergy.

Using a different approach, but recognizing the same basic principle, Alliant Energy, Northern States Power, Wisconsin Electric and Wisconsin Public Service Co. have pooled their nuclear plant operating expertise to form Nuclear Management Co. This organization operates seven plants at five sites, and has a mix of two BWRs and five PWRs.

This is all very surprising considering that, not too long ago, the financial community regarded nuclear plants as a millstone around the neck of any company unfortunate enough to own or operate one.

The key words in Hintz’ PowerGen observations are “well-run” and “going-forward.” Because the operating and fuel costs per kWh for these plants are low, a well-operated nuclear plant can be a real cash machine. Those companies capable of operating nuclear plants at high availability factors and with high safety levels, avoiding Nuclear Regulatory Commission (NRC) shutdowns and fines, can be both profitable and competitive. The problem with nuclear power economics has always been the plants’ high initial costs. Purchasing an existing plant, which has been substantially depreciated already, can help overcome this obstacle.

Even the NRC has taken a realistic approach to these plant sales, company mergers and operating arrangements. The Commission recently announced that it will no longer require anti-trust reviews for license transfers of operating plants, thus eliminating at least one bureaucratic barrier to industry restructuring. So the stage is set for an on-going, thriving nuclear power industry in the U.S.