The Elephant in the Room

Issue 7 and Volume 112.

By Brian Schimmoller, Contributing Editor

Ongoing talk about the nuclear renaissance is both exciting and encouraging, but it always must dance around the elephant in the room: project finance. Even if all the siting, technical and licensing barriers are overcome, no plant is going to get built until a developer can secure the financial commitment for the $5 billion to $8 billion price tag of a new plant.

At the Nuclear Energy Institute’s Nuclear Energy Assembly meeting in Chicago in May, Exelon CEO John Rowe captured this sentiment quite nicely: “I’m technically biased for nuclear power, but I’m not economically biased. We need more certainty in cost estimates.” While we’re still waiting for Wall Street to commit to such a huge investment, there are “proxy” signs that indicate the financial elephant is getting pushed toward the exit.

  • Georgia Power awarded the Shaw Group and Westinghouse Electric Co. an engineering, procurement and construction (EPC) contract for two new Westinghouse AP1000 nuclear power units and related facilities at the Vogtle site near Augusta, Ga. While Georgia Power has not formally committed to building the plant, many view the EPC contract as a definitive signal that the nuclear renaissance is “real.”
  • GE Hitachi Nuclear Energy announced it will expand its campus near Wilmington, N.C., creating 900 jobs over the next five years and investing $704 million. GE Hitachi also said it is launching a new project office in San Jose, Calif., to offer the nuclear alliance’s Advanced Boiling Water Reactor to U.S. utilities considering building new power plants.
  • URS Corp. opened a nuclear office in Fort Mill, S.C., that will serve as the headquarters for the company’s commercial nuclear energy engineering and construction business. The center plans to employ more than 400 nuclear professionals and will provide a complete range of licensing, design, engineering, procurement and construction services for new nuclear generation facilities and nuclear fuel cycle facilities.

Another sign of building financial interest—if not confidence—in the nuclear industry is the growth of exchange traded funds (ETF). These funds, which resemble the index funds used for common stocks, provide a passive investment vehicle to the nuclear industry. Two such funds have launched in the past year. Van Eck Global launched its Market Vectors Nuclear ETF in July 2007 and PowerShares Capital Management LLC launched its Global Nuclear Energy Portfolio ETF in late March. Both are tied to indexes that aim to track the overall performance of globally traded companies engaged in the nuclear energy industry. The two funds share some common holdings, but the Van Eck fund tilts toward the upstream uranium mining and nuclear fuel supply sectors, while the PowerShares fund tilts toward companies closer to plant design and operation.

“The Market Vectors Nuclear ETF is a pure play instrument,” said Adam Phillips, Van Eck nuclear fund’s director. “Companies in the portfolio need to generate more than 50 percent of their gross revenues from nuclear energy-related activities.” The Van Eck ETF currently has little U.S. exposure—about 19 percent—because relatively few U.S. companies are pure plays in nuclear.

Growing global interest in nuclear energy has not yet translated into significant ETF price appreciation. The Van Eck fund, for example, has dropped more than 16 percent since inception. At least part of the decline can be attributed to the heavy weighting in upstream uranium stocks. The declining price of uranium over the past year has had a dampening effect on ETF performance.

Some unconventional factors impact nuclear ETF performance. Although the fraction of U.S. companies in the funds is rather small, many investors are American, who have been known to react to stimuli somewhat removed from business fundamentals. “What happens politically with respect to nuclear power affects investor interest in nuclear-related financial instruments,” said Harvey Hirsch, Van Eck’s senior vice president of marketing. “Congressional action—or lack of it—on key issues such as waste disposal and loan guarantees can trump economic and other considerations at times.”

The indexes that the ETFs are tied to get rebalanced periodically, and as they broaden their reach, the effects of politics and uranium prices on fund performance should be mitigated. In March, for example, the DAXglobal Nuclear Energy Index, to which the Van Eck fund is tied, added nuclear vendor AREVA and French utility EDF to the index. Moving forward, the continued evolution of the nuclear renaissance, the development of regional and global carbon trading markets and the introduction of new players to the nuclear industry could have a substantial effect on the funds and their resulting performance.

Nuclear utilities make up a relatively small portion of the nuclear indexes, primarily because of the self-imposed pure play constraints. The DAXglobal index only contains Exelon, British Energy, Constellation and French utility EDF; the WNA Nuclear Energy Index contains Exelon, EDF, E.ON, Tokyo Electric Power Co., Constellation, British Energy, Duke Energy and Entergy. Utility representation is likely to grow as more utilities explore spinoff strategies. If Entergy is successful in spinning off its nuclear business, for example, the new company could join the ETF fray, as could the new company formed by NRG Energy and Toshiba Corp. to develop advanced boiling water reactor projects in North America.

The volume traded in nuclear focused ETFs is rather small—about $4 million a day in the Van Eck fund and $1 million a day for the PowerShares fund. Their very existence, however, is an endorsement of nuclear energy. Their growth will provide a unique bellwether of the nuclear renaissance.