By Gregory Spear
Spear's Security Industry Analyst

       Below we discuss the implications of the new energy bill for the nuclear industry and offer another conservative way for subscribers to play the alternative energy card, namely with Florida Power & Light (FPL).

Wheel of Fortune

        The question for investors is how to invest in the ever changing homeland security domain? We have noticed in the last year that playing the homeland security wheel of fortune is getting more sophisticated and more paradoxical. It used to be focused on hardware and software such as biometrics, Internet security and bomb detection. While there are still some plays in those areas, and we profile one below, addressing the security theme more indirectly, via the convergence of national security and the energy sector, has so far been a more stable long-term approach. This is especially true given that business spending on hardware and software has remained sluggish and the cyclical bull market itself may be nearing some sort of top.
        Speculative alternative energy stocks received a boost before the passage of the Energy Bill, but we expect, and have seen, a sell-the-good-news reaction in many of these news-driven names. That's the norm on Wall Street. The only alt energy companies that we really want to 'marry' are those with good fundamental prospects and relatively low market caps. Daystar (DSTI) (Editor's Note: we hold DSTI in TSR Pro) and Distributed Energy Systems (DESC) come quickly to mind. Our long-term portfolio has been focused on the oil and gas sector and that has proven to be a worthwhile allocation of capital.

Nuclear Spring

        We believe investors will be looking at other energy plays over the next few months that have not been as well covered. For example, due to a number of beneficial provisions in the Energy Bill, nuclear power producers are likely to find it much easier going in the months and years ahead. The bill offers a nuclear-production tax credit of up to $125 million per 1,000 megawatts, over the next eight years for new nuclear power plants built in the United States. Another provision authorizes federal loans for up to 80% of the cost of projects that can avoid or reduce noxious emissions. This directly benefits renewable energy technologies but also includes nuclear.
        While nuclear power is America's number two source of electricity, providing 20% of total usage, after Three Mile Island in 1979, nuclear construction ground to a halt. It has been two decades since an electric utility built a nuclear power plant in the United States. The two key issues are safety and waste.
        In terms of safety, there have been many improvements to the design of nuclear reactors over the last two decades, with one of the main elements being the concept of standardization. Few reactors built in the heyday of the US nuclear program were standardized. As a result, costs were high and engineering was variable. In contrast, the French nuclear program, based on 34 standardized nuclear plants, supplies, about 75% of that country's power. Compared to existing plants, modern standardized reactors such as those proposed by Westinghouse have designs that will require half the building volume, 50% fewer valves, 80% less pipes, 35% fewer pumps and 70% less control cable. It is likely that as many as eight conventional nuclear power plants could begin construction by the end of the decade.
        That's a start, but it is essentially dressing up an archaic technology that will eventually be superceded by a new type of simplified, non-pressurized, helium-cooled reactor- the pebble bed reactor - now being commercially developed in South Africa and China. An application for NRC certification for a pebble-bed reactor by a South African company will be submitted in 2007. The Chinese have plans to build several hundred of these plants over the next two decades. We believe it represents the future of electric power globally. One interesting by product of the pebble reactor is its ability to produce hydrogen from the waste heat. We will update subscribers on this technology in future editions, as there is no viable investment play on it at this time.
        While reactors design has improved over the decades, and is about to take a giant leap forward, nuclear waste from conventional reactors remains a problem. Most waste is now stored in temporary containers and pools at 126 sites around the nation. Yuk! DOE now plans to transport all high level nuclear waste to Nevada and bury it beneath Yucca Mountain. After years of stalling, the DOE says it will seek an operating permit for this by the end of the year. By the way, pebble-bed reactors produce waste that is easily handled and stored.
        Our previous utility pick, PPL (PPL), is an integrated electric utility with an expertise in alt energy and exposure to the nuclear market. We have found another similar play in Florida Power and Light (FPL P/E 19, Market Cap $17 billion), which is profiled below.
       Don't let the name fool you. Florida Power and Light is not just a Florida utility. The company owns more than 11,800 net megawatts of generating capacity across 20 states, including three nuclear plants, two in Florida and one in New Hampshire. FPL produces more energy from wind than any other company in the U.S. approximately 45% of the US total. In fact, roughly 25% of its generating capacity comes from wind power; more than 2,900 net megawatts. The company's proposed Long Island Offshore Wind Park, to be located three miles offshore, will consist of 40 wind turbines capable of producing 140 megawatts of power. FPL also operates the two largest solar fields in the world in Harper Lake and Kramer Junction, CA, plus various hydroelectric, gas fired and waste coal plants. The "cleaner" generating sources - gas wind, nuclear, solar and hydro account for 90% of FPL's production.
        In 2004, FPL scored the highest ranking in the U.S. and second globally, in a World Wildlife Fund report. The report gave FPL high marks for leadership in developing alternative energy and its commitment to dramatically improving power plant efficiency. FPL has twice been cited as the best among the nation's 28 electricity generation companies for "beyond-compliance" environmental performance.
        For reasons too complicated to get into in this analysis, we believe the current low interest rate environment is sustainable. Because utilities are highly leveraged, a low interest rate environment does great things for their bottom lines. Moreover, the new Energy Bill repealed part of the Public Utility Holding Company Act (PUHCA), which had limited merger and acquisitions and added a layer of onerous oversight by the SEC. The bill also provides a wealth of tax incentives for new investment in transmission, pollution control, renewables and nuclear alternatives that will benefit companies like FPL. Accordingly, we believe that select utilities with a focus on renewables are an excellent supplemental way to play the global energy squeeze.
        Editor's Note: Greg Spears is editor of Spear's SecurityIndustry Analyst, 45 Wintonbury Ave., Bllomfield, CT 06002, 1 year, introductory rate, $197. SSIA specializes in companies involved in the design, manufacture or sale of products related to homeland security. Monthly in-depth issue with market analysis, stock profiles, buy list, stocks to short. Weekly e-mail alerts. For more information, www.SpearReport.com