Wendy Stueck
Globe and Mail
March 1, 2004

Vancouver: Uranium producer Cameco Corp. has rolled into the U.S. electricity market by bidding $333-million (U.S.) for a 25.2-per-cent stake in a Texas nuclear power plant, the first step in what it hopes will become a substantial U.S. presence.

“This acquisition will give us a better understanding for the light-water reactors that are common in the United States,” Cameco president and chief executive officer Jerry Grandey said in a conference call on Monday.

“It will also broaden our understanding of the electricity markets in the U.S., providing us with a stronger platform for further expansion south of the border.”

Saskatoon-based Cameco, the world’s biggest uranium supplier, has in the past few years trained its sights on becoming an integrated nuclear energy company, a strategy it kicked off in 2000 when it agreed to buy a 15-per-cent stake in Ontario’s Bruce Power for $100-million (Canadian).

Last year, Cameco increased its stake to 31.6 per cent for an additional $204-million.

As a vertically integrated uranium company, the thinking goes, Cameco has a stake in – and stands to profit from – every aspect of the nuclear energy business, from mining uranium to converting it to fuel for use in nuclear reactors and selling the end product to utilities.

Mr. Grandey said Monday’s proposed deal would give Cameco a foothold in the Texas market where electricity supply is expected to “tighten” in future months.

“Some of the higher-cost gas-fired units will be shut down over the next little while, and it’s a market where the population is growing and the economy is growing,” he said in response to an analyst’s question about market prospects in the region. “So it’s a combination of those things.”

A Cameco subsidiary signed an agreement to buy 25.2 per cent of the South Texas Project (STP) from a unit of American Electric Power Co. Inc. for $333-million (U.S.). STP consists of two 1,250-megawatt nuclear units in Texas on an 11,000-hectare site about 145 kilometres southwest of Houston. Cameco’s stake in STP would amount to 630 megawatts, enough power to supply the daily needs of 504,000 homes.

STP’s other owners are Texas Genco Holdings Inc. (30.8 per cent), San Antonio City Public Service Board (28 per cent) and Austin Energy (16 per cent).

Cameco’s proposed acquisition is subject to a right of first refusal by the other owners for 90 days.

Mr. Grandey said confidentiality agreements that were part of the negotiating process prevented Cameco from talking to the other owners, so he could not speculate on their intentions.

Cameco would consider taking a lesser stake, he said, but would require at least a 13.2-per-cent share in STP to pursue the deal.

Cameco is not interested in becoming a majority owner of STP, he added.

Analysts said the proposed transaction fits in with Cameco’s previously announced intention to become a more integrated company.

“Cameco has decided, and I think rightfully so, that they are not a uranium company, but an energy company,” said Terence Ortslan, a mining consultant with Montreal-based TSO & Associates.

Buying into the Texas reactors is a way for Cameco to generate more profit from its core mining business, Mr. Ortslan said, as well as diversifying geographically.

In the short term, the analyst said, Cameco may face some pressure to increase its dividend – steady dividends have traditionally been a hallmark of utility companies – as it shifts away from being solely a mining company.

Moving toward a utility model could also put downward pressure on Cameco’s earnings multiples, which are typically higher for mining companies.

But that pressure may disappear if the company’s strategy appears to be paying off quickly, Mr. Ortslan added.

“If the company can successfully reinvent itself as a new energy play, with the significant position they have in the uranium business, and critical mass in the utility market, then that multiple adjustment may not take place,” Mr. Ortslan said.

American Electric Power, the largest power producer in the United States, is selling Texas generation assets to recover stranded costs – how much the book value of an asset exceeds its market value – as the Texas electricity market is deregulated.

American Electric said on Monday that the book value of its stake in STP was $1.5-billion at the end of 2001.

“The market is showing us that nuclear plants are not worth very much,” said Tom Adams, executive director of Toronto-based Energy Probe, which has lobbied against government subsidies for the nuclear power industry. “Cameco is betting that if you buy these assets cheaply enough, you can make a business out of these things.”

Mr. Adams said the long-term prospects for nuclear reactors are uncertain, as some countries are phasing them out and advancements in fuel cells and other energy technologies could make investments in nuclear energy less attractive.

Cameco said the transaction would have a positive impact on cash flow and profit, based on current operating performance and market conditions. Cameco said it would not use debt to close the deal but would look at other options, including equity issues, to pay for the deal.

Cameco announced in January that it is spinning off its gold assets into a new public company called Centerra. Analysts have estimated an initial public offering could raise $500-million (Canadian) or more.

Cameco shares rose 87 cents to close at $64.57 on the Toronto Stock Exchange on Monday.