UBS Investment Bank holds a large portfolio of loans to companies involved in extracting natural gas using the combination of horizontal drilling and hydraulic fracturing. Because of the healthy fees associated with generating those loans initially, UBS, along with several other large investment banks, supported drilling programs for production that was not justified by the existing demand for natural gas.
The inevitable happened; more gas was produced than customers needed or wanted. That led to a glut and rapid price declines. Many of the entities that borrowed money from UBS are now in danger of default because their revenue is insufficient to pay the carrying costs of the loans for much longer. Recent sales from the loan portfolio have closed at 65 cents or less on the dollar.
UBS appears to be addressing this business challenge by issuing analyst reports to investors encouraging the closure of several merchant nuclear power plants. Their permanent removal from the market will soak up the natural gas glut, push prices up, and restore the value of the loan portfolio.
Good for UBS and the underwater borrowers, bad for environment, bad for consumers.
Smoking gun.
Above synopsis Added Oct 1, 2015
A friend sent me a link to a Boston Globe article titled Tough times, no easy answers for Pilgrim Nuclear Power Plant.
It includes a smoking gun.
A report by UBS AG this week estimated that Pilgrim is slated to lose $25 million this year and about $60 million during the next four years.
“The magnitude of the losses is unpalatable,” said Julien Dumoulin-Smith, one of the authors of the investment bank’s report, which noted that Entergy’s stock has fallen 30 percent this year and advised investors to sell. “Wall Street is demanding better.”
Entergy officials acknowledge the problems facing Pilgrim and expect to make a decision about its future in coming months. The plant was refueled last spring, had its license renewed three years ago, and can continue operating until 2032, as long as regulators deem it safe.
…
The authors of the UBS report, “The Nuke Retirements are Coming,” offered what they called a “sobering view” of the future of nuclear power. They suggested that retiring plants may be the best way Entergy can offset the “twin headwinds” of cheaper natural gas and increasing amounts of renewable energy.
My skeptical mind immediately wondered, did UBS make any loans to companies involved in hydraulic fracturing. A few days ago, I read a couple of articles indicating that those loans are at risk of default due to continuing losses by extractors in a low natural gas price environment.
A quick search led me to a March 18, 2015 Wall St. Journal article — among many other sources – with a title that almost says it all. Banks Struggle to Unload Oil Loans Citigroup, Goldman, UBS and others face losses as investors balk at riskiness of energy sector. If you search on that title, you should be able to get access to the entire article, even without a WSJ subscription.
Here are some key phrases confirming my smoking gun suspicion that UBS analysts have most likely been encouraged to do what they can to convince investors to pressure companies that own nuclear plants to shut them down instead of selling them off to buyers that might be able to make them profitable again.
Investment banks helped fuel the oil-and-gas exploration boom of the past decade by making loans valued at about $1 trillion to companies in the energy industry, most of which they sold to investors.
…
The banks held off for several months, hoping that oil prices would rebound. Instead, Nymex crude prices hit a fresh low this week. A spokesman for C&J declined to comment.
…
The loans that haven’t been sold could yet recover value if the market turns around.
…
Houston-based Express Energy Services borrowed $220 million in October from a group of banks led by UBS and Goldman Sachs to pay for a so-called leveraged buyout by Apollo Global Management LLC.
The banks tried selling the loan several times before unloading it this week at a price below 65 cents on the dollar, taking a roughly $66 million loss, said a person familiar with the matter.
There is almost no doubt that closing 5 large nuclear power plants would help natural gas and oil prices recover and reduce the losses that Wall Street banks face on the loans that they ill-advisedly made to companies drilling for natural gas even when the market was adequately supplied.
Price wars, like any other war, can be very painful for all participants.
Rod Adams is Managing Partner of Nucleation Capital, a venture fund that invests in advanced nuclear, which provides affordable access to this clean energy sector to pronuclear and impact investors. Rod, a former submarine Engineer Officer and founder of Adams Atomic Engines, Inc., which was one of the earliest advanced nuclear ventures, is an atomic energy expert with small nuclear plant operating and design experience. He has engaged in technical, strategic, political, historic and financial analysis of the nuclear industry, its technology, regulation, and policies for several decades through Atomic Insights, both as its primary blogger and as host of The Atomic Show Podcast. Please click here to subscribe to the Atomic Show RSS feed. To join Rod's pronuclear network and receive his occasional newsletter, click here.
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The losses in the fracking game will be staggering, unless oil prices rebound to $100 sometime in the not distant future. Gas has been losing money for a long time … they are just trying to pay the interest on the loans now. Eventually huge amounts will be written off here as well. But, don’t cry for the banks. As has been demonstrated, they are now beyond market forces or even the law. They are now a perpetual motion machine that is nothing but a constant drag on the economy.
“The losses in the fracking game will be staggering, unless oil prices rebound to $100 sometime in the not distant future.”
Oilfield layoffs in the Bakersfield area are occurring at a increasing rate. I don’t know if the N. Dakota fields are experiencing the same thing, but if so, some of those boom towns are going to get hit hard.
http://m.kspr.com/money/oil-crash-cut-my-pay-and-killed-over-86000-jobs/21053196_35079810
American companies have disclosed at least 86,405 job cuts directly attributed to falling oil prices since June 2014, according to outplacement firm Challenger, Gray & Christmas. Oil sells for $47 a barrel, down dramatically from north of $100 as recently as July 2014.
Oil-fueled layoffs have clearly accelerated as hopes for a speedy recovery in prices have been dashed. Crude tumbled below $38 a barrel last week for the first time since 2009. The latest company to ax jobs was energy giant ConocoPhillips, which on Tuesday said it would eliminate nearly 2,000 positions.
“Companies of all shapes and sizes are cutting back. The industry is really scared,” said Tobias Read, CEO of Swift Resources, a major oil and gas manpower provider.
Chesapeake Energy Cuts 15% of Jobs
Rod,
Have you been able to obtain a copy to the UBS report? or a link to it?
Hope all is well in Retirement…..
Rod: I like the article, and it’s informative. However, I do have a bit of a knit to pick. An inference, no matter how reasonable, is NOT a smoking gun. It is, in fact, the opposite of a smoking gun.
While the article does include good stuff, there seems to be a bit of an oversight, I think. You have failed in this article to address the following basic consideration/question:
While it’s true that the banks have a lot of exposure to gas and oil debt (and thus, risk of default), so that it is in their interest to see competitors close, those banks did not, I don’t think (or at least you have not shown this to be the case), make nuclear plants unprofitable. Any plant of any kind that is unprofitable will eventually shut down if it cannot become profitable again.
There is something very broken, right now, with the nuclear energy industry. This is what I mean. Most of the nuclear plants in the fleet are old enough that the initial capital costs of constructing them, and also subsequent upgrades, have been paid for.
I’ve always heard it said that the O&M and Fuel costs for nuclear plants are fairly low, lower than most competitors. If that’s really true, why aren’t these PAID-OFF nuclear plants now in a very lucrative part of their life cycle where they’re making money hand over fist, even with low energy prices, because their cost of production is just so low?
How is it the case that paid-for nuclear plants are losing money? Something is very wrong.
@Jeff S
I don’t think (or at least you have not shown this to be the case), make nuclear plants unprofitable. Any plant of any kind that is unprofitable will eventually shut down if it cannot become profitable again.
Nuclear plant costs have not increased by enough to make them unprofitable when they were wildly profitable in 2004-2008. They are also producing just as much, if not more electricity per unit as they were then.
The change that had made them unprofitable is the price at which they sell their product. That fall in price was a result of over-production of a commodity whose existence was already known.
The banks played a major role in enabling that over-production and price collapse.
At this point I’d really like someone to reiterate a bit more detail how peaking plants, and spinning reserve can be profitable while baseload generators’ profitability are so thin. I understand how unreliable, intermittent sources have subsidies and mandates, but I don’t understand at all any details of the tariffs relating to the power generators required to operate with the unreliable, intermittent sources for spinning reserve and peaking.
I vaguely recall that somehow peaking plants can be profitable without actually generating any power. What’s the tariff that makes that possible?
@John Chatelle
The regional transmission organizations in “competitive markets” are responsible for ensuring reliable power delivery. They often hold capacity auctions to find suppliers that will guarantee delivery of a certain amount of power when needed. They get paid to be on standby and paid for the energy produced when called on to operate.
In some cases, like in New England, the RTO will help the standby generators buy fuel stocks or install additional storage for fuel so that they can reliably run when needed because of high demands or failures in other suppliers on the grid.
One reason is because peaking plants only require a signal from the dispatcher back in the office to operate (no operators on site = low overhead, when it is not running it does not cost much at all). But the real reason is — They only operate when needed. When running the electricity they make may cost them as much as $0.20 – $0.50 per kWh to make. But when needed they can sell the electricity they generate for $2,000, $4,000, even much more (occasionally) per kWh. That is right the same electricity you are paying $0.15 for may cost your utility $4,000 per kWh. And they will sell it for that to prevent enactment of penalties, avoid outages, brown-outs. Think of it like the fancy rental unit in the ideal spot. It would be a money pit if it as not for the fact that for four to ten weeks out of the year you can rent it for ten to 20 times the total cost of maintenance, insurance, taxes, and mortgage.
When was a kW-hr ever sold for $2000? Maybe a MW-hr? Willing to be convinced, but I’d like to see some backup to the claim.
Here is on link indicating $600 – $700 per mWh day ahead pricing. However, keep in mind that is a contract, You pay for the day. (because if you didn’t buy it they could have sold it to someone else and they could have bought all of it) – like a hotel room you don’t get a refund if you only stay half a day. There are Hourly markets – usually in summer, and they go for much higher prices. Because the day ahead capacity has been sold, making the peak 2:00 – 4:00 PM market very volatile, And in essence not much more, possibly even less, than if they bought the whole day capacity. I just retired from an electric utility, and have often overheard talk from the dispatchers bragging about how much they sold our extra capacity for and complaining about how much they had to pay for the electricity to meet the peak.
And here is the link.
http://www.platts.com/news-feature/2013/electricpower/uspower/index
“and spinning reserve can be profitable”
I am not an expert on this matter, however, I have never heard of a reason that spinning reserve is profitable, other than the avoidance of penalties and fines. Spinning a reserve is a state and FERC mandated requirement for grid reliability. It does not create a profit. For the “average” utility it means that you have to have the average size power plant (>10% of your peak power generated for the day) online, operating, ready to deliver that standby 10% extra power. If you only have the exact amount of generation capacity online as you are selling/delivering. then when there is a sudden demand the voltage and even the frequency will drop as this increased demand is picked up by the “grid.” This decrease in voltage/frequency acts like a sinkhole (use as an analogy) and suck in other connected grids and has the potential to cause a black-out like the famous NYC blackout or the Midwest outage years ago. Numerous penalties, fines and law suits will follow.
Note, (to prevent nit-picks) you don’t have to have an extra plant on line, you can operate 10 plants at 90 percent power, or 20 at 95 percent power,etc.to provide that “reserve,” However, as efficiency decreases as power load drops, the typical plant operating at 90 – 95 percent power costs just as much to operate, and uses just about as much fuel as if it was operating at 100 percent power. CCTG’s running at 50% are worse and also worse CO2 emitters – which kills the reason for using gas instead of coal.
Rich – thanks for that link, very informative. BTW, it says,
“Power prices have also climbed to record levels not seen since the summers of 1998 and 1999, when power spiraled out of control in the Midwest and reached $2,000/MWh.”
So I think you made a typo in your post above, describing $2,000 per kW-hr (should be MW-hr).
“The magnitude of the losses is unpalatable,” said Julien Dumoulin-Smith,”
Thanks to your article we know that it was the loan losses for drilling that were unpalatable and they are using the article as a potential means to lessen their losses. It’s amazing what’s out there just hidden behind the facade.
If all these smoking gun articles were rolled together, they could make a good book.
Just for curiosity, what kinds of steps could be taken to reduce costs at a plant like Pilgrim? Say the goal is a $25 million savings annually. The plant employs about 650 people, with a few contractors now and then thrown in. A lot of the O&M costs are probably in personnel. Say the average salary is $100K per year, including benefits. $25 million would be 250 people, probably not doable. What about taking pay cuts? If 650 people were to take a $15K pay cut (on average) to save their jobs, that would cut almost $10 million off the deficit. So we need $15 million more revenue. Or maybe reduce other costs. What are the yearly taxes paid? Would MA consider a (temporary) reduction in tax to keep the plant? Probably not.
I’m just throwing around ideas. When you’re drowning you tend to grab for lifelines.
A large part of the “costs” associated with these plants is the overhead assigned from the corporate structure and debit load associated with buying them in the first place. Entergy’s executive loading is about 40% of the loss quoted, they ( Entergy’s ) management has not cut anything back other than operating costs by deferring most maintenance, getting rid of most senior employees, and cutting the employee counts.
With the cutbacks in maintenance at the plants in question we should be talking about closing them as quickly as possible before we have an accident. Even in plants with a cost plus profit structure like the plant they manage in Arkansas they have deferred maintenance when the maintenance could be profitable because they do not want a in depth look at the way they have been raiding the the bottom line. ( by the way quite an accident there).
Not much hope for the future of these plants unless someone like the TVA picks them up and soaks the taxpayers. Of course the TVA has there own management problems being a political organization.
When Plymouth closes it will be a long cold winter in New England. Particularly with the fight to keep the gas transmission pipelines out. But all in all with a lot of family in Southern New England I hope they close it soon.
Mark, it’s Pilgrim, not Plymouth and I don’t understand why you would want a nuclear plant that’s been operating reliably for more than 40 years to be shutdown. What are you afraid of? What’s your timeline for solar and wind to take up the slack? And will you be comfortable with the increase in CO2 and pollution emissions while New England “bridges” the gap with NG and biomass? Be careful what you wish for.
@Mark Hemeon
Thank you for joining in the conversation. I have to ask — where you are getting your information?
You do realize, I hope, that all US nuclear plants have at least one full time resident inspector for each unit and one who is responsible for the entire site. That means there are two full time US NRC inspectors at a single unit site like Pilgrim. There is very little, if any, opportunity to engage in the kind of shenanigans that you are describing.
Meanwhile, I am being told that again next year that there will be no increase in my COLA for retirement pay as the 10’s of millions needed to implement Fukushima changes to the Nuke plant prevents them from adding to the retirement funds to bring them up to NEW federal requirements.
How many $Billions has the nuclear industry spent in the last four years and how much safer are we?
Oyster Creek and Nine Mile one cost about $60 Million. Are the new plants worth spending $6 Billion to make them 100 times safer? Just what is the gain of 100 times safer when 100 nuclear power plants operating for a combined average of ~30 years giving you about 3,000 reactor years has caused no deaths beyond those of the type that would happen in any other industry (on the job heart attack, falls), and actually fewer than those of an accounting firm with the same number of employees. What is 1/100 of 0 ?
We will end up spending 70 million plus……for a plant that is 3.5 hours from the coast.
Why did NRC downgrade Pilgrim to its lowest performance rating?
Supposedly because they had “too many” unplanned shutdowns. I think it is stupid to degrade the performance rating of a plant because of this. Any kind of machinery has unexpected outages. The fact that it shuts down safely in such an event shows that the safety systems are functioning as designed. Sure, you’d rather avoid the shutdown because of the economic penalty, but shutdowns in and of themselves do not indicate a threat to public safety, nor are they dispositive evidence of poor operation or maintenance.
In the case of Pilgrim, not exactly. The information is easily found. Start here:
http://www.nrc.gov/NRR/OVERSIGHT/ASSESS/PILG/pilg_pim.html#IE4th
Start at July 01, 2014 and read down. Too many trips with complications and repeat problems. These are red flags.
It does lead to speculation (on the street) if Entergy really has their “heart” into a long term future for the plant. Especially if circumstances line up so they really have difficulty making a profit in today’s pricing market. And they still probably have to expend capitol on FLEX.
“The magnitude of the losses is unpalatable,” said Julien Dumoulin-Smith, one of the authors of the investment bank’s report, which noted that Entergy’s stock has fallen 30 percent this year and advised investors to sell. “Wall Street is demanding better.”
Sounds like cow chips to me. Companies take losses on various things all the time and keep plugging along. H-P took a $42 million dollar hit when they gave Carly Fiorina the boot. They’re just looking for excuses to trash the place.
What is it worth to kill the goose to put a golden egg on your balance sheet…
Wow! This ongoing grid settlement process, natural gas glut, gas pipeline plays, spinning reserve and reacting to intermittent sources… makes California’s fleecing by Enron seem simple. When you add in the threat of ‘premature decommissioning’ from legislative squeeze plays and shrinking margins, such as I believe befell Vermont Yankee, a real minefield.
Though I am not from there, to me Vermont Yankee seemed like a precious jewel. A nuclear plant in close proximity and direct connection with a hydroelectric plant with enough power to black-start it. Could one even place a monetary value on that? Was not this pairing the very model on which our entire nuclear fleet should have been designed, if it had been a perfect world? How much sticker shock will Vermont experience this Winter, now that Yankee, only slightly ‘overpriced’ at the time, is no longer available at any price?
Are precious things being broken in a way that cannot be fixed?
Okay, so you own a nuclear power plant. All other things being equal, hypothetically assuming it is free of vexing maintenance issues, running precisely at break-even right now (in that I really mean generating revenue comparable to your other energy holdings)… what would triggering decommissioning do to your balance sheet, tomorrow? Even if this is a windfall… where are the deep-pocket speculators with foresight ready to swoop in and double-down to take it off your hands? Do they exist? Is this really a golden goose scenario?
Thanks kindly to knowledgeable folk who might weigh in in a way I can understand.