Why Do Seemingly Sound Nuclear Projects Have Difficulty Attracting Affordable Financing?
On Friday, February 5, Areva hosted a conference call for invited bloggers to discuss the progress that they were making on their Eagle Rock (Idaho) nuclear fuel enrichment facility. Areva was represented on the call by Sam Shakir, the head of Areva Enrichment Services. Dan Yurman at Idaho Samizdat has a summary write up about the call in a post titled Update on Areva’s Eagle Rock enrichment plant. What I want to do is to explore one aspect of the call in more detail.
During the call, Sam described the facility’s technology, the commercial interest in its products, the market demand, and the capacity provided by other suppliers. He talked at length about the company’s successful efforts to sign up large utility customers to more than $4 billion worth of long term contracts for purchasing the output of the facility and about Areva’s own commitment of more than $1 billion in equity. He then talked about the vital importance of the US Department of Energy loan guarantee and the impact that significant delays in finalizing that arrangement would have on the project.
I have been involved in a number of efforts – some successful and some not – in obtaining financing. With that background I started the following dialog:
Rod Adams: With a company like Areva and commitments from the kind of customers that you have under contract, why would a bank care whether or not you have a US government loan guarantee? Your project sounds imminently financeable without it.
Sam Shakir (Areva): Great question. I appreciate you asking it. On paper, this would be an ideal project to finance. Because you have proven technology with performance that is on record for a couple of decades at least. You have contracts from credit worthy customers that go on for fifteen years and envelop the period of financing that we would be looking for. We have a very supportive community in Idaho and a licensing track that is well-proven with the NRC given the LES experience with the same kind of plant.
So all in all, it looks great. We have a rating agency that has given us an investment grade rating. Having said all that and putting it all together and considering the long term construction of the project and considering that there is the word nuclear associated with the project it remains a major issue for commercial banks. They don’t know anything about this kind of facility.
It’s not like a gas fired plant where they know what it is going to take, how long it will take to construct and know the outcome. This is a unique project that is not financeable in the commercial marketplace. We have visited with a number of banks and have very clear indication that this is not possible to finance in the open market without a loan guarantee.
Steve Packard from Depleted Cranium pointed out that it is currently difficult to obtain any kind of financing for any project.
Sam Shakir: What I just said was all true prior to the collapse of the capital markets. It is even more true today given the credit crunch and the unavailability of these kinds of large sums of money to offer to projects like ours. It’s even that much more difficult today.
Investors are not patient to wait for returns on projects that are this long in terms of construction. That’s the key driver. The second thing that we hear is in terms of abandonment. They still remember the nuclear projects that were abandoned because of cost overruns. They recognize that this is not a reactor project, but again, the “n” word is there and they are not willing to take that risk.
This response gnawed at me for several hours after the call. I am a vigorous advocate of nuclear technology; it distressed me to again hear just how dependent the industry is on government decision making. I know that government decisions can get derailed or delayed as a result of many influences, including those that come in the form of lobbying efforts from competitive industries.
I am not religiously opposed to government involvement in important infrastructure projects, but it does not bode well when even the leaders of the soundest of nuclear projects believe that they cannot proceed without a government loan guarantee. It is not as if Areva will actually be receiving any money from the government – it will, instead, pay a hefty fee up front to pay for the cost of the government review and risk assumption.
In the case of this particular project, there is not even the often repeated excuse that the project is outside of the financial capacity of the company – Areva has a large enough capital base to be able to carry a $2 billion loan under normal circumstances, especially since it is putting at least $1 billion of its own equity into the project.
I decided to obtain another opinion about the reasons for the stated reluctance by commercial banks, so I contacted a banker who has been involved in financing energy related projects for a couple of decades. Roy Piskadlo was with Merrill Lynch when I first met him; now is is with Pareto Commodity Partners. I asked him the following question:
The man in charge of Areva’s planned Eagle Rock enrichment facility spoke to a small group of bloggers about the project. He provided an interesting description of the project, the customers that it has signed up and then spoke about the fact that the company is waiting on the final documents for its Department of Energy guaranteed loan. He said that without that guarantee, they cannot obtain financing.
I was a bit incredulous. Here is one of the largest companies in the world, almost wholly owned by a large country, with $5 billion worth of long term contracts signed by monopoly utility companies that is building a $2 billion plant in a supportive community that is nearly identical to one that they are already operating in France. How can it be that such a project is not considered to be credit worthy without a government loan guarantee?
Here is Roy’s response:
Rod
I am not surprised at all. I believe that the real problem that is being addressed by the loan guaranties are delays either during construction or upon start up that are due to lawsuits brought by people apposed to nuclear power. I believe that you could get the project financed in many first world countries with the fact pattern that you described without the loan guaranties (certainly that would be the case in France and Japan). One of the biggest problems that we have in this country with regard to restarting the nuclear power industry is that a project could be stopped either during construction or upon starting operation at COD with a lawsuit by someone apposed to nuclear power. The fact that the project is located in a supportive community is very helpful but we all know that lawsuits in this country can come from anywhere and not just the local community. From a lenders perspective, the risk of delayed operation in this country is too great (delayed operation equals no cash flow from operations).
The delay risk is really limited to either new greenfield projects or expansions (i.e. brownfield projects). Lenders will bear project nuclear plant operating risk. There are examples around the world where lenders bear the risk that plants get taken off line. The project entity is typically required to hold cash in a debt service reserve to cover debt service during the time a plant has been forced off line. A more recent example is Entergy’s proposed spin-off of their nuclear power plant subsidiary. The entity is expected to own 6 operating nuclear power plants and be spun-off to ETR’s existing shareholders to become a separate listed and traded company who’s primary business is to gene
rate and sell power using nuclear power plants. The entity will issue approximately $3.4 billion of debt that will ultimately be held by third parties. After the spin-off, the entity is only expected to retain $750 million of cash for working capital. Said another way, the primary credit support for the $3.4 billion of debt will be the operating cash flows from the business.
So that is the dilemma; nuclear construction projects seem to carry a uniquely difficult to quantify risk reputation in the financial community. The bankers have long memories of projects that were delayed – often for years at a time. Those delays added costs, but more importantly, they pushed the period of revenue generation off into an uncertain future. Because the delays were often caused by government action, inaction or distraction due to lawsuits, they are seen to be solvable only by having the government stepping in to back the loan and make lenders whole in the case of a significant project delay.
For those fiscal conservatives that dislike nuclear because they believe that all industries should be able to stand on their own feet without the government propping them up, my plea to you is to help us figure out a way to ensure that a yes is a yes. The United States did not achieve its position of leadership in the world by being a place where investors had to worry about sovereign risk or a place where contracts could be invalidated with the stroke of pen in the hand of a newly elected leader or, even worse, an appointed bureaucrat.
Nuclear technology is a key tool in our effort to address energy security and limit pollution caused by fossil fuel combustion. Not only will new nuclear power plants help our economy prosper, but nuclear fuel services facilities will also take advantage of the fact that our market for those services is, and should remain, the largest in the world.
It’s not just the States. This is why we are being treated to the spectacle of AECL looking at astonishingly large estimates for a reacter built in Canada, while setting world records for on-time, on-budget, builds on off-shore projects.
Unfortunately there is no easy work-around – it will have to be done by legislative fiat, and for that to happen, enough politicians have to have the backing of their constituencies, that supporting such a law would not be career suicide.
Again, we have to take the fight out into the street, that is where our opponents draw their strength, and that is where we must make inroads if there is going to be change.
DV82XL, I’d say that the lack of attention to building needed future power infrastructure is not special. The same lack of attention is applied economy-wide to all infrastructure, in Canada and the United States. We’ve been half-assing it building some things with Public Private Partnerships, in order to hide debts (debt=bad, apparently, to politicians and newspaper editorialists). (I don’t think P3’s are necessarily bad … it is just that they are used as a con game to avoid discussing the neccessity of taking on debt.)
The effects of not wishing to take on debt in certain sectors are very clear. The reduce economic activity, and make the activity that remains less efficient. The nuclear industry in Canada is but one example of this phenomenon. Building some reactors takes a huge investment is training, equipment, etc. So the money is invested, and we build them. Then this activity stops, due to lack of customers (really, a lack of capital for the customers, and due to short-term thinking government). You strand your physical assets. You strand your workforce, which chaffs. Then you want to start up again. And you spend a huge amount of money again. The cycle repeats. What a plan!
I live in Vancouver, and another example of this mentality is with SkyTrain rapid transit. We built one train line, and then waited a decade, build another, waited 5 years, and built another. Start, stop, wait, stop. What are the workers and machines and factories that build the trains doing? Idling. But still paying their bank loans. How do they pay those loans: by charging more when, in the next decade, a little more work comes around, and by scrimping on training and wages and investment.
It is the mania of less debt that strangling the west. It will kill it, as surely as devotion to dogma killed the communist economies. Governments taking on debt is not bad. if it is service to ensuring the economy and society grows in directions the public wants. There is such a thing as good debt and bad. If the private sector is unwilling to finance provably needed power infrastructure (or transport structure), the government must step in.
How did our grandparents do it?
Rod — Great article, but you’re missing the elephant in the room.
In the 2005 EPAct, Congress set aside $2B for “front-end fuel cycle” technologies. See here:
http://nuclear.gov/np2010/neScorecard/neScorecard_financial.html
I’ve heard arguments that the $2B was specifically put in for USEC, which may or may not be true. The only other possible users of that money would be AREVA and, as a long shot, GE’s GLE. GE decided its technology wasn’t mature enough, so they backed out.
AREVA’s not stupid. They’re trying to eat USEC’s lunch.
As further proof, National Enrichment Facility in NM (built by Louisiana Energy Services, which is mostly a front-end shop for URENCO) was already out the door, and didn’t need the loan guarantee funding. So, building a uranium enrichment facility CAN be done on private funding.
@thermopile – Are you implying that the reason that Areva is insisting that they need the loan guarantee is that they are trying to ensure that the loan guarantee authority is not available for later award to USEC when their American Centrifuge Enrichment is judged to be mature enough?
That is an interesting thought, though Sam Shakir was insistent during the call that there is plenty of market demand for both Areva and USEC. He even indicated that there was enough demand for enrichment services to accommodate any production that becomes available from GE’s Silex, though he did have a somewhat snide qualifier on that particular comment – something about “if they ever get it working”.
Yep, that’s what I was implying.
I could have my numbers wrong, but AREVA applied for the DOE loan guarantee on the first process building — capable of 3.3M SWU. There’s a whole second process building available to them, to increase the total output to 6.6M SWU, once the first building gets up and running. Their NRC license application has been amended for 6.6M SWU.
AREVA would be happy to fill the vacuum left by USEC. GE has a tough road ahead.
Rod, you raise a lot of great questions. While you and most of your loyal readers know that these projects are long-term money-makers, in the everyday realm of construction project risk management, their exposure is viewed as too high, too long-tailed and subject to a volatile regulatory environment. These risks simply exceed the expected profit for the typical financial institution.
Even the largest of conventional projects, e.g., Bank of America Tower at One Bryant Park ($1b) or the new Yankee Stadium ($1.5b) seem simple to justify compared to the newly designed first-of-a-kind (FOAKs) being considered at $6b or more. NYC cubicles will always cost and rent at some probability of a calculable square foot rate range, no matter what. Beer, hot dogs, a bobblehead and a hat can be easily sensitivity analyzed along with thousands of costs and variables to the nickle and dime over the last and next forty years. Investors can look at an infinite variety of ROI scenarios to almost any degree of certainty they wish.
Now, about that FOAK in a swamp somewhere? How much did you say it was going to cost?
Sam makes a good point about the n-word, “nuclear.” It is indeed “radioactive.” Potential investors will want to see “skin in the game” from others, especially risk-spreading insurance and goalpost-moving government entitiies. Since the government ordered TMI design changes mid-construction and the cost of money related thereto drove the huge cost increases last time, it’s all tied together in the collective mindset. Insurance companies were caught off guard, too. Imagine if the Chesapeake Basin had been contaminated. Hence, there are now nuclear exclusions in each and every insurance policy everywhere at all times now. Check your rental car agreement or pet’s health care plan. It’s in there, and it’s in every policy needed to drive a nail or move a ladder, too. No insurance, no dough.
Roy’s point about lawsuits is also strong. Don’t dismiss the intervenors struggling to get traction of today, like SACE, remember the ones that shut down Shoreham causing a $5b loss (in 1980s dollars.) Consider the effect that has on decisionmaking to this day. Although unlikely, there is always the possiblity of another TMI. The banks are not as confident as those closer to the safety record. Out of sight, out of mind. Recently, the government has put skin in the game with financial protection for regulatory changes, and now loan guarantees. That leadership was needed, so the ball is moving out of their court albeit slowly.
As such, when it becomes clearer that money can be made in these endeavors with a little creativity and foresight, see e.g., Surety Bonds for Nuclear Energy Facility Construction Cost-Savings, I expect we’ll see some piecemeal movement in the direction you’d like. The NuScales and B&Ws might even be able to make a quick quantum hop, skip or jump in that direction with easily financed packages. We’ll see.
Some of the conservative reactions to Obama’s recent announcement about tripling loan guarantees seemed a bit knee-jerk and troubling. They need to understand that this effort is closer to certain NASA programs than ACORN in regard to government spending.* Some seem to have forgotten how in the last breath they were calling for energy independence. I like the more balanced approach from Conditions and Policy Reforms Must Accompany Nuclear Loan Guarantee Boost.
There is a great opportunity here and now is the time for the industry to double down on the discipline.
* As you’ve previously stated, a loan guarantee is not even “spending” per se, and only a fraction is likely set aside (reserved) in case of a loss.
Brian: Excellent comment. Just a couple of small clarifications. The facility in question is NOT a $6 billion power plant, it is a $3 billion enrichment facility and Areva has already committed more than $1 billion of its own equity. They also have $4 billion in signed long term contracts from very credit worthy electric power producers for enrichment services to be provided by the facility.
Secondly, I reviewed the President’s budget submission. The numbers next to the entry for “loan guarantee programs” were negatives for the next four years. That means that not only is the program NOT a spending program, it is a revenue program where the Treasury actually gets income from the loan applicants when they pay the fees for the guarantees!
When the right people wake up to the fact that even the government can make money on this, I want to be there. From what I’ve seen people seem to enjoy electricity.
Brian:
My enjoyment of electricity is never far from my mind, but it has been even more apparent during the past few days. We have been hit with a lot of snow and unable to leave our house for several days at a time. All is good as long as the electric heat pump, the electric well water pump, the electric stove, the electric refrigerator and the electric entertainment devices are up and running. If that tiny little wire coming into the house stops carrying juice, however, just existing gets quite challenging very quickly. There are a lot of vulnerabilities along that wire that are threatened by stormy weather and heavy snow, but so far, so good.
I think the reasons for difficulties in obtaining financing are rather obvious. The banks have been less willing to loan money for any sort of projects since this financial mess blew up in September of 2008.
If you look at the macro picture of demand for electricity, the realities of slowing increases in demand have to be noted. Why the slowing increase in demand? Well, the very things that I used to write about at _We Support Lee_ i.e. offshoring of manufacturing and stagnant wages. These are the same things that caused the housing bubble to burst.
If the upper income people can’t afford McMansions anymore and are moving to smaller homes, and if lower income people are moving in with friends/relatives, what does that do to projected electricity demand five or seven years out?
The answer is that the demand curve is flattened dramatically.
Thus, the CEO’s and CFO’s of utilities don’t see the positive return in making the huge capital investment needed to build a new nuclear plant. They might have seen this potential return as positive back in 2005 when the housing market was being very heavily built, but that picture has changed greatly in the intervening five years.
Thus, plant order cancellations.
It’s a real shame, and it is quite a setback for long-term carbon-free energy planning. But, this is the reality.
I hate to sound like an anti-nuke, but until we get some of the economic picture straightened out, we just won’t have the demand for electricity that justifies a lot of new plant build.
The key here is to GET WORKING PEOPLE’S INCOMES BACK IN LINE WITH THE INCREASED COST OF LIVING. When people can afford to, they will stop doubling up with their beleaguered relatives and friends and they will move into their own place. When people in 1700-sf homes can afford a 2500-sf home, they will trade up. But as long as college tuition and medical costs gallop up at 30% per year, while wages remain stagnant or go down, that upscaling in lifestyle isn’t going to happen. And neither is demand associated with domestic goods production going to come into the picture until we get some of our jobs to come back to our shores.