Thursday, January 29, 2009

Investors Recognize the Value in US Nuclear Plants

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There have been a number of recent developments in the US nuclear industry that amount to a shaking out of the various technologies, vendors, and utilities who are likely to emerge as leaders in the race to build the first new nuclear plants in the USA. A good analogy is the multi-stage bicycle race, the Tour de France. Each stage of the race has a winner, but the winner of any one stage will not necessarily win the race. I’d say we’re still not quite at the half way point of the race, but each month it’s becoming more and more clear which projects are in the lead pack, which are trailing, and which are in the race simply because they think it’s cool to wear the colored jerseys.

GE ESBWR Reactor Dropped by Exelon, Entergy and Dominion

There are growing indications that one new design is not progressing at the pace needed to support new construction anytime soon. Work on the General Electric Environmental Safe Boiling Water Reactor (or ESBWR) has yet to reach the level of detail that would enable GE to make firm costs estimates. As a result, three large customers, Exelon, Entergy, and Dominion Resources, have all announced they are no longer considering the ESBWR for their new plant projects. This is unfortunate for a number of reasons; the ESBWR is, in my opinion, a move in the right direction. It is a simplified design with fewer components and passive safety features. It should end up costing less than other reactors of similar capacity because it would have fewer expensive pumps and valves. It’s also a setback for the companies that were supporting that design - Exelon’s Texas project, Entergy’s plans for new reactors in LA and MS, and Dominion’s plans in VA will all experience delays as they regroup to select a new reactor type and negotiate with new vendors. At this point, the only remaining project for an ESBWR is from DTE Energy for their Michigan Unit 3 project. I have to wonder about General Electric’s commitment to the effort, particularly when their potential reactor business is but a small fraction of their projected wind and gas turbine revenues. Their leadership may be making resource decisions that acknowledge one new nuclear plant could prevent the construction of several gas large turbines and hundreds of wind turbines.

Toshiba and Westinghouse Sign Contracts for New Reactors in the USA

A few projects appear to be moving full speed ahead. This past week newspapers began to report that Toshiba had signed a contract to supply NRG Energy with two 1400 MW Advanced Boiling Water Reactors (ABWRs). The deal, reportedly worth about $8.8 Billion, is for two new units at the South Texas Project where there are already two Westinghouse Pressurized Water Reactors (PWRs). If this comes to pass, it will be the first time a Japanese nuclear reactor company has built a reactor outside of Japan. Interestingly enough, while Toshiba builds boiling water reactors in Japan, they also own the AP-1000 pressurized water reactor technology because of their 2006 purchase of Westinghouse.

Early this month Progress Energy signed a deal with Westinghouse for two new Advanced Passive 1000 (AP-1000) reactors for their Levy project in Florida. That contract is for $7.65 Billion. On a side note, last week Toshiba announced they have formed a partnership with Indian heavy equipment manufacturer Larsen & Toubro to build components for AP-1000 reactors they plan to sell in India. The Indian government has stated they need to build 60,000 MW of new electricity generation by 2030, and a large share is expected to be nuclear.

The AP-1000 design seems to betting the most “takers”; Progress Energy, Southern Company, Duke, South Carolina Electric & Gas, and TVA have all filed applications with the NRC for a total of 12 AP-1000 reactors. Other companies including FPL have stated their intent to do the same. Areva’s Evolutionary Pressurized Reactor (or US-EPR) is in second place with four units on the drawing board for Constellation Energy, PPL, AmerenUE, and Unistar. Areva is the international business company for EDF, the French Electric company that operates their 59 nuclear reactors.

French Utility EDF Buys 50% of Constellation Energy’s Five Nuclear Plants

Those of you inside the nuclear industry have certainly been watching the fascinating high stakes financial dealing that has been going on between Constellation Energy, Warren Buffett’s MidAmerican Energy Holdings, and EDF. If anyone was questioning the value of existing nuclear plants in the USA, after they hear this story any doubts they had will be a thing of the past. Last fall, about the time the world’s financial markets took their downturn, it became apparent that Constellation Energy was in trouble. Their cash reserves were depleted, and their stock price had reached an unreasonably low level when compared to their assets and balance sheet. In September Warren Buffett came to the rescue with a $4.7 Billion cash offer to buy the company. Areva, the international business arm of the EDF, recognized an opportunity and in December they countered Warren Buffett’s offer. The EDF offer was $4.5 Billion for a 49.9 percent share in Constellation’s nuclear units. The Constellation Energy board of directors accepted EDF’s offer.

Constellation has five nuclear units located on three sites; two Calvert Cliffs units in Maryland, two Nine Mile units in New York, and the Ginna unit, also in New York. EDF’s deal included $1 Billion in cash which shored up Constellation’s balance sheet and provided much needed operating cash. EDF and Areva have been eager to get their foot in the door of the lucrative US nuclear market, and this deal provides that opportunity.

So, even with the current chaos in the world’s financial markets, EDF’s deal means the full market value of Constellation’s nuclear units is $9 Billion. I think EDF got a pretty good deal; it would cost upwards of $20 Billion to build 5,400 MW of new capacity, and several of those plants are big money makers because they are located in deregulated electricity markets where nuclear is the cheapest form of generation and the cost of expensive natural gas prices sets daily market prices.

Entergy is Waiting for the Right Time to Execute Nuclear Spin-off

The turmoil in the financial markets have definitely had an impact on some utility plans for expansion and growth. Entergy, for example, announced they are delaying the proposed spin-off of their six deregulated nuclear plants. They’ve made it clear the deal is still on, and they are waiting for the right time to make it happen. Here’s an interesting comparison: the plants Entergy plans to spin off into a new company called Enexus will have more capacity and more revenue opportunity than the Constellation units that the market tells us are worth at least $9 Billion. This indicates to me that once the spin off happens Enexus should have a market value of between $10 Billion and $12 Billion. It will be interesting to see how the Enexus stock performs as the only 100% nuclear generator in an American deregulated electricity market.

Exelon Attempts Hostile Take-over of NRG Energy

The final example of the value investors are seeing in existing nuclear plants is a deal that is still in the works. In October, Exelon made an unsolicited bid to purchase NRG energy for $ 6.2 Billion. When the NRG board of directors refused the deal, Exelon began an attempt at a hostile takeover. Exelon offered NRG shareholders a stock exchange deal of just under ½ a share of Exelon for each share of NRG. As of this week they claim to have received contracts for 46% of NRG. The offer will continue until late February.

My belief is that Exelon understands the huge value that emissions free generation will have in Texas under any kind of carbon cap and trade program. Texans has the highest per capita electricity consumption in the USA, and the highest per capita CO2 emissions. This is because they use mostly coal and natural gas to generate electricity. In a carbon constrained economy, emission free electricity will be very valuable (and very profitable). Exelon already has plans to expand into Texas, and they see the NRG acquisition as a way to accelerate the process.

Despite the financial turmoil and the tightening of the world’s credit markets, the future remains bright for the nuclear industry. Realization is growing across the country and particularly in the investment community, that nuclear energy is the only cost effective source of base load carbon-free electricity. Nuclear generation is the only source of electricity that can be expanded quickly enough and to the scale needed to meet CO2 reduction goals.

Wind and solar power need to be a part of the energy mix, in that we need to continue research and development to help them someday become competitively priced and scalable. Until then building new nuclear plants is the only realistic option. Conservation has a role to play, too. Unfortunately, I question how much conservation the USA can achieve without a massive relocation of population from rural areas to large cities and huge government spending to pay for retrofitting old homes, businesses, and factories. Perhaps that is something the new administration has in mind.

John Wheeler

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