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 generate 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.
