Warning to Taxpayers, Investors: Nukes May Become Troubled Assets
Part One: The Staggering Cost of New Nuclear Power
Nuclear plants with such incredibly expensive electricity and “out of control” capital costs, as Time put it, obviously create large risks for utilities, their investors, and, ultimately, taxpayers. Congress extended huge loan guarantees to new nukes in 2005, and the American people will be stuck with another huge bill if those plants join the growing rank of troubled assets (see “Nuclear energy revival may cost $315 billion, with taxpayers’ risking over $100B”).
The risk to utilities who start down the new nuke path is also great. A June 2008 report by Moody’s Investor Services Global Credit Research, “New Nuclear Generating Capacity: Potential Credit Implications for U.S. Investor Owned Utilities” (PR here), warned that “nuclear plant construction poses risks to credit metrics, ratings,” concluding:
The cost and complexity of building a new nuclear power plant could weaken the credit metrics of an electric utility and potentially pressure its credit ratings several years into the project, according to a new report from Moody’s Investors Service….
Moody’s suggests that a utility that builds a new nuclear power plant may experience an approximately 25% to 30% deterioration in cash-flow-related credit metrics.
And this would likely result in a sharp downgrading of the utility’s credit rating.
The application by Florida Power & Light (FPL) for a large nuclear plant came in at a stunning $12 to $18 billion, and the utility concedes that new reactors present “unique risks and uncertainties,” with “every six-month delay adding as much as $500 million in interest costs.”
The report Climate Progress published this week, "Business Risks and Costs of New Nuclear Power" by power-plant cost expert Craig Severance, has an extended discussion of the business risks to utilities and hence investors:
In its 2003 study “The Future of Nuclear Power”, MIT included a 3% risk premium in its calculations of projected Cost of Capital for nuclear projects, because of the extra business risks projected for nuclear. MIT’s concerns were valid.
Florida Power & Light has stated: “In general, the rating agencies (such as Moody’s Investor Services) view new nuclear construction as a higher risk than other technologies. This view is primarily driven by the long approval and construction process associated with new nuclear construction as well as the size of the capital requirements in relation to the utility as compared to capital requirements for other generation technologies. Rating agencies also recall the difficulties of the 1970’s and 1980’s.”
On June 2nd of this year, Moody’s Investor Services Global Credit Research issued a public announcement entitled “Moody’s: Nuclear Plant Construction Poses Risks to Credit Metrics, Ratings.” Per the Announcement: “Moody’s examines the effects of a new nuclear facility on the credit metrics of “NukeCo”, a hypothetical electric utility. Through this illustrative model, Moody’s suggests that a utility that builds a new nuclear power plant may experience an approximately 25% to 30% deterioration in cash-flow-related credit metrics. In the case of “NukeCo”, cash flow from operations as a percentage of debt falls from roughly the 25% level to the mid-teens range.”
The Moody’s simulation begins with the fictional utility “well-positioned within the single-A ratings category before building a nuclear plant….”, however “ … in years 5-10, when construction costs reach their peak and key credit metrics begin to deteriorate significantly, the fictional company would be better positioned in Baa-rating category.”
In today’s nervous credit climate, downgrading a corporation to a more risky Baa rating (the lowest tier of investment grade debt) may carry serious consequences. Moody’s Seasoned Baa Corporate Bond Yield: Percent [www.economagic.com/em-cgi/data.exe/fedstl/baa+2], shows that in October 2008, the Baa yield climbed to 8.88 percent, compared to only 7.31 percent in September 2008, the highest relative monthly jump since the table began in 1919, indicating investors have extreme default risk concerns. The fact a Baa bond will have a higher effective interest rate is not even the biggest concern. The very ability to sell downgraded bonds in a credit market already termed “dysfunctional” may be the more critical factor.
The Moody’s Announcement also notes a risk to the shareholders of the utility: “The technology is very costly and complex, and the 10- to 15-year duration of these construction projects can expose a utility to material changes in the political, regulatory, economic and commodity price environments, as well as new alternatives to nuclear generation. These potential changes in the landscape could prompt regulators to disallow certain cost recoveries from ratepayers after a plant is built, or lead to market intervention or restructuring initiatives by elected officials.”
Industry commentators have also noted these financial risks. Nuclear Engineering International noted on 22 August 2008: “Companies that build new nuclear plants will see marked increases in their business and operating risks because of the size and complexity of these projects, the extended time they take to build, and their uncertain final cost and cost recoveries. To the extent that a company develops a financing plan that overly relies on debt financing, which has an effect of reducing the consolidated key financial credit ratios, regardless of the regulatory support associated with current cost recovery mechanisms, there is a reasonably high likelihood that credit ratings will also decline. So ‘thinking caps’ must now certainly go on amongst US boards of management — credit ratings are important and taking a punt on a new nuclear plant may not be the first priority of a CEO in his late 50s with a distinguished career behind him.”
Credit ratings are very important. The prospect that undertaking a single project could have such a major impact on a utility company’s balance sheet and cash flow that company credit ratings would be downgraded, should give pause to any executive, or oversight regulator, contemplating the wisdom of undertaking such a project.
The full study is here.
Part One: The Staggering Cost of New Nuclear Power
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