Financing New Nuclear Power Plants Opportunities, Challenges and Options for Governments, Sponsors and the Private Markets

Transcription

1 Financing New Nuclear Power Plants Opportunities, Challenges and Options for Governments, Sponsors and the Private Markets INPRO Dialogue Forum on Nuclear Energy Innovations: Multilateral Approaches to Sustainable Nuclear Energy Deployment Vienna, Austria October 4-7, 2010 Michael D. Scott Managing Director Miller Buckfire & Co., LLC

2 Table of Contents 1. History of Financing Nuclear Power A Global and U.S. Overview 2. Financing New Nuclear Power and Risk Management 3. A U.S. Nuclear Renaissance? 4. The Future Sources of Capital for New Nuclear Power 5. Concluding Remarks 1

3 History of Financing Nuclear Power A Global and U.S. Overview

4 History of Financing Nuclear Power The Last Build Ownership and financing dominated by three models Governments State-Owned Utilities Investor Owned Utilities (U.S.) Participation with Cooperative Owned Utilities and Municipal Owned Utilities 3

5 History of Financing Nuclear Power The Last Build (cont d) Government and State Owned Utilities financed through cash or debt explicitly or implicitly backed by the sovereign Easiest approach Decision linked to strategic national priorities Market discipline of full cost recovery through rates not always a principal objective 4

6 History of Financing Nuclear Power The Last Build (cont d) Investor Owned Utilities (U.S.) Regulated market at the time State Public Utility Commission rate recovery mechanisms provided investors with perceived security that utilities would be able to charge rates necessary to cover costs plus profit margin Financing structure for IOU s benefited from low debt-to-capitalization ratios generally less than 50% Principally first mortgage bonds which provided a claim on ALL assets 28 of 104 reactors included cooperatives or municipalities as co-owners Cooperatives and local municipalities were co-owners securing a percentage of the output for load requirements and responsibility for financing their proportional ownership Ownership ranged from 0.1% to 40% Cooperatives typically financed through a U.S. Government loan program (sovereign) Municipalities typically financed through debt issued in the municipal market (sovereign) IOU remained responsible for the construction and operation of the plant - A prime example of the multilateral approach 12 of 104 reactors included IOU s as co-owners 5

7 Existing Multilateral (Joint Ownership) Projects (1) Reactor Name Owner Percentage Ownership Beaver Valley 1 Pennsylvania Power Co. 65.0% Beaver Valley 1 Ohio Edison Co. 35.0% Beaver Valley 2 Ohio Edison Co. 41.9% Beaver Valley 2 Toledo Edison Co. (The) 24.5% Beaver Valley 2 Cleveland Electric Illuminating Co. (The) 19.9% Beaver Valley 2 Pennsylvania Power Co. 13.7% Brunswick 1 & 2 Progress Energy Carolinas 81.7% Brunswick 1 & 2 North Carolina Eastern Municipal Power Agency 18.3% Catawba 1 North Carolina Electric Membership Corp. 61.5% Catawba 1 Duke Energy Corp. 38.5% Catawba 2 North Carolina Municipal Power Agency No % Catawba 2 Piedmont Municipal Power Agency 25.0% Crystal River 3 Progress Energy Florida 91.8% Crystal River 3 Other (2) 8.2% Davis Besse Cleveland Electric Illuminating Co. (The) 51.4% Davis Besse Toledo Edison Co. (The) 48.6% Duane Arnold NextEra Energy Resources, LLC 70.0% Duane Arnold Central Iowa Power Coop. 20.0% Duane Arnold Corn Belt Power Coop. 10.0% Edwin I. Hatch 1 & 2 Georgia Power Co. 50.1% Edwin I. Hatch 1 & 2 Oglethorpe Power Corp. 30.0% Edwin I. Hatch 1 & 2 Municipal Electric Authority of Georgia 17.7% Edwin I. Hatch 1 & 2 Dalton GA (City of) 2.2% Grand Gulf 1 System Energy Resources, Inc. 90.0% Grand Gulf 1 South Mississippi Electric Power Association 10.0% (1) Source: Nuclear Energy Institute. (2) Nine municipal or cooperative entities own between 0.1% and 1.7% of the reactor and output. 6

8 Existing Multilateral (Joint Ownership) Projects (1) (cont d) Reactor Name Owner Percentage Ownership Millstone 3 Dominion Resources, Inc. 93.5% Millstone 3 Massachusetts Municipal Wholesale Electric Co. 4.8% Millstone 3 Central Vermont Public Service Corp. 1.7% Nine Mile Point 2 Constellation Energy Nuclear Group, LLC 82.0% Nine Mile Point 2 Long Island Power Authority 18.0% North Anna 1 & 2 Virginia Electric & Power Co. 88.4% North Anna 1 & 2 Old Dominion Electric Coop. 11.6% Palo Verde 1, 2 & 3 Arizona Public Service Co. 29.1% Palo Verde 1, 2 & 3 Salt River Project 17.5% Palo Verde 1, 2 & 3 El Paso Electric Co. 15.8% Palo Verde 1, 2 & 3 Southern California Edison Co. 15.8% Palo Verde 1, 2 & 3 Public Service Co of New Mexico 10.2% Palo Verde 1, 2 & 3 Southern California Public Power Authority 5.9% Palo Verde 1, 2 & 3 Los Angeles Dept. of Water & Power 5.7% Peach Bottom 2 & 3 Exelon Corp. 50.0% Peach Bottom 2 & 3 PSEG Power 50.0% Perry 1 Cleveland Electric Illuminating Co. (The) 44.9% Perry 1 Ohio Edison Co. 30.0% Perry 1 Toledo Edison Co. (The) 19.9% Perry 1 Pennsylvania Power Co. 5.2% Quad Cities 1 & 2 Exelon Corp. 75.0% Quad Cities 1 & 2 MidAmerican Energy Co. 25.0% Salem 1 & 2 PSEG Power 57.4% Salem 1 & 2 Exelon Corp. 42.6% San Onofre 2 & 3 Southern California Edison Co. 75.1% San Onofre 2 & 3 San Diego Gas & Electric Co. 20.0% San Onofre 2 & 3 Anaheim Public Utilities Dept. 3.2% San Onofre 2 & 3 Riverside Public Utilities 1.8% (1) Source: Nuclear Energy Institute. 7

9 Existing Multilateral (Joint Ownership) Projects (1) (cont d) Reactor Name Owner Percentage Ownership Seabrook 1 NextEra Energy Resources, LLC 88.2% Seabrook 1 Massachusetts Municipal Wholesale Electric Co. 11.6% Seabrook 1 Taunton Municipal Lighting Plant 0.1% Seabrook 1 Hudson Light & Power Dept. 0.1% Shearon Harris 1 Progress Energy Carolinas 83.8% Shearon Harris 1 North Carolina Eastern Municipal Power Agency 16.2% South Texas Project 1 & 2 NRG Energy 44.0% South Texas Project 1 & 2 CPS Energy 40.0% South Texas Project 1 & 2 Austin Energy 16.0% St. Lucie 2 Florida Power & Light Co. 85.1% St. Lucie 2 Florida Municipal Power Agency 8.8% St. Lucie 2 Orlando Utilities Commission 6.1% Susquehanna 1 & 2 PPL Corp. 90.0% Susquehanna 1 & 2 Allegheny Electric Coop, Inc. 10.0% V.C. Summer South Carolina Electric & Gas Co. 66.7% V.C. Summer Santee Cooper 33.3% Vogtle 1 & 2 Georgia Power Co. 45.7% Vogtle 1 & 2 Oglethorpe Power Corp. 30.0% Vogtle 1 & 2 Municipal Electric Authority of Georgia 22.7% Vogtle 1 & 2 Dalton GA (City of) 1.6% Wolf Creek 1 Kansas City Power & Light Co. 47.0% Wolf Creek 1 Kansas Gas & Electric Co. 47.0% Wolf Creek 1 Kansas Electric Power Coop. 6.0% (1) Source: Nuclear Energy Institute. 8

10 Financial Challenges From The Last Build in the U.S. and Implications for the Future Financing Structure Performance Actual performance was reasonably good from last build, however, there were issues affecting investors at particular points in time 40 of 48 issuers were downgraded an average of 4 notches Selective defaults occurred Low debt-to-capitalization structures and use of first mortgage bonds by IOU s contributed to overall performance project finance and other proposed structures today do not necessarily enjoy these attributes Rating agency historical default curves for utilities are not necessarily comparable for the new environment Regulated environment has largely been replaced by de-regulated markets U.S. Government loans to Cooperative Utilities used high debt-to-capitalization structures (up to 100%) and resulted in significant write-offs by the U.S. Government The cost of new nuclear power plants in the U.S. represent significant balance sheet issues for even the largest U.S. IOU s Private market financing for new nuclear does not exist today without U.S. Government support 9

11 Construction and Regulatory Challenges From The Last Build in the U.S. Construction and Operating Risks Materialized Detailed Design and Engineering was performed during construction Licensing delays Significant re-work Cost overruns Regulatory framework was not completed prior to construction which caused uncertainty, delays, and additional post-construction requirements Inexperienced management teams, contractors, supply chain and workers in nuclear construction Poorly aligned performance risk sharing between contractors and utilities led to U.S. rate payers being principally responsible for cost overruns Licensing framework was not completed until after construction Extensive hearing process allowed opponents to delay or prevent the post-construction operating license 10

12 U.S. Government Response to Facilitate New Nuclear Power Development Nuclear regulatory and licensing certainty provided in the Energy Policy Act of 1992 New licensing process Early site permitting process Reactor design certification (pre-construction) Combined construction and operating license (pre-construction) Process not proven yet Energy Policy Act of 2005 Risk mitigation, financial and economic incentives Standby support (cash payments) for construction delays if caused by the U.S. Nuclear Regulatory Commission or litigation Nuclear liability addressed through the extension of the Price-Anderson Act Production tax credits provided for the first 6,000 megawatts of capacity U.S. Government loan guarantees for up to 80% of eligible project costs - Access to the U.S. Department of the Treasury s Federal Financing Bank for direct loans removes financial market execution uncertainty associated with loan guarantees financed by the private sector 11

13 Ownership Structures to Facilitate New Nuclear in the U.S. Continuation of multilateral approach between IOU s, Cooperative Utilities and Municipal Utilities Plant Vogtle 3 & 4 (Southern Company, Oglethorpe Power, Municipal Electric Authority of Georgia) Same owners as Vogtle 1 & 2 Owners represent a regulated rate base utility, a cooperative utility and a municipal utility U.S. Government loan guarantee and municipal market financing are key to the project Strategic partnerships between U.S. based IOU s and large foreign utilities/firms UniStar a joint venture between Constellation Energy and EDF first proposed plant is Calvert Cliffs 3 U.S. Government loan guarantee critical to project COFACE loan guarantee critical to project Project does not move forward without successfully accessing the U.S. Government loan guarantee program Nuclear Innovation North America (South Texas 3 & 4) a joint venture between NRG, Toshiba, TEPCO and CPS Energy U.S. Government loan guarantee is critical to the project JBIC and NEXI are likely to participate in the financing of the Japanese content Project does not move forward without successfully accessing the U.S. Government loan guarantee program 12

14 Ownership Structures to Facilitate New Nuclear in the U.S. (cont d) Common thread New nuclear does not get built without U.S. Government financing De-regulation drives new partnerships with larger entities Even in regulated markets, private market financing is not available in size, U.S. Government financing is critical to projects moving forward States and their Public Utilities Commissions are unpredictable and rulings trigger concern Florida (cost recovery), Vermont (license extension), New York (access to cooling water) Cost of nuclear projects relative to the IOU s balance sheets creates serious impediments new ownership and financing structures need to overcome these barriers 13

15 U.S. Nuclear Power Industry ($MM) The following companies own the 104 currently operating nuclear reactor units in the United States Company Operating Reactors (1) Market Cap (2) Total Debt (2) Exelon Corp. (3) 16.9 $27,953 $12,334 Entergy Corp ,641 11,853 NextEra Energy ,352 20,310 Duke Energy Corporation ,183 17,810 Dominion Resources, Inc ,615 16,502 Tennessee Valley Authority 6.0 N/A 24,915 Southern Company ,869 20,532 Progress Energy Inc ,847 12,704 Constellation Energy Group, Inc ,350 4,277 FirstEnergy Corp ,136 14,895 Public Service Enterprise Group Inc. (3) ,913 9,137 Xcel Energy Inc ,002 9,084 Pinnacle West Capital Corp ,459 3,790 Energy Future Holdings (Luminant) 2.0 N/A 39,862 NRG Energy, Inc ,484 9,470 PG&E Corp ,771 12,862 American Electric Power Co ,346 18,821 PPL Corporation ,956 9,177 Edison International ,038 11,650 Energy Northwest 1.0 N/A N/A Nebraska Public Power District 1.0 N/A 1,490 Omaha Public Power District 1.0 N/A 1,865 DTE Energy Co ,134 7,968 Ameren Corporation 1.0 6,650 8,007 SCANA Corporation 1.0 5,083 5,004 Great Plains Energy Inc. (4) 0.5 2,561 3,901 Westar Energy (4) 0.5 2,656 3,068 Total Reactors (1) Source: Nuclear Energy Institute as of August (2) Source: CapIQ as of September 16, (3) Exelon Corp and Public Service Enterprise Group are joint owners of Peach Bottom 2 and 3 (50% ownership each) and Salem 1 and 2 (42% and 57% ownership, respectively) nuclear reactors. (4) Great Plains Energy and Westar Energy hold 47% ownership each of the Wolf Creek 1 reactor. 14

16 Financing New Nuclear Power and Risk Management

17 What Makes Nuclear Power Different? At the macro level, nuclear power is certainly similar to other critical infrastructure projects like clean and waste water, transportation, communications and other forms of energy all of which are important for society and economic development At a micro level through, nuclear power is significantly more complex, and these complexities make financing of new nuclear power extremely challenging These additional complexities significantly reduce or eliminate the relevance of other infrastructure finance alternatives available through multilateral financial institutions such as the World Bank group of entities or multilateral development banks, most of which either explicitly or implicitly will not finance new nuclear power plants 16

18 Risk Management Critical to Financing Success in Multilateral Approach Governments need to provide a robust, stable and predictable framework for nuclear power Policies Regulation Licensing Legal Financial Project sponsors and their partners need to control, mitigate or transfer the risks that arise throughout the life cycle of a nuclear power plant Pre-construction Construction Operation Decommissioning Many of the risks continue throughout all phases of the lifecycle and require constant attention 17

19 Risk Management Critical to Financing Success in Multilateral Approach (cont d) Project Risks Pre-construction Licensing and regulatory issues Liability management (internal, national laws Price-Anderson Act, international conventions) Site selection and infrastructure requirements - Transmission Grid - Water - Transportation Public support - Local - National 18

20 Risk Management Critical to Financing Success in Multilateral Approach (cont d) Project Risks Construction Technology - Proven design - First-of-a kind EPC contractor Supply chain - Heavy forgings - Precision components Skilled labor Project management Unit costs 19

21 Risk Management Critical to Financing Success in Multilateral Approach (cont d) Project Risks Business plan Credibility built through a thoughtful process that is fully reflective of the issues and risks inherent in the business of nuclear power and controls and manages the risks Incorporation of credible and supportable assumptions and inputs Finance sourcing and transaction structure that optimizes capital requirements - Power purchase agreements and other long-term off-take agreements - Contingent guarantees Market risks - Coal/gas/alternative prices - Carbon pricing / climate policy - Load requirements - Commodity prices - Exchange rates Capital structure and access 20

22 Risk Management Critical to Financing Success in Multilateral Approach (cont d) Project Risks Operations Skilled labor Fuel supply Safety Security Waste storage Decommissioning 21

23 A U.S. Nuclear Renaissance?

24 U.S. Government Loan Guarantee Legislation Title XVII of the Energy Policy Act of 2005 ( EPAct 2005 ) authorized Federal loan guarantees to speed the development and construction of innovative technologies that reduce greenhouse gas emissions. Ten technologies were eligible, including advanced nuclear energy facilities. Under EPAct 2005, the U.S. Department of Energy ( DOE ) was charged with the responsibility to implement the Federal loan guarantee program, after consultation with the Secretary of the Treasury Title XVII technically gave DOE unlimited loan guarantee authority by providing that the Federal credit subsidy required for a loan guarantee can be paid for by the borrower (this is a highly unusual approach within Federal credit programs, but helps Congress manage budget constraints) The implementing regulations provided loan guarantee authority until a technology became in general use, defined as a technology installed in three projects, in the same general application, each operating for five years Given the number of nuclear technologies and the time that it would take for each to be operating for five years, this program could provide loan guarantees for dozens of projects 23

25 Title XVII Program Execution Impediments Successful Federal credit programs rely on a willing Executive Branch the process, procedures and rules for Title XVII were established under the prior Administration All of which were designed to limit the usability of the program Results to date Eight solicitations ( ), $175 billion in guarantee requests $695 million funded, all in the last 12 months, all under American Recovery and Reinvestment Act of 2009 authority Two conditional commitments for new nuclear, one for a power plant, one for a front-end fuel processing facility, months before conditions precedent met to all financial closing on either Project sponsors, their partners, investors and the supply chain need to have confidence that Title XVII will be a reasonable, predictable and available Federal credit program The good news is that the President has all of the authority that he needs for correct the impediments to a successful Federal credit program A robust U.S. new nuclear development program is good for the global nuclear industry However, it will take some time to determine which scenario plays out 24

26 Lessons Learned from the U.S. Experience Federal credit programs do not operate in the same manner as the private capital markets Need to fully understand the roles, responsibilities, and motivations of the various actors involved in the Federal credit process as well as the statutes, regulations, and policies driving Federal credit Need to be able to understand the concerns of Congress, the oversight bodies and others who can influence the program positively or negatively and how to address their concerns in the context of a Federal credit program Need to be able to translate a private sector business plan and the process that is required of the program into the construct of the Federal credit model, in a way that addresses the various Federal agencies unique roles and responsibilities, and that provides the sponsor with an economically efficient outcome 25

27 The Future Sources of Capital for New Nuclear Power

28 Sources of Capital: All Projects including Multilateral Projects Governments Direct use of government funds because of ownership Directly or indirectly through loan or loan guarantee programs As sole provider of the capital/credit (U.S. Rural Utilities Service model) In combination with others (the Title XVII model) - Sponsor equity - Other investors - Export Credit Agencies State-Owned Utilities For their home markets In partnership in other markets Turn-key in other markets 27

29 Sources of Capital: All Projects including Multilateral Projects (cont d) Export Credit Agencies ( ECA s ) ECA s have ability and capacity to participate in financing Drive support for home country exports Recent experience demonstrates willingness to finance new nuclear - COFACE - JBIC - NEXI - KEXIM - KEIC - U.S. EXIM Amounts available tied to home country content Tenors can be limited Terms and conditions can require adjustments under international conventions 28

30 Sources of Capital: All Projects including Multilateral Projects (cont d) Project sponsors Equity Debt Project partners Equity Debt Power purchase agreements/long-term off-take agreements Corporate entities with significant load requirements Equity Power purchase agreements/long-term off-take agreements Turn-key operators Sovereign Wealth Funds Private Infrastructure Funds Capital Markets Multilateral Financial Institutions 29

31 Concluding Remarks

32 Concluding Remarks New nuclear power is fundamentally more complex than other forms of infrastructure and this complexity adds to the challenge of financing Higher capital costs Longer planning and construction periods Significant risk factors that need to be expertly managed For those projects that are not owned by the Government and for those sponsors that can expertly manage the risks involved with new nuclear power, the world has changed for the better since the last build More capable partners Better risk management tools Deep experience in nuclear Lots of examples of what not to do However, even in the best of conditions, significant financing obstacles need to be overcome Country specific issues will drive multiple approaches 31