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Moody’s – Nukes are bad for balance sheets

Dan Yurman's picture
Editor & Publisher NeutronBytes, a blog about nuclear energy

Publisher of NeutronBytes, a blog about nuclear energy online since 2007.  Consultant and project manager for technology innovation processes and new product / program development for commercial...

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Wall Street rating service takes a slap shot at utilities that want to build new reactors

Some parts of this blog post were also published in Fuel Cycle Week V8:N339 August 12, 2009, by International Nuclear Associates, Washington, DC

slap shot Publically traded firms love rating services when they get high marks from them, and hate the same creatures with a passion when the self-appointed Wall Street gurus are passing out bad grades.

What’s getting nuclear utilities in a huff this summer is a June 2009 “Special Comment” from Moody’s. The rating firm says it is “considering taking a more negative view” of the financial condition of firms planning to build nuclear power plants.

They’re not kidding. Of the 17 proposed reactor projects, two have “junk” ratings and both are in Texas. They are NRG’s South Texas Project 3 & 4 with Ba3 (questionable credit quality) and Luminant’s Comanche Peak with B3 (generally poor credit quality). Of the remaining projects, 13 of them have ratings just one step above “junk” and eight of them are in the southeast.

Stark findings

The implications could not be more dramatic as the financial ratings handed out by Moody’s determine risk and the cost of capital. If your firm is planning to go to the market to borrow $4.5 billion for a new 1,200 MW reactor, even half a percentage point in the wrong direction could add over $200 million.

moodys logoThat assumes you can get the money. Moody’s warns that there is intense competition for capital. This means a utility shopping for $5 billion to build a new nuclear power plant is up against other utilities chasing much less money for natural gas powered plants with much faster time to market and quicker returns for investors.

These differences in schedules are not lost on the solar and wind companies who also tout their speed of execution relative to nuclear plants. What it comes down to is that the drive for nuclear energy takes so much money that it impacts the acquisition of capital for all other energy technologies or so critics say.

The “special comment” has some more stark findings. Moody’s analysts state the obvious. Construction of nuclear-power plants represents a huge financial gamble, which they call a “bet the farm” proposition.

Worse, Moody’s says the regulatory and political climates are too variable to trust that these projects once started will be able to proceed to completion.

What Moody’s seems to be saying is that even if as a utility you fix your balance sheet problems, the political whims of elected officials and the winds of outrageous fortune could sink a nuclear reactor project despite your best efforts.

Reactors are “bet the farm” projects for utilities

The reasons, Moody’s says, are these.

poker chips We view new nuclear generation plans as a “bet the farm” endeavor for most companies, due to the size of the investment and length of time needed to build a nuclear power facility.

While we continue to view operating nuclear units positively, we increasingly sense that none of the issuers actively pursuing these endeavors have taken any material actions to strengthen their balance sheets.

As a result, it has become increasingly likely that the pursuit of new nuclear power projects will lead to some near-term rating actions or outlook changes.

NEI pushes back

The industry is not taking that assessment lying down. Mitch Singer, a spokesman for the Nuclear Energy Institute(NEI), told me in an interview Moody’s “bet the farm” remarks are based on out-of-date information, some of which was analyzed as long as 25 years ago.

Singer also argues the Moody’s has fallen into the trap of living in the past instead of simply learning from it. He says that interest rates are not as high as they were during the late 70s and early 80s.

nei logo He says the industry has recovered from the Three Mile Island accident. “Dwelling on it is not helpful,” Singer said.

He points out that the NRC has a new combined process for construction and operating licenses. In the past, the agency imposed enormous costs on utilities with separate license applications for building a plant and then operating it.

“The combined licensing reduces regulatory risk and should cut the time for construction of plants,” he said.

Singer acknowledges that Wall Street needs “confidence building measures” to loan money to utilities for new reactors. He expects investors will gravitate to states that allow recovery of construction costs while the plant is being built. All of these states are in the southeast.

Jim Hempstead, the lead author of the Moody’s report, was not available to respond to Singer’s remarks.

Advantages for ‘brown-field’ sites

green_fieldMoody’s believes there is a significant difference between new nuclear plants located adjacent to existing units from those that are green-field projects. They write

“In our opinion, brown-field projects benefit from the existing infrastructure (including security plans), local political support and historical operating record of the existing units.”

There are only two green-field projects on the drawing boards. One of the green-field plants, Exelon’s Victoria, Tex., site, has been put out to pasture for the time being. The Chicago-based utility has stopped work on its license application and is developing a much cheaper Early Site Permit, which preserves its options for a number of years without requiring its stockholders to commit to a course of action.

The other is a site in Levy County on Florida’s west coast. There Progress Energy has pushed back the clock by 20 months on site work and postponed rate increases to pay for early costs in response to declining demand for electricity.

Only two projects get a “thumbs up” from Moody’s. They are Southern’s plans for two new AP1000s at its Vogtle plant and TVA’s plans for two new AP1000s at its Bellefonte site. However, as the Moody’s report went to press, TVA announced it would only build one of two of the reactors. It cited declining demand for electricity and a limited amount of headspace relative to its debt ceiling.

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Idaho Samizdat is a blog about the political and economic aspects of nuclear energy and nonproliferation issues.  It covers the nuclear energy industry globally.  Additionally, the blog has regional coverage on uranium mining in the western U.S.  Link to original post

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