Transcript Credit Risks Associated With Nuclear Generation NARUC Staff Subcommittee on Accounting and Finance Sharon Bonelli Managing Director April 2, 2008 New Orleans, Louisiana.

Credit Risks Associated With
Nuclear Generation
NARUC Staff Subcommittee on Accounting and Finance
Sharon Bonelli
Managing Director
April 2, 2008
New Orleans, Louisiana
State of U.S. Nuclear Industry
> Currently 104 nuclear projects supply 20% of power in U.S
– Most existing nuclear plants licensed in 1960s and 1970s
– Plants performing well
– Nuclear fuel costs rising, but still quite low relative to fossil fuels
– 48 license extensions granted, 38 pending and publicly
announced
– Share of energy from nuclear will diminish absent new
construction
www.fitchratings.com
November 6, 2015
1
Drivers of Renewed Interest in Nuclear Construction
High Fuel
Prices
Growing Base
Load Demand
Potential Carbon
Regulations
Investment Incentives
in EPACT 2005
www.fitchratings.com
November 6, 2015
2
U.S. Nuclear Plant Additions
Years
New Plants
Completed
Capacity in MW
Average Size
(MW)
Pre-1970
4
1,269
316
1970-79
60
47,861
798
1980-89
46
50,295
1,093
1990-1996
5
5,614
1,123
1997-2006
None
None
None
Current plans
30*
* Planned additions
www.fitchratings.com
November 6, 2015
3
State of U.S. Nuclear Industry
> 30 new U.S. nuclear projects currently proposed by 17 companies
– Carbon free energy source
– Promotes diversity and national energy security
– Wide ranging cost estimates
– On the high end, Turkey Point 6 and 7 ($6,000 - $9,000/kw)
> $12 – 18 billion for 2,200 mw option
> $18 – 24 billion for 3,040 mw option
> Need certified by FPSC March 2008, permitting FP&L to get in the
queue for large castings
– On the low end, South Texas 3 and 4 (June 2006 estimate
2,000/kw)
> $5,400 billion for 2,700 mw
www.fitchratings.com
November 6, 2015
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Fitch Approach to Rating New Build Nuclear
> Fitch has no preference for nor against nuclear generation
– We focus on how the costs of building, operating and
decommissioning nuclear facilities could affect a company’s overall
financial health, and in particular its effect on bondholders
> Fitch evaluates nuclear investments in a similar fashion to investments in
other long-lived assets or capital outlays in the power sector
– Regulated utilities - Mechanisms and timeliness of cost recovery
– Gencos - Wholesale power market energy and capacity pricing
forecast or contractual cash flows
– Primary focus is on the adequacy of cash flow relative to debt and
interest, capital adequacy and liquidity
www.fitchratings.com
November 6, 2015
5
Credit Risks Evolve Through Nuclear Plant Life Cycle
> Construction and licensing period risk
– Credit risk often at peak during construction period
– Federal and state initiatives can limit associated risks
– Massive scale of investment; access to capital
> Operating period risk
– Operating performance and outages
– Power market effects of new capacity additions
– NRC regulation
– Storage/disposal of spent fuel
> End of operating life risk
– Decommissioning/license extension risks
www.fitchratings.com
November 6, 2015
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Construction and Licensing:
New Plant NRC Licensing Risk
Problems in Prior Building Cycle
Targeted Improvements this Cycle

Non standard design – frequent
change orders
 NRC design certification process
for standardized modular plants

Two stage licensing process
 One step combined Construction
and Operating License (COL) to
resolve issues upfront
- Construction
- Operation

Inadequate documentation led to
application delays at NRC

Safety issues unresolved until
construction completion

Widespread community
opposition to NRC licensing
www.fitchratings.com
 Cooperation among nuclear
developers using same design
 Community support in certain
regions, particularly existing sites
in the Southeast
November 6, 2015
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Construction and Licensing:
NRC Design Certification
>
Westinghouse AP1000 – Design certified by NRC
– Southern, SCANA, Progress, Duke, TVA/Nustart consortium
>
AREVA U.S. EPR – NRC application pending
– Unistar consortia: CEG, AEE, PPL, Amarillo Power, Alternate Energy Holdings
>
Mitsubishi Heavy Industries US-APWR - NRC application pending
– Luminant
>
GE/Hitachi US – ESBWR – NRC application pending
– Dominion, Exelon, Entergy, Entergy/NuStart consortium
>
GE/Hitachi ABWR – Design certified
– NRG
>
Other advanced designs from AREVA, Westinghouse, etc. may seek NRC design
certification in the future
www.fitchratings.com
November 6, 2015
8
Construction and Licensing:
EPACT 2005 Incentives for Early Movers
> EPACT 2005 provisions for new technology nuclear investment
– Risk insurance for NRC or litigation related delays
– DOE loan guarantee program for advanced technology clean
energy projects
> Nuclear solicitation round expected later this year
> Program designed to stimulate investment in new clean
energy technologies that may not otherwise be able to
attract capital on economic terms
> Companies will need to raise substantial equity for their investment
even with incentives
www.fitchratings.com
November 6, 2015
9
Construction and Licensing:
Nuclear Construction Risk
Problems in Prior Build Cycle
Potential Mitigant this Cycle
 Construction delays
 Standard design
 Rising material and labor costs
 Allocation of cost over-run or
delay risk to EPC contractor (the
bid/ask seems to be still wide)
 Rate shock when plant entered
operation and was added to rate
base
 Entire construction cost borne by
owner(s)
 Joint venture with manufacturer
 CWIP in rate base or other
mechanism to ease costs in rates
 Federal incentives such as FFB
funding under DOE program to
reduce costs
www.fitchratings.com
November 6, 2015
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Construction and Licensing:
Procurement Risks for Major Components and Labor
> Global competition for components increasing costs and lead times
> 35 plants under construction worldwide (6 China, 6 India, 7 Russia…),
China announced plans for 30 reactors at multiple sites
– Japan Steel Works is only maker of large forgings needed for reactor
vessels
– Other pinch points may develop for equipment such as steam
generators, turbine generators, nuclear-grade pumps and heat
exchangers
– Prices of steel, concrete and other materials very high
> Intense competition for design and craft skills
– Up-rates
– Maintenance needs for aging plants
www.fitchratings.com
November 6, 2015
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11 State Initiatives to Reduce Construction and
Licensing Risks
> Run the gamut
– Minnesota - 2007 law: repealed ban on certificate of need for new
nuclear plant
– Georgia – 2006 regulation: Allows Georgia Power to capitalize costs
incurred for development and licensing of a new unit at Plant Vogtle
– NC – 2007 law: allows NCUC to add approved costs to rate base prior
to completion or even if canceled
– More credit supportive models
> SC
> FL
> VA
www.fitchratings.com
November 6, 2015
12
SC Legislation
> South Carolina Base Load Review Act (May 2007)
– Intended to allow a utility to recover prudently incurred capital and
operating costs for new nuclear or coal plants larger than 350 mw
– Utility files application to build plant, SC PSC reviews and rules on
prudence of decision to build
– If decision is determined prudent, this finding is binding on all future
proceedings so long as construction proceeds in accordance with the
schedule, and budget estimates in the application
– Utility can file revised rates each year of construction for CWIP based
on updated cost of debt and capital structure
– Utility can use project specific ROE or use the return from proceedings
less than 5 years old
www.fitchratings.com
November 6, 2015
13
FL Legislation and Regulation
> Enabling legislation (SB888) enacted June 2006
> Florida’s Nuclear Power Plant Cost Recovery Rules promulgated to
promote investment in new nuclear plants by establishing alternate cost
recovery mechanism for such investments
> Phases in cost recovery to avoid rate shock
> Nuclear Cost Recovery Rule allows recovery of “all prudently incurred”
costs associated with siting, designing, licensing, constructing and
operating new nuclear power plants
> First units certified under this rule by FPSC March 2008, permitting
FP&L to get in queue large castings for Turkey Point 6 and 7 and
uprate of St. Lucie and Turkey Point
> Progress Energy Florida expected to seek certification for new
Levy unit later in 2008.
www.fitchratings.com
November 6, 2015
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Virginia Legislation
> Acknowledges need for baseload generation and provides enhanced
return on those investments
> New generation riders provide for recovery of financing costs, operating
costs, and investments through rate adjustment clause separate from
base rates
> Annual request to SCC for rider recovery of next year’s projected revenue
requirement
– Rider provides stability through forward looking approval
– Phases in the costs to avoid rate shock
> Annual true-up for actual vs. projected costs
> 200 basis point enhanced return on nuclear for 12 – 25 years of service
life; ROE floor based on peer group
www.fitchratings.com
November 6, 2015
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Operating Stage:
Nuclear Operating Risks
> Nuclear operator credit rating considerations
– Quality of nuclear assets
> Performance track record
> Outage history
> Age of unit/License extension status
– Safety record
– NRC inspection results
> Liquidity
– Cash and committed facilities
– Outage insurance
www.fitchratings.com
November 6, 2015
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Operating Stage:
Nuclear Operating Risk
> Track record of U.S. nuclear fleet is improving
– Capacity factors rising
– Re-fueling outages getting shorter
– Shared best practices
– Concentration of nuclear ownership
– Strong worker safety record (low incidence of lost time
accidents)
www.fitchratings.com
November 6, 2015
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Operating Stage:
Economic Incentives Under EPACT 2005
> Production tax credit of $18/mwh for first 6,000mw of new nuclear
capacity (8 years with annual cap of $125mm/unit)
> Risk mitigation: 20 year extension of Price-Anderson Act
www.fitchratings.com
November 6, 2015
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Operating Stage: Cost of Prolonged Outage
> Risks of prolonged outage – low incidence/high consequence
– Significant costs for replacement power, repairs
– May need NRC approval to re-start
– 45 reactors have had outages of one year or more (7 more than two
years) since TMI in 1979 according to the Union of Concerned
Scientists
> Most outages for component repair/replacements or safety
restoration
> 1,000 mw XYZ Nuclear unit replacement power costs for estimated cost of
1 year outage
1,000 mw x 8,760 (hours) x 90% (capacity factor) x $50 mwh (spot market
price) = $394.2 million per year or about $7.5 million per week
www.fitchratings.com
November 6, 2015
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First Energy Case Study
> Davis Besse Outage
– 883 mw nuclear unit
– 2 Year outage (Feb. 2002 – April 2004)
Capital
O&M
Replacement pwr.
Total
2002
63
115
120
298
Outage Costs ($ Mil.)
2003
21
93
196
310
2004
0
1
64
65
> Ratings Impact
– July 2002 - Rating Outlook revise to Negative from stable
– September 2003 – Ratings lowered to ‘BBB-’ from ‘BBB’
www.fitchratings.com
November 6, 2015
20
U.S. Nuclear Refueling Outage Days
Average
104 106
95
88
92
81
66
66
51
40
44
37
40
33
42
38
39
40
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: 1990-98 EUCG, 1999-2007 Energy Velocity / Nuclear Regulatory Commission
Updated: 2/08
U.S. Nuclear Industry Capacity Factors, 1971- 2006
100
89.6
90
80
70
60
50
40
1971
1976
1981
1986
1991
Source: Global Energy Decisions / Energy Information Administration
Updated: 10/07
1996
2001
2006
End of Operating Life Risks
> Community opposition to license extensions in certain locales
> Most decommissioning funds are over-funded; license extensions provide
additional time for funds to grow
> Spent fuel disposal is a federal problem, not a credit risk
www.fitchratings.com
November 6, 2015
23
New Nuclear Plant Status
Company
Alternate Energy Holdings /
Unistar
Amarillo Power / Unistar
AmerenUE / Unistar
Constellation / UniStar
Constellation / UniStar
Detroit Edison
Dominion
Site(s)
Owyhee County, ID
Vicinity of Amarillo, TX
Callaway County, MO
(Callaway)
Calvert County, MD (Calvert
Cliffs)
Oswego County, NY (Nine Mile
Point)
Fermi, MI (Fermi)
Duke
Louisa County, VA (North
Anna)
Cherokee County, SC (William
States Lee)
Davie County, NC
Duke
Oconee County, SC (Oconee)
Entergy
West Felciana Parish, LA
(River Bend)
Claiborne County, MS (Grand
Gulf)
Duke
Entergy (NuStart )
www.fitchratings.com
Early Site Permit Construction / Operating
(ESP)
License Submittal
FY 2009
-
FY 2009
FY 2008
-
Partial - Under Review, Full
- FY 2008
FY 2009
Not yet
determined
Approved
November 2007
-
FY 2008
November 2007
December 2007
Under
consideration
Under
consideration
-
Not yet determined
Approved April
2007
FY 2008
Not yet determined
FY 2008
November 6, 2015
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New Nuclear Plant Status, continued
Company
Exelon
Site(s)
Clinton, IL (Clinton)
Exelon
Florida Power & Light
Victoria County, TX
Miami-Dade County, FL
(Turkey Point)
Glen Rose, TX (Comanche
Peak)
Matagorda County, TX (South
Texas Project)
Luzerne County, PA
(Susquehanna)
Wake County, NC (Harris)
Levy County, FL
Fairfield County, SC (V.C.
Summer)
Burke County, GA (Vogtle)
Luminant
NRG Energy / STPNOC
PPL Corp. / Unistar
Progress Energy
Progress Energy
South Carolina Electric &
Gas
Southern Company
TVA (NuStart )
Source Nuclear Energy
Institute
www.fitchratings.com
Jackson County, AL
(Bellefonte)
FY=fiscal year
Early Site Permit Construction / Operating
(ESP)
License Submittal
Approved March
Not yet determined
2007
FY 2008
Not yet
FY 2009
determined
FY 2008
-
September 2007
-
FY 2009
-
February 2008
FY 2008
FY 2008
Under review,
Approval expected
early 2009
FY 2008
-
October 2007
November 6, 2015
25
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