Areva seeks financing solutions

Will it sell shares to utility investors in the Eagle Rock uranium enrichment plant?

French nuclear giant Areva has money problems. According to a report in the Wall Street Journal on Feb 23, the firm needs at least [E]3 billion ($3.81B; 1[E] = $1.27) just in 2009 to meet all of its investment needs. Over the next four years, it reportedly will need more than three times that amount to fund its current commitments. Where will the money come from in today’s economic climate?

The WSJ reported last year it posted a 12% profit of [E]760 million on sales of [E]6.17 billion. Results this year were not nearly so good. According to its latest financial report, Areva reported a sharp drop (-22%) in net profits to [E]589 million.

A key liability is the repayment of [E]2.4 billion to Siemens which pulled out of its joint venture with Areva to partner with Russian nuclear energy export programs. Also, Areva is building two of its 1,600 MW EPR reactors in Europe. Both are running late and the one in Finland is now under arbitration with Finnish utility TVO for [E]1.7 billion in cost overruns tied to schedule delays of three years and additional costs for concrete and steel.

Areva does have publically traded shares (EPA:CEI). It is carrying debt of [E]4.5 billion, against a market cap of [E]12 billion and is unlikely to take on any more. Last month Standard & Poors placed the firm on a negative watch for credit.

How to fund global expansion?

The firm has business units that span the entire nuclear fuel cycle from uranium mines, enrichment, nuclear fuel, reactors, and spent fuel reprocessing. It has global reach with operations in Europe, Africa, Asia, and North America.

It sold two 1,600 MW EPR reactors to China last year along with a commitment to provide nuclear fuel for them for the next two decades. It has an agreement with India to sell two EPR reactors in the near term and as many as six over the next two decades along with fuel to run them for up to 60 years. In Europe it has two EPR reactors under construction, one in France and the other in Finland. French President Nickolas Sarkozy just committed earlier this month to second EPR to be built in France. Areva is also pursuing a reactor deal with the UAE for two EPRs.

In the U.S. it has plans to build a fleet of nuclear reactors at Calvert Cliffs, MD, Callaway, MO, Nine Mile, NY, and Blue Bend, PA. In Canada Areva is at the top of the nuclear fuel supply chain in terms of uranium mining and has growing uranium mining operations in Africa.

Japanese investment deal may be a signal for Idaho’s future

The French government is trying to figure out how to fund the firm’s planned global expansion which includes the $2.4 billion Eagle Rock uranium enrichment plant scheduled to break ground 18 miles west of Idaho Falls, ID, in 2011 and go into commercial operation by 2014. There may be a precedent for what happens with the funding for this facility.

According to the WSJ report, Areva is in negotiating with Japan’s Kansai Electric Power Company (KEPCO) to sell it a 2.5% stake in Areva’s [E]3 billion Georges Besse II plant uranium enrichment plant under construction in France. The plant is already committed to a $6.5 billion contract for uranium enrichment services with Electricity de France. The Japanese share of the plant would work out to $95 million. Areva may also decide to sell additional shares of the plant to other investors.

Areva has applied for federal loan guarantees for the U.S. plant in Idaho which would lower the cost of capital for it. The Department of Energy has not made a decision whether to grant the $2 billion in insurance to Areva or to a competing $3.5 billion plant being built by USEC in Ohio.

USEC (NYSE:USU) has been on shaky financial ground and is expected to lobby heavily for the government to award the loan guarantee insurance to an American firm.

Louisiana Energy Services, which already has a $2 billion uranium enrichment plant under construction in Eunice, NM, near the Texas border, has not applied for a loan guarantee for that project. Additionally, the firm has put competitive pressure on both Areva and USEC by announcing it will double the plant’s capacity.

One of the attractions for utility investors in the Eagle Rock plant would be a guaranteed supply of enriched uranium for their reactors. Most utilities own the uranium from the time it leaves the mine as yellowcake. They still need access to enrichment services to keep their investors happy with assurances of a robust supply chain for nuclear fuel and to keep their customers supplied with electricity.

A source close to Areva told this blog equity investments are an option, but the path forward depends on whether the firm gets the loan guarantees from the Department of Energy. The agency has, according to the source, told the firm its application is "investment worthy." The source also said Areva has already sold contracts for 3.2 million SWU for the Eagle Rock plant.

Jarret Adams. a spokesman for Areva, said in a press release on March 2 it’s unclear when the DOE may hand down a decision on the loan guarantee application, but the company is optimistic about newly-appointed U.S. Energy Secretary Steven Chu’s call to “start printing checks” for programs that support large-scale renewable and nuclear energy projects.

“We’re extremely encouraged. The fact that the secretary has made a point of moving the loan guarantee program forward… might signal that there might be some movement on this over the coming months,” Adams said. “But beyond that it’s anybody’s guess.”

New lamps for old?

While there is nothing about the Eagle Rock facility and Areva’s financial challenges in the WSJ report, nor in a similar report in the Financial Times, both newspapers say the quickest way the firm can raise cash is to sell shares in current projects or sell off some of its assets.

The WSJ points out sale of Areva’s Transmission and Distribution Unit, reportedly worth [E]5 billion, would help the firm’s financial outlook. However, Areva executives told the WSJ they think that option is a bad idea because it is part of the firm’s vertically integrated structure that supplies nuclear energy across the entire nuclear fuel cycle.

According to the Financial Times, Anne Lauvergeon, Areva’s CEO, has estimated the firm needs [E]11billion in the next three years as a growing number of countries launch nuclear programs. She has resisted pressure to finance this growth by selling assets. The Times reports the French government has insisted on changes in return for its support on a capital increase. She has also resisted efforts to merge Areva with Alstom, the French steam turbine giant which has built a U.S. plant in Chattanooga, TN.

Ms Lauvergeon told the Financial Times that she was "sure that we will find the best funding solutions in the coming weeks.” There is no question Areva would want to hold off selling assets as long as possible. It is very likely betting its vertical integration will pay big dividends once the world economy turns around. It wouldn't want to miss that boat when it sails because it had missing pieces in its business model.

The bottom line is don’t be surprised if Areva offers large nuclear utilities the opportunity to buy shares in the Eagle Rock facility. If it happens, it will add momentum to the project because partners will insist that the plant’s schedule to go into production be met. The investors will also be customers. There is no more demanding investor than one which has a stake in the product as well as the financial return.

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