Saturday, July 11, 2009

Show me the money

Senate hearing is long on sound bites, short on financial commitment

USSIowaFiresIn a rare display of political firepower, the Obama Administration sent four of its leading lights this week to testify before the Senate Environment and Public Works Committee on the subject of controlling greenhouse gases. As everyone knows, the House passed a massive bill that lumbered its way through a muddy mine field of lobbyists and special interests to celebrated passage in record time. It now faces an uncertain fate in the Senate.

There has been considerable speculation of how the Obama Administration will approach Senate passage of a measure which could define not only its place in history, but also help put the nation on the path of saving the planet. It is a daunting challenge, and it will have to be met with more than the "if wishes were fishes" philosophy of green groups about renewable energy.

One of the key issues for Senate Republicans is that the House bill has no real support for nuclear energy. So it was with considerable interest that Sen. Lamar Alexander (TN) and Sen. Mike Crapo (ID) asked Energy Secretary Steven Chu about his views on the subject. To his credit, Chu (right) was ready for them.

Steven Chu He told the committee, “I think nuclear power is going to be a very important factor in getting us to a low carbon future.” He added, “Quite frankly, we want to recapture the lead on industrial nuclear power . . . we want to get it back.”

That’s wonderful stuff, but something is missing. It is support for expanded loan guarantees for the 17 applications pending with the Department of Energy worth a staggering $188 billion in new construction of nuclear power plants in the U.S. Support for the loan guarantees won’t cost the taxpayers a nickel since the industry would pay for the insurance the same way farmers pay for crop insurance.

But neither Chu nor the other administration policy makers said one word about the key subject that really matters. It’s not soup yet for the Democrats as long as they stick to the intoxicating illusions promoted by FERC’s Jon Wellinghoff that renewable energy sources along can save the planet.

cop_logo_1_rThe general political consensus is that if the Obama wants a greenhouse gas emissions control bill out of the Senate in time for a global confab on the subject to be held in Copenhagen, Denmark, in December, he has to make a move on nuclear energy.

The single most important move he can make is to expand loan guarantees for nuclear power plants. Right now the $18.5 billion available might cover three or four plants. A shift to three or four times that amount would allow as many as 12 to move forward and enter revenue service by the middle or end of the next decade. Now that’s real soup.

Right now the Obama Administration’s cautious if unstated policy appears to be something like this . . . ‘let’s see if they can build a couple of them, and then we’ll let future administrations support a more determined roll out of new plants.” In the meantime, the White House can keep its political base intact with billions tossed to subsidize solar and wind energy projects. By the time everyone realizes you can’t light the nation’s cities and power its factories this way, we will have pushed real progress for nuclear energy back 20 years.

Show me the moneyThe Nuclear Energy Institute, the trade association for the industry, says that development of a ‘Clean Energy Bank’ separate from the Department of Energy would be the way to go. It would provide immediate support for nuclear energy as well as renewable technologies.

In fact, and in principle, one of Obama’s policy makers got it exactly right. Lisa Jackson, the head of the Environmental Protection Agency, told the Senate Committee . . .

“Clean energy is to this decade and the next what the space race was to the 1950s and 60s and America is behind. Governments in Asia and Europe are ahead of the U.S. in making aggressive investments in clean energy technology.”

She’s cleared all ten pins with that one. Bravo Ms. Jackson. Just look at what is happening in the UK, India, China, and even Italy and you can see the nuclear renaissance is underway big time. Now Jackson may not have had nuclear energy exactly on her mind when she made this comment, but the shoe definitely fits. Hopefully, it was part of her thinking.

It is only in the U.S., and in Germany, where green groups have a near strangle hold on government financial commitments to new nuclear power plants. Statements of support from people like Steven Chu and Lisa Jackson are a start to change that situation.

There has to be more change if there is going to be legislation similar to the House coming out of the Senate this Fall. So far statements of principle by Sec. Chu, however appealing, aren’t enough. President Obama has got to show us the money. It’s too soon to know whether the White House will do it, but the opportunity is there if they will take it.

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So here's some techno fusion as inspirational music for the Obama team - Vanessa Mae playing "red hot." Five on the Scoville scale. "Fasten your seatbelts" - VM.

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Sunday, July 5, 2009

Texas nuclear industry heats up ~ Exelon's hot pursuit of NRG

  • Exelon raises the stakes for its hostile takeover of NRG
  • NRG raises the costs of STP units 3 & 4, but CPS Energy stays in at 40%
  • Exelon pulls out of Victoria, TX, NRC license process for two ABWRs

wildcatThe nuclear industry in Texas more closely resembles the West of oil wildcatting days than corporate, button down corner offices. That's because Exelon, which is based on Chicago, is not going to accept "no" for an answer from NRG. Exelon has been trying to force an all stock hostile takeover of NRG since last October, but without so much as a hat tip from the object of its desire.

Instead, NRG has dug in its spurs, so to speak, and advised its shareholders not to accept a modest premium for the stock from Exelon. The firm has said repeatedly that Exelon’s previous all stock offer was “inadequate and uncertain.” However, NRG also said it was open to a deal at a fair price, and, undoubtedly, for cash.

premium chocolateSome of NRG's investors agreed, especially several with more than 5% of NRG's shares, and said the only way they'd participate in the deal is if Exelon sweetened it to their liking.

That's exactly what happened this week when Exelon Corp (NYSE:EXC) announced on July 2 an increase in its offer to acquire all of the outstanding NRG common stock in an all-stock transaction with a fixed exchange ratio of 0.545 of a share of Exelon common stock for each NRG (NYSE:NRG) share, a 12.4% increase over the initial exchange offer of 0.485. Exelon said its increased offer represents value of over $3 billion to NRG shareholders.

Exelon’s stock closed July 2 at $49.37/share. A swap of 0.545 shares for each share of NRG stock, which closed July 2 at $24.80/ share, would come in at $26.91. The difference of would be a 6.1% premium at the market close prices of 7/2.

The CFO class math gets a bit complex here. The size of the premium is not based on stock prices at market close, but on stock valuations offered by Exelon. For instance, the New York Times Dealbook Blog reported that Exelon addressed this difference by pricing NRG’s stock at $28.10/share which is a hypothetical price that exists only in the pages of Exelon’s corporate presentation.

So while Exelon has increased the amount of stock it is willing to offer for NRG’s hypothetically more valuable shares, the premium still remains quite modest and may not prod NRG’s investors to buy in to the deal. As these NRG stockholders have stated in the past, they see more of an upside associated with NRG’s expected growth in the future than they do with Exelon’s “bird-in-hand” all stock deal today.

The premium may not be very attractive to NRG stockholders given the performance of Exelon’s stock. It has been volatile dropping from a Feb 6 price of $57.81 to a March 11 price of $40.15 and then rising slowly since then to its close 7/2 of $49.37 down from a mid-day high of $51.00.

Exelon has another rabbit in its hat

magicianExelon also filed the SEC an investor presentation that will be used as part of the company’s proxy solicitation for the election of nine new, independent directors to the NRG board of directors. In the presentation, Exelon cited approximately $1.5 billion of additional newly identified synergies as the primary reason for the increase. The new offer also reflects the value of NRG’s recent acquisition of the Reliant Energy retail business.

“We listened to NRG investors and balanced their views with the best interests of Exelon shareholders. An exhaustive analysis by our internal team, informed by the best third-party experts, resulted in additional synergies, allowing us to increase our offer to NRG shareholders,” said John Rowe, chairman and chief executive officer of Exelon.

“This is our best and final offer, and we will use the time leading up to the NRG annual meeting on July 21 to communicate the value of our new offer to NRG shareholders, encouraging them to vote for nine new independent directors who can unlock that value.”

In the presentation, Exelon also shared details on its financing plan to maintain its investment grade credit ratings while optimizing long-term shareholder value. Exelon says it is confident, based on discussions with its outside advisors, that the company will be able to meet all financing needs associated with the transaction, including the re-financing of $4.7 billion of NRG’s senior notes and other NRG debt, if necessary, while maintaining investment grade credit ratings.

raising_capitalThe Wall Street Journal reported July 3 that if the deal does go through, Exelon would issue $1.1 billion in new stock and sell $1.6 billion in assets. Exelon already had planned to sell several power plants as part of the deal but added NRG's Louisiana and international assets to its divestiture list.

The moves is designed to help Exelon protect its credit rating if the deal closes, credit analysts told the WSJ. Exelon told the newspaper it is confident it will retain its investment-grade ratings after the transaction, under which Exelon could have to refinance $4.7 billion of NRG's senior notes and other debt. Last month Exelon laid off 500 people for a cost savings of $350 million. More layoffs would likely occur at both companies if the deal closes July 21.

STP Units 3 & 4 may run $13 billion

When NRG filed its license application with the NRC in September 2007, it priced the cost of twin GE-Hitachi 1,350 MW reactors at $2,000/Kw. That price has gone up quite a bit since then. This week new estimates by CPS Energy of San Antonio, one of NRG’s investors, put the price at $13 billion, including interest, or $4,800/Kw more than two times the original estimates.

It’s a daunting set of numbers, but what’s interesting is that CPS Energy, which will own 40% of the new plant, feels nuclear energy is the most cost effective solution for its customers. CPS Energy must take its numbers to the city council in October.

This new estimate produced predictable cries of “foul” from green groups who claim renewables will cost less. However, Steve Bartley CPS general manager told the San Antonio Express, “We believe the long-term lowest price option is nuclear.”

The San Antonio utility will keep rates down by selling half of the capacity it will own, or 20%, on the wholesale electricity market. Construction of the two new plants will begin in 2012 and they will enter revenue service in 2015 and 2016.

Exelon mulls future of Victoria new build

exelon logoWhile Exelon continued its hot pursuit of NRG and its current and future reactor operations, the Chicago utility was cooling off its activities in Victoria, TX, where it planned to build two GE-Hitachi ABWRs. The new plants would have sent electricity to San Antonio and Houston. However, Exelon clearly sees a faster time to market with its hostile takeover of NRG which will service the same markets.

Exelon has postponed work on its NRC COL application and instead will pursue an early site permit (ESP). This move will preserve Exelon’s options to develop the site for the next two decades. The Victoria site was one of two “greenfield” sites among COL applications submitted to the NRC last year.

Exelon Corp. said it has called off plans for now to build a new nuclear plant in Texas because of worries over the economy and the limits on federal loan guarantees.

Earlier this year it bid goodbye to GE-Hitachi’s new ESBWR reactor design when it learned the Department of Energy ranked its applications out of competitive range for loan guarantees. Switching to ABWRs didn’t improve Exelon’s chances. The result is the company is not going forward with the project absent the loan insurance.

"We just aren't in a place to pursue the nuclear project," John Rowe, Exelon's chairman and CEO, told The Associated Press.

Exelon said some activity may continue at its site in Victoria, but major preconstruction work such as road upgrades and site preparations will be deferred.

Under the ESP process, the NRC evaluates site safety, environmental impact and emergency planning regarding a proposed nuclear plant. By issuing an ESP for a specific site, the NRC is certifying that the site satisfies the criteria in these areas. If the company later chooses to pursue construction, the ESP becomes part of the COL application, which requires a separate review and approval by the NRC.

Exelon has informed the NRC that the company will not submit a revision to the COL application submitted in September 2008, which referenced the ESBWR. This move saves Exelon a boat load of money since the firm will not have to update the license application with new information about the ABWR reactor. That’s money it could probably use if it is successful in its hostile takeover of NRG.

Update 07/11/09

The New York Times reports a proxy firm has advised NRG shareholders not to accept Exelon's offer saying it is too low.

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GE-Hitachi files with NRC for laser enrichment plant

If licensed it will be the 4th uranium enrichment plant slated for start-up by 2014

megatonslogo_220The clock is ticking on the U.S. Russian “Megatons-to-Megawatts” program which ends in 2013. Once it wraps up there could be as many as four uranium enrichment plants slated for start-up in 2014.

There could not be a clearer signal that investors see the U.S. nuclear industry expanding than the commitments to these four plants which come in at a minimum of $2 billion each. This is not just about replacing the supply of commercial fuel coming from blending down of Russian HEU. It is a series of multi-billion dollar bets that by 2020 the US will have four-to-eight new nuclear plants, or 5-10 GWe, coming into revenue service with as many as another 10-12 (12-15 GWe) in new reactors coming behind in a second wave of construction.

The first fuel loads for new reactors are always the largest buys that a reactor makes so U.S. demand for nuclear fuel will spike significantly during the next two decades. The demand profile in this country will be mirrored in other nations like China, India, and the UK, which also have plans for massive new builds for nuclear reactors.

The latest entry into the commercial enriched uranium market for U235 to 3-5% is Global Laser Enrichment (GLE), a business unit of GE-GHitachi and Cameco, who announced June 30 they submitted a license application to the U.S. Nuclear Regulatory Commission (NRC). The application is for a first-of-a-kind laser enrichment plant based on technology acquired by GE-Hitachi from Silex, and Australian firm. [fact sheets]

Cameco took a 24% stake in the Ge-Hitachi project for $125 million in June 2008. It is one of the world’s largest producers of uranium mostly from mines in Canada. Note that GLE will hold the license for the plant assuming the NRC issues one. The NRC has no experience with licensing a commercial plant using a laser enrichment process so it will fall on GLE to take the agency up the learning curve.

For a technical explanation of the differences between laser enrichment and gas centrifuge uranium enrichment processes, see this blog post by Brian Wang at Next Big Future and his graphic below,

Some of the critical technical issues are how much U235 can be produced in how much time, and how efficient the process is, e.g. tails assay at the end. GE-Hitachi has for proprietary reasons not released any of this information.

Before GE-Hitachi can break ground, the NRC must “docket” the application and complete a 30-month review of safety and environmental issues. Docketing means the regulatory agency must determine that the application is complete. Once that happens, the clock starts ticking on the review process which includes several public hearings.

GE-Hitachi said in a press statement the plant will be built in Wilmington, NC, adjacent to an existing commercial nuclear fuel fabrication plant and the GE-Hitachi nuclear energy business unit which makes and markets the firm’s reactors to global markets.

New plant will seek loan guarantees

loan_guarantee_money_bgIn a surprise move the GLE said it will seek federal loan guarantees for its new uranium enrichment venture. This move will put it in direct competition with USEC and Areva both of which are also building new uranium enrichment plants in the U.S. and have applied for the same federal insurance.

Bloomberg wire service reported that the firm thinks it can come out on top in what appears to be a “winner take all” outcome for the $2 billion insurance pot.

Tammy Orr, CEO of GLE, said in a telephone interview with Bloomberg . . .

“We are closely working with the government on the next round of loan guarantees and would be very interested in participating,” Orr said. “We believe nuclear energy is a worthwhile energy to invest in from a stimulus perspective.”

She declined to disclose the project’s estimated cost. However, she noted that the plant would employ 300 workers once built. Assuming there is some basis for comparison between number of permanent employees and plant size, this suggests an initial capacity of approximately 3 million SWU/year. A gas centrifuge plant that size would like cost between $2.5-3.0 billion to build. Because the laser enrichment plant is a first-of-a-kind, there isn’t an industry benchmark to estimate its costs.

GLE is currently building a test-loop for the laser enrichment plant at its Wilmington, NC, facility. The test loop will be used to confirm the commercial feasibility of the technology, help design the plant equipment, and layout production processes with the facility. GLE will make a go/no-go decision to proceed with full construction of the laser enrichment plant based on results achieved at the test loop.

The other three plants already slated production in the U.S. are Louisiana Energy Services (LES) in Eunice, NM, Areva’s Eagle Rock Enrichment Facility in Idaho Falls, ID, and USEC’s American Centrifuge Facility for Piketon, OH. The plants range in size from 2.0-3.8 million SWU/year.

Market share among plants

pie_sliceUSEC is the most problematic of the three plants as it has experienced difficulty attracting investors. It has issued formal statements that it cannot build the plant without getting the federal loan guarantee. The other two plants do not have financing issues. LES has not applied for a loan guarantee, but Areva has based on its worldwide need for capital.

Taken together they could account for approximately 75% of the market share of expected demand of 13-15 million SWU in 2014 or about 10-12 million SWU. This would leave three-to-five million SWU on the table. If GE-Hitachi succeeds with its new process, that would be the initial target market share for the firm.

Both LES and Areva has announced plans to double the size of their plants by 2018 as a marketing contingency. Actual construction of the additional plant capacity is relatively straight forward and will depend entirely on domestic and international demand.

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