Wednesday, June 20, 2012

An IPO for China’s nuclear energy triple play

It is a $27 billion package that will fund building multiple reactors at four sites
This is my updated coverage from Fuel Cycle Week V11:N477 6/14/12 published by International Nuclear Associates, Washington, DC.  Celebrating five years with INA this month.
Reactor core under construction in China
The Chinese government reinvigorated its civilian nuclear energy program last week with three major actions.

First, it announced the release of a long awaited safety plan that will result in the lifting of a moratorium on new nuclear reactor projects.

Second, it announced approval of an IPO by China National Nuclear Power (CNNP), the country’s largest reactor developer, to raise the equivalent of US $27.3 billion.

Third, the central government announced a list of seven strategic industry initiatives to counter a sharp down turn in economic growth. One of them is building new nuclear power plants.

Facebook step aside
Unlike the over-valued IPO for Internet giant Facebook, CNNP is not basing its IPO on the uncertain prospects of online advertising. It is to build new nuclear power stations, with multiple reactors, at least five of them, and within the next decade. It is a first of a kind financial offering for CNNP.
The short list of nuclear reactors that are under construction, and those that are planned, in China represents 77 reactors and 86 Gwe of power. Of that number, two reactors types are most frequently cited for projects planned by China National Nuclear Corp (CNNC), the parent firm of China Nuclear National Power.

Upgraded domestic design
Ling Ao II RPV
The first is the CPR-1000. It is a 1,080 MW Gen II+ PWR with a digital control room which has an expected operational life of 60 years. In terms of fuel, it uses conventional enriched uranium in 157 fuel assemblies. The Ling Ao II is one of the first plants to be built with safety enhancements include its ability to ride out seismic events and dealing with floods as well as having sufficient emergency power to deal with station blackouts.

The reactor is expected to be the leading plant design for domestic use. So far 15 units are under construction and 13 more are planned to be built though not all will be built by CNNP. The standard construction time for a CPR-1000 is reported to be 52 months at a cost of $2,000/Kw. An IPO of $27 billion would buy 10-13 reactors depending on the mix of CPR-1000 and AP1000 units and other cost factors such as grid improvements to bring power to customers.

The second most frequently referenced design is the 1,150 MW Westinghouse AP1000. This is an advanced Gen III+ design with passive safety features that is well known in the U.S. Four units are under construction and another 15 are planned for construction by CNNC and by the China Guangdong Nuclear Power Group.

According to English language reports from the Chinese mainland media, $5.4 billion of the money from the IPO will pay the 20% upfront money needed to start five multi-reactor power projects previously approved in 2008-2010 for Fujian, Zhejiang, Jiangsu, and Hainan provinces. The projects are currently listed as CPR-1000s or AP1000s.

How solid is the IPO?
An IPO is the 21st century equal
to cash on the barrelhead
The IPO has been approved by the Ministry of Environmental Protection and now goes to the regulatory agencies in charge of financial securities. It is unclear how many shares will be offered or if the offering price will be changed, up or down, once the review by regulatory agencies is done. Another factor is whether the IPO will be fully subscribed by investors.

On June 6 the Wall Street Journal raised questions about the impact of an offering this size on China’s financial markets. It reported that Chinese financial analysts told the newspaper the IPO could divert funds from riskier investments leading to problems with their sustainability. This report could also be the effect of speculators trying to protect their position.

Another issue is which exchange will handle the IPO and whether the selected venue will be up to the task. It is unclear at this time if foreign investment banks will be able to participate in the IPO.

Reasons for the IPO
Andy Mulkerin, Managing Partner at the Nicobar Group, a consulting firm with offices in Shanghai and New York, told FCW via email that the CNNC IPO announcement is exciting news for both the Chinese and global nuclear power markets.

“While other Chinese nuclear power manufacturers and uranium mining subsidiaries are already listed in Shanghai and Hong Kong, this IPO represents China’s first for a nuclear plant operator and could be China’s largest IPO to date.”
“Our opinion is that this is a sign of China’s continued dedication to nuclear power, despite the delay in new construction starts, and the country’s long-term vision that nuclear power will play a major role in fulfilling its growing energy needs. More importantly, it is a milestone event in the beginning of a period where we see more and more Chinese outbound activity in global nuclear markets.”
Asked why the IPO is being developed at this time, Mulkerin said there are several possible considerations contributing to the decision for CNNC’s IPO, the strongest of which likely include international branding and raising capital.

“An IPO will allow CNNC to project more accountability and transparency as they look at more international opportunities. CNNC’s IPO may be a way to demonstrate that they are on par with SNPTC and CGNPC (who are both now part of consortiums bidding on Horizon in the UK) in terms of their international prowess, as they have lagged behind both since the introduction of 3G plants in China. “
Another issue is that during China’s 14 month long suspension of new starts, the projects that will be funded by the IPO have seen cost escalation. Nicobar’s analysts say the IPO should help them to ease the financing of these plants in completing the projects. They also observe that having assured funding will attract the kind of management expertise needed to bring the projects in on time and within budget.

“Secondary reasons for IPO may include attracting and retaining top internationally experienced management, seen most recently in the appointment of Qian Zhimin as General Manager, who was formerly at CGNPC, WANO, and NEA, and other financial motivations such as facilitating acquisitions and creating various investment opportunities – i.e. convertible debt and equity offerings.
Safe at Third
Safe at third is a baseball metaphor for
unique accomplishments since not many get there
After a very long rain delay, the Chinese government has indicated it will lift its 14 month moratorium on approving new construction starts for nuclear reactors. The government called a halt soon after the March 11 tsunami that wrecked six nuclear reactors at Fukushima, Japan.

At the time 28 reactors were under construction in China. Work continued on Gen III+ reactors being built by Westinghouse (4 AP1000s) and Areva (2 EPRs). Other new starts were halted especially those involving CPR-1000 Gen II designs which had not yet broken ground. The 9 Gwe of installed reactors remained operational, though they received safety checks.

China’s cabinet, the top level of government decision making in the government chaired by Premier Wen Jiabao, announced last week that it approved and will release a safety plan that will be implemented for the nation’s current and future nuclear power stations. It did so as part of a nuclear energy strategy that takes it to 2020. China plans to have 100 operational nuclear reactors by 2020 which could make it the biggest buyer of uranium in the world.

The organizing principles of the safety plan focus on significant systems and the quality of components manufactured by Chinese firms. Implementation strategies enumerated in the plan follow well established paths including accident prevention, defense-in-depth, continuous improvement, procedural compliance & supervision, etc. Overall, the new plan is said to comply with safety standards published by the IAEA.

Other indications are that the plan will force a shift from China’s older versions of its domestic reactors designs, generally designated at Gen II for the profile of their safety features, to Gen II+ and Gen III+ reactor designs. Upgrades to the design of China’s mainstay domestic reactor, the CPR1000, a 1,000 MW PWR, are expected to be included in new starts.

During the moratorium on new starts the Chinese government commissioned the Ling Ao 2 reactor, an “upgraded” Gen II+ CPR-1000 and connected it to the grid bringing total installed capacity to 12 Gwe.

China has ambitious plans for a fleet of its own designs based on the Westinghouse 1,150 MW AP1000. It is working on a 1,400 MW version called the CAP-1400. China’s intellectual property agreements with Westinghouse release it from licensing requirements for designs greater than 1,350 MW.

The new safety plan also pulls the trigger on restart of new construction approvals for fuel cycle facilities including uranium enrichment plants and, potentially, a $15 billion spent fuel reprocessing center to be built in collaboration with Areva.

While China has 86 GWe of planned new nuclear reactor construction on the books, many analysts believe that a more realistic goal that is that by 2020 new output will be in the range of 60-70 GWe.
Xu Yuming, the vice secretary at the China Nuclear Energy Association, said May 17 in a statement resulting from advice to the central government that China will complete 70 GWe by 2020 and have an additional 30 Gwe under construction at that time. He estimated China could have 200 GWe of installed nuclear power by 2030.

More concession sales
The Chinese government, mindful of the cooling off of its economy, has announced a policy of investing in a set of seven key industries. It will launch 20 projects that include nuclear power and wind energy infrastructure. What it wants is a stimulus of the economy through spending on large capital projects.

China’s state-owned nuclear component manufacturers have seen their business activity frozen by the 14 month suspension of new construction starts. The combination of release of the safety plan with its promise of new starts, and the IPO, could result in thousands of new jobs.

According to financial wire service reports, new starts on nuclear reactors could generate contracts worth close to $8 billion for firms like Shanghai Electric Group, Dongfang Electric, and Harbin Electric. Some estimates are higher depending on how many projects are approved by the government.

Other sectors targeted by the program include information technology, biotechnology, high-end manufacturing, and new composite materials for a wide range of applications. In particular, it wants to start sending energy efficient appliances into the hands of consumers to address rapid growth in electricity demand.

The government is providing tax incentives to consumers to purchase them which will stimulate increased manufacturing activity for washing machines, refrigerators, and other conveniences of middle class life.

China looks abroad

The State Nuclear Power Technology Corp (SNPTC), which is a separate entity from state owned firms authorized to build and operate domestic nuclear power plants, is in talks to invest $10 billion in the UK’s Horizon nuclear power project. The funds are not associated with the $27 billion IPO recently announced by CNNC.

Horizon was to have been developed by a consortium of the German firms E.ON and RWE to build up to three reactors at Wylfa and three more at Oldbury. The two firms backed out in April citing cash flow problems.

What makes the idea seem feasible is that SNPTC is the entity in China that is licensing Westinghouse AP1000 reactor technology for domestic and export use. Since the Westinghouse AP1000 is mostly through the UK General Design Assessment, it’s interest in the project seems to be a closer match than might otherwise appear.

The six reactors at the two power station sites could represent $60 billion in new construction and an operational life of 40-60 years.

Russia’s Rosatom also expressed interest in offering its 1,000 MW VVER PWR for the Horizon project. However, it would have to start from scratch in terms of safety review and licensing which could make it tough to get in the game.

SNPTC has also approached the government of South Africa over financing of its planned 9 GWe tender which is to be released later this year. There the Chinese are up against a better positioned entry from Rosatom which recently wined and dined South Africa Energy Minister Dipuo Peters in Moscow while pitching their reactors.

It’s likely that if the South African tender moves ahead, the government may buy from several vendors. Areva and Westinghouse submitted bids on the 2008 tender for 20 GWe which was cancelled by Eskom due to lack of adequate financing.

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