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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

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Credit Risks Associated With Nuclear Generation NARUC Staff Subcommittee on Accounting and Finance

Sharon Bonelli

Managing Director

April 2, 2008

New Orleans, Louisiana

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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

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Drivers of Renewed Interest in Nuclear Construction

High Fuel Prices

Growing Base Load Demand

Potential Carbon Regulations

Investment Incentives in EPACT 2005

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U.S. Nuclear Plant Additions

* Planned additions

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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

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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

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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

Credit Risks Evolve Through Nuclear Plant Life Cycle

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Problems in Prior Building Cycle

Non standard design – frequent change orders

Two stage licensing process



Inadequate documentation led to application delays at NRC

Safety issues unresolved until construction completion

Widespread community opposition to NRC licensing

Targeted Improvements this Cycle

NRC design certification process for standardized modular plants

One step combined Construction and Operating License (COL) to resolve issues upfront

Cooperation among nuclear developers using same design

Community support in certain regions, particularly existing sites in the Southeast

Construction and Licensing:New Plant NRC Licensing Risk

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Construction and Licensing:NRC Design Certification

  • Westinghouse AP1000 – Design certifiedby 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

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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

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Problems in Prior Build Cycle

Construction delays

Rising material and labor costs

Rate shock when plant entered operation and was added to rate base

Entire construction cost borne by owner(s)

Potential Mitigant this Cycle

Standard design

Allocation of cost over-run or delay risk to EPC contractor (the bid/ask seems to be still wide)

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

Construction and Licensing:Nuclear Construction Risk

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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

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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

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SC Legislation Risks

  • 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

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FL Legislation and Regulation Risks

  • 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.

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Virginia Legislation Risks

  • 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

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Operating Stage: RisksNuclear 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

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Operating Stage: RisksNuclear 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)

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Operating Stage: RisksEconomic 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

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Operating Stage: Cost of Prolonged Outage Risks

  • 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

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First Energy Case Study Risks

  • Davis Besse Outage

    • 883 mw nuclear unit

    • 2 Year outage (Feb. 2002 – April 2004)

      Outage Costs ($ Mil.)

      2002 2003 2004

      Capital 63 21 0

      O&M 115 93 1

      Replacement pwr. 12019664

      Total 298 310 65

  • Ratings Impact

    • July 2002 - Rating Outlook revise to Negative from stable

    • September 2003 – Ratings lowered to ‘BBB-’ from ‘BBB’

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U.S. Nuclear Refueling Outage Days RisksAverage

Source: 1990-98 EUCG, 1999-2007 Energy Velocity / Nuclear Regulatory Commission

Updated: 2/08

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U.S. Nuclear Industry Capacity Factors, 1971- 2006 Risks

Source: Global Energy Decisions / Energy Information Administration

Updated: 10/07

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End of Operating Life Risks 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