New Build Nuclear: Who takes completion risk?

1. New Build Nuclear:Who takes completion risk? Platts Nuclear Energy – Opportunities for Growth & Investment in Europe by Milton Caplan President, MZConsulting Inc. 2006 May 8

2. Outline • The return of nuclear power • Risks and Realities of Nuclear Power • Examples • Moving forward

3. France to build at Flamanville UK considers new nuclear Finland commits to Olkiluoto 3 Germany to do energy review Sweden supports ongoing nuclear operations Canada considers nuclear US supports nuclear energy G8 supports nuclear power as part of the mix Bush reopens nuclear cooperation with India Environmentalists now supportive It’s Cool to be a Nuke!

4. Nuclear Advantages • Environmental – no GHG emissions • Security of Supply • Economic • Excellent performance of existing fleet

5. What are the Alternatives? • Fossil fuels falling from favour • Coal is dirty, new clean coal technology on the way • Gas prices volatile and increasing • Renewables increasing in use • Acceptance that it can’t do it all • Nuclear is the only large scale generation option available for baseload requirements

6. Is it time to Celebrate? Maybe its still too soon.

7. Making it happen! • Support for nuclear is only the beginning • Is the infrastructure in place to enable new build projects to succeed? BIG RISK Governments support new build, but do not create the criteria for success!!

8. Nuclear Issues • Large capital • Long project schedule • Low variable cost of operations • Complex regulatory regime

9. Market Construction Operations Project Risk Triangle = $ • Evolving markets • De-regulated/liberalized • Fixed risk (PPA) • Merchant Plant • High Capital Cost • Poor performance in past • New Improved Designs • Confidence is building Generator • Low variable cost • Strong performance • Much M&A experience • Confidence is High $ + $

10. What is Completion Risk? • The total cost of the completed plant including • Engineering • Equipment • Construction and erection • Commissioning • Fuel • Financing costs • Regulatory approvals • etc

11. Old Model • Vendors built on cost plus basis • Utilities (Generators) borrowed on balance sheet • All costs both construction and operations passed on to the customer Essentially 100% risk on the customer Many projects had long delays and significant overruns

12. The Market Fights Back Market Project Finance Generator Lenders Turnkey PUSH Vendor

13. Vendors Listen • Vendors have now taken a more product oriented view i.e. develop new products considering all the risks associated with its implementation • Modern designs such as EPR, AP1000, ESBWR and ACR-1000 • Worked with regulators to improve processes and governments to improve planning approvals • Results are lower costs and lower risks

14. Criteria for a Successful Project • Well designed economic plants • Stable regulatory regime • Risk sharing amongst all project stakeholders • Strong project team • Extensive Project Planning Confidence

15. Turnkey ScopeC ScopeD Scope A ScopeE ScopeB ScopeF Generator Risk Models Generator • There is a limit to the risk that vendors will take • Exclude circumstances beyond their control • Consequences commensurate with role and responsibility • No consequential damages Generator cannot lay off all of the risk!

16. New Build Nuclear Reality #1 Generators have the completion risk

17. Financing • Projects • Large Capital • Long schedules • Risk profile varies from construction to operations • Lenders will require • Strong debt coverage (large equity) • Overrun funds in place (stand by facilities) • Date certain for start of repayment • Project Financing is not ideal and high cost • On balance sheet creates EPS dilution issues

18. New Build Nuclear Reality #2 Generators have the financing risk • Credit risk • Funds to complete

19. Plan for Success • Well planned and managed project • Structure to assure successful project completion • Completion risk is real • Assess the risk • Mitigate the risk • Manage the risk • Low risk, high consequence • Economics not robust enough to price it in • Generators cannot risk bankruptcy on one project

20. New Build Nuclear Reality #3 Generators will not bet the company on a new build nuclear project

21. Recent Projects • Finland Olkiluoto 3 Project • Turnkey supply of EPR from Areva • Customer owned utility • Deliver power to customers at cost • Canada Bruce Units 1&2 Restart • Multiple contracts managed by independent project manager • Shared risk of overruns with government

22. USA • Government programs to support new build include: • Delay insurance for regulatory and litigation risk • Loan guarantees for 80% of project cost • Production tax credit of 1.8 cents / kWh

23. Let’s get real! New Build Nuclear Realities • Generators have completion risk • Generators have financing risk • Generators will not bet the company on a new nuclear project

24. Business Models that Work • Large utility with multiple units • Well structured project that places significant risk with vendors • Strong project management • On balance sheet financing • Risk sharing with the market • Regulated, or PPA with some overrun risk sharing

25. Making it Happen! • More work to be done to create well structured projects that can proceed • Requires committed stakeholders to work together to develop details of workable models • Different markets will have different solutions

26. Objective is Clear Well managed successful new build nuclear projects!! It’s cool to be a Nuke!!

27. Thank You Milton Caplan MZConsulting Inc mzconsulting@rogers.com www.mzconsultinginc.com +1.647.271.4442