Managing financing risks for new nuclear
23 May 2016
Developers of new nuclear power plants can draw on the experience of other large-scale infrastructure projects to help identify and reduce financing risks, a senior corporate banker told delegates at a recent conference.
"There has been funding out there already for large-scale $10 billion projects. Long-dated money is available. Taking commodity price risk off the table, having strong counterparties with strong financial ratings that are willing to apply completion guarantees doesn't hurt," said Carl Cho, who works in Citi Bank's North American Power and Alternative Energy Group.
Speaking at the conference titled Nuclear Energy's Role in the 21st Century: Addressing the Challenge of Financing, held on 11-12 May at the OECD Nuclear Energy Agency headquarters in Paris, Cho described the risks associated with nuclear projects and explained how lessons could be learned from the structure of a liquefied natural gas project in the USA. He also described how two US new nuclear plant projects - Vogtle and VC Summer - have been able to manage cost overruns and their credit ratings.
"The key financial risks for a nuclear new build project are more or less the same as for any large infrastructure project," Cho said. "One of the biggest risks is size: the bigger the deal, the more finance providers have to raise. Everyone, from banks, to funds, to insurance companies like to sell down their risk, like to share their risk with as many investors as possible. So a big deal requires either going to a lot of investors or each investor holding a bigger chunk."
One of the biggest risks with large-scale capital-intensive projects, he said, is that they have "a long useful life" and therefore the payback period for the investment can be long.
"Time is one of the risks that I don't think can be hedged," he said. "We have markets that hedge interest rates risk, markets that hedge commodity risk, and the banking regulators recognise this."
But US banks and most "overseas" banks are phasing in the requirements of Basel III regulations, and cost of capital "goes up dramatically the longer dated our loans are", he said.
Loosely related to the time element of an infrastructure project is counterparty risk, he said. "Assuming a PPA [power purchase agreement] is struck at the money - meaning the price for electricity being sold by the PPA reflects a market price - what happens if the market price increases or decreases over time? If the price of power starts to fall on a contract for power, then I'm paying a higher price than my pre-settlement risk on the PPA, which is effectively a fixed-rated swap," he told delegates. "So financially, if I'm lending against that PPA, and prices move against the off-taker, I'm taking more credit risk against that off-taker," he said. "The potential price movement in a ten-year contract versus a five-year contract is mathematically greater."
Completion risk applies to any project financing, whether it's structured as a special purpose vehicle or "done on the balance sheet" of a company, Cho said. Operating risk - "if there's downtime" - raises the question, he said, of how to cover the lost revenue. Regulatory changes are also a factor to consider, since "even developed countries, like Italy and Spain can actually change their mind and not just eliminate subsidies but can claw them back," he said.
Cameron Project
Cho described Cameron LNG's project to add natural gas liquefaction and export facilities to its existing terminal in Hackberry, Louisiana. The new facilities will include three liquefaction trains. Construction on the project began in October 2014, with commercial operations expected to begin in 2018.
Sempra Energy and its project partners - Engie (formerly GDF Suez), Mitsui, Mitsubishi and Nippon Yusen Kabashiki Kaisha - reached a final investment decision in August 2014 and signed $7.4 billion in financing to back the project. Expansion of the existing regasification site is underpinned by a "fixed price date-certain" EPC contract with a consortium of Chiyoda and CB&I.
Cho noted that Japan Bank for International Cooperation provided a loan of $2.5 billion and a group of 29 commercial banks provided the remaining $4.9 billion. And Nippon Export & Investment Insurance insured $2 billion of the commercial bank debt. The sponsors provided completion guarantees.
"I think one of the reasons why this project worked was the strategic importance of the natural gas for the off-takers," Cho said. The primary feature of the off-take agreement, he said, is that it is a tolling agreement and so there is no commodity risk. "Rather than paying for the capacity of the plant and also buying the gas, the off-takers signed the relevant separate supply agreements for gas and they are simply paying rent for using the facility in a 20-year contract."
Another interesting feature of this project is that it is based at an existing facility, he said, "so, it has operating cash flows". Construction of the three trains for liquefaction and the storage facilities is being done "in a modular fashion", he said, "and there are completion guarantees from the sponsors". The loan has a tenor of 16 years, he added.
US regulatory support
Construction of new nuclear plants in the USA is being financed "within the rate base of regulated utilities", Cho said. "That means the utilities went to their regulatory commissions, they proposed and got approval to raise financing for these projects and there are scheduled tariff increases."
The Vogtle and VC Summer projects - in Georgia and South Carolina, respectively - have shown the importance of how credit rating agencies view financing, he said. "It is a fact that there have been overruns on the two projects and both [S&P and Moody's] view this as a business risk for the utilities," though the utilities concerned are working within different contexts.
In January last year, the start-up dates for the first new nuclear power plants to be built in the USA in 30 years were pushed back by 18 months. Vogtle 3 is now expected to enter service in the second quarter of 2019 with unit 4 following in the second quarter of 2020. Construction of Vogtle 3 officially began in March 2013, with unit 4 following in November the same year.
They will be operated by Southern Nuclear Operating Company on behalf of owners Georgia Power, Oglethorpe Power Corporation, Municipal Electric Authority of Georgia and Dalton Utilities.
South Carolina Electric & Gas (SCE&G) plans to complete the two AP1000 reactors under construction at VC Summer in June 2019 and June 2020, about six months later than previously expected. SCE&G, a subsidiary of Scana Corporation, stated the revised target dates in a petition it filed with the Public Service Commission of South Carolina in March last year.
The four Westinghouse-designed AP1000 reactors are being built by a contractor consortium of Westinghouse and CB&I/Stone and Webster.
Cho said: "In Georgia's case there have been some deferrals as to covering that cost. But if you're talking a market cap at Southern of $46 billion compared to their $7.5 billion commitment to the project, then they have a lot of cushion. In fact they have recently raised equity, so they have access to both the equity and the debt markets to fund this. So while there is a business risk from the rating agencies, they have the capacity to absorb that risk to the extent that a lot of completion [risk] is not passed on to the ratepayer."
He added: "In the case of VC Summer, South Carolina Electric & Gas's parent company Scana has a market cap of about $10 billion compared to their roughly $6.8-7 billion commitment. But the South Carolina Public Service Commission took a different approach and allowed them the cost recovery for the cost overruns of about $700 million. So while the ratings agencies highlighted business risk, they viewed that as a regulatory positive."
Both S&P and Moody's attribute more than half of the corporate rating of regulated utilities to "qualitative factors", he said. "As much as 25-30% of the final rating of a publicly rated utility can come from the rating agency's view of the regulatory support."
Researched and written
by World Nuclear News