Areva stock facing junk status from S&P rating

Cost overruns at a reactor under construction in Finland and delays globally in nuclear projects have hurt the French state-owned nuclear firm

Reuters reports that French state-owned nuclear power group Areva may Areva logo decide this week to scale back investments in order to avoid having its credit rating downgraded to junk status. The wire service cites the weekly newspaper Le Journal du Dimanche as its source.

According to that newspaper, Areva’s board is expected to decide on investment and spending cuts next week, but before Standard & Poor’s (S&P) is due to decide on the firm’s long-term credit rating. Areva has a market capitalization of about $4.8 billion euro.

S&P put Areva on “credit watch negative” on Sept. 9 and said it would decide on the rating within 30 days.

The French newspaper reported, without citing a source from S&P, that the credit rating agency will agree to maintain Areva’s investment grade if the company reduces costs and sells assets. Also, the paper wrote that Areva is said to need two-to-three billion euro in cash to bolster its balance sheet. The firm is 87% owned by the French government and would likely seek the help to maintain the country’s flagship nuclear presence in global markets.

However, a “junk” rating would force many investment houses to sell their stock in Areva as their policies prevent them from owning stock with that status. A junk rating would also harm Areva’s ability to present a credible case for new projects or to partner with other nuclear firms.

falling prices Reuters noted that Areva shares tumbled 20% on Aug. 1 when it report steep losses and cut estimates of future earnings and cash flow. It took a charge of 373 million euros exiting the solar energy business.

Areva’s one peg above junk BBB- rating has remained unchanged since December 2011. It was downgraded by S&P at that time after Areva booked a 2.4 billion-euro charge for project delays and cancelled orders in the wake of Japan’s Fukushima nuclear crisis.

Lost ground in U.S. and global markets

In the U.S. Areva at one time was slated to build four 1650 MW EPR design reactors, but all of them have been cancelled or indefinitely delayed due to the great recession and competition from low priced natural gas. The projects included PPL’s Bell Bend, Ameren’s Callaway, Constellation’s Calvert Cliffs, and Unistar’s Nine Mile.

Ameren briefly flirted with a proposal for a 225 MW SMR to be built by Westinghouse, but that firm has stopped development of equipment for that market. Also, it failed twice to convince the Missouri legislature to adopt a fund as you go law that would provide cash from ratepayers to cover construction costs.

Constellation was acquired by Exelon who’s CEO at the time in stopping work on the new reactor said it was “inconceivable” the firm would build a new reactor in a deregulated electricity market. Work on Nine Mile was suspended in 2009, and the license application for Bell Bend is listed as “not scheduled.”

Areva continues to be a vendor of commercial nuclear fuel for U.S. nuclear utilities. However, it mothballed work on a uranium enrichment plant in Idaho for which it received an NRC license and a $2 billion loan guarantee from the Department of Energy.

Globally, the construction of an EPR at the Olkiluoto power station in Finland is running behind schedule and over budget which has been a major source of financial stress. The Finnish government is so concerned about the delays and costs that it has stopped for now progress on a permit for a fourth reactor at that site.

Competition from Russia’s Rosatom has also reduced Areva’s market share. Jordan recently signed a deal for two 1000 MW VVERs. Also, Areva was shut out of South Africa after the announcement in September of a deal to be financed by Rosatom for a monster $50 billion, 9.6 Gwe of nuclear powered generating capacity.

It’s unclear whether South African President Zuma has the power to make that deal stick, but if he doesn’t the country isn’t in a position financially to go with another nuclear vendor.

Areva has not yet broken ground on a project in Jaitapur, India.  An agreement is pending for the price of power to be sold from the plant. France has also committed to provide India a loan for the project at 4.8% interest rate for 25 years.

The project will initially involve construction of two 1650 MW EPRs with options for four additional units. Success for the project hinges in part on a civil nuclear cooperation agreement between India and Japan. That country would supply some of the key components of the Jaitapur reactors.

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