Areva’s financial crisis gets worse. Is Hinkley Point at risk?

The financial future of the French state-owned nuclear giant has become less certain and some worry it may threaten the viability of the UK’s Hinkley Point 3200 MW new nuclear build.

investors2Just four months after sharply dropping its financial projections for the next year, and dodging a bullet from S&P that would have tagged its bonds as junk, Areva has suspended its previous estimates for financial performance. It has substantially revised its sales forecasts for new reactor projects, nuclear fuel cycle operations, and services for operating reactors.

AREVA LOGOThe company said in a statement to financial wire services on Nov 18 “Areva is undertaking a review of its strategic outlook and mid-term funding plan.  Areva is working . . . to adapt to market conditions which remain unfavorable.”

Areva reported a net loss of 694 million euros ($860M) and sales in the first half of its fiscal year dropped by 12%  Although the firm is majority owned by the French government, at about 87% of shares, trading has been suspended on its stock which has dropped from a 52-week high of $22 to just over $9. The non-governmental shares are mostly held by institutional investors.

On 11/21 S&P downgraded Areva’s debt to BB+ from BBB-, the lowest ever, with a negative outlook. BBB- is considered to be the lowest investment grade rating issued by the agency. ‘BB+, which is a lower rating in terms of quality of the investment, is considered the first tier of speculative grade by market participants.

The reasons for Areva’s troubles include new delays and costs at two nuclear reactor projects, one in Finland and the other in France. The slow restart of Japan’s remaining fleet of 48 reactors has also impacted Areva’s revenue from uranium sales as has the closure of half of Germany’s reactors.

In the U.S. Areva’s strong marketing start in the nuclear renaissance in 2007 has crumbled from plans to build four 1600 MW EPRs to having no active new build reactor projects. Also, it suspended indefinitely the start of construction of a $3 billion uranium enrichment plant in Idaho for which it had received an NRC license and a $2 billion loan guarantee from the federal government.

Delays accumulate costs

Areva’s problems in Finland have increased over time and have become mired in multiple contractual disputes with Siemans, its partners on the project, and also with TVO, the Finnish nuclear utility for which the plant is being built. The disputes center around the causes of delays in construction of a first-of-a-kind 1600 MW European Pressurized Reactor (EPR), Areva’s flagship nuclear reactor design.

Delays have also accumulated unanticipated costs with the construction the an EPR at Flammanville in France. That project is running four years behind schedule. EDF, which is building the reactor, blames Areva for delays in providing components when they are needed to keep to the construction schedule.

Costs have escalated at Flammanville from an original estimate of 3.3 billion euros to 8.5 billion euros ($10.7 billion) or to about $6,400/Kw. The plant was supposed to enter revenue service in 2012. The Flamanville EPR is now scheduled to start up in 2017.

The New York Times reported on Nov 19 that Areva’s two EPRs under construction in Taishan, China, have also run into delays, but did not provide any details.

According to a Reuters report in July of this year, the two EPRs under construction in Taishan, China, were originally set to enter revenue service in 2014 and 2015. Reuters cited the trade paper Nuclear Intelligence Weekly that said the China National Energy Administration expected the Taishan 1 and 2 reactors to come online in June 2015 and September 2016.

French government’s rescue mission

As part of a rescue mission, the French government said it would add $2 billion euros ($2.48B) in new capital from the sale of stakes in other state-owned firms.  The government also said it would lock up Areva’s losses in a separate legal entity. The objective is to contain the costs at the Olkiuoto reactor project in Finland. Also it is an effort to get them off the balance sheet.

The French government has reportedly rejected suggestions that the company be broken up into mining, reactor, and services departments on the grounds it would lose its competitive advantage as a vertically integrated supplier of nuclear plants, fuel, and services.

Some analysts claim the firm’s troubles stem from over-extended commitments globally. with inadequate capital to back them up, under the direction of former Areva CEO Anne Lauvergeon. During her tenure French President Nicolas Sarkozy promoted the firm’s export strategy taking a high profile in closing the deal for two EPR’s in China.

Still, Areva is a jewel in the French government’s crown and even President Hollande has no plans to privatize it, which is what Canada did with AECL.

Is Hinkley Point at Risk?

Money futuresIn the UK EDF is planning to build two 1650 MW Areva EPRs investments from Areva and Chinese nuclear companies. The projected cost of the 3200 MW project is estimated to be 24.5 billion pounds or $38.3 billion. Start-up for the two units is set for 2023 and 2024.

These numbers include the entire power station as well as grid and other regional infrastructure improvements. The back end decommissioning costs are also reportedly included in the estimate. The reactors by themselves might reasonably be expected to come in at about $6000/Kw.

Areva’s crumbling finances, and galloping delays and costs in Finland and France, have made some UK advocates of Hinkley Point nervous and critics are saying “I told you so.” The main risk isn’t so much Areva’s current financial crisis as it is the firm’s ability to delivery the two reactors for Hinkley Point on time and within budget.

Among the critics, Steve Thomas, a professor of energy policy at Greenwich University, blasted the project telling the New York Times on Nov 19 the EPR is “a rotten design that should be abandoned.”

He said Areva’s difficulties with the two first-of-a-kind units in Finland and France that Area is building are proof.  Thomas also said he doubts Areva will be able to raise the 10% of the cost, or about 2.5 billion pounds ($3.94B), for its equity stake in the effort.

Former U.S. Energy Secretary Steven Chu weighed in on Nov 16 telling the Guardian newspaper that the UK should not build multiple reactors from different vendors. He said that the differences would be a “financial drain” on the UK ratepayers. And Chu made reference to Areva’s troubles in Finland and France with the EPRs already under construction.

Chu said the UK should adopt South Korea’s model which is to build at least 10 nuclear reactors based on the same design. He said the 10th plant would cost just 60% of the first one.

While Chu didn’t mention Areva’s chief competition in the UK, which is Westinghouse, the firm is on tap to build some of the UK’s new reactors. It is planning to build three 1150 MW AP1000s at the UK’s Moorside Cumbria site. However, EDF is also planning to build to more EPRs at the UK Sizewell site in Suffolk. See chart below for a complete profile of the UK new nuclear build.

image

Table 1: World Nuclear Organization, Nuclear Power in the United Kingdom, October 2014

Investors still show up

These kinds of criticisms about reactor types and costs haven’t stopped investors from showing up for the Hinkley project their confidence boosted by the UK government’s promises of rate guarantees for the plant once it comes online.

The investment profile of the project calls for Areva to take a 10% stake. Separately, EDF is reported by financial wire services to be selling equity stakes in a combined total of 30-40% ($11.8B-to-$15.7B) to China General Nuclear Corp. and to China National Nuclear Corp. In an unrelated effort, EDF is also reported to be in negotiations to sell up to an additional 15% of the project ($5.9B) to the Saudi Electric Co.

If all these minority stakes sell at these percentages, total third-party investor participation will be 55-65% of the total cost. EDF will take the equity position in shares it does not sell to investors.

The Chinese firms would also like to participate in supply chain procurement for the project, but so far UK officials and EDF aren’t buying it.

While the government of French President Francois Hollande has been aggressively anti-nuclear, calling for a 25% reduction in France’s dependence on nuclear energy, his economics minister has a different view.

Emmanual Macron, who has an investment banking background, told the UK news media, in response to hand wringing about Areva’s finances and the future of Hinkley Point, that “Areva is here to stay. It is a priority for us.”

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