Nuclear Power Industry News

 Part of a Special Section covering the Nuclear Construction Summit USA 2009, October 26-27 – Washington DC

The Nuclear Construction Summit, USA 2009 was attended by professionals who finance, plan and develop next nuclear projects. Professionals delivered information that will form blueprints for successful financing and construction risk assessment and management at every phase of the construction cycle.  From government and regulatory bodies to operator insight and in-depth contractor experience.

  - Presented by Barry Gassman, Partner, Energy and Finance Practice, Pillsbury Winthrop Shaw Pittman LLP, New York Office –

The attached pdf presentation from the NCS meeting details Structuring a JV to Win a Combined Operating License (COL)

Why a Development JV

• Nuclear plant vendor desires to have the Nuclear Regulatory Commission actively review design control document (DCD) to certify vendor’s
  nuclear technology
• Assists marketing of the same nuclear technology within and without U.S.
• First to market establishes a beachhead in U.S.
• Design certification required for NRC part 52 licensing in U.S.
• Design certification establishes a valuable imprimatur for non-US sales
• Sponsor needs to satisfy future demands for electricity
  • Nuclear generation a clean technology
  • Long lead in time to achieve commercial operation
  • Sharing of development costs to put the Sponsor in a position to build a nuclear plant
  • Sponsor acquires, in effect, an option to build one or more nuclear units on its site

Goals of the Nuclear Development JV

• Finance costs of preparing and processing the NRC combined operating license application (“COLA”) and state permit applications
• Commence site specific engineering
• Commence development activities:
  • Evaluate, and if required, contract for water resources
  • Perform environmental reviews
  • Perform seismic and geotechnical studies
  • Identify and apply for required permits
  • Confirm or acquire necessary land and site permits
• Obtain COL and state certification of need
• Ascertain availability of financing for construction of the units

Parties to a JV

• Nuclear plant vendor, such as Mitsubishi Heavy Industries or Toshiba
• Sponsor—regulated utility or merchant operator that currently owns and operates one or more nuclear units
• Other potential parties
  • Non-nuclear investor owned utilities, municipal utilities or electric cooperatives providing electric power
  • Institutional investors, although perhaps later in the development process

Structure of JV

• Typically, vendors and sponsors have formed limited liability companies taxable as partnerships
• The major exception is the relationship between municipal utilities and a joint venture
  • Municipal utilities wish to finance their share of development and construction costs in the tax-exempt market
  • To preserve the municipal utility’s access to the tax-exempt market, a municipal utility cannot be treated as using the asset in an activity for profit
  • As a tax partner of a limited liability company, a municipal utility would have imputed to it the activities of the JV and would thus be barred from issuing tax-exempt securities
• What are a municipality’s alternatives?
  • Own an undivided interest as a tenant in common with the JV
  • Enter into a contract to assume a pro rata  share of development and costs in exchange for a share of the plant’s output (“Contract Equity”)
  • In a Contract Equity arrangement the municipal utility does not own a beneficial interest in the nuclear plant or its ancillary equipment
  • The municipal utility’s rights to outputinvolve no interest in real or tangible personal property to pledge in support of any tax-exempt financing

The Undivided Interest Structure

• Two or more entities each own an undivided interest in all of the assets of a generating facility and agree to share development, construction and operating costs in accordance with their percentage ownership interests
• Each undivided interest owner is entitled to take in kind its share of the nuclear plant’s output, although an owner may arrange with the operator or
  other owners to sell its share of output
• Properly structured, a co-ownership arrangement is not taxable as partnership for federal income tax purposes
• Has been commonly used in project financings of power plants and may be an important tool for nuclear financings in the future

Valuation Issues

• Problem: what is the value of an undeveloped site upon which one or more new units may be constructed that is contiguous to an operating plant?
• This has been a key issue in the formation of several nuclear development joint venture
• One approach has been to view an undeveloped site that is contiguous to an operating facility as giving the owner of the site an option to build new units
• The question then becomes how to value the option
• The option methodology makes many key assumptions, such as
  • Inflation rate
  • The development and construction costs for the licensing and construction of one or more nuclear units on the site
  • The length of the construction period
  • The commercial operation date of each nuclear plant
  • The power prices of the output from the nuclear plant for an agreed period (i.e. the future power curve in the location where the plant will be built)
  • Refueling schedule
  • Capital structure and weighted cost of capital
  • Asset life of 60 years
• Formula: Option value is equal to the present value of net operating revenues from the plant minus the sum of the present value of capital expenditures and
  development costs
• A valuation using the option methodology provides a ballpark estimate of the vale of the option
• The valuation is merely the starting point for negotiations

Establishment of the Cost Sharing Ratios Among JV Members

• Determine range of development costs and timing of such expenditures through an end date, such as issuance of the COL or obtainment of construction financing
• Agree upon a preliminary development budget through COLA issuance or some other end date
• Cash contributions may not be pro rata, especially in light of the significant value to be contributed by the Sponsor
• Allocation of risk for cost overruns for development expenditures

Management of the JV or Co-Ownership Relationship

• If the parties form a limited liability company, the parties have great flexibility in structuring management
• Generally, a limited liability company is managed by a board of managers
  • The scope of board’s authority may be a function of (i) whether each member has board representation and (ii) the voting power of each manager
  • Certain key issues may require unanimous consent
• A co-ownership arrangement is characterized by one of the co-owners being appointed the operator of the facility pursuant to an operating agreement signed by all co-owners
  • The operator has day- to- day control of the JV
  • Certain decisions may require all of the co-owners’ consent
• A contract equity arrangement typically has the municipal utility playing a passive role in the development and construction of the nuclear unit

Abandonment of the JV

• Sponsor may wish to build into the JV an exit scenario for any of the following
  reasons:
  • To adopt a different nuclear technology
  • Lack of cost efficient equity or construction financing
  • To build a fossil fuel generation facility
• Risk of Technology Failure
  • Possible objective standards to trigger abandonment related to nuclear technology
    • NRC suspends review of the DCD or COLA for more than an agreed upon period NRC’s schedule for issuance of Final Safety Evaluation Report (“Final SER”) for the COLA is extended for more than an agreed upon period beyond the date of the NRC’s first published projected date of issuance of the Final SER
    • The Final SER for the DCD is not issued by a date certain
    • The Final SER contains material additions to the COLA action items expected to result in a material expenditure of fund
  • Failure of Construction Financing\
    • Project does not receive Department of Energy loan Guaranty
    • Inability to raise debt or equity financing to meet construction needs

Due Diligence

• Vendor Due Diligence
• Early Stage Development
  • Vendor must be prepared to accept certain development risks
  • Water rights and permits will all not be in place
  • Regulatory risks: change in regulations
  • Is transmission from proposed site adequate?
  • Governmental approvals will certainly just have begun
  • Real property rights
• Scope
  • Water rights
  • transmission
  • nuclear regulatory
  • real property
  • environmental
• Sponsor Due Diligence
  • review of technology
  • site visit to manufacturing facilities
  • engineering expertise
  • working relationship

Liquidation of the JV Prior to Construction

• Sponsor wants its site back
• The risk of the Sponsor losing control of the Site in a planned or forced liquidation is a particularly difficult problem
• The Sponsor was in part provided its JV interest on basis of valuation of the Site
• To distribute the Site in whole back to Sponsor will raise difficult income tax and accounting issues

Click here for the complete New Nuclear Joint Ventures Financing