Nuclear Energy Sector Turns in Taxpayer-Sinkhole

Given the difficulty of accurately gauging nuclear capital expense, how can we infer if these enterprises can ever be profitable?

By Leonard Hyman and Bill Tilles,

When a utility stock pays a dividend that yields 11 percent it is either an overlooked steal or the equity of a company with big problems–and a dividend that’s soon to be either eliminated or reduced. EDF, France’s state controlled nuclear energy giant, looks more the latter than the former. But never underestimate the determination of French politicians–right, left and center to protect and subsidize their civilian nuclear power establishment.

To understand this byzantine story of French public and private partnerships, let’s start with EDF’s current stock price. It’s priced in Paris this morning at about €9.60, slightly above the 52 week low. And down from a high of €28.78 more than two years ago.

To compound its woes, EDF’s stock sells at about 63 percent of its book value. This typically indicates the market’s view that either current earnings provide a below-cost-of-capital return or that investors don’t believe the assets are worth the value carried on EDF’s books. By way of contrast, a financially sound electric utility in the U.S. sells at about 1.5 times its book value and its shares offer investors a yield of less than 4 percent. In February, shareholders of EDF and Areva, the state controlled nuclear engineering and mining company will vote on a monumental reorganization. The reported terms would raise serious questions in Wall Street’s finest minds.

EDF plans to buy majority control of Areva’s nuclear engineering and construction division for €2.5 billion. (It may sell down some of this ownership position later). The French government will also invest in Areva: €5.2 billion into the remaining portions of Areva. The government, we assume, has several objectives: first, take the liabilities and lawsuits of the delayed, over-budget and still incomplete Finnish nuclear project, Olkiluoto, off of Areva’s engineering division and then, with a hopefully more financially stable entity the government can reduce its ownership stake in Areva.

But there’s always something. Investigators suspect falsification of documents at one of Areva’s facilities that manufactures components for nuclear plants. The engineering arm already faces a weak market and this investigation will not help.

But regardless of Areva’s value, where will EDF get the money to buy it? Not to mention their supposed €30 billion plan to rehab France’s aging nuclear fleet. (As an aside we should point out that looks to us like a €100 billion program. Just assume they plan to overhaul 40 nuclear power stations at a cost of €2.5 billion per station.)

As if this wasn’t enough capital expense, they also have a big financial commitment in the UK with the planned construction of Hinkley Point C, using French EPR technology. Offsetting this to a considerable extent are financial guarantees from the British government. However, there is a €2 billion holdback of funds if EDFs Flamanville nuclear project is not completed by 2020. This is tied to the EU’s rules on national subsidies. But given Brexit, whether the EU’s rules continue to apply in this case remains to be seen.

To raise funds for what looks like the start of an audacious capital program (either that or a big step down the road to financial perdition), EDF plans to sell €4 billion of new stock. Of the proceeds, the French state will take €3 billion. And as for the supposed “safety” of the common dividend, the French government plans to take its dividends in stock for three years thus saving EDF considerable cash disbursement.

Most of these funds go from one state-controlled company to another. From the French treasury to a firm that it owns. But as long as the French government has a printing press or the ability to sell sovereign debt, there is no shortage of money to pay for whatever the government decides to do.

The bottom line in this saga? France has a presidential election this year and all the main party candidates are decidedly pro-nuclear. Too many jobs involved. Too much French pride invested in its nuclear effort. Marine LePen, the right wing politician, was quoted as saying that “so-called green energies are not realistic yet.” No Thatcher-like preference for free market outcomes or private ownership here.

In short, EDF’s story again shows the vital role of government subsidy in nuclear power. This also shows that privately owned firms in the nuclear energy business without government partners may find themselves at a competitive disadvantage. How can you compete when the “other guy” can borrow billions at no or low cost from its state-sponsored partner or owner?

In the nuclear energy business, the demand for capital is so large that very few privately owned enterprises are able to engage. Unlike Britain, which privatized its utility sector, the French, Chinese and Russians have state sponsored nuclear power generation activities that aggressively seek export opportunities.

The woes of EDF’s shareholders reminds us of several things. Nuclear energy is, relatively speaking, high cost energy. And that risk assessment in this area is difficult even for the most seasoned professionals. This is a fancy way of saying we really don’t accurately know what new nuclear plants, refurbishments and the like will eventually cost.

Given the difficulty of accurately gauging nuclear capital expense, how can we infer if these enterprises can ever be profitable? This suggests to us that ongoing nuclear development, at least near term, requires the deep pockets that only a state sponsored partner provides.

The financial issue here is not about having a balance sheet large enough to absorb potentially large losses. But rather the capacity to withstand significant financial uncertainty, for protracted periods, in return for uncertain financial outcomes. Big investment, big risks and low or no profits barring subsidies. This sounds like a public sector or governmental function to us. By Leonard Hyman and Bill Tilles,

Having been embroiled in all kinds of nuclear, financial, and accounting scandals that investors deluded themselves into thinking were behind it, Toshiba shares surged 206% from February into December. Now shares are once again melting down as its nuclear fiasco strikes again. Read… Scandal & Cover-Up Plagued Toshiba Re-Implodes

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  23 comments for “Nuclear Energy Sector Turns in Taxpayer-Sinkhole

  1. Johnny Reb says:

    Thanks Wolf good article
    So the French government can print up 3 billion euros outta thin air, buy shares in EDF and receive 11% in dividends. Except they will take the dividends in stock because the Frog politicians don’t want to stress out EDF financially? Is that right?
    I don’t know if this is the correct analogy, but you would think the French would have learnt from their experience with John Law and the Mississippi Bubble.
    IMO physical GOLD & SILVER sound like a better investment, but WTF does a bricklayer know:-)

    • Tom Kauser says:

      The nuclear power plant needs more money and the ECB needs to give them more money and the fed needs to give them more money and the Finnish hot tub makers sit in cold bubbles in anticipation of holiday on Ibiza ……..ah Europe can’t live with, can’t live without!

      • nhz says:

        I bet the ECB will gladly lend unlimited loads of money to EDF at a negative rate.

        At the same time, profitable small companies in Europe have difficulties getting business loans at below 5-8% interest, if any.

        Nuclear is an extortion business just like the military-industrial complex and Big Pharma. Good business if you can get it ;-(

    • Álvaro says:

      “by Leonard Hyman and William Tilles”

  2. Tom Kauser says:

    11% and government backing for a project in Norway , that’s like free money?
    I am dollar cost averaging international with a focus on undervalued Europe.
    I like 7-10 year treasuries and would avoid corporate america across the board. That being said, this stock rally has another 20% upside if dollar continues to look heavy?
    The fed will need to hire more casino workers in the future!

  3. Dan Romig says:

    Minneapolis based Xcel Energy has been in the news lately since they use parts in their Prairie Island nuclear plant from France’s Areva SA’s Le Creusot forge. Evidently, it is better to have your nuclear reactor contained in solid structures that don’t crack.

    Xcel Energy does pay a $1.36 dividend, or about 3 1/3%. I own a bit of stock, and 11% sounds better, eh?

  4. walter map says:

    “Given the difficulty of accurately gauging nuclear capital expense, how can we infer if these enterprises can ever be profitable?”

    You can’t. Clearly that’s a feature, and not a bug.

    If nuclear technology isn’t profitable after all these years of R&D it’s certainly because it can’t be. Hence the vast subsidies everywhere it is still employed.

    Germany recognized this a long time ago, and, not being fools, gave up on it, while the French, who are, remain wedded to it largely as a matter of national pride. Meanwhile radiation contamination is a matter of French national security because of the risk it poses to the tourist industry. Cherbourg doesn’t show up on the high-end travel brochures for rather excellent reasons.

    Domestic nuclear technology has long been promoted in no small way because it’s acceptance is so closely associated with acceptance of military nuclear technology. The French hierarchy has always been nuts about both.

    Don’t get me started about ‘fusion power’. That’s been the Energy of the Future for sixty years, and looks like it always will be.

    • polecat says:

      Fusion … Ha ! … just wait 10 tens ….. or is it 20 ?

      Nuclear Power plants are nothing but a Yuuuge subsidy dumpster .. and always will be !

      and then there’s the issue of what to do with/about all the dreadful waste .. uh .. ‘products’ ! Governments around the planet will fiddle, while the ‘Romes’ of the world irradiate !!


      • nhz says:

        nuclear fusion has always promised to be profitable within 30 years; for 60 years already ;-)

        The only thing that keeps forging ahead are the size of the budgets, and probably the salaries of the project managers.

    • DV says:

      This is because both Areva and Westinghouse did not build new facilities for decades. The competencies have been lost. Therefore, Finnish fiasco. This is simly means that these companies are not cmpetitve vis-a-vis Russian or even Chinese nuclear companies. Russia’s Roatom has been doing just fine.

      • Wolf Richter says:

        Are you talking about “Rosatom” (NOT Roatom)? It’s Russia’s State Atomic Energy Corporation. It’s state-owned and run and operates with state guarantees, like all Chinese nuclear companies. These companies don’t need to show a profit. That’s why they’re “doing just fine.” And that’s exactly one of the points in the article.

  5. Chicken says:

    Given the present rate of growth for wind and solar in Germany, there might not be any need for France to add any capacity, they may have difficulty justifying the current installation base?

    Consider, Germany has slowed growth of wind and solar, to avoid a gigantic investment bubble and jobs have been cut as well.

    They should probably focus on improving their grid?

    • DV says:

      It is not clear how they will be able to manage their grid with so many intermittent sources. I would like to see someone investigate that issue as the question remains – what installations will continue to provide the base load?

      • nhz says:

        yes, that’s the main problem and probably the reason why Germany is scaling back on alternative energy.

        Netherlands (originally build with wind power, but for now with the lowest percentage of green power of almost all EU countries) has started to build huge wind turbine parks at sea, which in 10 years could provide almost the whole current electricity use – except when there is no wind.
        Hopefully some efficient storage solution will emerge; there were plans for this several decades ago already like using excess power to pump sea water into artificial basins at sea, near the wind turbines, and generate power from draining the basins when there is no wind. But all these plans were shelved, partly because of the promise of ‘extremely cheap’ nuclear.

        However (all the other technical, environmental and social issues of nuclear aside), nuclear is not a good solution to balance this intermittent green power, and would at best be suitable for large industries that require a constant huge amount of electricity throughout the year. An example would be an Aluminum smelter, which was the official reason for building a nuclear power plant in my area. The smelter would provide a few hundred well-paid jobs, and the nuclear power station would provide ‘free’ energy for the smelter and ditch all the electricity meters in the province because electricity would become so cheap that it wasn’t necessary to pay for it.

        Despite huge subsidies for its electricity bill the smelter went out of business many years ago and now only the aging nuclear reactor is left. Of course the electricity meters are still there, and our rate is the highest in the whole country. Politicians don’t want to talk about the unsecured financial risks of waste disposal and dismantling of the power station – supposedly this is taken care of with a seed capital of 20 million euro’s or so that is invested so wisely (probably by nuclear engineers …) that it yields about 15% ROI every year for the next 50 years, which should be enough to pay for decommissioning if inflation doesn’t get out of control ;-)
        Madoff could learn some tricks from these experts.

        Fortunately politicians don’t have to consider the financial risk of Fukushima on the Scheldt river, as Dutch law (like in much of Europe) states that in case of a nuclear accident the owner of the plant is not responsible for any damage.

  6. 2banana says:

    There are certain strategic advantages to being able to produce nearly all your country’s power without importing oil.

    Solar and wind are no where there yet. Germans pay on average 3x the cost of power than Americans.

    • nhz says:

      But that cost has nothing to do with the real cost of green energy. Netherlands has almost zero green energy, and electricity rates are often even higher than in Germany.

      I don’t know how the German rates are set up, but in my country more than half of e.g. the electricity bill is a fee for ‘transportation’ that you pay irrespective of how much power you use. And the price per KW of power that the enduser pays is many times what it costs to produce it …

      • nhz says:

        P.S.: the projected cost of wind power in the new Dutch wind parks at sea is projected to be lower than even the power of coal power plants within about 10 years. Even the wind turbines that are under construction now are already very close in cost to ‘cheap’ coal (with the main problem that the wind turbines don’t provide power all the time, and electricity storage is relatively expensive / inefficient).

  7. wkevinw says:

    I think a full “long term cost of ownership” including “life cycle cost analysis” should be fairly reliable with nuclear energy at this point. A few parties need to make the estimates/calculations and have them be examined by the decision makers.

    It’s pretty much that simple, if certain parties will let it be so.

    • nhz says:

      it’s not simple at all. NOBODY knows what decommissioning of a real nuclear power plant will cost, because NONE of them has been fully decommissioned anywhere in the world. Only a few very small military or research reactors have been decommissioned, often at staggering cost; there is a reason why they are postponing this for at least 50 years (= until all the responsible engineers and politicians are at the graveyard).

      Also, there is no way to calculate the cost of longterm storage because NO ONE has a solution for nuclear waste disposal (that works for more than e.g. 20 years).

      Of course, such pesky ‘issues’ have never been a problem for the snake oil salesmen from industry and politica who even now assure us that nuclear energy is cheap.

  8. Alfred (Melbourne) says:

    One thing that is rarely mentioned when it comes to the existing French nuclear power plants is that they required the importation of a vast number of cheap laborers from North Africa.

    That was the genius of president Pompidou – who was brought in by the bankers after the successful putsch (i.e. color revolution) against de Gaulle. The CIA – using its proxies such as the OAS – tried to assassinate de Gaulle a great many times without success but they did manage to replace him with a stooge.

    Much later, president Mitterrand allowed these North Africans to bring in their families. He also nationalized insolvent private banks (e.g. Banque Rothschild) and “compensated” the shareholders by paying them a multiple of the value of these banks.

    I think by now it should be clear that the plan to drown Europe in non-productive 3rd world immigrants is quite an old one.

    • Wolf Richter says:

      >>> “…in non-productive 3rd world immigrants..”

      I swear I heard you say that they built the nuclear power plants in France. So these folks must have been very productive. These are big installations, and they’re expensive and hard to build, and take years to finish. So if those immigrants were brought in to build them, they did one heck of job!

      • nhz says:

        I think Alfred is right, much of Western Europe infrastructure and industry was build up in the 50’s/60’s with cheap labor from countries like Morocco, because even then native labor was quickly deemed too expensive. Of course much of this construction was hard but relatively unskilled work. I don’t doubt that the inside of the nuclear reactors was build by more skilled (?) native engineers.

        In my country too the idea was that the migrant workers would go back to their own country once the job was finished, but many of them never left and just as Alfred says starting bringing their whole family with many of them often living on welfare and causing lots of social problems (and voting for the socialist parties …), now in the second or third generation. Even now, 50 years later large numbers of mostly uneducated people from Turkey and Morocco are still migrating to Netherlands every year and definitely not to start working here :-( The bright ones have been returning to Turkey for years, because they see better opportunities there.

        There is a huge difference with the current situation though: 50 years ago those migrants came here to work, nowadays most of them (from Africa or Asia) come here for a lifelong vacation on social security (plus some fraud to spice things up, some of them even collect welfare using a dozen different names …). Yes, some of they are skilled workers (but without the local language and local job experience they have very little chance on the market) and some dream or boast about becoming a brain surgeon or pilot even though they haven’t even finished primary school …

  9. micromacroman says:

    One thing that wasn’t mentioned is what consumer energy costs are. US vs Germany vs France. Sure their are Govt subsidies in all three. And each pays through higher taxes. But what is the end consumer pay in each nation as a comparison vs those taxes ?

Comments are closed.