DOE loan: chicken or egg?

On 28 July 2009, news stories stated that US Enrichment Corporation (Usec) had delayed its application for a US Department of Energy loan guarantee for its American Centrifuge Plant uranium enrichment project.

Usec’s share price dropped by over 30% on the news and Usec announced that, without the loan guarantee, it would demobilize or cancel the ACP project in which it had already invested about $1.5 billion.

There are only two applicants for the $2 billion DOE front-end nuclear fuel cycle loan guarantees, Usec’s ACP project and Areva’s Eagle Rock uranium enrichment project in Idaho. Both applicants appear to be seeking the full amount. It is not clear if Areva’s project would automatically receive a loan guarantee if the ACP project was no longer in the running.

A week later, Usec was granted a six-month reprieve to address DOE’s financial and technical concerns.

Although the details of DOE’s review of the ACP application are not public, the commercial readiness of the Usec ACP technology is clearly an important issue. The DOE loan guarantee programme was intended to provide federal support of clean energy projects that use innovative technologies. In particular, eligible projects include new and improved technology that is not yet commercial, but that have the potential to result in commercial projects in the US. R&D and demonstration projects are excluded.

The financial situation of the Usec ACP project is also an important issue. The legislation establishing the DOE loan guarantees requires that the DOE undertakes a process of due diligence that supports a determination that there is a reasonable prospect of repayment of the guaranteed loans. There is also an evaluation to determine whether the loan guarantee, along with other available funds, will be sufficient to complete the project.

The nuclear power plant loan guarantee programme is even more oversubscribed. DOE received 19 applications that requested a total of $122 billion in loan guarantees for nuclear power plants. The $18.5 billion that has been authorized for nuclear power facilities would, at the current cost estimates, cover less than 5000MWe, assuming the maximum 80% of total project cost is guaranteed. DOE lists four finalists: South Texas Project – two ABWR units, Calvert Cliffs – one EPR unit, Summer – two AP1000 units, and Vogtle – two AP1000 units, which together make more than 8500MW. Even if these projects take less than the maximum of 80%, there still may not be enough to satisfy all four finalists. Since this legislation was passed, nuclear power plant capital cost estimates have increased significantly. Some of the US nuclear projects may not be built if they do not receive a DOE loan guarantee.

The nuclear power projects applying for a loan guarantee expect that a portion of their project debt will be covered by guarantees from an Export Credit Agency (ECA) such as Coface or JBIC (Japan Bank for International Cooperation). These ECAs are involved because a significant part of these new US nuclear plants will come from other countries (e.g., Japan for the AP1000 and the ABWR, France for the EPR) and because the US is perceived as a key to the overall world market for new nuclear power plants.

Like a project finance lender, the DOE loan guarantee process must determine the subsidy cost of the loan. The subsidy cost of a loan guarantee is the estimated long-term cost to the Federal government of a loan guarantee, calculated on a net present value basis, excluding administrative costs (which are charged separately). The cost is based on estimated cash flows associated with the loan guarantee, including payments by the government to cover defaults and delinquencies and other requirements, and other fees paid to the government.

DOE must receive either an appropriation for the subsidy cost or the loan guarantee recipients must pay the subsidy cost. While some DOE loan guarantee programmes have appropriated funds to cover the subsidy cost, no funds have been appropriated by Congress for the subsidy cost related to nuclear power plants or front-end nuclear fuel cycle facilities. The US Office of Management and Budget is taking a hard line on the issue of subsidy cost, determined to prevent another round of federal loan defaults. Estimates of the subsidy cost for a nuclear power plant range from a few hundred million dollars to as much as 30% of the total amount of the guarantee.

Applicants will not have a clear view of the magnitude of the subsidy cost until a final term sheet is offered, well into the process and after payment of significant non-refundable fees. The subsidy cost must be paid by the applicant at closing, prior to actual loan disbursements and may not be paid from the loan guarantee amounts.

Finally, the initial loan guarantee programme rules included collateral security requirements and related financing terms that would have made participation by other lenders in a project with a loan guarantee very difficult. These financing issues may now be resolved, thanks to consultations with applicants and the financing community. DOE issued a Notice of Proposed Rulemaking on 6 August 2009 that revises these security provisions.

As a general matter, applicants for a loan guarantee are like applicants for any large loan. Applicants that really need the loan guarantee may not qualify for it and applicants that would qualify for the loan guarantee would likely not apply.

By Edward Kee, vice president of NERA Economic Consulting

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