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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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American Small Reactor Development Suffers From Short Sellers

  • NuScale has subscribers for about 120 MWs of power already lined up but it needs an additional 250 MWs for the project to continue.
  • NuScale was recently impacted by a negative research report from a small short selling firm.
  • NuScale has about three months to find buyers for 250 MWs of power in the Intermountain West or its initial subscribers at UAMPs can walk away from the project receiving full refunds.

NuScale is America’s contender in the race to build a commercial, nuclear small modular reactor (SMR). The company has two buyers for its product lined up. But the stock’s price seems to say that there is trouble ahead, especially after the recent release of a negative research report by a small short selling firm, Iceberg Research. Peak to trough the shares have fallen about 75% and since their initial $10 a share public offering via a merger with a special purpose acquisition company (SPAC) in May 2022 the shares (ticker SMR) have dropped to $3.80. Iceberg’s report highlighted three negative issues, two of which were already publicly disclosed. First, NuScale needs to sign up more power customers by Feb. 2024 to continue developing the Utah Associated Municipal Power Sytem (UAMPS) project.  UAMPS provides wholesale electric power to about 50 rural electric co-ops in the Intermountain West. So far, NuScale has subscribers for about 120 MWs of power already lined up but it needs an additional 250 MWs for the project to continue. Otherwise, the initial power off takers can cancel and are entitled to refunds. We wrote about this issue for OilPrice readers several months ago. However, that February 1 deadline is now less than four months away.

What investors are trying to decide is whether the members of Salt Lake City-based regional power wholesaler will decide to continue with this project or will they cancel and avoid the risks of future price escalations. When they initially signed up for this nuclear project, NuScale offered the co-ops a rather attractive power price of $55 per MWh installed in their attempt to migrate away from coal fired power generation. Due to inflation etc. NuScale’s revised cost estimates have risen to  $89 per mwh, which is more expensive power than all of the co-op’s alternatives both fossil fired or renewable. Our impression, from the few public comments we’ve seen, is that UAMPS and its members have limited appetite for any further cost escalations. Let’s take a step back and ask ourselves a simple question. What is the likelihood of a radically new nuclear reactor design coming in on time and on budget with a 2029 estimated completion date? All we can realistically say is that it's possible but not very likely. If the co-ops decide to cancel their NuScale power agreements it's hard to see this project having any future—a small 462 MW nuclear power plant situated near Idaho Falls, ID where no public or private wholesaler wants the power because it's too expensive. Related: TotalEnergies Q3 Profit Tops Estimates As Oil Prices Rise

Second, the short sellers' report highlighted NuScale’s cash position, its cash burn rate, and prospects for the company needing an equity raise within the next 15 months. This claim is less compelling for several reasons. First of all, there is a lot management can do in that time frame. They can tap other funding sources, sell more equity, and try to increase U.S. Department of Energy  (DOE) funding commitments. Yes, it is probable they will have to raise more money from the capital markets at some point in the future perhaps resulting in meaningful shareholder dilution. However, that is a long term concern for a company with near term problems. Our guess is that part of NuScale’s share price decline this past week reflected shareholder grumpiness about prospective dilution. However, this is not a new issue for anyone paying close attention.

But rather than simply pile on after a bad news week for NuScale, we should take a step back and review a few positives. Most important, NuScale’s is the only SMR design to receive preliminary approval from the U.S. Nuclear Regulatory Commission  (NRC). No other SMR design has achieved this yet in the U.S. Second, the DOE has seen enough merit in NuScale’s technology to warrant over half a billion dollars in government grants. Our point here is that NuScales’s problems at this stage appear financial, not technological. The company’s initial reactor design proposal, already NRC approved, was for a 50 mw reactor module. However upon further testing the company realized that these units could actually produce 77 mws apiece. This design change sets the clock back on revised NRC approval by about two years. Stated differently, the first installed reactor modules are now delayed from 2026 to 2029.

The short seller’s report, however, also dwelled on the odd and seemingly out-of-the-blue transaction announced with Standard Power earlier in October month, plans to develop two, 12 reactor modules totaling 1848 MW’s with a crypto miner and data center developer with an identified site in Ohio. The short seller implies that the firm is simply not a plausible or viable buyer for 1848 MW’s with a contract supposed to be worth $37 billion according to the company. The fact that one of Standard Power’s senior executives was convicted of securities fraud and is an alum of Stratton Oakmont (the Wolf of WallStreet's old firm shuttered for SEC violations) does little to enhance investor confidence. And, according to Iceberg, while NuScale’s shares saw a little bounce the former CFO used this as an opportunity to liquidate his remaining equity holdings—certainly not the vote of confidence we would have expected following a supposedly game changing contract.  

We should take a moment to compare the UAMPs contract with the one recently signed with Standard Power. There are three key participants in the UAMPs transaction: 1) the developer, Nuscale, 2) the power off-taker, UAMPs and its various co-ops who are all legitimate power buyers, and 3) a site owner, the Idaho National Engineering Laboratories, a 900 square mile facility where the US government has conducted energy and weapons related research since the dawn of the nuclear era. Standard Power’s proposed transaction has 1) NuScale as the developer along with Entra1 (which lists only one employee on its LinkedIn page), 2) Standard Power is the off taker (whose website states that it presently purchases about 40 MWs for crypto miners and data center developers), 3) and for the two proposed twelve unit nuclear modules, one 125 acre site in Coshocton, Ohio presently touted on Standard’s website as wonderfully situated to take advantage of U.S. shale gas. The Standard Power contract with NuScale does not even remotely resemble the agreement with UAMPs and has to be judged as far less credible. 

NuScale is in a race with some of the largest, and best financed nuclear research entities in the world: Westinghouse, EDF, and Rolls Royce just to name a few. The large corporate entity behind NuScale is Fluor Corp, a major engineering, procurement, and construction firm with 40,000 employees. However, Fluor has publicly indicated a desire to reduce its holdings in NuScale. On a worst-case financial basis, NuScale as a corporate entity simply goes away while Fluor tries to monetize its technology and various patents to the U.S. DOE and others. We would not be shocked to see a de facto government takeover here with the NuScale reactor still developed at its present site at the Idaho National Engineering Labs.

To sum up. NuScale has about three months to find buyers for 250 MWs of power in the Intermountain West or its initial subscribers at UAMPs can walk away from the project receiving full refunds. Also, at some point next year NuScale will need more cash, which will likely lead to meaningful dilution for existing shareholders. And lastly, we have senior management engaging in a battle with a short seller who seems to view the Standard deal as something akin to a stock promotion scheme of dubious merit. Short sellers don’t always get it right, but their attacks often undermine investor confidence in the target company. Not a good prospect for a company that must maintain the confidence of potential customers in order to get orders and of investors in order to raise the capital needed to build the product. All we can conclude. at this point, is that American development of SMR technology seems in real jeopardy for nontechnological reasons.

By Leonard Hyman and Bill Tilles for Oilprice.com

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