1. Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. ©Copyright 2009 Latham & Watkins. All Rights Reserved. 1 Finance & Nuclear Power Breton Peace

2. 2 Part I ECONOMICS

3. 3 Economics of Nuclear Power The following few slides are provided solely to orient thinking on the economic and financing concerns of nuclear power in light of the late cancellations by other presenters. They are not intended to provide an in depth overview of the economics of nuclear power or to conclude that nuclear power is economically beneficial in a particular context.

4. 4 Cost of Electrons Levelized Energy Cost (LEC) analysis of nuclear power and other renewable energy sources (wind, solar, geothermal) are based on many factors (e.g. capital costs, operating costs, run rate). Industry LEC analysis say nuclear power is cost effective LEC analysis by opponents of nuclear power say the opposite LEC analysis can confuse issues. Ex. The failure to distinguish between two fundamentally different commodities from the State’s perspective SONGS nuclear plant produces 2,500 MW of clean based load power SEGS solar facility produces 354 MW of clean intermittent power LEC analysis is a single factor in the State’s broader determination about its future energy mix and economic growth. Examples of things to consider: Jobs (nuclear power plants provide thousands of high paying construction jobs and hundreds of high paying operating jobs) Environment (e.g. nuclear power plants do not require large amounts of land like utility scale solar and wind) Public Safety (e.g. nuclear power involves significant safety considerations ranging from non proliferation to site security) Reliability (e.g. there are ample supplies of uranium) Transmission Costs Desirability (e.g. there may be communities in CA that want nuclear power plants in areas that are seismically and geologically appropriate)

5. 5 Dept. of Energy (DOE) Analysis Key Findings Natural gas fired with combined cycles (no CCS) costs least Nuclear costs similar to advanced coal with and without CCS, other natural gas turbines, geothermal, biomass, hydro Wind (land) costs 25%more than nuclear, wind (offshore) costs 50% more than nuclear Solar PV is >3 times more expensive than nuclear, solar thermal is >2 times more expensive than nuclear Nuclear and geothermal have the highest capacity factor Life of a nuclear power plant = 60 years v. life of a wind turbine = 15-20 years

6. 6 The Cost of Electrons v. The Cost of Capital While there is disagreement over the LEC and more general economic benefits of nuclear power relative to other power sources, there is a general agreement that currently the cost of financing nuclear power is prohibitive without public support. When people talk about nuclear power as being too expensive, they are generally talking about financing the construction of new nuclear power plants.

7. 7 Part II FINANCING

8. 8 Financing Nuclear Power California’s moratorium on the construction of new nuclear power plants cites two primary concerns: Cost Waste We deal only with cost. Before the moratorium, cost overruns plagued projects. These massive cost overruns were passed into the rate base. Plants were built, essentially, with a blank check because all of the financial risk was shifted to ratepayers. Consider two points: California can determine what ratepayers will bear, if anything Financial markets have long memories

9. 9 How Did we Build These? Sponsor Ratepayers $ This is a simplified illustration, but not far from reality.

10. 10 Project Finance Model Corporate boards won’t “bet the company”. Non or limited recourse financing is paramount. Lenders look primarily to cash flows from the plant (e.g. a power purchase agreement) rather than to the sponsor for repayment Lenders will not take on financial risks they cannot control (particularly political/regulatory risks) Financial risks are spread through contracts with creditworthy counterparties rather than born wholly by the sponsor. Ex. The contractor guarantees the plant will be on budget and on time Political and regulatory risks are known and limited This, in a nutshell, is the “Project Finance” model used today to develop nearly every power plant in California. Let’s see...

11. 11 Basic Project Finance Model Ratepayers $

12. 12 Pure Project Finance Won’t Work A new nuclear power plants costs approximately $6 - $8 billion. We assume the objective is to harness the private sector so that ratepayers do not bear unreasonable financial risks. Financing risks associated with nuclear power projects are unique, and cannot be mitigated through contracting with project counterparties or insurance. As a result, basic financing models and incentives used to build gas, wind, and solar projects, as examples, will not work without something MORE. MORE is described a lot of ways, but at its core: MORE = Government Sharing Some of the Financial Risks

13. 13 Allocation of Financial Risks If the State determines that it desires new nuclear power generation, the State must determine what level of credit support, if any, the State is willing to provide the energy and financial industries such that the private sector development of nuclear power plants in California is financially viable. This analysis is a negotiation to allocate risks, primarily involving: States Ratepayers (Off takers) Sponsors (developers) Contractors and Suppliers Lenders The Federal Government Others Two divergent perspectives: The ongoing debate over the public cost of nuclear power involves private industry trying to extract subsidies and credit support from the government and ratepayers The ongoing debate over the public cost of nuclear power involves the government providing incentives to private industry such that it will take on many of the risks typically born by the government in the development of public infrastructure projects while harnessing the benefits of private sector development The outcome of this negotiation will determine the true cost (or financial risk) of nuclear power to the State and ratepayers. Today, California is not at the table.

14. 14 Types of Financial Risks Construction risks are of primary concern. Ex. On budget ; on schedule; avoiding litigation and regulatory (political) roadblocks Nuclear power’s scale magnifies these risks. Ex. A gas fired plant takes 2 years to construct. A nuclear plant takes at least 8-10 years to license and construct Contractors will not guarantee price and schedule (nor do most have the balance sheet to support such a promise) Interest expense skyrockets without an interim source of revenue Note: The industry has made advances in modular construction and computer generated design geared to standardizing technology, development, and operation of nuclear power plants. The benefits of standardization should over time reduce the cost of construction Ex. There is a change in law or challenge to a license. The project parties cannot control or mitigate the financial consequence of the delay (or worse) to the project A sponsor will not build the project or be able to obtain financing unless a party capable of mitigating the risk steps in In my opinion this is the risk most appropriately assumed by the government

15. 15 Lenders Require MORE “We believe these risks, combined with the higher capital costs and longer construction schedules of nuclear plants as compared to other generation facilities, will make lenders unwilling at present to extend long term credit… Lenders and investors in the fixed income markets will be acutely concerned about a number of political, regulatory and litigation risks that are unique to nuclear power, including the possibility of delays.” – Comment from major investment banks in response to DOE rulemaking The above concerns are well founded, for example: History of cost overruns in the US once born by ratepayers could fall to lenders History of projects not reaching commercial operation The Olkiluoto-3 Plant in Finland is currently at least $2 billion over budget No solution to long term waste storage Size and risk directly relate to the cost of financing: Ex. Interest expense is greatly reduced if there is some type of rate recovery during the construction period Ex. Sheer size requires tapping multiple financial markets. Risk is often packaged into different tranches of debt with different interest rates and priority on assets If the government guarantees a portion of the debt it will dramatically reduce the interest rate. Also, some markets are only available to financial instruments backed by the full faith and credit of the government

16. 16 Cost Subsidies v. Risk Mitigation Cost subsidies relate to competitiveness of power production on a unit of output basis. Example : Production Tax Credits (PTCs) provide a cost competitive advantage by reducing the tax liability associated with producing a unit of energy Other “subsidies” are designed to mitigate risks – as risks are understood more private parties may be willing to take on those risks. Example : DOE Loan Guaranties enable capital providers to invest in the face of perceived un-financeable risks (notably, political and regulatory risks) – as time elapses, those perceptions may change States that want nuclear power development need to find ways to reduce risk as opposed to thinking solely in terms of “subsidizing” nuclear power.

17. 17 NRC and DOE Programs The stated goal of the US Government is to standardize the technology and regulatory regime to eliminate risk over time. Federal credit support programs are designed to get over the “first in kind” risks to achieve standardization NRC Combined License Construction and Operating License Eliminates much of the risk that a plant achieves completion but cannot deliver power 3-5 year licensing process that is expensive to undertake NRC has an “early site permit” program that is less expensive and focused on identifying viable sites in advance of determining reactor design etc. Regulatory Risk Insurance Program (“Standby Support”) Provides insurance for delays in development caused by federal licensing and related litigation. Originally approved only for the first 6 new projects Loan Guaranty Program for Nuclear Power Projects The US Gov guarantees loans for up to 80% of eligible project costs. Works much like Export Import Bank in foreign investments. The US Gov “lending” side by side with financial institutions provides a certain level of comfort. Congress initially allocated $18.5 billion for guarantees and DOE received applications for $122 billion (DOE has asked for approximately $36 billion in FY 2011) Designed to overcome “first in kind” concerns – funds will be exhausted Constellation balked at the credit cost of the DOE guaranty Cost to Constellation: $880 million (11.6% of the guarantee amount) Credit subsidy cost = risk to taxpayers of a default by the beneficiary under the guaranteed loan

18. 18 States Are Doing MORE Rate recovery legislation or something like it in rate-restructured jurisdictions, can be a proxy for contractual risk mitigation. Different flavors of rate recovery. New models are not necessarily a proxy for the old utility model. Southern Co.’s project in Georgia recently received a DOE Loan Guarantee GO implemented “Construction Work in Progress” (CWIP) allowing Georgia Power to recover $2 billion from ratepayers during the construction period CWIP legislation is getting passed largely in southern rate regulated states Ex. MI – recover interest expense during construction period. Ex. KS, VA, FL, SC, GO – different varieties of legislation allowing recovery of reasonable pre development and construction costs during the construction period The level of state support for nuclear power (politically and financially) weighs heavily in DOE decision making for loan guarantees. DOE is acting much like a lender in this regard How else can states reduce risk? Streamlining regulatory processes Lowering the cost of entry Providing state equivalents of DOE programs that mitigate political and regulatory risks at the state level Filling gaps in federal programs

19. 19 Conclusions If privately developed (market driven), nuclear power plants currently require significant government credit support, the level of which is uncertain. California has had little influence on DOE programs, while rate regulated states with CWIP legislation benefit. There are significant potential financial downsides to California waiting to engage a robust discussion on nuclear power in the event California later decides it needs to develop new generating facilities. Ex. DOE Loan Guarantees are by design limited Ex. Even if California decided tomorrow to pursue new nuclear power generation, it’s at least 3 years from getting a site approved by NRC (extending the development period) A robust discussion may consider, for example, supporting execution of an early site permit (ESP) by a State appointed applicant Many industry executives and Wall Street analysts have stated that rate recovery legislation is necessary. If California lifted its moratorium tomorrow there would be no financial risks born by ratepayers without the state doing MORE. Getting to building new nuclear power plants in the US is an ongoing iterative process in which California should participate. Next time someone tells you nuclear power is too expensive, remember that there’s a difference between the cost of electrons (long term view that largely supports nuclear power) versus the cost of construction (the short term problem).