Concerns abound in Germany about the generators’ ability to cover nuclear liabilities. We see nuclear liabilities as well covered, but recognize that there are no dedicated assets. Nuclear provisions are specific in terms of utilisation or reversal, but there is concern about the utilities’ cash generation profile being insufficient. E.ON’s split and the nuclear bad bank debate has increased the worries. We see risk of political action that could lead to additional cost and/or cash outflows for the generators in relation to nuclear. E.ON stands up better than RWE.
A Green Party commissioned study by the Ruhr University concludes that E.ON’s and RWE’s nuclear provisions may be insufficient to cover their respective long term liabilities. It quotes E.ON’s assets of Eur 56bn as just sufficient to cover Eur 55bn of liabilities, and RWE’s Eur 41bn assets as insufficient for coverage of Eur 51bn of liabilities.
The ability to meet nuclear liabilities can vary substantially in function of the underlying assumptions. That begins with the full and true cost of decommissioning and site rehabilitation and ends with discount rates and time frames.
We sense that both RWE and E.ON have always followed a conservative provisioning policy, certainly with regards to cost assumptions and discount rates. There have been times where the market has questioned the discount rates for being very conservative and leading to high levels of provisioning. RWE’s uses market rates, E.ON 4.7% which we find prudent. Like most utilities, both have based their cost assumptions on high profile external estimates that are regularly updated.
The issue that has arisen is the shorter than expected life span. But, that has led to provision re-evaluation at the time the nuclear phase out was passed into law.
Industry precedents and estimates suggests decommissioning costs of USD 200-600/kW to which come site rehabilitation. We recognize that there is risk to the upside. German experts have quantified the costs at Eur 50bn, thus discounted at the utilities’ rates Eur 37bn for the whole of the sector. That is broadly in line with total provisions to date. For the big two, E.ON has Eur 17bn of nuclear provisions and a Eur 57bn asset base including financial assets. Pension and financial liabilities are another Eur 25bn. We estimate discounted liabilities for E.ON’s reactor base to the tune of Eur 15bn. In that sense there should not be a coverage problem. RWE has Eur 10bn of nuclear provisions against an asset base of Eur 41bn of tangible and financial assets, while pension and financial liabilities are Eur 28bn. Again, at this stage coverage is reasonable, even though tighter than at E.ON.
The issue that worries politicians is that there are no dedicated or ring fenced assets, but that provisions are backed by the companies’ generation fleet and financial investments. Recognition has sunk in that asset bases no longer delivers cash generation levels that may be sufficient to underpin provisions and cover associated and financial liabilities. That concern has been heightened by E.ON’s split and the debate about a nuclear bad bank. We (and to our gage investors) share the concern about cash generation, on various levels, not just nuclear provisions coverage.
We see risk of political action and/or legislation that might lead to additional costs for both generators in relation to nuclear as the legislator seeks to ring fence cash. The government is very concerned that the tax payer might have to step in. The Economy Minister has in the past hinted towards placing additional requirements onto the generators. Intermediate and final waste storage provide tangible opportunities for that.
E.ON’s stronger balance sheet and stronger cash generation profile of its asset base make us more comfortable than RWE’s. E.ON’s split might be a catalyst for action by the government, but any action will cover both generators.