Friday, September 26, 2008

Nuclear Power - Deader than Dead

Warren Buffett, the famed investor, owns a holding company named Berkshire Hathaway. Berkshire Hathaway invests in a number of industries where Berkshire's leadership believes that they can make money over the long term.

Berkshire Hathaway made a lot of its money in the insurance business (GEICO). They like the steady returns and solid, understandable business model behind insurance. Also, due to Berkshire Hathaway's AAA rating (VERY few US companies have this rating), they have a very low cost of capital which gives them a significant cost advantage against competitors.

The US utility industry (electricity) is an area where Berkshire Hathaway has made investments over the years. Berkshire Hathway bought up a group of Iowa utilities (where I used to work) that were rolled up into a company called MidAmerican Energy. Berkshire Hathaway has a very long time horizon (other CEO's have to hit immediate earnings targets and are impatient) and thus they can be opportunistic, holding on to their (vast) cash until the right target comes along. Berkshire Hathaway jumped on Pacificorp, which had previously been bought up by Enron, when Enron's finances imploded.

Recently Berkshire Hathaway bought up Constellation Energy, which is the electrical utility with nuclear plants that serves Maryland and Baltimore. Constellation Energy had a large energy trading arm that was intertwined with Lehman; when Lehman went bankrupt Constellation was going to be forced to put up more collateral and faced a downgrade in their credit ratings. Their stock plunged from $100 / share in early 2008 to as low as $13 before Berkshire Hathaway agreed to buy them; the stock is now at $26 / share and the company is worth $4 - $5 billion.

Constellation Energy was one of the "dreamer" companies that was thinking about taking advantage of US government tax breaks to re-invest in nuclear power. As I have noted previously, don't bet on any of these plants getting built (maybe TVA builds one and someone else another one; this is not going to even cover those plants at end-of-life and being retired from service, much less constitute a renaissance in nuclear power).

Per a September 26, 2008 Wall Street Journal Article titled "Buffett Could Reshape Nuclear Power Industry" -

"Warren Buffett's decision to rescue Constellation Energy Group Inc. gives one of the nuclear power industry's biggest skeptics some important clout in deciding its future."

Uh, why would that be? Why would a man revered as being one of the greatest financial minds in history (and who apparently escaped this whole economic panic unscathed) not want to invest in nuclear power, which has made a "comeback" in the popular press?

"For Mr. Buffett, price has always been the major sticking point. His energy company, MidAmerican, formed a special unit last December to explore possible construction of a nuclear plant at a site in Idaho. That created a flurry of excitement as people in the industry believed that Mr. Buffett might finally throw his weight behind the technology. But MidAmerican pulled the plug seven weeks later, saying it was too costly."

I get it... Warren Buffett understands basic economics and probably looked at this for five minutes and told his minions to give it up. Let's run through the "business case":

1) whatever you do will be fought fanatically by every NIMBY across the nation
2) construction will be measured in geological time (didn't we start that plant in the Cretaceous period?)
3) costs will start in the billions and go up from there... no one really knows
4) everyone who is working in the nuclear power industry in the US is about 15 minutes from retiring (remember, the Simpsons have been on almost 20 years, H*mer is getting long in the tooth)
5) technology is in transition from the older proven technology to the next generation, which may be a lot better or may not prove viable at all
6) if you do spend billions and take the decade or so to get the plant done, there is no mechanism to recover these costs and get them back from ratepayers

It probably took about 30 seconds for Warren to laugh out loud and tell them to get out of his office he has better things to do. Probably when Warren was listening to this business case he was asleep like that scene in the new B*atman movie where Bruce naps through the business pitch. Remember, he just spent $5B to get a big chunk of Goldman Sachs, and $5B likely wouldn't even buy you 1/2 a next generation nuclear plant. Oh, and Constellation Energy's market value at the time of collapse was under $5B.

The final, saddest part for nuclear plant dreamers is that about the only person in the land who could have financed one of these things is Warren Buffett and Berkshire Hathaway. They have the AAA rating to raise money in these dark times and they could just finance it themselves if they wanted to out of the billions just sitting on their balance sheet.

While I personally think that nuclear power should be built for the United States my point is that this NEVER was going to happen and Mr. Buffett, who could finance one of these in a heartbeat and could have pulled it off, just put the final nail in the coffin.

Cross posted at Chicago Boyz

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