SMR - NuScale Power: Is NRC Certification Of Small Module Nuclear Reactor Enough?

2023-03-27 05:45:04 ET

Summary

• NuScale's Small Module Reactor ("SMR") reached a major milestone in January when its design achieved certification from the Nuclear Regulatory Commission.
• The regulatory approval was a necessary but not sufficient milestone on the path for success. NuScale's SMR still faces challenges: cost, adoption, and radioactive waste storage.
• On the plus side, NuScale has $267.7 million in cash, no debt, and a strong patent portfolio.
• Today, I'll take a fresh look at NuScale stock to see if the risk/reward opportunity has swung in its favor.

Since my initial SELL-rated coverage on Seeking Alpha (see NuScale: Finally Time For Small Module Reactors? ), the stock of NuScale Power (SMR) is down 44% (see below). In that piece, I identified significant headwinds for the company - including certification, cost and schedule over-runs, competition from cheaper wind, solar, battery back-up and natural gas, and the on-going challenge of existing nuclear power plants: where to store the radioactive waste given there is still no Federal nationwide plan in place. However, in January the Nuclear Regulatory Commission ("NRC") certified NuScale's advanced light water reactor design. It was the first SMR design to be certified by the NRC and just the seventh reactor design cleared for use in the United States. Given the certification approval, combined with the plunge in the stock price since my initial coverage, today I'll take a fresh look at NuScale to see if the risk/reward proposition has changed in its favor.

Investment Thesis

The investment thesis behind SMR's is relatively clear: global warming is an existential threat to mankind. That being the case, proponents say that carbon-free nuclear power generation is essential to meeting global de-carbonization targets. However, given the history of large cost and schedule over-runs of nuclear power plant projects in the United States, the industry has been stagnant for years. Indeed, the vast majority of incremental electrical power-generation capacity in the U.S. has, for many years in a row, been primarily met with renewables: wind, solar, and battery backup. The EIA reports that that will be the case again this year. The largest contributor to new electric power generation in the U.S. this year will be solar (54%) with total power-gen capacity of 29 GW - that's more than 13x that expected to come from nuclear (2.2 GW), which is the smallest contributor:

Enter the idea of a "Small Module Reactor". The idea here is to design a single highly optimized and small nuclear "plant" that can be replicated many times such that the cost comes down with increased volume and the SMR can be deployed in various configurations (i.e. multiple modules) to meet most any electrical power-generation requirement from small to large.

NuScale's basic power module design is shown below:

However, I need to point out that SMR's are not a new concept. Indeed, when I was in engineering school back in the late 1970's, SMR's were a much discussed topic. However, and for a number of various reasons, SMRs have never become a reality. But that is what makes NRC certification of NuScale's SMR a notable achievement and why, today, I'll take a fresh look at NuScale to see if the stock might be an opportunity for investors.

Earnings & Capitalization

I'll start with NuScale's recent Q4 and full-year 2022 earnings report . For the year, SMR reported revenue of $11.8 million and a net loss of $141.6 million. That compared to revenue of $2.9 million and a net loss of $102.5 million for FY2021.

Going forward, NuScale said it expects higher cash-usage this year due to a number of factors, including:

• Below anticipated fiscal year 2023 U.S. Department of Energy ("DOE") appropriations that NuScale is seeking to recoup in fiscal year 2024.
• The delay of customer progress payments.
• An increase in R&D expense driven by inflation and
• Added workscope to mitigate risk and ensure delivery execution.

For 2023, NuScale says these items, in aggregate, will equate to an anticipated negative operating cash flow range of $102-$142 million.

That's the bad news. The good news is that NuScale has $267.7 million in cash and no debt. That being the case, the FY2023 cash-burn equates to roughly half the company's cash position. A slide from SMR's Q4 presentation summarizes the company's overall capital structure:

As can be seen in the graphic above, the combination of both classes of stock, options, warrants, and restricted stock units ("RSUs") equate to a fully diluted share count of 259.2 million. That being the case, NuScale's current cash position equates to an estimated $1.03/share (the stock closed Friday at $8.33). At the midpoint of the FY23 cash-burn guidance ($122 million), and all else being equal (but acknowledging that that is often not the case ...), the cash position by year-end is likely to fall to an estimated $0.56/share.

Engagement

As reported on the Q4 conference call by NuScale CEO John Hopkins, the shut-down of coal-fired plants has a tangential benefit for the company as well:

For example, our VOYGR SMR power plants can be installed at retired coal facilities near high population zones while other technologies may not. As I mentioned earlier, we are already seeing this benefit confirmed by RoPower who will site their first plant at a retired coal plant site. We're looking forward to sharing our progress on this front in the coming quarters.

Meantime, NuScale has also engaged with Ukraine's clean fuel for SMRs pilot project and became a signatory of the United Nations 24/7 carbon-free energy compact at COP27. And, of course, the U.S. Department of Energy, or DOE, continues to be a critical supporter of NuScale. Utility funding in the Clean Energy Act (otherwise known as "IRA") should also be a tailwind for NuScale going forward.

Challenges

NuScale still faces a number of challenges, starting with the fact that U.S. utility company CEOs know they can plan and complete large-scale wind, solar, and battery-backup capacity on-time and on-budget. The same is true for natural gas power-generation. This, of course, is why over the past few years renewables and natural gas have been the predominant additions to the U.S. power generation fleet - even as dozens and dozens of coal power plants have been closed forever.

Another challenge is cost. As I mentioned in my previous article on NuScale, its SMR design ran into the same problem that large-scale nuclear plants had run into: large cost and schedule over-runs. That caused some of SMR's backers for its initial project - Utah Associated Municipal Power Systems ("UAMPS") - to back out.

Indeed, Seeking Alpha contributor Keith Williams points out that "NuScale's first project with UAMPS (Utah Associated Municipal Power Systems) has experienced a 53% increase in cost to $89/MWh which makes it comparable to that of large scale nuclear power." See NuScale: Costs Are Problematic .

To date, SMR still only has two committed customers: UAMPS and Romania's RoPower. While the company says it has "15+ committed to proceed with new advanced nuclear deployment", the key to making the SMR concept an economic reality is quick adoption (i.e. volume sales). Clearly the industry is still in its infancy, but adoption and deployment of NuScale's design is critical. Otherwise, as shown above, the company could be burning cash for many years to come. That will likely lead in the issuance of either additional equity and/or debt, neither which will be good for existing shareholders.

However, on the previously referenced Q4 conference call, and in response to an analyst's inquiry about the prior outlook to be cash-flow positive by 2024, NuScale CFO Chris Colbert replied:

We haven't really forecasted out to 2024 at this point in time, but there's nothing for us to believe if we continue in the process we're on in terms of both the customers we have in hand and the customers we want to get in hand this year that, that objective could not be met. But that's something that will play out through the year, and we'll update it as we have a better understanding as to both how our markets are developing. And our first customers are moving forward through their process of engaging us on work to move forward with their plants.

Meantime, the U.S. still does not have a national plan to store radioactive waste. That being the case, radioactive waste in the U.S. is typically stored on-site, which many argue (including myself) has created ticking environmental time-bombs all across the nation. So, no matter how small the reactor is, if radioactive waste is stored on-site, that will lead many to not want such a design "in my backyard".

The other side of the equation is that NuScale arguably has a large lead on the competition, a patent portfolio of 655 patents issued or pending, and - of course - it now has its SMR design certified by the NRC.

Summary & Conclusion

From an investment standpoint, NuScale is still a relative long-shot in my opinion. I say that because obviously the cash-burn is high and the prospect for additional equity and/or debt issuance is also high. However, given the big drop in the stock price, combined with the NRC certification of its design, the risk/reward proposition has changed since my last review. That being the case, I am upgrading SMR from SELL to HOLD. However, investors should understand that NuScale is still a high risk/reward proposition and if more design wins don't come down the pike this year, I would likely downgrade the company back to a SELL. That's because investing in NuScale, even if it is successful in the long-term, is likely to have significant opportunity costs over the short- to mid-term if adoption of its SMR design does not accelerate.

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