NuScale ($SMR) Has Deceived Investors about the Certification of its Reactor.

May 16, 2024 https://iceberg-research.com/2024/05/16/nuscale-smr-has-deceived-investors-about-the-certification-of-its-reactor/

NuScale is a developer of small modular reactors (“SMR”) with no credible orders. The company has not landed a single deal since the termination of the UAMPS contract, caused by cost overruns. Without any serious customer, NuScale’s marketing now leans heavily on one claim: having the first and only SMR design certified by the US Nuclear Regulatory Commission (“NRC”).

This statement is everywhere. It features on NuScale’s website, investor presentations, and on earnings calls. Unfortunately, journalists have also echoed this story, without questioning its meaning.

This claim is important. Certification is notoriously long and demanding in the nuclear industry, so NuScale wants investors to believe that it is ready to sell reactors now to meet AI’s rising demand for energy, while competitors are still engaged in the lengthy process.

The problem is that this claim is grossly misleading. NuScale’s design certification was for the original 50-MWe reactor design that was obtained in 2023. The company was forced to upsize its SMR to 77-MWe after it found that the economics of the 50-MWe version didn’t work. The new 77-MWe that NuScale wants to commercialize has zero approval. NuScale has recognized that it does not plan to commercialize the old 50-MWe version anymore (Pg 5).

The regulatory process for the new reactor is more complex and lengthier than what NuScale presents:

The 77-MWe reactor is not a simple update of the previous design, as increasing the power output by ~50% will cause more stress to critical components of the reactor.
The company requested for a Standard Design Approval (“SDA”) and not full certification. SDA is a less rigorous step in the approval process. It does not prevent issues resolved by the design review process from being reconsidered during a rulemaking for a design certification, or during hearings associated with a construction permit, or combined license application (Source). SDA progress stands at 40% as of today with approval expected in July 2025. Then, if NuScale seeks full certification to mitigate the above mentioned regulatory uncertainty, we estimate this would take an additional two years.
NRC certified the previous 50-MWe design under the condition that three issues had to be addressed by the constructor/operator of the power plant (Pg 3 of Design Certification). These were the design of the shielding wall, containment leakage from the combustible gas monitoring system, and steam generator stability. It is quite puzzling that NuScale has never resolved these issues, despite being exactly the same ones when it got the SDA in 2020 (Pg 5 of SDA letter).

NuScale deliberately misleads investors into believing that its current design has been certified, which is absolutely incorrect. The regulatory process in reality will take years before NuScale can commercialize its SMR, provided demand exists.

Elusive Clients

NuScale still does not have any binding licensing contract.

Standard Power

We called the Standard Power contract a pipe dream. Even some sell-side analysts found it hard to take this client seriously. This seems even more like wishful thinking now. NuScale’s 10-K reveals that Standard Power is merely a potential customer.

RoPower

In January 2023, Romanian nuclear energy firm RoPower Nuclear SA — a joint venture established by Nuclearelectrica and Nova Power & Gas — awarded a front-end engineering and design (“FEED”) work contract to NuScale to develop an SMR plant in Romania. As of now, NuScale has completed work for phase 1, but phase 2 hangs in the balance. Nuclearelectrica shareholders were expected to vote on continuing with the NuScale project at a meeting last month. However, the controlling shareholder, the Ministry of Energy, did not vote. This halted the project’s progress, and as reported in Romanian media (1, 2), the abstention meant the project’s FEED 2 study, the signing of key contracts, and the Ministry of Energy’s decision to raise the loan ceiling for the project’s financing were not approved. The Ministry of Energy later stated that these matters will be put back on the agenda but the uncertainty is starting to look like version 2 of the UAMPS debacle.

Ukraine

NuScale even claims to be in talks to deploy its technology in Ukraine for ammonia production, but wishes that ‘the bombs stop falling’. The country probably has other priorities.

Fluor the long-suffering shareholder

Fluor is NuScale’s largest shareholder and invested more than $600m in the company between 2011 and 2021. However, it is no secret that Fluor wants to offload a significant chunk of NuScale. As an insider, Fluor is familiar with the regulatory struggles, and most likely expects a litany of cost overruns – all too common in this industry.

The loss of faith in NuScale began as early as twelve years ago. In 2012, David Seaton, Fluor’s CEO at the time, told analysts that the company was ‘keenly focused on bringing in additional investors’ for NuScale. Since then, Fluor has made multiple attempts to substantially get rid of NuScale, without much success, finding some relief only during the SPAC boom, which provided a once-in-a lifetime opportunity to cut bad asset exposure.

Fluor has made clear since the start of 2021 about its long-term plan to hold just 20%-25% of NuScale. This stems from a desire to stop funding NuScale’s losses and deconsolidate the company to get rid of the drag on earnings. In 2019, former CEO Carlos Hernandez told analysts that the company does not ‘expect to provide any additional funding out of Fluor for NuScale’, and added that NuScale was ‘going to affect earnings because we have to consolidate…’.

The disinvestment plan is not going well. As of 1Q23, the company told investors to expect news on strategic investment in NuScale ‘near the end of the year’. The timeline keeps shifting, to ‘end of the year or early in the new year’ in 3Q23, and then to ‘update in the first half of this year’ during the 4Q23 call held on 20 February 2024. Most recently, on the 1Q24 call, management said Fluor will ‘continue to provide updates on this front in the coming quarters of 2024’.

This lack of buyer interest is unsurprising, for a company with no orders, no certification for its new design, and dwindling cash balances.

Cash burn update

Our estimates show that NuScale has 14-21 months of cash. We expect cash outflows of ~$118m, and liquidity to vary, depending on whether or not the company draws down on its at-the-market facility.