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CASE STUDY 3: FINANCIAL MODELLING AND ETHICAL ISSUES IN FINANCE
CS Energy, a Queensland State Government-owned electricity generation company, has developed a proposal to construct and operate a nuclear power station located near the town of Mount Isa in North-western Queensland. The primary basis for this proposal is the desire for additional electricity generation capacity which is relatively low-cost in operation and has a low emissions level platform. This additional capacity is required to support the substantial growth in mining and industrial activity in various parts of Queensland, as well as additional demand for energy consumption based on population growth in the main residential areas of Queensland, and particularly Brisbane and the Gold Coast and Sunshine Coast precincts. CS Energy currently operates a number of coal-fired and hydroelectric power stations in a number of locations within Queensland, and the company’s head office is located in Brisbane. The company current generates approximately 34% of Queensland electricity output, of which around 10% of electricity generated is supplied to the National Electricity Market (NEM). Subject to Australian Federal Government approval associated with the strict controls over the usage and distribution of uranium, and particularly uranium enrichment process to generate energy, the construction of the nuclear power station will commence in 2019 and be completed during 2024. The plant is envisaged to begin operation and electricity generation during 2024 and will have a 50-year operating life and be scheduled for decommissioning in 2074. Table 1 summarises the envisaged construction and operational schedule:
Table 1: Project Construction and Operation Summary
The following specifications, requirements and parameters for the nuclear power station project have developed as part of project planning:
• The Queensland State Government has state-owned land, close to a current water source and reservoir (required for supplying water to the plant and for the cooling of depleted uranium fuel rods) with a water access allocation that can be provided for the project. There is no opportunity cost associated with this land as it has no other viable industrial or agricultural use.
• The nuclear power station will be a 1,000 Megawatt (MW) generating unit, which will be based on a pressurised water reactor which will operate through the nuclear fission process of splitting uranium (U-235) atoms, with the resulting steam generated turning turbines
Date
?
Project Activity
?
January 1st 2019
Construction begins on the power station (assumed to be continuous until 2024)
July 1st 2024
?
Commissioning and initial operation of the power station
?
December 31st 2073
Discontinuation of the operation of the power station
December 31st 2074
??Decommissioning of the power station and the site
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(steam-to-turbine method) to produce electricity. A 1,000 MW generating unit operating at
full capacity will produce 1,000 MW hours of electricity per hour.
• A 1,000 MW nuclear power station is expected to require 379.6 kilograms (kg) of processed
uranium pellets for electricity generation over a normal yearly operating period.
• The useful life of the generating unit is 50 years.
• The average operating capacity factor of the power station is expected to be 95% of full
capacity, with the 5% efficiency loss primary associated with maintenance work on the
nuclear reactor.
• The nuclear power station is estimated to use 10% of the total electricity generated to
operate the nuclear reactor and associated infrastructure and equipment.
• The power station generation unit is assumed to operate 24 hours a day, 365 days a year
(ignoring leap years and industrial disputes).
• The average tariff at which electricity can be sold to contractual customers (such as
resources and refining companies, electricity retailers) or to the National Electricity Market
is AUD$190.00 per Megawatt hour (in real terms).
• Uranium, as the key fuel input for the operation of the power station, will be sourced under
contractual agreement from the Ranger 3 Deeps uranium mine operated by Energy Resources of Australia Limited (ERA). This open pit uranium mine was closed in November 2012, however, ERA has entered into a Heads of Agreement with the Queensland State Government (CS Energy) to recommence uranium mining at the site, subject to approval by the traditional indigenous owners of the land on which this mine is located.
• The average cost of uranium for use in the operation of the nuclear power station is estimated to be US$45 per ounce (in real terms), which includes the cost of the extraction of uranium oxide and the refining, enrichment and transformation of this into pellets for the development of uranium fuel rods to use in the nuclear reactor.
• Operating and maintenance costs (in real terms) are estimated to average 40% of the forecasted electricity revenue, which includes power station and nuclear reactor operation, staffing and management costs, costs for water for use in the reactor and the cooling ponds adjacent to the power station, equipment, vehicles, inventory and supplies required, and other utilities costs.
• The Queensland State Government (CS Energy) has entered into an arrangement with the Ngapa indigenous community, owners of the Muckaty Station, to store the depleted uranium rods from operation of the nuclear power station on their land. The Ngapa people will be paid AUD$25 per ounce (in real terms) of uranium pellets stored on their land, with the planned use of these funds being for housing and to alleviate community poverty.
• The construction and related costs associated with the nuclear power station can be depreciated using the straight-line method over the 50-year indicative operating life of the power station.
• At the end of the operating life of the project, there will be an estimated $1 billion expenditure cost for CS Energy to dismantle the nuclear power station and to protect the site from any future radiation contamination or exposure. This restoration and repair expenditure will be incurred in 2074.
• CS Energy is expected to pay Federal Government-levied company tax on profits created by operation of the nuclear power station at an average future marginal tax rate of 30%.
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• The average rate of inflation over the life of the nuclear power station project is assumed to be 2.50% per annum.
• The Queensland State Government has a real (after-tax) required rate of return on capital investment projects of 7.00% per annum.
• The US$ to AUD$ exchange rate is forecast to average 0.74 over the life of the project.
• All figures are expressed in June 30, 2017 real dollars.
• All information is as at June 30, 2017.
• Note that 1 Megawatt hour represents 1,000 Kilowatt hours, and 1 Kilogram = 35.274
ounces.
Estimated construction costs for the new nuclear power station project are as follows: Table 2: Forecast Project Capital Construction Costs
Y ear
?
Estimated project construction costs
2019
?
$1,300 million
2020
?
$1,150 million
2021
?
$1,000 million
?
2022
$900 million
2023
?
$750 million
2024
?
$625 million
?There will also be an estimated $25 million spent in 2018, subject to Federal Government approval for the project, for initial design and contracting work, including tendering for construction of the nuclear power station facility.
CS Energy has hired your consulting firm to conduct the financial modelling and capital budgeting assessment of the potential power station project, as well as to act as its adviser in dealing with the Federal Government in negotiating the project approval process. The completion of a risk assessment based on conducting sensitivity and scenario analyses of the project valuation focusing on key parameters impacting on the project’s operation, feasibility and cash flows.
• Based on the project modelling and risk assessment analysis, and any other quantitative and qualitative considerations, the provision of a recommendation as to the feasibility of the project.
• The preparation of a proposal directed to the Federal Government providing justification for why approval for the nuclear power station project should be
provided, including addressing any ethical issues or considerations raised by the development of the project.
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