Yesterday, I wrote a quick post that linked a recently issued UBS report’s negative views about the economic viability of merchant nuclear power plants in the US to UBS’s large portfolio of troubled loans to companies involved in various aspects of the natural gas extraction technique known as “fracing” (alternatively spelled as fracking in many publications, including this one.)
Low oil and gas prices have hammered revenues at the companies that borrowed the money, threatening their ability to remain current on the loans. Because of the high risk of default, UBS is having a hard time selling the loans. The pool of uninformed buyers has shrunk as more and more people realize the deeply troubled nature of the portfolio.
Recent sales of fracing-related loans have netted just 65 cents or less on the dollar.
This morning I read another article, this one from Power Engineering, titled UBS Warns More Nuclear Retirements on the Way covering the UBS report that the Boston Globe article discussed yesterday. It included another clue about the extent of the at-risk loans UBS made in recent years on the basis of high oil prices.
The article mentioned the expected drop in average Northeast regional natural gas prices that should come when the “Constitution Pipeline” project is completed. A drop in prices, which benefits consumers, is not really the goal of companies that build and own pipelines. Their interest is in the revenue they receive from selling capacity on the pipeline. In this case, however, the pipeline owners have additional financial interests.
The Constitution Pipeline is a 121 mile connector between gas-producing regions in the Marcellus shale region of Pennsylvania and natural gas consuming areas in the Northeast. Its capacity is well booked in advance because of the current transportation constraints that limit the total amount of gas that can flow between the regions, often resulting in market price spikes when there are periods of high demand.
The project, announced in April 2012, is owned by a partnership between Williams Partners L.P. (75%) and Cabot Oil and Gas Corporation (25%). Just a month before announcing the Constitution Pipeline project, Williams Partners L.P. announced the $2.5 billion purchase of Caiman Eastern Midstream LLC, a relatively small oil and gas gathering and processing company with significant capacity to extract oil and gas from the Marcellus, but little or no capability to move that gas to market.
In 2012, there was a rather large price differential between wellhead prices in the Marcellus shale region and consumer prices in the Northeast. Williams Partners L.P., which has a large pipeline business, saw the opportunity to profit from both the extraction and delivery of gas. There is a rosy description of the project’s attractiveness and expected returns for investors on the Williams Partners investor web site titled Williams Partners Announces $2.5 Billion Acquisition to Establish Major Footprint in Liquids-Rich Area of Marcellus Shale; Plans Joint Venture to Pursue Utica Shale Opportunities.
UBS Investment Bank and Jefferies provided financial advice to Williams Partners for the Caiman acquisition. UBS Investment Bank also provided a $1.78 billion interim liquidity facility to help fund the cash portion of the transaction. The expected profitability of the acquisition and the subsequent Constitution Pipeline construction project is closely tied to having an increasing demand for natural gas in the Northeast.
The executives and managers at UBS Investment Bank and its client companies have a fiduciary responsibility to maximize shareholder value, an outcome that is driven by a number of variables. Executives often simplify the action prioritization process for employees by focusing them on maximizing relatively short term profits. It is beyond my current capabilities for forensic accounting to determine the current extent of loans from UBS to Williams Partners, but there is a decent probability that the strong relationship between the bank and the company still exists.
Permanently getting rid of a few large nuclear power stations, which each produce between five and eight billion kilowatt hours of electricity each year, would help increase the demand for natural gas and most likely increase the average realized sales price. That would help improve the value of a troubled loan portfolio.
Issuing a strongly negative report about the future financial performance of competitive plants is a pretty inexpensive way to call in the usual suspects in the antinuclear movement to serve as unpaid and perhaps unsuspecting tools. Many lifelong antinukes eagerly participate in an energy supply constraining action to kill off productive nuclear power plants while not realizing who will reap the almost inevitable rewards. The tactic, like grabbing the shirt of a receiver streaking down the sidelines, works well as long as none of the referees throw a flag.
My goal is calling attention to actions and motives that might otherwise go unobserved. It’s probably not illegal, but it sure isn’t in the best interests of the common defense, security, environmental cleanliness and prosperity of the United States to replace reliable, emission free nuclear power plants with fracked natural gas.
It’s also not in the best long term interests of companies that own well-run nuclear plants to listen to financially motivated analysts that want them to destroy long-term value because of short term commodity prices in historically dynamic market.
Aside: When I searched for related posts to add depth to this story, I was a little surprised to find an Atomic Insights post about B&W’s decision to dramatically reduce its investments in the mPower reactor development project in the search results. That story included a mention of the fact that UBS analysts were encouraged by the decision; they upgraded their recommendation on B&W’s stock. Hmm End Aside.