NuScale Power Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

NuScale Power is developing a small modular nuclear reactor (SMR) technology that aims to provide safer, cleaner, and more flexible energy solutions for the future.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

NuScale Power is a nuclear technology company focused on commercializing its innovative small modular reactor (SMR) design, the NuScale Power Module™ (NPM). Here’s a deeper look into the business:

  • Revenue Model: The company’s primary revenue stream is based on the sale of its SMR technology and design to utilities and power producers. This includes engineering services, project management, and technology licensing fees. Recurring revenues will come from providing parts and materials, and operation and maintenance services to clients who chose their technology.
  • Industry Trends: The nuclear energy industry is undergoing a renaissance driven by the need for carbon-free electricity. SMRs, with their smaller footprint and reduced capital costs, are seen as a potentially crucial solution for distributed power generation and replacing retiring coal plants. However, the industry is also facing significant cost overruns, delays, and high regulatory burdens.
  • Competitive Landscape: The SMR market is becoming increasingly competitive with numerous players developing their own technologies. NuScale is competing with both other SMR designs, as well as with companies offering alternative sources of clean energy, like solar, wind, and large-scale nuclear. Key competitors include Westinghouse, Rolls-Royce, and GE Hitachi Nuclear Energy.
  • What Makes NuScale Different? NuScale’s SMR is a light-water reactor, which is a well-known technology with a more established regulatory framework compared to other advanced SMR designs (such as molten salt reactors). The company touts its design’s simplicity, inherent safety features (like passive cooling), and modular design as crucial advantages. NuScale also is unique in the degree of control it maintains over its supply chain.
  • Financial Performance (from 10-Qs):
    • Revenues: Have grown slowly. Net revenues for the three months ended September 30, 2022, was $17.6 million, a slight increase from $13.4 million in 2021, and $0 in 2020. Revenue was largely related to services provided in support of the design. This signals that NuScale has not yet fully commercialized its products and is still largely supported by grants.
    • Gross Profit/Loss: Gross loss was $1.1 million in the three months ended September 30, 2022, down from a loss of $5.9 million in 2021.
    • Operating Expenses: Operating expenses were a huge driver of net losses, totaling $41.9 million, $48.8 million and $54.2 million for the three months ended September 30, 2020, 2021 and 2022 respectively.
    • Net Income: The net loss for the period was -$43.5 million in the three months ended September 30, 2022, compared with a loss of -$54.7 million for the comparable period in 2021.

  • Earnings Calls:

    • The primary source of revenue has been DOE payments and other federal agreements, which they expect to continue.
    • The company plans to monetize their technology through several means including licensing agreements, design and production, component production, and sale of the company.
    • They recently achieved an important milestone in gaining 75% approval of their design certification from the Nuclear Regulatory Commission. This is a significant milestone for the company.
    • Supply chain issues are a real challenge that they are focusing on. They have vertically integrated a significant portion of the company.
    • They have limited visibility into future demand, but they believe that the demand for SMRs will increase significantly in the coming years and their strategy is to try to get as many orders as they can.

Moat Assessment: 2/5

NuScale’s “moat,” or competitive advantage, is currently limited:

  • Intangible Assets: NuScale holds a first-of-a-kind SMR design that has gone through rigorous review with the regulatory authorities. While this might represent an advantage, patents and designs can be copied or modified, and the regulatory approvals can be attained by others, which reduces its moats. The company is attempting to maintain its competitive advantages by being the only company designing the production of their reactors. However, other companies may easily begin to build their designs.
  • Switching Costs: Customers of SMRs have significant switching costs due to the size and scope of the projects. This means customers will be more reluctant to switch to other vendors and may have contracts in place for the long-term. However, new players to the industry can make a strong push by innovating in new areas (such as design or price point).
  • Network Effects: Network effects do not appear to apply. The value of the company is generally not dependent on how much other players use the company’s technology, but how high and reliable are the returns they generate.
  • Cost Advantages: NuScale is attempting to bring low cost nuclear energy with its design. However, if other companies also have the same design or can create something better, they will quickly steal market share. Overall, they face several large competitors, such as GE and Toshiba, that are giants and operate with a lot of market power and resources.

Risks to the Moat and Resilience

Several factors could erode NuScale’s competitive position:

  • Regulatory Risk: Securing all regulatory approvals and licenses for the design and sale of nuclear power plants has historically been very difficult, time consuming, and expensive. This increases execution risk and makes it more difficult for NuScale to sell its products commercially. The government can also change the rules or limit the scope of approval for the designs which makes the process highly uncertain. This also means that competitors are equally subjected to this risk, which in turn could make other new players to be better positioned to gain market share.
  • Technological Risk: SMR technology is still relatively new. Despite NuScale’s design having a light water reactor, the technology may not perform as expected or be quickly obsoleted by more advanced alternatives that are superior to NuScale’s design.
  • Competition Risk: There are several other competitors offering similar services that can reduce the margin or cause market share erosion.
  • Execution Risk: Building and managing complex projects, like SMR power plants, has historically proven difficult with considerable cost overruns and delays, which is important to avoid. A few years back, a study concluded that nearly every nuclear power plant built in the US took longer to complete and went over budget.
  • Financial Risk: The company has not yet proven its ability to generate meaningful income. Current revenues do not come from a commercial product. The company is largely reliant on grants and funding from the U.S. government. If they fail to secure more funding or revenue from commercial projects, the company may have financial troubles.

Understandability: 4/5

The business model of providing power through small modular reactors is relatively straightforward to grasp. NuScale Power’s focus on a specific type of technology, coupled with their efforts to obtain regulatory approvals, simplifies understanding their business. However, their method of production and future revenue generation is difficult to understand fully as the company is still a pre-revenue entity, and it depends on the future.

Balance Sheet Health: 3/5

NuScale’s balance sheet is mixed:

  • The company’s total assets are $336.8 million, while its total liabilities are $139.5 million as of the quarter ended September 30, 2022.
  • Spring Valley Acquisition Corp. (the SPAC that NuScale merged into) placed $233.4 million in a trust account. As of the merger date, $100 million of these funds were restricted and unavailable to the operating company and for any other purpose. The remaining funds in the trust are only to cover potential public shareholder redemptions.
  • They are also highly reliant on governmental funding, the loss of which could potentially lead to serious financial troubles for the company.
  • The company’s ability to generate sustainable cash flows from commercial operations remains unproven.

Conclusion

NuScale Power is an innovative company with a technology that addresses long-term energy needs. However, it faces significant challenges including a difficult regulatory environment and increasing competition in a very capital intensive industry. Their “moat” is fairly weak and their future success depends on the company proving its technology commercially viable, a more efficient process of production, and its ability to overcome existing competitors.