NuScale Power ($SMR): A Fake Customer and a Major Contract in Peril Cast Doubt on NuScale’s viability

Please refer to our disclaimer at the bottom of the report.

Main Findings

• NuScale, a developer of small modular nuclear reactors (SMR), recently disclosed a huge contract with blockchain datacenter service provider Standard Power. The deal aims for a projected capacity of 1,848 MWe that we estimate is worth ~$37bn. This contract has zero chance of being executed as Standard Power clearly does not have the means to support contracts of this size. Its current CEO Maxim Serezhin has an outstanding $54k tax warrant in New York. Its former managing director Adam Swickle was found guilty of securities fraud in the past. Entra1 — NuScale’s commercial partner — is expected to help with the funding. The company was created in 2021 and it is very unlikely to be able to finance even a portion of this contract.

• NuScale has a more credible contract with the Carbon Free Power Project (“CFPP”) for the Utah Associated Municipal Power Systems (“UAMPS”). CFPP participants have been supportive of the project despite contracted energy prices that never seem to stop rising, from $55/MWh in 2016, to $89/MWh at the start of this year. What many have missed is that NuScale has been given till around January 2024 to raise project commitments to 80% or 370 MWe, from the existing 26% or 120 MWe, or risk termination. Crucially, when the participants agreed to this timeline, they were assured refunds for project costs if it were terminated, which creates an incentive for them to drop out. We are three months to the deadline and subscriptions have not moved an inch.   

• NuScale has around 15 months before its cash runs out. We fully expect further shareholder dilution, as completion of the CFPP remains an iffy prospect with its constant cost overruns.

• We believe these commercial and financial struggles present hurdles NuScale won’t cross without continued support from the Department of Energy (“DOE”). This presents a double-edged sword. Even if that support continues, the DOE’s usual policy is that costs have to be shared with the private sector, meaning that existing shareholders will be diluted. 

Presentation of NuScale

NuScale Power Corporation, based in Portland, Oregon, has been developing small modular nuclear reactors (“SMRs”) since 2007. In May 2022, the company went public through a merger with SPAC Spring Valley Acquisition Corp. NuScale’s market cap stands at ~$1.2bn. This valuation combines both Class A and Class B shares, which can’t be traded unless converted to Class A. Fluor Enterprises Inc, NuScale’s parent company, holds 126 million Class B shares that represent 55.8% of NuScale’s voting power.

SMRs have power capacities of up to 300 MWe per unit while conventional nuclear reactors generate around 1,000 MWe. For example, NuScale’s design is 77 MWe. These SMRs come with lower upfront costs because of their smaller size. But this benefit is offset by lower economies of scale compared to conventional reactors. 

NuScale Power Module

Source: NuScale filings

Over the last 16 years, NuScale has spent ~$1.6bn to develop its SMR tech, funded by a mix of SPAC money, government grants, and private investments. The Department of Energy (“DOE”) has contributed over $650m of grants to NuScale’s endeavors.

The company is going toe-to-toe with industry goliaths like Westinghouse, Rolls-Royce, EDF, etc. But it managed to snag the first-ever Standard Design Approval from the Nuclear Regulatory Commission in 2020 – a 12-module plant at 50 MWe each. However, in August 2023, the company decided to switch the blueprint – a six-plant design featuring an uprated 77 MWe. NuScale is now waiting for the new design’s approval, which would take ~24 months according to the company.

As of now, there are only two operational SMR plants in the world — located in Russia and China — and both have experienced cost blowouts and delays. NuScale claims approximately 680 issued and pending global patents. But the company does not have an operational SMR and the only revenue it generates comes from the reimbursement of specific R&D activities.

As for customers, NuScale has two significant contracts. The first is a 462 MWe agreement with the Utah Associated Municipal Power Systems (“UAMPS”), a consortium that supplies wholesale electricity to around 50 municipalities, priced at $9.3bn. The second is a 1,848 MWe deal that was recently signed with blockchain datacenter service provider Standard Power, with an estimated value of ~$37bn.

New client Standard Power: Crypto mixed with nuclear energy – What could possibly go wrong?

On 6 October 2023, NuScale’s stock popped over 20%, after the company announced its largest-ever contract, to deliver 24 units of 77 MWe modules in 2029. As part of this agreement, NuScale’s commercial partner Entra1 would develop, manage, own, and operate these SMRs, while blockchain datacenter service provider Standard Power would be the end-user.

The deal’s total projected output is 1,848 MWe, four times the size of NuScale’s existing agreement with its other major client UAMPS, and translates to a staggering $37bn financial commitment. Considering there are only two operational SMR plants globally, one in China and the other in Russia, this agreement not only marks a significant achievement for NuScale but also holds the distinction of being the largest SMR contract ever.

Source: NuScale filings and various news websites

Unsurprisingly, the sell-side cheerleaders have applauded this deal. B Riley wrote that “The large increase greatly improves visibility for near-term revenue/cash flow and highlights the importance of NuScale’s relationship with ENTRA1.” Additionally, they noted, “We do not expect the Standard Power projects to have the same issues as the CFPP regarding subscription levels or costs. With the plants earmarked for powering data centers, energy demand will not have to be sought out, nor will subscription levels have to be reached.”

Both Standard Power and Entra1 present obvious credit and performance risks.

1) Standard Power

Standard Power was formed in 2018 to provide data centre services for blockchain mining and high performance computing applications. 

According to its LinkedIn page, the company operates with just 30 employees.

Source: LinkedIn

In September 2022, the reported data mining capacity of the company was a mere 50 MWe, far below the contracted SMRs total capacity of 1,848 MWe. Adding to the confusion, Standard Power’s basic website reveals that “Planned development at this site (Ohio) include a 40 megawatt blockchain mining operation and a data center with critical capacity of up to 12 megawatts.”

Searching the internet suggests that Standard Power’s most significant partnership to date was with Cipher Mining. In 2021, the company signed a hosting agreement with Cipher ‘to provide a total mining capacity of at least 200 MW’. This deal ultimately fell apart as the contract was terminated in February this year (see below).

Source: Cipher Mining filing

Standard Power’s current and former management

Source: LinkedIn

Standard Power’s management team raises some serious red flags. CEO Maxim Serezhin has an outstanding $54k tax warrant in New York, indicating a failure to fulfill his tax obligations. The address of the tax warrant matches that of his firm, Aurelian Global Holdings.

Prior to his current role in the field of cryptocurrency servers, Serezhin served as the director of BeMe Intimates, a lingerie company currently undergoing a “legal reorganization,” as indicated on the LinkedIn profile of the company’s former CEO, who has since moved on to Standard Power.

Former MD Adam Swickle has a track record that screams “investor beware”. He cut his teeth at notorious Wall Street firms like Stratton Oakmont and Meyers Pollock & Robbins — both infamous for pump-and-dump schemes and ultimately shuttered due to regulatory crackdowns.

Source: SEC complaint dated 19 November 2003

In 2003, the SEC went after Swickle for setting up a fake foreign exchange trading house and making off with investors’ cash. As the CEO of United Currency Group, from May 2001 to December 2002, he conducted a fraudulent offering of securities based on misleading info. This included the company’s plans for an IPO, Swickle’s own background, and how corporate funds would be used. 

As reported by New Orleans TV media 4WWL, Swickle claimed innocence, insisting that he was just collecting money from a few close friends and family to launch a new online trading venture. But the judge ruled that Swickle lied to an FBI agent who had posed as an investor. He had bragged about a fake track record and bogus audits of United Currency Group. The final judgement ordered Swickle to pay $483,989, plus $107,842 in interest, and a $120,000 fine. 4WWL also noted that Swickle has a history of not paying for court-ordered judgements, despite his lavish lifestyle.

Swickle also moonlights as a self-help author, having published the book “Welcome to Toxic Abuse Anonymous: How to Break Free from Your Trauma Bond, Understanding the Narcissist & 10 Step Program”. He extends his expertise into the realm of TikTok, where he uploads weird videos offering life advice. Although Swickle left the company, one can wonder what kind of companies would partner with him. His troubled background is public information.

Douglas Wurth serves as chairman at both Standard Power and Bluejay Diagnostics. The latter is a diagnostics/medical device company that went public in November 2021. Bluejay currently has a market cap of ~$5m, its financials are dismal, and its third-tier auditor Wolf & Company warned over its ability to continue as a going concern in the 2022 report.

Source: Google Finance

Taking these factors into consideration, it appears that Standard Power does not have the balance sheet to support this contract, both in the present and in the future.

2) ENTRA1

NuScale portrays Entra1 as having a “strong global pipeline of energy production projects” and a ““one-stop-shop” for the financing, investment, development, execution, and management of NuScale-powered projects and opportunities”, suggesting that Entra1 will finance the Standard Power contract. 

Entra1 was incorporated in Delaware in December 2021. But the firm has only one employee referenced on LinkedIn, its online presence is almost non-existent, its Twitter account is essentially a NuScale bulletin board, and its only announced deal is unsurprisingly, with NuScale.

Source: LinkedIn

At a recent Analyst/Investor Day event, it was disclosed that Wadie Habboush, the founder of Entra1, has a longstanding personal relationship with NuScale’s CEO, John Hopkins. Around 10 years ago, Habboush formed a joint venture with Fluor — NuScale’s controlling shareholder — for projects in the Middle East e.g., Iraq. We can’t see how experience working on Middle Eastern projects would be directly transferable to managing a $37bn mega-SMR project in the US.

Fluor, NuScale’s controlling shareholder, has been open about its intention to reduce its stake (55.8%) in the company. Its long-term plan is to own only 20%-25% of NuScale as per EVP Joseph Brennan on Fluor’s 3Q22 call. He further elaborated in 4Q22 that Fluor had “kicked off the strategic exercise” and the company would be in a better position to discuss that at the end of 1Q23. There were no updates on Fluor’s 2Q23 call.

Source: Fluor earnings call transcript

Considering Fluor’s plan to divest its NuScale stake and the apparent lack of substantial activity at Entra1, one could speculate that Standard Power and Entra1 were brought in primarily to pump NuScale’s stock, just like many other SPACs. 

We believe that the contract with Standard Power has zero chance of being executed. Announcing a deal with such counterparties damages the credibility of a company in an industry where public trust is paramount. We doubt established players like Westinghouse would deal with a questionable client like Standard Power. 

The situation at the Carbon Free Power Project is much worse than what NuScale lets on

Unlike Standard Power, the Carbon Free Power Project (“CFPP”) started off as a sound counterparty.  The project was launched in 2015 by the Utah Associated Municipal Power Systems (UAMPS), as part of its long-term strategy to reduce carbon emissions and replace outdated coal-fired plants. If completed, the Idaho Falls plant will begin generating power in 2029, and will deploy six, 77-MWe modules to generate 462 MW of electricity by 2030. Its development and construction is funded under a cost-share agreement between the DOE and UAMPS.

Originally, between 2016 and 2020, NuScale priced the power at $55/MWh. Then, the price was raised to $58/MWh when the project was downsized from 12 reactor modules to just six (924 MWe to 462 MWe). By December 2019, 35 UAMPS members had signed on for 200 MW of power. But escalating costs have caused these numbers to shrink. As of March this year, there were 26 participants, and subscriptions dropped to ~120 MW (see appendix for table), representing 26% of the project’s total capacity.

The shocker came in January this year when new cost estimates pushed that figure up by 53%, setting it at $89/MWh. NuScale attributed the significant increase to a 75% rise in estimated construction costs, from $5.3bn to $9.3bn, caused by factors such as commodity price inflation and higher interest rates. The actual cost would be much higher, if not for more than $4bn in subsidies the project expects to get from US taxpayers, according to the Institute for Energy Economics and Financial Analysis.

The good news for NuScale is that the participants extended their commitment and accepted the revised cost. On NuScale’s 1Q23 earnings call, CEO Hopkins stated, “Right now, we feel very comfortable with that $89 megawatt hour.” 

Source: NuScale earnings call transcript

What was generally overlooked in the press is that the agreement includes conditions that essentially kick the can down the road, and endanger the project. The extension (Pg 4) states that NuScale must raise subscription levels from its current 120 MWe (26% of total capacity) to 370 MWe (80% of total capacity), on the earlier of the combined license application (“COLA”) submission, or 1 February 2024. 

Source: Amendment 3 to Development Cost Reimbursement Agreement

UAMPS member Idaho Falls laid out the stakes at its council meeting (Pg 4) in February. If NuScale fails to meet the subscription target, and costs continue to go up, so does the risk of project termination.

Source: Idaho Falls council meeting minutes

Key to the extension is this condition: participants will be refunded their costs if the 80% threshold is not reached. Now, with this new clause, they have a strong financial incentive to withdraw if NuScale fails to meet the subscription target. 

NuScale has around three months to the deadline but is nowhere near the 80%. In August 2023, the company told news outlet Power that “no changes have occurred since March”. At a September meeting of the Washington City power board, when asked about subscription progress, director Rick Hansen said (1:01:10-1:04:00) that “Not anybody that’s able to or willing to sign at this point.” He added. “We have lots of cheerleaders but not a lot of people that want to jump in the game at this point.” Interested parties want additional mechanisms to de-risk it, according to him. This suggests no one has signed on since March. 

Source: YouTube

The contract that has lent NuScale credibility is hitting a wall. The company seems to echo this sentiment, based on recent language in its 10-Q, which now adds: “While it is reasonably possible we will be required to pay these amounts, no accrual has been recorded in our financial statements.”

Source: NuScale disclosure on commitments and contingencies in its 2Q23 report

Specifically, NuScale had a capped financial obligation’ of $83.5m to UAMPS. As of the end of June, this looming liability was around $37m.

Even if the project continues, NuScale’s $89/MWh commitment adds further financial risk. The nuclear reactor industry has a notorious history of cost overruns and delays during the construction stage. NuScale has not built a SMR yet so there’s no reason to believe the company will defy industry norms. For equity holders, this is uncomfortable, as they will bear the brunt of these performance shortfalls and costs.

NuScale’s heavy cash burn will lead to shareholder dilution

NuScale’s financial position appears increasingly shaky under the uncertainty hanging over the CFPP. The company has around 15 months of cash, based on its end-June cash balance of ~$215m, and LTM operating cash flow of negative $167m. That runway could stretch to ~26 months if the company maxes out its $150m at-the-market equity line, announced on 9 August 2023. But this does not account for potential CFPP cost repayments.

We fully expect further shareholder dilution. Completion of the CFPP remains an iffy prospect, and given NuScale’s track record with cost overruns, that seems almost inevitable.

Against this backdrop, we noted that Chris Colbert, NuScale’s ex-CFO, has been offloading his shares since May 2023. According to NuScale’s proxy statement, Colbert and his wife’s combined holdings, including direct ownership and other forms such as options or restricted stock units, amounted to a total of 758,974 shares. The exact details of whether Colbert has fully exercised his rights remain unclear. However, the Form-4 filings indicate that throughout 2023, the couple sold over 200,000 shares, accruing gross proceeds of approximately $1.7 million. Colbert’s last Form-4 filed in June 2023 shows the former CFO had ~15,000 shares. This could be a leading indicator of NuScale’s unspoken issues. 

Conclusion

NuScale’s delusional contract with Standard Power seems more like an act of desperation to shore up investor confidence, rather than a strategic move. The company is struggling and we believe its equity has little to no value without government support. Even if that support continues, the DOE’s usual policy is that costs have to be shared with the private sector, meaning that existing shareholders will be diluted. 

Importantly, the DOE holds a non-exclusive worldwide license to NuScale’s intellectual property, according to financing agreements. This creates the possibility that the DOE could simply transfer this intellectual property to a more established player, if NuScale is unable to meet performance obligations. 

Source: NuScale filings

We are short NuScale.

Appendix

Disclaimer

Our research and reports express our opinions, which we have based upon generally available public information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. We strive for accuracy and completeness to support our opinions, and we have a good faith belief in everything we write, however, all such information is presented “as is,” without warranty of any kind – whether express or implied. Iceberg Research (“Iceberg”) makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. You agree that the use of Iceberg’s research is at your own risk. In no event will Iceberg be liable for any direct or indirect trading losses caused by any information available on this report. Think critically about our opinions and do your own research and analysis before making any investment decisions. You should seek the advice of a security professional regarding your stock transactions.

You should assume that as of the publication date of our reports and research, Iceberg may have a short position in the securities (and/or options, swaps, and other derivatives related to the stock) covered herein, and therefore may stand to realize gains in the event that the price of the covered securities declines. We may continue transacting in the securities of the company covered in this report, and we may buy, sell, cover or otherwise change the form or substance of our position in the issuer regardless of our initial views set out herein.

This is not an offer to sell or a solicitation of an offer to buy any security, nor shall Iceberg offer, sell or buy any security to or from any person through this site or reports on this site. Iceberg is not registered as an investment advisor in any jurisdiction. You agree to do your own research and due diligence before making any investment decision with respect to securities discussed herein. You represent to Iceberg that you have sufficient investment sophistication to critically assess the information, analysis and opinions in this report.

We are entitled to our opinions and to the right to express such opinions in a public forum. We believe that the publication of our opinions about public companies that we research is in the public interest. This report and all statements contained herein are the opinion of Iceberg and are not statements of fact. You can publicly access any piece of evidence cited in this report or that we relied on to write this report. All expressions of opinion are subject to change without notice, and Iceberg does not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them.

You agree that use of Iceberg’s research is at your own risk. In no event will you hold Iceberg or any affiliated party liable for any direct or indirect trading losses caused by any information on this site. You further agree to do your own research and due diligence before making any investment decision with respect to securities covered herein. You represent to Iceberg that you have sufficient investment sophistication to critically assess the information, analysis and opinion on Iceberg’s site and in this report. You further agree that you will not communicate the contents of this report to any other person unless that person has agreed to be bound by these same terms of service.

By downloading, opening and/or reading this report you knowingly and independently agree: (i) to abide by the terms of service of our website, which are hereby fully incorporated herein, (ii) that any dispute arising from your use of this report or viewing the material herein shall be governed by the laws of the State of New York, United States, without regard to any conflict of law provisions; (iii) to submit to the personal and exclusive jurisdiction of the superior courts located within the State of New York and waive your right to any other jurisdiction or applicable law; and (iv) that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of this website or the material herein must be filed within one (1) year after such claim or cause of action arose or be forever barred. The failure of Iceberg to exercise or enforce any right or provision of this disclaimer shall not constitute a waiver of this right or provision. If any provision of this disclaimer is found by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to the parties’ intentions as reflected in the provision and rule that the other provisions of this disclaimer remain in full force and effect, in particular as to this governing law and jurisdiction provision.