Saturday, October 09, 2010

Update On Nuclear Power - Constellation Drops Out

Back when the US government selected 4 companies who might lead the nuclear power "renaissance" in 2009 I wrote this article and noted that of the four:

- Southern Company was a good candidate since they have nuclear experience and a substantial market capitalization
- SCANA (South Carolina)is a relatively small company, but since South Carolina has the "traditional" regulatory structure where companies can pass the cost of construction on to customers, this might work, although it would put the company at extreme risk of foundering if costs rise
- NRG is a smaller independent power company that was unlikely to be able to finance such a large venture and unwilling to take the financial pounding that will likely ensue as the projects face difficulties
- Constellation Energy (Baltimore) was a wounded company and unlikely to succeed, even with a partner in the vast French nuclear company EDF

I said that of the four companies, 1 1/2 (Southern plus SCANA, on a shoestring) might be able to pull it off.  I also said that it boded ill for this false "renaissance" that Exelon, the largest nuclear operator in the USA and one of the largest in terms of market capitalization, was bowing out of this effort, likely because they ran the numbers and risks and decided that it was foolhardy.

In this post I noted that NRG had a falling out with their nuclear effort, and according to this recent presentation, they have reduced their spend to a maximum of $1.5M a month, which is literally a pittance in a multi-billion dollar effort, dumping the rest of the work onto their partners and Toshiba.  Effectively naming NRG was a joke in the first place, as I pointed out in my original post, and now they are abandoning the giant capital efforts of nuclear plant construction and moving onto other areas to earn profits.

Today the other shoe dropped - as summarized in this excellent Bloomberg article titled "Constellation Drops Maryland Nuclear Plant Loan, Denting EDF's U.S. Plans":

Constellation Energy Group Inc. pulled out of negotiations on a U.S. loan guarantee to build a nuclear reactor in Maryland with Electricite de France SA, potentially damaging the French utility’s U.S. expansion plans and the companies’ partnership.The cost of a $7.5 billion U.S. government loan guarantee that the companies’ joint venture, UniStar Nuclear Energy, would need to build the Calvert Cliffs 3 reactor is too high and creates too much risk for Constellation, the Baltimore-based utility said in a statement today.
So now Constellation has dropped out, I am batting a thousand so far, since at $1.5M / month NRG has also effectively abandoned the effort.

As far as the 1/2 company, I have been following SCANA's efforts through their web site, which contains extremely useful information.  Since the rate-payers are on the hook for this effort (SCANA has "traditional" rate regulation), SCANA publishes detailed information on a regular basis so that the regulators can measure progress.  This document is a Q2 2010 update on their 2 units under construction and is excellent reading if you wish to learn more about nuclear plant construction.  Some relevant facts:

- at a stock price of about $40 / share, SCANA has a market value a bit above $5B
- the estimated cost of building two nuclear units as of their most recent estimates is about $6B
- scheduled completion dates for Units 2 & 3 are April 1, 2016 and January 1, 2019
- SCANA is planning on spending approximately $500M on these two units in 2010

It will be a high-wire act to see if SCANA can pull this effort off with their small market capitalization relative the potential risks on this construction effort.  Delays in the schedule or cost over-runs will pose a significant risk to their liquidity and South Carolina is a relatively small state if they need to rely on support.  That is why I still give SCANA a 1/2 as far as the 4 companies listed above - they have a shot and are certainly making the most of it but they are a LONG way from the finish line and any significant deviation will dent their capitalization significantly.  For example when the company has $5B sunk into the project, if the date is delayed the company will not only have to keep financing that $5B in debt but they will have to purchase replacement power to make up for the nuclear power that isn't yet on line, dealing them a double blow.

Southern is still moving forward with their construction and of the 4 they, and Exelon, were the only 2 companies in the US with the level of experience, commitment and financial capacity to pull this off, if they chose to do so.  I will update you on Southern's construction efforts in a future post.

But it amazes me that what I, a non-journalist who is several years removed from direct experience with the industry, could call immediately when the government named these companies and how I have been completely correct so far.  The nuclear renaissance is about to be buried, with only Southern soldiering on and South Carolina holding their breath (if they are smart) to bet that SCANA can pull this off or they will be stuck holding an immense debt and be short of power, to boot.  Given the 100% rate of overruns in nuclear plants and dates being missed by years (if not decades), SCANA's high wire act is going to be tough to pull off, but I wish them luck.

Cross posted at Chicago Boyz

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