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Westinghouse financial meltdown threatens nuclear ‘renaissance’

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An artist renderibng of one of the Westinghouse Electric AP1000 reactor units that's under construction at V.C. Summer Nuclear Station in Fairfield County. (Image/Provided)From April 24, 2017 print issue of the Columbia Regional Business Report

When SCANA and Santee Cooper announced in May 2008 plans to build two, 1,117-megawatt reactor units, it was heralded as a key moment in the nation’s march toward hatching a new generation of nuclear power plants.

 “This is an important milestone in our efforts to ensure we can continue meeting the energy needs of our customers safely, reliably, and with minimal impact on the environment,” said Bill Timmerman, who was then chairman and CEO of SCANA. 

Added Lonnie Carter, president and CEO of Santee Cooper, “Nuclear energy is clean, safe, reliable and emissions-free, and it is an increasing source of generations worldwide.”

SCANA, parent of South Carolina Electric & Gas, and Santee Cooper made that announcement a few weeks after Southern Co. said its subsidiary, Georgia Power, became the first U.S. company in decades to sign a contract for new nuclear construction at its power plant near Waynesboro, Ga. 

Within the commercial nuclear industry, the Southern and SCANA announcements were celebrated as evidence that a “nuclear renaissance” was underway in the United States, where a new reactor unit had not been licensed in 30 years.

Fast forward to March 29, 2017. Westinghouse Electric Co., designer and contractor of the AP1000 units being built in South Carolina and Georgia, files for Chapter 11 bankruptcy protection and says in court papers that it wants out of the nuclear construction business and focus on more profitable lines such as nuclear fuel fabrication and maintenance.

Westinghouse’s financial revelations have prompted SCE&G and Santee Cooper, which operate a 966-megawatt reactor unit at V.C. Summer Nuclear Station where the new units are being built, to regroup and decide their next move.

Both companies have said they want to go forward with the project because they need the additional power the nuclear units would generate. However, the companies also need to determine how many more billions they’re willing to spend to complete the job.

Presently, the South Carolina project at the Fairfield County nuclear power plant is estimated to cost $13.9 billion, more than $2 billion over the original budget approved by regulators in 2009, and is about four years behind the original schedule.

The Southern Co. project at Plant Vogtle is in the same straits, too.

 

The next step

SCANA has informed the Public Service Commission in late April that it has reached an agreement with Westinghouse to extend by 60 days the evaluation period to assess Westinghouse’s cost estimates for completing the project and mull their options.

Westinghouse informed SCE&G that the V.C. Summer project’s share of the reserve for contract losses is approximately $1.5 billion. Of that amount, $825 million would be SCE&G’s 55% share of the additional cost, while the utility’s partner Santee Cooper would shoulder 45% of the loss.

“That amount is largely associated with the fixed- and firm-price option negotiated for the V.C. Summer project,” the company said in a press release. The figures, though, are Westinghouse’s estimates and SCANA has not yet validated the amounts, the release added.

The $1.5 billion figure is considerably less than Morgan Stanley’s estimate that the Summer project faces $5.2 billion in additional construction costs and delay-related cost overruns.

If the Morgan Stanley projection holds up, that would push the cost of the new units to about $19 billion, nearly double the $9.8 billion for the EPC (engineering, procurement and construction) contract with Westinghouse that SCANA cited in an amended Form 8-K filed May 23, 2008, with the Securities and Exchange Commission. Companies must file a Form 8-K with the SEC to announce major events affecting their stock price that shareholders should know about, according to the commission’s website.

An aerial view offers an overall persective of the immensity of the reactor project at the V.C. Summer Nuclear Station. (Photo/Provided)Additionally, the company said its agreement with Westinghouse suspends the milestone payments established by the Dispute Resolution Board and provides a mechanism for SCE&G and Santee Cooper – the project owners – to continue to pay for work performed on the site, the release said.

These total payments have been approximately $30 million ($16.5 million for SCE&G’s 55% share) per week, or approximately $120 million ($66 million for SCE&G’s 55% share) per month.

The depth of Westinghouse’s problems publicly surfaced earlier this year when its parent, Toshiba Co., said it was writing off $6.3 billion in business because of losses incurred by Westinghouse in nuclear construction projects in the United States and China.

Toshiba already was on shaky ground. In December 2015, its credit ratings slipped to speculative grade, triggering a provision in SCANA’S contract requiring Westinghouse to establish a surety bond in the form of a letter of credit ranging up to $100 million, SCANA CEO Kevin Marsh said.

Additionally, SCANA began to escrow intellectual property and software for the reactor units, Marsh said. Westinghouse reported that substantially all the required intellectual property is now in escrow.

Marsh told the commission on April 12 that possible options for the project include:

  • Continue with construction on both units.
  • Focus on construction of one unit and delay work on the other.
  • Continue with one unit and abandon the other, seeking recovery of money spent on the project under the state Base Load Review Act.
  • Abandon the project altogether and seek recovery under state law.

“All other things being equal, our preference would be to complete the units for the benefits that they would provide for our system,” Marsh said. “We are giving all available options full and equal consideration on their merits. We are not prejudging any option.”

Abandonment is the least-preferred option because SCE&G still needs the generation capacity the new units would provide to serve its growing customer base, Marsh said.

Construction of the two units at Summer is about one-third complete, although most of the pieces, parts and equipment are at the construction site, on the way, or already purchased. About 5,000 workers are on the site pushing to complete the project, SCANA reported.

Westinghouse has provided SCE&G revised in-service dates of April 2020 and December 2020 for Units 2 and 3. That compares with in-service dates of 2016 for the first unit, and 2019 for the second unit, which were included in the May 2008 press release.

The potential effects of Westinghouse’s bankruptcy on SCE&G and SCANA have “attracted a great deal of attention from the financial community,” Jimmy Addison, SCANA executive vice president and CFO, told the commission.

The interest rate cost on SCE&G’s senior secured debt has climbed 0.1% to 0.4% since the bankruptcy was first “publicly suggested,” Addison said. In addition, SCANA stock has lost about 18% of its value compared to peers. Meanwhile, SCANA and SCE&G’s debt ratings have been put on “negative outlook” or “watch” status but the ratings have not been changed, Addison said.

The state’s Base Load Review Act has buffered worries over the project’s uncertainty.

“Perceptions profoundly influence markets’ realities,” Addison said. “For the market to become concerned that the regulatory risk disability were too great under either a cancel or continue scenario, SCE&G could lose the ability to raise capital on reasonable terms; and that fact, alone, could itself force us to cancel the project.”

Passed by the General Assembly in 2007, the law allows SCE&G to annually seek commission approval to raise rates to cover the cost of borrowing money for the reactor project. An independent analysis shows that the law will save ratepayers about $1 billion during construction and another $4 billion over the 60-year life of the reactor units.

Since the commission approved SCE&G’s request in 2009 to build the reactors, the company’s electricity customers have seen nine rate increases to cover financing costs for the new units. According to the state Office of Regulatory Staff, residential customers using 1,000 kilowatt hours per month have seen their bills climb to $147.53 per month. About 18.2% of the bill is the result of the nine rate hikes, according to the state office.

The rising cost of electricity has sparked protests among various organizations representing consumers and small business. Leslie Minerd, founder and honorary president of South Carolinians Against Monetary Abuse or SCAMA, labels the reactor project a “nuclear misadventure.”

Ratepayers, Minerd said, are being set up to take it on the chin. “We want our money back for what has turned into nuclear misadventure that regulators in the state allowed to happen though we have repeatedly warned them about the possibility of this situation since 2008.” 

 

The renaissance

So, what happened to the nuclear “renaissance”? 

“I think the renaissance died before we got to this point,” answered Edwin Lyman, an internationally recognized expert on nuclear power safety and security, and member of the Institute of Nuclear Materials Management and Union of Concerned Scientists. “Even before they broke ground on these projects, the renaissance was in big trouble.”

New nuclear construction had largely been dormant in the United States because of soaring construction costs and the lengthy licensing process required to build and operate units. At the same time, the 1979 partial meltdown of a reactor at Three Mile Island and the 1986 reactor disaster at Chernobyl, Ukraine, raised questions about the technology's safety. Costs climbed even higher following 9/11 as regulators required reactor units be built to withstand airborne attacks. More increases in safety-related costs followed an earthquake and tsunami disabled the power supply and cooling of three Fukushima Daiichi reactors in March 2011.

The industry’s hopes for a revival also have been blunted by a collapse in national gas prices, Lyman said. Fracking has led to discoveries of a seemingly endless supply of natural gas and historic low prices have made it attractive for utilities to build cheaper gas-powered generators.

The “renaissance” arrived about the time the United States plunged into the Great Recession and customers sought to trim power bills. Additionally, consumer demand grew for investments in renewable energy sources such as solar.

But blame also can be placed on the nuclear power industry, which believed that it had found ways to build reactor units cheaper and faster, avoiding the construction delays and cost overruns that bankrupted vendors and some utility companies, experts say.

 “You can do the math. They have not demonstrated they could overcome problems that plagued projects of the past,” Lyman said. “They went in really believing they would be able to deliver these projects on time and within budget. It was just hubris on the part of the vendors.” 

The Westinghouse design featured modular construction with parts being built off-site and transported to the project location for assembly. 

SCE&G sought to control costs by taking advantage of an EPC contract offered by Westinghouse that provided for a “significant portion” of the project price to be fixed or fixed with agreed-upon inflation factors, according to SCANA’s 8-K filing.

Dennis Wamsted, former editor of the industry trade journal Energy Daily and author of the “Wamsted On Energy” blog, said the fixed-priced nature of the contracts Westinghouse signed for the V.C. Summer and Vogtle projects were really a “marketing tool.”

“Its AP1000 reactors had never been built in the U.S. and the projects for Southern and SCANA’s South Carolina Electric & Gas unit offered a chance for the company to prove the technology’s worth,” Wamsted wrote. “Never mind that Westinghouse had no real idea what the project would cost since almost none of the detailed design drawings were complete before the contract with Southern was signed, it was a chance to get a foot in the developing nuclear revival in the United States.”

Though expensive and fraught with headache-inducing challenges, the V.C. Summer and Vogtle expansions are among the most significant infrastructure projects in the United States today, said Maria Korsnick, president and CEO of the Washington, D.C.-based Nuclear Energy Institute.

“Building a nuclear plant is a complex enterprise, and historically, such projects have seen changes in midstream, including companies entering bankruptcy,” Korsnick said in a statement. “Even when these events occur, projects can go forward. We support the completion of Vogtle and Summer without interruption, for the benefit of all parties.”

Reach Chuck Crumbo at 803-726-7542.

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