SCANA's Big Gamble

 | Mar 26, 2012 | 4:30 PM EDT
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The Nuclear Regulatory Commission is expected on Friday to approve only the second license in three decades to build a new nuclear power facility in the U.S. SCANA Corp. (SCG) is expected to get the green light it to build two 1,154 megawatt (electric) AP1000 reactors designed by Westinghouse in South Carolina.

Whether or not SCANA has the capacity and capability to construct these new units is a question on the minds of some observers. The issue is the numbers. While SCANA's proposed reactors are exact duplicates of Southern Co.'s (SO) AP1000 currently under construction at Georgia Power's Vogtle site, the utilities are in very different financial conditions. Southern is the nation's largest domestic utility. It has a market capitalization of approximately $38 billion and an enterprise value of almost $60 billion. At 45.7%, Southern only owns a minority interest in the new Vogtle units.

SCANA is a much smaller utility. It has a market capitalization of approximately $5.8 billion and an enterprise value of just over $11 billion. At 55%, SCANA owns a majority interest in the proposed V.C. Summer units 2 and 3.

While both utility groups are building duplicate reactors under similar conditions and using the same contractors, SCANA's gamble is much larger than Southern's. But it is not just the owners' financial condition. SCANA's understanding of what it will take to build these units is very different from Southern's understanding. SCANA believes it can build its AP1000s 29% cheaper than Southern's identical units.

Reuters reported last June that SCANA expects to put its first unit into commercial operations in 2016, the same year Southern completes its first unit. The second unit will lag Southern's by two years, and SCANA's total cost for both units is estimated to be $4 billion lower than Southern's delivered costs. The Reuters reports are confirmed by SCANA's revised NRC license application, or COL, where SCANA claimed its total nuclear production plant cost would be $9.84 billion. But in that COL, SCANA suggested its commercial operation dates could slip two years for each unit.

When it comes to cost estimating, SCANA appears to be using a secret sauce -- and it's not sharing that sauce with Southern. But it is sharing it with Duke Energy (DUK) and possibly Progress Energy (PGN).

Duke has an option to buy a minority position in SCANA's new facility from Santee Cooper, South Carolina's state-owned electric and water utility and the state's largest power producer. Santee has a 45% interest in SCANA's two new nuclear units, but it has buyer's remorse. Santee Cooper wants to unload a portion of its interest to Duke and Progress Energy. Duke is interested in the offer, subject to due diligence.

But Duke's due diligence could be the deal breaker. Duke CEO James Rogers has painful memories of the huge cost overruns PSI Energy experienced at its Marble Hill Nuclear Power Plant, which the New York Times said is the most expensive nuclear project ever to be abandoned. Rogers was PSI's chairman, president and CEO shortly after Marble Hill was abandoned (PSI later merged with Cinergy, which subsequently merged with Duke). If SCANA's cost numbers have a secret sauce, Duke may jump in. If Duke decides SCANA's numbers are unrealistic, Duke may walk.

If Duke walks, Santee Cooper may hesitate and SCANA's nuclear project may be in peril. With weak financials, SCANA is in no position to finance the project alone. Further, if the state's municipal utility backs out, the state utility commission may become reluctant to provide the critical approval to put SCANA's new units in the rate base. Without a rate base to hedge the equity investment and without federal guarantees to hedge the debt, the project is doomed.

Utilities need to be realistic about construction costs. Building a first-of-a-kind nuclear power plant for less than $4.4 million per megawatt, as SCANA asserts, is not a likely outcome. It could build a series of large, combined-cycle, gas turbines for approximately $1 million per megawatt and substantially reduce the financial risk its proposed nuclear units impose on shareholders and ratepayers alike.

It would be a surprise if Duke buys into the V.C. Summer project without adjusting the project's cost estimates. It will also be a surprise if SCANA can maintain a 55% majority position after cost estimates are adjusted.

It would not be a surprise if V.C. Summer's owners announce a schedule delay in constructing the new units. The new license provides optionality and that is a valuable asset. It's just not valuable yet.

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