Duke Cancels $13B Nuclear Reactors Project

 | May 03, 2013 | 5:38 PM EDT
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Duke Energy (DUK) told the Nuclear Regulatory Commission yesterday that it is suspending its application to build two new nuclear power units at Harris near Raleigh, N.C. The Charlotte-based energy company said it can meet its customer power demand for the next 15 years without the $13 billion project.

This is big news for the nuclear power industry. Chicago Bridge & Iron (CBI) was expected to be the engineering, procurement and construction contractor of the likely Westinghouse AP1000 designs.

Duke originally submitted the combined construction and operating license application in 2008. It could have continued with the application process and held an option to build the plant in the future. Under NRC rules, Duke did not need to commit to the reactor design.

In relation to the overall project cost, Duke didn't spend a lot of money in the application process, but it will likely see a write-down for the money it has spent.

Duke still has two other options for the AP1000. According to Dhiaa Jamil, Duke Energy executive vice president and president of Duke Energy Nuclear, "The Harris site is well suited for new nuclear generation and has not been eliminated from our long-term consideration as a site to expand our nuclear fleet."

The second option is to take a partial ownership of SCANA's (SCG) Virgil C. Summer nuclear project in South Carolina. Summer is already under construction, has minimal regulatory risk and is looking for a partner to replace a portion of Santee Cooper's equity position. Santee Cooper is South Carolina's state-owned electric and water utility. Duke purchased an option and has had Summer under an ongoing due diligence process.

The recent announcement to terminate Duke's North Carolina project suggests that Duke may be reluctant to go forward with the two-unit Summer nuclear power project. The expected $6 million per megawatt capex may prove uneconomic in the face of lower cost alternatives. Specifically, combined cycle gas turbines could provide the same baseload service at a lower capital cost and similar production cost.

Duke's North Carolina decision does not necessarily mean that it will pull out of SCANA's project. But Duke's involvement in Summer is difficult to justify economically when lower cost alternatives are available. It is also difficult to justify as consumer demand wanes.

Chicago Bridge & Iron's shareholders should be concerned. With today's announcement, its backlog of new nuclear power plant projects is shrinking. It appears they have only two solid projects remaining. The first is the Summer unit at an estimated cost of $14 billion. The second is Southern's (SO) two-unit project at its Vogtle site in Georgia.

There is some risk that SCANA's and Southern's projects may be delayed. Summer's future is somewhat dependent on Southern's project, as SCANA's financial ability is weaker than Southern's.

Investors should understand that these projects have economic relationships. They were to share the engineering and licensing costs of the AP1000. With fewer participants, costs have to be reallocated, or Westinghouse/Chicago Bridge & Iron will have to absorb initial development costs.



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