Duke Energy's 'Pig in a Poke'

 | Aug 06, 2012 | 5:08 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

duk

,

eix

,

sre

As Duke Energy (DUK) was about to finalize its merger with Progress Energy, Duke developed concerns that it may have bought "a pig in a poke." It appears that Duke was in receipt of new cost estimates to repair Progress' Crystal River Nuclear Power Plant, and it appears those estimates were worse than expected.

Crystal River is an 838-megawatt plant in Florida that uses pressurized water reactor (PWR) technology to produce steam. The plant was commissioned in 1976, and it's scheduled to retire in 2016, unless it receives a 20-year license extension from the Nuclear Regulatory Commission.

Originally, Crystal River cost about $375 million, or $447,500 a megawatt (1977 dollars). While the final cost was an overrun, the plant turned out to be a bargain for shareholders and ratepayers. That is, until 2009.

In September 2009, Crystal River was taken offline for refueling. While the plant was in cold shutdown, plant owners decided to uprate power production by adding and replacing strategic equipment. They expected a 20% boost in production, something other plants have successfully achieved.

Part of their plans included replacing steam generators, which are large heat-exchanging units that are normally associated with PWRs. The Crystal River project was similar to the steam generator replacement undertaken by Edison International (EIX) and Sempra Energy (SRE) for their San Onofre Nuclear Generating Station (SONGS).

Like SONGS, Crystal River's project developed some unexpected problems. When creating a workspace to remove Crystal River's steam generators, workers unintentionally damaged the outside wall of the facility's containment building.

Structurally, this wall is complicated. According to the NRC, Crystal River's containment wall is 42 inches thick, it contains both horizontal and vertical tensioned steel tendons, and it's lined on the inside with steel plate. To take out the old steam generators and to move new ones in, workers needed to cut a 27-foot opening through the side of the building.

According to nuclear expert Dan Yurman, Crystal River's engineers developed concerns about the project. They thought it inadvisable to cut into the containment wall without the help of experienced engineering firms. Yet apparently, Progress CEO William Johnson disagreed and signed off on the equivalent of a "do-it-yourself" project.

In October 2009, while cutting the containment's outer wall, workers discovered an unexpected crack, or delamination. The delamination caused everything to stop; Crystal River's outage schedule had to be extended indefinitely as engineers and NRC inspectors analyzed the damage. After months passed, Progress Energy announced its intentions to repair the containment structure and announced that it expects Crystal River 3 to return to service in 2014.

However, costs became a primary issue. After the Duke-Progress merger was completed, Duke's CEO Jim Rogers announced that the original estimate of $900 million to $1.3 billion to repair Crystal River was "trending higher." However, those costs did not include purchasing replacement power, which were estimated to cost another $1 billion.

Just before the merger, there was good news for Duke. An agreement between the Florida Public Service Commission and Progress Energy had been reached. That agreement required Duke to refund ratepayers $288 million, but it allowed Duke full recovery of all other replacement power costs, which were not covered by insurance proceeds.

It turns out that Crystal River, like SONGS, had insurance coverage from Nuclear Electric Insurance Ltd. (NEIL). Rogers recently announced that NEIL had already paid about $300 million for repairing Crystal River and provided funds for replacement power, but $70 million has been withheld. Some speculate that NEIL is finished with Crystal River, and they are not expecting additional claims.

That leaves the important question of who will pay the remaining repair costs. The answer is not clear. Accordingly, Duke's executives are reconsidering whether they want to repair or retire Crystal River.

There is a real and significant value to ratepayers and shareholders if Crystal River is repaired and returned to service. The evidence is in the cost of replacement power.

Industry commentators, such as Dan Yurman and Rod Adams, suggest that the cost of replacement power could be justification to repair Crystal River. If Duke retires the plant, replacement power is still needed. If Duke repairs the plant, it avoids future costs to replace power. Those future savings might be enough to pay for repairs.

There really is a pig in that poke. Crystal River is a valuable asset to Duke's shareholders and ratepayers. A repaired Crystal River can produce safe, economic and reliable power at costs well below natural gas turbines or replacement power.

Columnist Conversations

My sense is that if yesterday's upmove was not the start of a vertical upside blow-off that is heading directl...
Oracle is today's top gainer in the S&P 500 following last night's Q2 earnings report. The stock op...
If AAPL is going to continue to rally....this cluster zone and prior swing high need to be cleared! This is t...
Yesterday and today was the classic case of watching realized vol. in the SPX and other indexes jump. The mark...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.