You may have seen headlines about cracked concrete at Dominion Resources' (D) North Anna Nuclear Power Station in central Virginia. From what has been reported by industry experts, these cracks are not safety-related and have nothing to do with the safe operation of North Anna's reactors. The cracks were found in an interior wall. That wall is designed to separate equipment, has no nuclear responsibilities and bears no physical loads.
Another set of headlines focused the quake's impact on North Anna's 57 nuclear waste containers. Apparently, 27 canisters moved a few inches. This is not a surprise and not a safety issue; these canisters are designed to tip over on their sides without causing a significant safety concern.
In fact, there has been no significant damage found anywhere on North Anna's property. Yes, some remote office buildings and a nearby auxiliary building experienced superficial cracks in some floors. But none of these findings is safety-related, and many of these same cracks can be found in office buildings all across the nation.
Nevertheless, both units at North Anna will likely remain in cold shutdown until all analysis is completed, any modifications are implemented and all red tape has been processed. During the shutdown, Dominion will be curtailing about 46,800 megawatt-hours of production per day and will lose about $2 million a day in revenue.
But shareholders may not see this loss. In all likelihood, the utility will use this shutdown as an opportunity to get ahead of preventive maintenance. This means its next refueling outage will be quicker and less costly than originally planned.
In addition, North Anna is covered by insurance for property damage and replacement power. According to Dominion's recent Form 10-K, the company purchased insurance from Nuclear Electric Insurance Limited (NEIL), a mutual insurance company composed of about 86 investor-owned, public and cooperative utilities. And it looks like that insurance will protect Dominion's shareholders.
Dominion's shareholders should not be concerned that the insurance company could become recalcitrant in compensating Dominion for its losses. The current chairman of NEIL is David A. Christian, who is CEO of Dominion Generation, the unregulated subsidiary of Dominion Resources. In addition, Dominion's nuclear colleagues are sitting on NEIL's board, including senior officers from Southern Co. (SO), Pinnacle West Capital (PNW), Entergy (ETR), PPL (PPL), SCANA (SCG), Exelon (EXC) and Constellation Energy Group (CEG), among others.
According to NEIL's annual report, its "primary property program" provides property insurance coverage of $500 million per occurrence. The excess program provides property insurance coverage of $2.25 billion in excess of $500 million per occurrence. This means North Anna may be covered for all damage the quake may have caused to the property. However, any claim is likely to be small, because North Anna asserts that it did not incur significant damage.
The larger loss for Dominion is business interruption. NEIL's outage program pays a maximum weekly indemnity limit of $4.5 million "resulting from an accidental outage at any one unit" (North Anna has two units). The maximum coverage on any single incident at a unit is limited to 100% of the weekly indemnity for 52 weeks and 80% for the subsequent 110 weeks, up to a maximum of $490 million for any one occurrence (with optional deductibles).
Dominion can expect a maximum of $9 million per week from NEIL for its earthquake-induced outage. According to the Nuclear Regulatory Commission (NRC), North Anna's two units normally produce about 328,171 megawatt-hours per week. This suggests Dominion will be compensated about $27.50 per megawatt-hour for lost power, or about $6 above its average production costs. That $6 has to cover North Anna's general and administrative costs, interest, depreciation, amortization, increased regulatory costs and other indirect costs. The total has to cover any power sales agreements that may exist with other utilities. Assuming Dominion is entitled to NEIL's maximum coverage; Dominion could take a slight loss every day that North Anna is off line.
If the Nuclear Regulatory Commission determines that the momentum experienced at North Anna exceeded the plants' design basis, Dominion could face additional expenses. On the basis of its findings, the NRC could require North Anna to upgrade its facility. Any upgrade could cause additional capital expenses and significant schedule delays before Dominion can return its units to service.
Going forward, there is a degree of uncertainty over Dominion's revenue and asset valuations. However, revenue uncertainty is capped, and the overall impact on earnings is limited. Further, North Anna was engineered to exceed, not just meet, regulatory requirements. Therefore, any NRC-mandated modifications should be minor, and asset valuations should hold.