Bernstein Research thinks it is becoming increasingly likely that Duke Energy (NYSE: DUK) will opt to retire the Crystal River 3 nuclear plant in Florida rather than repair it.
In a Nov. 1 analysis led by Bernstein Senior Analyst Hugh Wynne, the firm said it is becoming “increasingly clear, in our view, that management is not confident that the repair can be completed within the final estimated costs and schedule. We believe it more likely than not, therefore, that Crystal River 3 will be retired.”
Duke announced a double-shot of bad news on Oct. 31. The company announced $280m in write-downs. They include a $180m pre-tax charge for further cost overruns at the Edwardsport IGCC (integrated gasification combined cycle) power project in Indiana, and a $100m reserve for the refund of replacement power as a result of Duke’s decision not to start repairs at its Crystal River 3 nuclear power plant before the end of 2012.
The Edwardsport charge will bring total write-offs in respect of this project to $866m, the Bernstein analysis said.
Taken together, the Edwardsport and Crystal River 3 developments illustrate “the high degree of regulatory uncertainty” faced by Duke Energy shareholders, according to Bernstein.
Duke subsidiary Progress Energy Florida (PEF) recently told the Florida Public Service Commission that December is the earliest date when management might be ready to decide the reactor’s fate. Conceivably the decision might not be made until summer 2013.
The company will refund replacement power costs of up to $40m in 2015 and $60m in 2016 if repairs don’t begin on Crystal River 3 prior to the end of 2012.
As a reminder, in the fall of 2009, while the containment dome of the Crystal River 3 nuclear plant was being opened to allow the replacement of two 500-ton steam generators, the concrete within one of six walls of the structure separated or delaminated. On March 14, 2011, during the final stages of returning the unit to service, a second delamination occurred in a different wall. At that point, Progress Energy, stopped work at the unit. In July 2011, while no work was being performed on the building, a third wall delaminated, Bernstein noted.
In March 2012, prior to closing the July merger with Progress, Duke Energy commissioned an independent review team, led by Zapata to review and assess Progress Energy’s repair plan for Crystal River 3. The Zapata report found the Progress repair plan technically feasible, but highlighted several significant risks.
Depending on the scope of work, Zapata has said that repairing the 860-MW nuclear plant could cost from $1.55bn to a worst case scenario of $3.43bn.
It is significant, therefore, that the investigation by the North Carolina Utilities Commission (NCUC) into Duke Energy’s dismissal of former Progress Energy and Duke Energy CEO, William Johnson, has revealed serious misgivings among Duke Energy’s senior management and its board of directors with respect to Progress’s plans to repair Crystal River 3, Bernstein said.
The NCUC probe “has created an adversarial regulatory relationship with Duke Energy’s most important regulator” and might hurt Duke’s planned rate cases.
Cost overruns dog Edwardsport IGCC
Duke said Oct. 31 that it had updated its cost estimate for the 620-MW Edwardsport project to more than $3.15bn, from $2.98bn.
The company updated its current allowance for funds used during constructions (AFUDC) to $400m from $375m previously.
This is “the latest in a series of cost overruns” that have plagued the coal gasification project since the state issued a Certificate of Public Convenience and Necessity in late 2007.
In Indiana, Duke is still waiting for a decision from the Indiana Utility Regulatory Commission (IURC) regarding the settlement reached on the Edwardsport IGCC cost overruns. Commissioning of the project has been delayed to mid-2013.
This delay, which stems from the extensive testing of project components, and lower than projected revenues from power output during testing, added about $174m to the project cost – costs which, pursuant to the terms of the proposed settlement, Duke is no longer in a position to recover, the firm said.
Duke’s problems in Indiana were worsened in 2010. A scandal involving Duke’s Indiana subsidiary hiring IURC employees “materially weakened Duke standing with the Commission and its Indiana customers,” Bernstein said. The events culminated with Duke’s eventual termination of its COO James Turner.