Exelon works to save several nuclear plants; takes big Q2 2016 writedown

The famous Three Mile Island nuclear plant in Pennsylvania, which failed to clear a PJM Interconnection auction, is these days on the endangered nuclear plant list of Exelon Corp. (NYSE: EXC), said Exelon in its Aug. 9 quarterly Form 10-Q report.

Exelon said that it and its Exelon Generation subsidiary continue to evaluate the current and expected economic value of each of Exelon Generation’s nuclear plants. Factors that will continue to affect the economic value of these nuclear plants include, but are not limited to: market power prices, results of capacity auctions, potential legislative and regulatory solutions to ensure nuclear plants are fairly compensated for their carbon-free emissions, and the impact of final rules from the U.S. Environmental Protection Agency requiring reduction of carbon and other emissions and the efforts of states to implement those final rules.

In 2015, Exelon Generation identified the Quad Cities, Clinton and Ginna nuclear plants as having the greatest risk of early retirement based on economic valuation and other factors. At that time, Exelon and Exelon Generation deferred retirement decisions on Clinton and Quad Cities until 2016 in order to participate in the 2016-2017 Midcontinent ISO primary reliability auction and the 2019-2020 PJM capacity auctions held in April and May 2016, respectively, as well as to provide Illinois policy makers with additional time to consider needed reforms and for MISO to consider market design changes to ensure long-term power system reliability in southern Illinois.

In April 2016, Clinton cleared the MISO primary reliability auction as a price taker for the 2016-2017 planning year. The resulting capacity price is insufficient to cover cash operating costs and a risk-adjusted rate of return to shareholders. In May 2016, Quad Cities did not clear in the PJM capacity auction for the 2019-2020 planning year and will not receive capacity revenue for that period.

Based on these capacity auction results, and given the lack of progress on Illinois energy legislation and MISO market reforms, on June 2, Exelon Generation announced it will move forward to shut down the Clinton and Quad Cities plants on June 1, 2017, and June 1, 2018, respectively. The current Nuclear Regulatory Commission (NRC) licenses for Clinton and Quad Cities expire in 2026 and 2032, respectively. Exelon Generation is proceeding with the market and regulatory notifications that must be made to shut down the plants, including notification to the NRC on June 20, and filing of a deactivation notice with PJM for Quad Cities on July 6. Exelon Generation will formally notify MISO of its plans to close Clinton later this year.

In the second quarter of 2016, as a result of the plant retirement decision for Clinton and Quad Cities, Exelon and Exelon Generation recognized one-time charges in Operating and maintenance expense of $141 million related to materials and supplies inventory reserve adjustments, employee-related costs and construction work-in-progress (CWIP) impairments, among other items. In addition to these one-time charges, there will be ongoing annual incremental non-cash charges to earnings stemming from shortening the expected economic useful life of Clinton and Quad Cities primarily related to accelerated depreciation of plant assets (including any asset retirement costs (ARC)), accelerated amortization of nuclear fuel, and additional asset retirement obligation (ARO) accretion expense associated with the changes in decommissioning timing and cost assumptions. Exelon’s and Exelon Generation’s second quarter 2016 results include an incremental $110 million of pre-tax expense for these items.

As a result of the Clinton and Quad Cities retirement decision, Exelon and Exelon Generation will incur certain employee-related costs, including severance benefit costs. Severance benefits will be provided to impacted union and non-union employees, to the extent that those employees are not redeployed to other locations. In June 2016, Exelon and Exelon Generation recognized severance benefit costs of $46 million related to expected employee severances resulting from the plant retirements within Operating and maintenance expense in their Consolidated Statements of Operations and Comprehensive Income. The final amount of severance cost will ultimately depend on the specific employees severed.

The Three Mile Island (TMI) nuclear plant also did not clear in the May 2016 PJM capacity auction for the 2019-2020 planning year and will not receive capacity revenue for that period. This is the second consecutive year that TMI failed to clear the capacity auction. Although the plant is committed to operate through May 2018, the plant faces continued “economic challenges” and Exelon and Exelon Generation are exploring all options to return it to profitability, said the Form 10-Q.

While a portion of the Byron nuclear plant’s capacity did not clear the PJM 2019-2020 planning year capacity auction, the plant is committed to run through May 2020, the company added.

The company’s other nuclear plants in PJM cleared in the auction, except Oyster Creek, which did not participate in the auction given Exelon’s and Exelon Generation’s previous commitment to cease operation of the Oyster Creek nuclear plant by the end of 2019.

In New York, the Ginna and Nine Mile Point nuclear plants continue to face significant economic challenges and risk of retirement before the end of each unit’s respective operating license period (2029 for Ginna and Nine Mile Point Unit 1, and 2046 for Nine Mile Point Unit 2). On Aug. 1 of this year, the New York Public Service Commission (NYPSC) issued an order adopting the Clean Energy Standard (CES), which would provide payments to Ginna and Nine Mile Point for the environmental attributes of their production.

Subject to Ginna and Nine Mile Point entering into a satisfactory contract with the New York State Energy Research & Development Agency (NYSERDA), as required under the CES, and subject to any potential administrative or legal challenges, the CES will allow Ginna and Nine Mile Point to continue to operate at least through the life of the program (March 31, 2029). An approved grid reliability support deal with the New York ISO currently requires Ginna to continue operating to March 2017. If Ginna does not plan to retire shortly after the expiration of the grid deal, Ginna is required to file a notice to that effect with the NYPSC no later than Sept. 30, 2016.

NRC regulations require that licensees of nuclear facilities demonstrate reasonable assurance that sufficient funds will be available in certain minimum amounts to decommission the facility. These NRC minimum funding levels are based upon the assumption that decommissioning activities will commence after the end of the current licensed life of each unit. If a unit fails the NRC minimum funding test, then the plant’s owners or parent companies would be required to take steps, such as providing financial guarantees through letters of credit or parent company guarantees or making additional cash contributions to the Nuclear Decommissioning Trust (NDT) fund to ensure sufficient funds are available.

It is currently estimated that Clinton will no longer meet the NRC minimum funding requirements due to the earlier commencement of decommissioning activities and a shorter time period over which the NDT fund investments could appreciate in value, Exelon noted. Quad Cities is also at risk for such a shortfall.

A shortfall could require Exelon to post parental guarantees for Exelon Generation’s share of the obligations. However, the amount of any required guarantees will ultimately depend on the decommissioning approach adopted at each site, the associated level of costs, and the decommissioning trust fund investment performance going forward.

Within two years of shutting down a plant, Exelon Generation must submit a post-shutdown decommissioning activities report (PSDAR) to the NRC that includes the planned option for decommissioning the site. Considering the three alternative decommissioning approaches available for each site, the most costly estimates currently anticipated could require parental guarantees of up to $385 million for Clinton in order to access its NDT fund for radiological decommissioning costs. Although Quad Cities is better positioned than Clinton to avoid the need for a parental guarantee, a guarantee of up to $135 million, at Exelon Generation’s ownership percentage, may be required in order for the site to access its NDT fund for radiological decommissioning costs.

As of June 30, the additional plants at the highest risk of early retirement – Ginna, Nine Mile Point and TMI – pass the NRC minimum funding test based on their current license lives. However, in the event of an early retirement the most costly estimates currently anticipated could require parental guarantees of up to $130 million, $205 million, and $80 million for Ginna, Nine Mile Point and TMI, respectively, at Exelon Generation’s ownership percentages.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.