Exelon and NRG face uncertainties for new nuclear builds in the lone star state
No one outside of NRG (NYSE:NRG) really knows what it will cost to build the 3rd and 4th units at the South Texas Project (STP), but that hasn’t stopped NRG, the New Jersey utility that is building them, from seeking long-term commitments from the investors in the first two units. The cities of Austin and San Antonio are across the breakers trying to figure out, like the future of Bobs’ Big Boy, whether they should stay or go.
At the same time Exelon’s (NYSE:EXC) new nuclear plant project slated for Victoria, TX, is reportedly “at a standstill,” because it has jettisoned its reactor design from GE-Hitachi for the ESBWR and it is running into opposition from water rights advocates.
Finally, Exelon and NRG are still locked in mortal combat, like two bull moose in rutting season, due to an attempted all-stock hostile takeover effort from Exelon which has stalled out with the Chicago-based utility owning 45.6% of NRG. That’s not enough to force a change to the current board at NRG.
Seeking investors in Texas
For NRG to succeed with the financing of its two new GE ABWR reactors, which will generate 2,700 MWe of electricity once operational in 2015 and 2016 respectively, it must convince two of the current investors in STP Units 1 &2 to a repeat act with units 3 & 4. The cities of Austin and San Antonio are thinking it over, but the process is moving ahead more rapidly in San Antonio.
San Antonio’s CPS Energy knows it will need 800 MW of electricity by 2018 and that this base load power cannot come from solar or wind energy despite the fact the utility is seeking a contract for 100 MW of solar power. Currently, the firm gets 35% of its electricity from STP units 1 & 2.
Last week the utility committed $60 million to support plant engineering studies at STP Units 3 & 4. Also, San Antonio Mayor Phil Hardberger finally endorsed the project. However, he cautioned, “we haven’t made a decision to build.” So far CPS has spent $276 million on the project.
Not everyone is happy about the incremental steps the city is taking with STP. Eric Lane of the Consumer Energy Coalition in Texas is one of the a critics of these developments. He said, “What is happening right now is that CPS is hell-bent on going nuclear” He accused CPS of not listening to rate payers.
The situation is more muddled in Austin. Last year the city’s municipal utility director, who once ran for city council on an anti-nuclear ticket, recommended against investing in STP units 3 &4. Since then things have changed and the city is going back to the drawing board, metaphorically speaking, to take another look at the investment decision. The city’s reasoning is focused on the fact that electricity rates from STP will come at a lower price if the city is an investor rather than just a customer.
At the time NRG filed its COL application with the NRC, it estimated the cost of 2,700 MW of new nuclear power at $2,000/Kw or $5.4 billion. The run up of costs for concrete and steel in the past year has changed that estimate, but NRG hasn't said what it will be. The current economic recession has drastically reduced these price pressures. Assuming a cost of $3,500/KW, the two new plants would come in at $9.5 billion.
The issue of what the plants will cost is central to the investment decisions by the two Texas cities. With NRG holding its cards close to its vest, it remains to be seen whether the municipal utilities will stay at the table.
The dance around investment decisions by the two cities does not deter NRG from moving forward. NRG Texas President Kevin Howell told the San Antonio new media that if the cities pull out, there are huge Texas oil companies waiting in the wings to become investors. He believes that NRG will sell the electricity to the two cities, and others, regardless of whether they become investors.
NRG inks construction deal with Toshiba
One thing is for sure, NRG is moving ahead with STP units 3 & 4. Toshiba, which is slated to build the GE ABWR units, reportedly announced it had signed a contract with NRG for the job. Dow Jones/WSJ reports that Toshiba will receive orders worth nearly $9 billion to build two GE ABWR nuclear reactors (2,700 MWE) for NRG at the South Texas Project.
The WSJ noted that, "The orders will make Toshiba the first Japanese company to independently supply equipment to a power station outside Japan. Such a deal may help Japanese heavy machinery makers gain traction in the international market for nuclear power plant equipment."
NRG said at the time it filed its “first-mover” COL application with the NRC that it was exploring export credits from the Japanese government to help finance the STP new build because it was using Toshiba as the construction manager.
Victoria project changing direction?
Exelon, which has just one new reactor project, but two units, in the nation’s nuclear renaissance, has some explaining to do about the stalled effort at Victoria, TX. There the giant utility has bid goodbye to GE-Hitachi’s ESBWR reactor design due to a low ranking in the Department of Energy’s loan guarantee program. Christopher Crane, Exelon COO, told the Victoria Advocate Jan 23 that the project will not advance without the loan guarantees.
Another issue that has come up are protests from area ranchers over water rights. While a nuclear power plant is not a major consumptive user of water, most passes right through, that hasn’t stopped state officials from expressing concern. Texas Lt. Gov David Dewhurt reportedly told Exelon it needed to do a credible study of the water issue before moving too far along with its plans.
Crane told the Advocate without water rights secure and with loan guarantees in doubt, the Victoria project could be pushed back by at least a decade. He added that the utility’s decision on next steps will depend on projections for future demand for electricity in Texas and how deeply the current recession impacts Texas.
Hostile take over stalled out for now
Exelon is locked in an all stock hostile takeover bid for NRG in an effort to gain market share in the nuclear energy field in Texas. So far it isn’t working. The Chicago Tribune reports the two utilities met briefly on Jan 20, but no agreement came out of the discussions. NRG’s board has rejected Exelon’s all stock bid as too low and rebuffed Exelon’s efforts to conduct “due diligence” to verify the value of the firm. David Crane, NRG CEO, said the effort wouldn’t change anything.
NRG is reportedly looking for a “white knight” to offer an all cash deal for the company. Media speculation in the nuclear trade press has focused on Warren Buffett who has twice been thwarted in his efforts to buy into the field. He abandoned an effort to build a greenfield plant in Idaho and was out bid for a controlling interest in Constellation Energy by France’s EDF. He’s got the cash and the ambition to get into the nuclear energy business. All he needs is the right company. Is NRG right for Warren Buffett? The company is loaded with over $7 billion in debt, but it has bright prospects for success. Watch this space to see if Buffett shows up in the Texas nuclear mix either by himself or with other private equity firms.