Monday, February 22, 2010

Exelon still thinking about Texas

But that’s about all

exelon logoThe citizens of Victoria, Texas, could be forgiven if they do not take kindly to questions about Exelon’s (NYSE:EXC) intentions to build two nuclear reactors there. After a whirlwind courtship, the nation’s largest utility backed out of the relationship and said it just wanted to be friends.

Square Dance Part of the reason is a bad case of parental disapproval. For the Victoria project, Exelon had hitched up with the 1,530 MW GE-Htiachi (GEH) ESBWR reactor design.

Unhappily for Exelon, two chaperons said this was the wrong girl to bring to the dance.

The NRC said GEH had some more explaining to do about her family ties and the Department of Energy said the girl might just be too young to be dating.

Translation – NRC wasn’t satisfied with the responses it was getting to requests for additional information as part of the reactor certification process. The Department of Energy did not consider the time-to-market for the ESBWR to be a near-term or even a sure thing, and rated it low relative to Exelon’s application for a loan guarantee. Exelon then switched to the GEH ABWR, but that move did not improve its prospects.

The fact that the government has started this month to hand out federal loan guarantees for new nuclear power plants casts new light on the question of where Exelon stands in Texas. Exelon will submit an Early Site Permit (ESP)for the Victoria site sometime later this year, perhaps as early as this Spring. However, the ESP does not commit Exelon to choose a reactor design or apply for a license to build and operate one.

unhappy Craig Nesbitt, an Exelon spokesman, told the Victoria, Tex. “Advocate” Feb 19 that poor economic conditions make for poor prospects for building a reactor in the region. He said, “Right now the market is down. It doesn’t show any signs of coming back anytime soon.”

And despite the President’s request to Congress for another $36 billion in loan guarantees, Exelon isn’t sure it will affect its decision to build or not in Texas. Nesbit told the newspaper, “…that’s not entirely answerable right now.”

Exelon not happy about lack of action on Cap & Trade

JohnRoweJohn Rowe, Exelon CEO, (right) is a staunch advocate of trading systems on carbon emissions. As the head of the nation’s largest nuclear utility, with 17 reactors, he knows that once a price is put on carbon, people will beat a path to his company’s door. That’s because nuclear power plants do not emit CO2 nor other greenhouse gases.

Rowe told Bloomberg Wire Service Feb 17 without carbon taxes and a trading system there is not going to be a nuclear renaissance in the U.S. and there certainly is not going to be anybody from his company building reactors in Texas.

“We may see more and faster development of new plants now. We probably won’t see a full-blown nuclear renaissance in the next five to 10 years.”

So what is Exelon doing about it? The company’s growth strategy for nuclear energy is a $4.4 billion series of up-rates of power and plant infrastructure over the next few years.

Taken together, the individual actions will add a fleet-wide increase of 1,300-1,500 MW or the equivalent of a new reactor. In short, Exelon may get the electricity generation capacity it planned to build in Texas by improving the performance of the power stations it already owns.

Do investors get it?

investor Put another way, Exelon can get the equivalent of just around $3,000/Kw for the power increase equal to a new reactor. That’s a very competitive price. You would think investors would be grateful, but apparently they’re not.

Exelon’s stock has been falling since Dec 11 from a close of $51.61with market close on Feb 22 of $44.78, The 52-week range is $38.41-$54.47.

Without cap-and-trade legislation in place, Rowe won’t have the capital or the profits to meet earnings objectives.

According to ChicagoBusiness for Feb 22, a leading stock analyst has downgraded Exelon as an investment from “outperform” to “market perform.”

The newspaper reports that Hugh Wynne, analyst at Sanford C. Bernstein & Co. LLC. Mr. Wynne, "a longtime bull on Exelon based on its low-carbon power-generation fleet," on Feb. 5 downgraded his rating on Exelon's stock"

Even if Exelon wanted to do more, the question is where will it get the money. Wynne thinks cash flow will fall to $400 million in 2012 from $2.3 billion this year. That’s a long way down.

And there is competition in Texas

competition-4 Getting back to Victoria, Exelon was a late entry into the Texas nuclear renaissance.

NRG was the first mover in September 2007 with a plan for two new 1,350 MW ABWR reactors at the South Texas Project. It’s on the short list for a federal loan guarantee.

Luminant has plans for two gigantic 1,750 MW Mitsubishi APWR reactors at its Comanche Peak site. It is thought to be in fifth place as a “runner up” for a loan guarantee if one of the four short-listed firms fails to make the final cut.

This leaves Exelon more-or-less out in the cold. With only one more year in his term as CEO, Rowe isn’t likely to chase after another hostile takeover of a nuclear reactor company.

He fell short in an effort with an all stock deal to take over NRG. Investors rejected the offer last July, but Exelon VP William Von Horne Jr. told Chicagousiness that increasing the price offered for NRG's stock would have meant “over paying for it.” Last November, Rowe said he was through trying to make deals and would concentrate on profits for investors.

What could change?

Some things could get better. The one factor that really matters is the U.S. economy, but other things have to improve as well and they are.

First, GEH finally submitted the information NRC wanted and was able to declare a victory of sorts. The ESBWR design is still referenced by Detroit Edison for the FERMI III project, but with the collapse of the auto industry in Michigan, the timeframe for a new reactor could be far in the future.

water rightsSecond, Exelon might choose to return to the ESBWR for Victoria, Texas, in the next two decades, which is the approximate shelf life of an Early Site Permit.

In the short-term, it is holding on to water rights from the Guadalupe River for the plant. There may be life in the project, but the question of “when” remains more significant than “what.”

Mr. Nesbit back at Exelon’s corporate HQ in Chicago gets the last word here. He says the decision whether to build a reactor in Texas depends on the timing of the nation’s economic recovery. Until we know what that is, the clock will just keep ticking.

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