But judging by what little of it stands,
Not even the ingenuities of debt
Could save it from its losses being met.
-- Robert Frost
This week US utility Dominion Energy offered to acquire South Carolina utility Scana in a deal valued at $14.6 billion. Scana has been weighed down by the financial burden of a cancelled nuclear plant construction project, and the merger hinges on regulatory approval of Dominion’s proposal for resolving these losses.
Bearing the Risks of Nuclear Programs
The primary difficulty in developing large nuclear power projects is that their high capital costs ($5-10 Billion or more) make risk management the key consideration. In simpler times when new generating plant costs were lower and schedules more predictable, regulators would allow utilities to book plant capital costs to a “work in progress” account that was settled when the new plant began operating.
US utility regulators were unwilling to expose utility customers to the large financial risks of a nuclear renaissance, so for Scana’s V.C. Summer project and Southern Company’s Vogtle Unit 3-4 these risks were passed up the supply chain to the EPC firm (CBI Stone and Webster, formerly a unit of Shaw Group) and the nuclear supplier (Westinghouse, a unit of Toshiba). The utilities negotiated “fixed price” contracts for the new plants which, they believed, protected their shareholders and customers from major cost overruns.
Things haven’t worked out that way. The first public sign of trouble was the 2015 acquisition of CBI Stone and Webster by Westinghouse in which “Westinghouse will assume project operations and assets, including AP1000 [nuclear] plant project contracts in the U.S. and China”. This left a single firm (Westinghouse) bearing all the risks of completing these projects.
Construction continued for a time, but the costs to complete these projects became so great that in early 2017 auditors refused to sign off on Westinghouse and Toshiba’s annual accounts, throwing Toshiba, the parent company, into financial turmoil. When forced to recognize the huge financial liabilities related to completion of these projects, Westinghouse declared bankruptcy in March 2017. Toshiba ended up selling its semiconductor memory business later in in the year to restore its balance sheet.
Scana was confronted with a bankrupt supplier and decided to stop their nuclear construction program, after spending billions to develop it. Over the next year Scana shares fell 40% relative to the S&P 500 Utilities Index. Dominion’s offer is a way to settle accounts and meet these losses, but completion of the deal will depend on whether the regulators will accept it or decline in hopes of a better offer.
Expect more of this type of deal. Scana co-owned the V.C. Summer project with state-owned utility Santee Cooper. Santee Cooper’s losses are still to be met at some future date.