$6B Cost Estimate Increase Imperils U.S. Nuclear Projects
The Westinghouse bankruptcy filing over estimated cost increases causes utility owners to reassess projects
Westinghouse Electric Co.’s recent realization of more than $6 billion in additional costs related to completing construction of two U.S. nuclear projects forced the firm to file for Chapter 11 bankruptcy protection on March 29. Meanwhile, the respective utility owners, Southern Co. and SCANA Corp., are facing heightened Wall Street scrutiny as they scramble to confirm independently the new numbers. They will have to justify potential increased costs to state regulators and investors or consider other options, including abandonment.
Westinghouse’s bankruptcy filing in U.S. District Court in New York City lists the biggest creditors as construction manager Fluor, at $193.9 million, and CB&I, at $145 million—a deferred purchase price from Westinghouse’s 2015 acquisition of CB&I’s nuclear construction operations.
Court filings indicate the contractor estimated that it would cost an additional $6.1 billion to complete both projects on schedule, a sum that “could not be sustained by Westinghouse,” the company noted in its bankruptcy documents. The company was operating under fixed-price contracts with both project owners.
Those projects include two 1100-MW nuclear units at Plant Vogtle, near Waynesboro, Ga., where Georgia Power owns 45.7% of the project. Westinghouse and construction manager Fluor Enterprises also are adding two nuclear units at the V.C. Summer Nuclear Station in Jenkinsville, S.C., for SCANA Corp. and South Carolina Electric and Gas.
The surprise sticker shock—coming four years into construction and more than a year after Westinghouse took over from CB&I as lead contractor—is rattling more than just financial statements.
“It’s amazing to me that Westinghouse has been in these straits and has withheld [information] from one of their major customers,” Stan Wise, chairman of the Georgia Public Service Commission (PSC), told ENR shortly after Westinghouse’s filing. “It’s extraordinary to me that we first knew of it when Toshiba starts writing down $6 billion ... and rumors start flying that Westinghouse will bankrupt.”
On a March 29 call with industry analysts, SCE&G COO Steve Byrne said, “Up to date, we’ve had a difficult time getting information out of Westinghouse. Since we got into this bankruptcy situation, they’ve become much more open.”
Obligated by the fixed-price contracts Westinghouse signed with both utilities, the company’s bankruptcy followed its calculation of liabilities from increased construction costs, schedule delays and resulting potential liquidated damages. While those contracts shielded risk from owners, it proved too much to bear for WEC.
Addressing Georgia PSC commissioners on March 30, Kevin Greene, Southern Co. lawyer, noted, “To a certain extent, we really didn’t have a concern as to what the total cost to complete this project was because our obligations were linked to our milestone payments to Westinghouse.”
The fixed-price contracts protected Vogtle’s owners and provided utility customers a buffer against rate increases.
As a result of those fixed-price agreements, “We protected customers,” Greene stated. “From this point forward, that may not be the case.”
Agreements between WEC and the respective project owners will keep construction progressing until April 28. During this time, both utilities are reviewing the contractor’s cost estimates, developed with input from Fluor Enterprises. Prior to the bankruptcy filing, Fluor had submitted liens of $105 million and $60 million against Georgia Power and SCE&G, respectively. The contractor joined the Vogtle and V.C. Summer projects in January 2016.
Westinghouse’s agreement with Georgia Power allows the utility to suspend making milestone payments to Westinghouse as previously required under its engineering-procurement-construction (EPC) agreement and, instead, will make those payments directly to Fluor “as their costs accrue.” However, the project owner will pay WEC for craft-related expenses, says Greene. Further, the Vogtle owners will pay Westinghouse $5.4 million per week “to continue what they’re doing,” including engineering design and support.
In the meantime, Wall Street analysts are calculating the costs to complete.
A Morgan Stanley research update surmises that SCANA’s portion of the V.C. Summer project will cost an additional $5.2 billion, for a total of $12.6 billion. The firm reached that $5.2-billion figure by first assuming the recently announced cost overruns will be split evenly between both Vogtle and V.C. Summer, adding $1.7 billion to the cost for SCANA’s 66.7% portion of the plant.
If future cost overruns continue apace, the analysts expect an additional $2 billion to accrue. Morgan Stanley also estimates another $1.5 billion in additional costs, including loss of production tax credits.
Similarly, Morgan Stanley estimates Southern Co.’s costs for the Vogtle plant will total $8.7 billion.
The analyst speculates that WEC’s announced cost overruns will add $1.4 billion to Southern’s costs for Vogtle. Morgan Stanley further expects an additional $950 million in overruns, along with an additional $940 million in owner’s costs, including financing costs and lost PTCs.
Further, the analysts note that, if the Vogtle project is canceled, it would trigger a requirement for early payment of the federal government’s loan guarantee. In its Feb. 28, 2017, Vogtle Construction Monitoring report, Georgia Power noted that it has received $2.63 billion in federal loan guarantees to date.
Both utilities indicate that they are considering all options. “Our commitment is still to try to finish these plants,” SCANA CEO Kevin Marsh told analysts. “The least-preferred option is abandonment because … if we just cancelled these plants, we’d still have a generation issue.”
Though SCANA has not yet validated WEC’s latest estimate, Marsh added that, “at this time, we expect that the resources available from Westinghouse and Toshiba, including its parental guarantee, are adequate to compensate us for the estimate of additional cost.” Toshiba has said it will guarantee another $585 million in costs.
“If continuing with construction is not determined to be the most prudent path forward,” Marsh continued, “we will look to exercise the abandonment clause of the Base Load Review Act.”
Wise, the Georgia PSC chairman, told ENR, “The options are continue, pause, stop or convert to some other fuel choice. The only [option] that resonates with me is the opportunity to continue. But all of those have to be considered.”
If the Vogtle project is abandoned, Wise says, “an enormous amount of money invested to date … becomes a black hole, and that serves no good purpose.”
Both utilities are expected to report the findings of their ongoing cost reviews to respective state authorities before determining a final decision on the fate of the nuclear projects.