Morgan Stanley & Co. LLC asserted in a March 30 report that Southern Co. and SCANA Corp. choosing to abandon their nuclear construction projects represents the most likely outcome for the utilities of lead contractor Westinghouse Electric Co. LLC filing for bankruptcy.
Because of Westinghouse's bankruptcy, in Morgan Stanley's view, the Toshiba Corp. subsidiary will not be able to fulfill its engineering, procurement and construction (EPC) obligations, and no other firm will likely step in and honor those fixed-price EPC contracts. Unless a firm managing the construction process sets up strong protections, neither state regulators nor Southern and SCANA will want to run the risk of further cost overruns, Morgan Stanley analyst Stephen Byrd wrote.
Westinghouse is the main contractor for the development of two new nuclear reactors at the Alvin W. Vogtle Nuclear Plant in Georgia and two new reactors at the V.C. Summer plant in South Carolina. Both sites use Westinghouse's AP1000 design. Georgia Power Co., the Southern subsidiary, is leading development and owns the largest share of the new Vogtle units, along with co-owners Oglethorpe Power Corp., Municipal Electric Authority of Georgia and Dalton Utilities. SCANA and Santee Cooper, legally known as the South Carolina Public Service Authority, are co-owners of the Summer facility.
Southern and SCANA have both reached agreements with Westinghouse to continue building new reactors during an initial assessment period. The companies have also filed interim agreements with Westinghouse to conduct full-scale schedule and cost-to-complete assessments during a transition and evaluation period.
Southern and SCANA opting to abandon Vogtle and Summer was just one of several outcomes Morgan Stanley examined, and concluded that "abandonment is becoming the most likely scenario." Byrd described two abandonment scenarios: rate base recovery and securitization. The former, while more positive, is the less likely of the two, in which Southern and SCANA would be allowed to recover nuclear investments to date through a traditional utility rate base. To accomplish this, regulators would adjust their return-on-equity ratio levels, along with the timetable for realizing returns on assets. Rate base recovery would lead to a 15% decline in Morgan Stanley's 2019 EPS estimate for SCANA and an approximately 2% decline for its 2019 EPS estimate for Southern.
More likely would be Southern and SCANA securitizing the nuclear investments, which would be a more negative outcome than rate base recovery in the eyes of Morgan Stanley. The companies would get upfront cash proceeds for all investments made to date, but no future earnings on those assets. Stock could then be bought back, or investments could be made into new rate base growth initiatives. In this scenario, SCANA would lose 52% of Morgan Stanley's 2019 EPS estimate, and Southern would lose 8%. But once share buybacks and growth investments occur, SCANA will have a net 27% decline in EPS, along with a net 3%-4% EPS decline for Southern.
Based on the bankruptcy filing, Morgan Stanley noted Westinghouse's significant non-nuclear earnings before interest, tax, depreciation and amortization. It would be natural for Southern and SCANA then to believe Westinghouse's value could support cost overruns at Summer and Vogtle, Byrd wrote, which raises questions as to why the Toshiba subsidiary filed for bankruptcy in the first place.
But Wells Fargo Securities LLC concluded in a March 30 note that Westinghouse's bankruptcy "does not materially alter our thoughts on [SCANA]'s and [Southern]'s new nuclear projects." The bank cited Southern and SCANA's "clear preference" to finish the plants, and expects them to develop a resolution that would allow Westinghouse to exit its EPC role, and for Toshiba to cap its financial exposure. Fluor Corp., the plants' subcontractor, will take on an increased role to finish both projects, Wells Fargo projected.
Even if abandonment becomes warranted after a thorough analysis, Wells Fargo wrote, recovery safeguards in Georgia and South Carolina will act as a backstop, and the states' regulatory environments are considered "constructive" to help move things along.
UBS Global Research seemed to concur with Wells Fargo's outlook, with analysts writing in a March 30 note that, "Bottom line, construction work at both Vogtle and Summer is continuing on schedule for now."
And CreditSights, writing in a March 30 note, said its concerns about Summer's abandonment were quieted by SCANA's public tone and South Carolina Gov. Henry McMaster's public comments in support of the project.