In 2018, approximately 8,000 miles away from U.S. shores, China's National Nuclear Corp. (CNNC) announced that Sanmen Unit 1 reached 100% power, having achieved first criticality, or a sustained chain reaction, in June. Sanmen Unit 1 is scheduled to enter commercial operation by the end of 2018. In the U.S, Southern Co. subsidiary Georgia Power Co. (GPC) recently voted with its partners to continue building the Vogtle Units 3 and 4, after announced cost overruns. Both the Vogtle and Sanmen nuclear units employ the same Westinghouse AP1000 nuclear technology. As independent arbiters of credit risk, S&P Global Ratings continues to observe progress on the new-build of nuclear power generation. In the U.S., despite the high-profile setbacks, new nuclear power generation has shown signs of life. First came Watts Bar Unit 2, the Tennessee Valley Authority (TVA) owned nuclear power plant, which achieved commercial operation in 2016. The next nuclear power plant in waiting is the Alvin Vogtle Nuclear Units 3 and 4 in Georgia. Given the experience in China, and with the construction of Vogtle Units 3 and 4 about 55% complete, the potential that Vogtle could also attain commercial operation collectively suggests the possibility of some new momentum for nuclear in the U.S. But can such a revival turn into a trend, and can credit quality for the utilities be preserved at the same time? Possibly, but for U.S. regulated electric utilities, the answer depends on several factors, including financial flexibility, project execution, and strong regulatory support.
The Current State Of U.S Nuclear Power Generation
There are currently 98 nuclear generating power stations across the U.S. Of this total, slightly more than half (53) are utility plants. Meaning, they are either part of a regulated, investor-owned utility's rate base or are operated by a public utility.
U.S. nuclear generation peaked around 1990, and gradually declined, leveling off beginning in 1998 before taking another dip in 2013 (see chart 1). Since then some nuclear plant operators have announced plans to close, largely owing to their exposure to market prices, making them uneconomic. These announced closures are mostly confined to merchant-owned nuclear plants (see chart 2). Diablo Canyon is unique in the sense that its expected closure is indicative of a transformational trend of investor-owned utilities in California becoming more transmission and distribution (T&D)-like, and less vertically integrated. In our view, regulated nuclear plants are unlikely to close prematurely considering the long-lived nature of the assets, and because they are less vulnerable to market prices. In the U.S., nuclear power generation represents about 20% of the overall generation mix, close to where it was about 10 years ago (see charts 3 and 4)
The Fallout For SCANA Persists…
It's been over a year since SCANA Corp. subsidiary South Carolina Electric & Gas Co. (SCE&G) announced that the construction of the nuclear plants V.C. Summer Units 2 and 3 would be stopped, after its partner, the South Carolina Public Service Authority (Santee Cooper) decided to withdraw from the nuclear project. The fallout that ensued resulted in adverse regulatory developments, which weakened the company's business risk profile, including concerns that the Base Load Review Act (BLRA) would be repealed or amended. On Sept. 29, 2017, we downgraded SCANA and its subsidiaries one notch to 'BBB', and placed these entities on CreditWatch with negative implications. Continuing the ongoing fallout, and after overriding Gov. Henry McMaster's veto, the South Carolina General Assembly enacted House Bill 4375 in the summer of 2018, which required the utility to lower rates by 15% or about $31 million per month related to the abandoned nuclear construction project. The rate reduction was retroactive to April 2018. SCE&G subsequently filed a lawsuit in the U.S. District Court in South Carolina in Columbia (Court), challenging the constitutionality of the new law, and requesting that the Court issue an injunction prohibiting the South Carolina Public Service Commission (SCPSC) from implementing the new law. However, in August 2018, SCE&G's request for a preliminary injunction to halt an experimental rate reduction was denied. We downgraded SCANA another notch to 'BBB-' and we maintained the ratings on CreditWatch with negative implications as a result pending the conclusion of the Summer abandonment proceeding.
…While Southern Co. Forges Ahead
Southern Co. subsidiary Georgia Power Co. recently voted with its partners to continue building the Vogtle nuclear Units 3 and 4 despite Georgia Power's earlier announcement that its share for the total nuclear construction estimate now exceeds $2 billion. Georgia Power is a majority owner (45.7%) of the Vogtle nuclear plants, along with Oglethorpe Power Corp. (30%), Municipal Electric Authority of Georgia (22.7%), and The City of Dalton, Georgia (1.6%). The decision to continue construction included key amendments to the existing agreements among the co-owners that we viewed as effectively mitigating key risks that otherwise could have derailed the plant's progress. We affirmed our 'A-' ratings on Southern Co. and its subsidiaries and removed the ratings from CreditWatch with negative implications following this development. The outlook on Southern Co. and its subsidiaries (except Gulf Power Co.) is negative. Our affirmation in part reflects broad-based political and regulatory support for the nuclear construction project to continue, including from the Department of Energy (DOE), which recently signaled that an additional $3.7 billion in federal loan guarantees will be made available for Vogtle Units 3 and 4 if the project moves forward.
Key Credit Risks Remain For Both SCANA And Southern Co.
For both SCANA and Southern Co., key credit risks remain, although how soon they will need to be faced varies. For SCANA, our credit concerns stem from ongoing uncertainty regarding cost recovery of the abandoned V.C. Summer nuclear construction project, which could result in lower ratings if credit metrics weaken further, particularly if the temporary rate cuts become permanent or if other adverse regulatory developments occur. In contrast, our ratings on Southern Co. take into consideration longer-term risks. In particular, the company's cost estimate assumptions, a potential change to the project's scope, missed productivity targets, and the potential that attempts to attract and retain skilled workers may fall short could collectively result in additional material cost overruns (see chart 5).
The potential for additional cost overruns heightens the risk of an eventual disallowance when the projects get placed into service since Georgia Power continues to retain the burden of proof on prudency for all capital costs above $5.68 billion.
Equity Issuance Has Supported Credit Quality In The Past
Equity issuance has supported credit quality in recent years. In Southern's case, the company has demonstrated its ability to issue equity over the years. With the exception of 2012, and 2015, the company's net equity issuance averaged approximately $900 million from 2007 through 2017 (chart 6), peaking at close to $3.8 billion in 2016. In addition, recent transactions, such as the announced sale of Gulf Power Co. to NextEra Energy Inc. for about $6.5 billion, and the $1.7 billion sale of Elizabethtown Gas Co. and Elkton Gas Co. to South Jersey Industries, suggest that Southern may also look to sell assets to preserve credit quality going forward.
In contrast, SCANA's net equity issuance for the past 10 years averaged at close to $80 million annually, peaking in 2013 at approximately $300 million (chart 7). What additional measures SCANA may take to preserve its credit quality as it navigates the challenging regulatory landscape in South Carolina remains to be seen. SCANA is also currently under a pending merger agreement with Dominion Energy Resources Inc.
For Some Nuclear Plant Operators, Zero Emission Credits Are Favorable For Credit Quality
In May 2018, New Jersey Gov. Phil Murphy signed legislation that established a Zero Emissions Credit (ZEC) program. This program provides compensation to nuclear plants that meet certain requirements, including demonstrating that they do not emit greenhouse gases, and that their revenues are insufficient to cover their costs and risk. Similar programs are already in effect in Illinois and New York, where legal challenges to the ZEC programs where recently dismissed by Federal Courts of Appeal in both states. We view such programs as favorable for credit quality because of the greater cash flow stability they provide. For U.S. regulated utilities, the biggest beneficiaries of the ZEC programs thus far are Public Service Enterprise Group Inc. and Exelon Corp., utility holding companies that own both pure-play regulated utilities and merchant power plants. While these programs may not usher in a renaissance for nuclear power, they do underscore a public policy commitment to lowering carbon emissions from power generation, and nuclear power is contributing to that objective.
In The End, Financial Flexibility, Project Execution, And Strong Regulatory Support Are Essential
Can a U.S. nuclear power continue to gain momentum without jeopardizing credit quality for the utilities? For the first part to this question, we posit yes, given TVA's experience, nuclear power developments in China, and recent public policy support for existing plants. The second part to this question is trickier, and may take some time to fully assess. For U.S regulated electric utilities, maintaining credit quality may ultimately depend on several key factors, including financial flexibility, project execution, and strong regulatory support. With the abandonment of the V.C. Summer nuclear power project, the focus now shifts to Vogtle Units 3 and 4, expected to come on-line in November 2021, and 2022, respectively. Successful execution on these units may start to diminish the memory of the myriad of challenges faced by recent plant developers.
Related Criteria And Research
- Southern Co. And Subsidiaries Ratings Affirmed, Taken Off Watch Negative Following Vogtle Decision; Outlook Negative, Sept. 28, 2018
- Southern Co. And Subsidiaries Ratings Placed On CreditWatch Negative, Aug. 10, 2018
- SCANA Corp. And Subsidiaries Downgraded To ‘BBB-’ After Court Rejects Company’s Request; CreditWatch Negative Maintained, Aug. 9, 2018
- SCANA Corp. And Subsidiaries Downgraded To ‘BBB’ On Adverse Regulatory Developments And Placed On Watch Negative, Sept. 29, 2017
- Nuclear Power And U.S. Utilities--A Half-Life Of 17 Years? Sept. 22, 2017
- SCANA Corp. And Subsidiaries Outlook To Developing On Plan To Abandon Construction Of Nuclear Plants; Ratings Affirmed, Aug. 3, 2017
This report does not constitute a rating action.
|Primary Credit Analyst:||Obioma Ugboaja, New York + 1 (212) 438 7406;|
|Research Contributor:||Andrea Dsouza, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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