The San Onofre nuclear power plant has grown into a half-billion dollar problem for Edison International since it was shut down last year. That led the company’s chief executive last week to say for the first time that permanent closure is a real possibility.
But the statement by the Rosemead company and its Southern California Edison utility, which owns 78 percent of the beachfront reactor, didn’t seem to shake investor confidence. The share price remained stable after the announcement.
It does increase uncertainty over the company’s future revenue, however.
“From a company and shareholder perspective, the true answer to the impact of retirement of the San Onofre Nuclear Generating Station is a big ‘to be determined,’” said Andrew Smith, senior equity analyst with Drexel Hamilton LLC of New York.
And that uncertainty could linger. That’s because lengthy battles are likely to follow over who will pay for the mounting tab: shareholders, ratepayers, insurers or Mitsubishi Heavy Industries Ltd., the Tokyo company that manufactured the steam generators that malfunctioned.
During the first 15 months the plant was shut down, Edison spent $109 million to staff and repair the plant and $444 million to buy replacement power. The cost of replacement power is expected to increase significantly, especially if a hot summer forces a jump in demand.
Edison is seeking to recover as much of these costs as possible from Mitsubishi and has also filed a claim for $183 million under its nuclear insurance program, Theodore Craver, chief executive of Edison International, said last week in a conference call with analysts.
While shutting down the plant would end the staffing and repair costs, replacement power costs would continue. And there would be a further battle over who would absorb the lost revenue from a permanent shutdown.
That uncertainty has cost shareholders, Smith of Drexel Hamilton said. The entire utility sector – including Edison – has soared to multiyear share price highs in recent months as investors have sought refuge from low interest rates in the treasury markets. But Edison’s stock hasn’t increased as much as other utilities: According to a Bloomberg analysis, Edison’s stock has increased 12 percent during the past six months, versus a sector average of 16 percent. Some utilities have seen their share prices go up as much as 24 percent over the past six months.
“Investors have looked at all this uncertainty and factored that in by discounting Edison’s share price,” Smith said.
And more share price discounting could come. Smith said that his analysis showed the San Onofre plant, when fully operating, represents roughly 22 cents a share in annual earnings to Edison shareholders. If the plant were mothballed, he said shareholders would likely bear some of the 22 cent loss in earnings.
Edison’s first quarter net income was equal to 77 cents a share, up 42 percent from a year ago and ahead of Thompson Reuters consensus estimates of 66 cents a share.
Edison stock closed May 1 at $52.45 a share, down slightly from its 52-week high on April 29 of $53.98.
But the strong earnings report was overshadowed by the news about San Onofre. Both units at the plant, located in northern San Diego County, have been shut since January 2012 after discovery of a degradation of tubes in the units’ new Mitsubishi steam generators that led to a small leak.
When operating at full capacity, San Onofre generates 2,150 megawatts of power, enough to supply about 1.4 million single-family homes. The plant provides about 9 percent of the region’s total power.
SCE has a 78 percent ownership stake in San Onofre; San Diego Gas & Electric, a unit of San Diego-based Sempra Energy, owns 20 percent; and the city of Riverside 2 percent.
Edison had initially said it hoped to restart Unit 2 – the less seriously damaged reactor – by June 1, running the plant at 70 percent of capacity for a five-month test period. But last week, Craver conceded that deadline was not likely to be met.
Craver told analysts in the company’s earnings conference call that if regulators can’t give SCE clear direction on when at least one of the two damaged reactors can be restarted, then Edison could move to mothball the plant.
“Without a restart of Unit 2, a decision to retire one or both units would likely be made before year end 2013,” Craver said.
The federal Nuclear Regulatory Commission is still considering Edison’s application to restart the reactor, using outside experts to gauge safety. Sen. Barbara Boxer, D-Calif., has been critical of Edison and Mitsubishi and has urged the commission to use more stringent standards in relicensing the facility. The NRC also faces mounting pressure from communities near the plant and from anti-nuclear activists who insist San Onofre should never be allowed to restart.
Craver referred to this opposition in his remarks to analysts last week.
“The NRC’s consideration of our restart plan continues to attract a level of controversy and opposition. … The public has the right to file motions to stay issuance of license amendments before the NRC and the federal courts. Even if the license amendment is approved by (NRC) staff, the approval of our … restart plan for Unit 2 could still take time.”
Meanwhile, the costs to Edison continue to mount. The California Public Utilities Commission will consider later this year whether ratepayers or shareholders should bear those costs.
Several analysts asked during the conference call if Edison was doing all it could to minimize staffing and repair costs at the plant during the shutdown.
“There is a limit to how much you can pare down costs if you’re waiting for a decision on restart,” Craver said. “You can’t lay off workers and expect to bring them back on quickly in order to get the unit restarted.”
That was the main reason, Craver said, why the company decided to signal that it would decide on its own to retire San Onofre by the end of this year if it does not receive clear direction from the NRC.
One analyst said the move was a good way to minimize the utility’s “stranded cost” – the term for unrecoverable investments.
“We believe management’s decision to potentially shut Units 2 and/or 3 effectively puts a cap on the amount that is subject to stranded cost recovery risk,” said Michael Worms, analyst with BMO Capital Markets Corp. in New York.
Nonetheless, Worms downgraded Edison to “market perform” from “outperform” last week. He cited the uncertainty over the potential restart of San Onofre and mounting opposition to the restart.
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