Westinghouse Collapse Sparks a Nuclear Bond Buying Opportunity

Southern utilities are leaving investors in a dark mood.

Shares of Scana Corp. and Southern Co. have lagged their rivals, as have the bonds of public agency Santee Cooper. The reason: fear of their exposure to billions of nuclear power plant cost overruns in South Carolina and Georgia after reactor builder Westinghouse Electric Co. filed for bankruptcy protection in March.

But some analysts say these concerns are overblown.

One piece of evidence: a surprisingly relaxed Lonnie Carter. On a recent afternoon in South Carolina, the Santee Cooper chief executive officer waved goodbye to stragglers outside a board meeting at the company’s headquarters and sent a clear message.

“It’ll all get worked out,” he said. “We got the fixed-price contract, so I didn’t have any specific worry about a Westinghouse bankruptcy.”

“Fixed price” means that Santee Cooper isn’t responsible for paying for those cost overruns. Westinghouse, working through bankruptcy court, is. For now, its Tokyo-based parent Toshiba Corp. is on the hook, up to a point. If the project exceeds the limits of Toshiba’s contractual guarantee, utility regulators, especially in the business-friendly South, have a long history of sticking ordinary consumers — not power companies — with those bills.

This might be news to many investors who have punished the bonds of Santee Cooper by demanding higher yields. Its bond that matures in 2054 — but can be called in seven years — recently yielded 3.65 percent, or 2.2 percentage points more than similar issuers. The biggest holders of Santee Cooper’s debt include Nuveen Investments Inc. and Blackrock Inc. Both declined to comment.

Of course, good news for investors is bad news for ordinary customers. If the companies don’t foot the bill, someone has to. So state oversight officials would need to approve rate increases. Consumers in both states are already paying a surcharge for the incomplete reactors, and regulators are showing signs of frustration.

On June 6, Georgia Public Service Commissioner Lauren “Bubba” McDonald proposed withholding those extra payments until a nuclear project that Westinghouse is building for Southern and other utilities starts producing power. Chairman Stan Wise shot down the idea because of a 2009 law that lets utilities collect costs during construction. Southern spokesman Jacob Hawkins said it would “determine the best path forward for customers.” Scana didn’t respond to messages.

“Utilities are trying to railroad these projects forward so they can get as much return on them as they can,” said Sara Barczak, a program director at environmental group Southern Alliance for Clean Energy. “There are a lot of billion dollar figures with question marks next to them. They just get rubber-stamped.”

Unlucky Customers

Whatever happens to the nuclear plants, the two million customers of Santee Cooper, officially called the South Carolina Public Service Authority, will be paying higher electricity prices for decades. They live in the sleepy farming community surrounding the Santee and Cooper rivers that inspired the agency’s folksy name. The utility itself has its headquarters in Moncks Corner, pop. 9,000.

After his board meeting, Carter, the silver-haired 58-year-old CEO, pointed over the tree line to two distant towers, remnants of the state’s first coal plant that are being removed by a “stack muncher.” It felled two more towers of another coal plant last year. The smokestacks are coming down in preparation for a low-carbon future.

“We’re going to need that nuclear power,” Carter said.

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