Nuclear Backlash Punishes ‘Boring’ Utilities on Japan Crisis
Investors are seeking protection from a public backlash against nuclear power producers as the threat from earthquake-damaged reactors in Japan stokes calls by U.S. lawmakers to limit plants in this nation.
The average cost to protect against a default by eight of the largest U.S. atomic energy producers, including Exelon Corp. (EXC), Entergy Corp. (ETR) and FirstEnergy Corp. (FE) jumped 15.5 basis points since March 11, the biggest weekly gain since May 2010, according to data compiled by Bloomberg and London-based CMA.
Utility companies, typically considered a haven among credit investors because of their resilience in economic downturns, are being punished as Tokyo Electric Power Co. struggles to cool damaged reactors. Environmental groups want limits on U.S. nuclear plants, and Representative Edward Markey is seeking a moratorium on facilities in seismically active areas. Nuclear-power executives say the nation’s reactors can withstand such disasters.
“There’s going to be a pushback on nuclear power generally, but in reality it’ll probably mean higher regulation and increased levels of capital spending required by the utilities to potentially upgrade safety standards,” said Rizwan Hussain, a credit strategist at Morgan Stanley in New York.
The extra yield investors demand to hold bonds of utility companies has climbed 7 basis points this week, the biggest weekly jump since the first week of May, when spreads increased 18 basis points, according to a Bank of America Merrill Lynch index of U.S. gas and electric utility company debt.
GE Swaps Gain
Credit-default swaps on New Orleans-based Entergy, which also operates the Vermont Yankee plant in Vernon, Vermont, are on pace for the biggest weekly jump since November 2008, two months after the collapse of Lehman Brothers Holdings Inc. They have climbed 46 basis points to 199.4 since March 11, according to CMA.
Such swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Five-year contracts on Exelon, the utility owner with the most nuclear power plants, climbed 11.8 basis points this week to 115 basis points, the biggest weekly increase since the period ended Oct. 29. Chicago-based Exelon said it’s reassessing a $3.65 billion plan to raise output because of the radiation threat in Japan. The company wants to ensure its spending remains prudent after safety reviews by the NRC that are “sure to come,” Chief Executive Officer John Rowe said in an interview this week.
Swaps on Raleigh, North Carolina-based Progress Energy Inc. (PGN) have jumped 9.8 basis points to 46.5 basis points, the biggest weekly increase since May, CMA data show.
Tokyo Electric Power, known as Tepco, said it may finish reconnecting a power line to the No. 1 and No. 2 reactors by tomorrow morning to restart pumps needed to protect fuel rods from overheating. Even with power, the damaged pumps may not work, the company said.
While the three loaded cores had become “relatively stable,” their damaged state and lack of cooling leave the situation “very serious,” Graham Andrew, Director of the United Nations’s International Atomic Energy Agency, said yesterday at a briefing in Vienna.
In the U.S., there were 14 near-misses by U.S. nuclear plant operators last year, according to a report yesterday by the Union of Concerned Scientists that criticized the Nuclear Regulatory Commission’s oversight of the nation’s reactors.
Progress Energy, which plans to merge with Duke Energy Corp. (DUK) to create the largest U.S. utility owner, had four accidents at three reactors, according to the report, written by David Lochbaum, chief of nuclear safety for the watchdog group and a former safety instructor for the NRC.
“We have the highest safety standards for our nuclear plants and our employees, and we work continuously to improve safety,” Mike Hughes, a spokesman for Progress, said in an e- mailed response yesterday. “We are taking definitive steps to address the issues raised.”
At Entergy’s Indian Point power plant 24 miles north of New York City, the NRC has been aware of a leak in the liner of refueling cavity since 1993 and yet allowed the plant to continue operating, putting people living in the area around the plant in Buchanan, New York, at “elevated and undue risk,” Lochbaum wrote.
‘No Safety Issue’
“Leakage has been captured, understood, analyzed and determined to pose no safety issue,” said Jim Steets, a spokesman for Entergy, in a phone interview yesterday. “This is not leakage into the environment that we’re walking away from. We are acting responsibly.”
Backlash from the Japan incident, as the U.S. experienced following the Three Mile Island accident in 1979, “could lead to delays in new construction of nuclear power plants, reduced willingness to extend operating licenses for existing plants and increased costs due to more public scrutiny and security requirements,” Hans Mikkelsen, Bank of America Corp. credit strategist, wrote in a note to clients this week. The concerns have left the market for utility debt as “anything but boring,” he said.
Despite the increase in perceived risk of nuclear-power operators compared with the broader credit market, the crisis may eventually help the companies’ creditworthiness, according to analysts at the capital markets research group of Moody’s Corp.
“Ironically, in some cases a decline in the growth of nuclear power may have a positive impact on some companies’ credit metrics, since the shelving of nuclear plant construction could lower their business risk,” Robert Eckerstrom, a director in the group, wrote in a note yesterday.
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