Tornadoes Inflate Nebraska Nuke Plant’s Bond Risk: Muni CreditJennifer Oldham and Michelle Kaske
The risk of floods and tornadoes is preventing investors in $1.8 billion of bonds of Nebraska’s biggest electricity provider from participating in the best year since 2008 for municipal debt of U.S. power companies.
Borrowings of Omaha Public Power District, the nation’s 12th-largest public-power utility, are at risk of a rating cut by Moody’s Investors Service amid delays in reopening its Fort Calhoun Station nuclear plant. The facility has been shut since 2011 in part to safeguard against Missouri River flooding and the threat of Midwest twisters.
More than two years after floods crippled Japan’s Fukushima Dai-Ichi nuclear plant, investors in the municipal market have to factor borrowers’ preparedness for natural disasters into their risk analysis. The Nebraska shutdown shows the cost to issuers when they fall short. The extra yield buyers demand on some Omaha bonds has risen 20 percent this year, data compiled by Bloomberg show. Any signs the shutdown will be prolonged may add to the penalty, said Paul Mansour at Hartford, Connecticut-based Conning, which holds about $10 billion of munis.
“If there’s any indication that this is not going to come online this year, or there’s other issues that arise, that would give us pause,” said Mansour, a managing director.
Federal inspectors found this year that the 40-year-old Fort Calhoun site needed upgrades to ensure it could ride out a tornado. The findings were on top of 450 items the U.S. Nuclear Regulatory Commission has discovered since 2011. The plant was closed for refueling when the Missouri overflowed its banks in June 2011, flooding portions of the facility, which then experienced an electrical fire.
“Every plant in the U.S. has to be able to withstand the most severe historically recorded natural phenomena in the area,” Lara Uselding, a spokeswoman for the Rockville, Maryland-based NRC, said in an interview.
Moody’s in May placed the district’s Aa1 senior and Aa2 subordinate electric-system revenue-bond ratings under review for downgrade. The senior debt is graded one step below the top. The company cited repeated delays in restarting the plant following the increased NRC scrutiny. The restart date has been delayed at least three times in the past year.
“Additional requirements for tornado safety were added due to the numerous tornadoes that have occurred in the Midwest in recent months,” wrote John Medina and Chee Mee Hu, analysts in the public finance group, in a May 29 report. The report came less than two weeks after a tornado devastated a suburb of Oklahoma City about 500 miles (805 kilometers) to the south.
“If this were a much lower-rated utility, it’s not out of line for them to remain off line,” Medina said in an interview. “If you are the cream of the crop, you should have minimal operating issues.”
Any rating cut would be limited to one level, Medina said in the report. Moody’s announcement affected about $1.5 billion of senior and $346 million of subordinate debt.
The extra yield investors demand to buy some district debt rather than benchmark munis has climbed. Senior bonds maturing in February 2039 and callable in 2019 were valued by BVAL analysis on July 15 at a yield spread of 2.42 percentage points, up from 1.97 percentage points at the start of the year.
Debt of U.S. power providers is on pace to beat the broader market for the first time since 2008. The segment has lost 2.9 percent this year, compared with a 3.2 percent decline for all munis, Bank of America Merrill Lynch data show.
Moody’s is also concerned that the provider will suffer relative to its peers because of the plant shutdown.
“When we look at power-supply diversity, they’re going into another summer where they aren’t going to have this low-cost power supply,” Medina said. “It’s pressuring their business profile in relation to” similar credits.
Moody’s decision didn’t come as a surprise, Jeff Hanson, the district’s manager of communications strategy and technology, said via e-mail.
“We understood Moody’s might place the bonds under review for possible downgrade since OPPD was placed on negative watch last September concerning issues surrounding Fort Calhoun Station,” he wrote.
OPPD, which serves 780,455 people, hired a unit of Exelon Corp. in August to operate Fort Calhoun, a 478.6-megawatt plant on the Missouri 19 miles north of Omaha. Chicago-based Exelon is the country’s largest nuclear-power producer.
“Exelon has the resources and experience to help return Fort Calhoun Station to a high-performing plant in a cost-efficient manner and sustain the performance,” Hanson said.
Moody’s cited the condition of Fort Calhoun Station. The NRC placed the facility under special oversight and assigned the highest level of safety significance after the flooding.
Fort Calhoun is one of more than a dozen nuclear power sites placed under the highest level of NRC scrutiny since 1993. Issues at the Nebraska facility date to the original design of the plant, said David Lochbaum, director of the nuclear safety project for the Cambridge, Massachusetts-based Union of Concerned Scientists.
“What’s hard to explain about Fort Calhoun is that in the mid-1990s a lot of plants went through similar problems with legacy design issues and addressed them,” he added. “I’m not seeing in their paperwork, or the NRC’s paperwork, why those problems were missed.”
To help pay for the $143 million in fixes required by the NRC, the district implemented a 6.9 percent retail rate increase on Jan. 1, Hanson wrote.
Some investors still like the district’s debt because the system has raised rates and reduced expenses to mitigate Fort Calhoun’s delayed reopening, said Mansour at Conning. The firm would still consider buying Omaha Public Power bonds, he said.
“There are only a handful of credits in the public-power sector with that rating to begin with,” Mansour said.
The district hasn’t set a date to restart the plant, said Hanson.
“The vast majority of the items on the checklist are either closed, ready for inspection, or being inspected,” he said. “Cost estimates for restart continue to be within budget and manageable.”
There is still work to be done at the facility and inspectors must return and ensure that officials complied with 18 categories of items, with three being signed off on to date, according to Uselding.
“They are not ready -- they have a lot of work to be done,” said the NRC’s Uselding. “They’ve lost credibility in the community.”
In the municipal market this week, Texas’s Grand Parkway Transportation Corp. leads localities offering about $9 billion of long-term debt, the most in three months.
The wave comes as yields on benchmark 10-year munis are the lowest since July 5. At 2.78 percent, the yield compares with 2.53 percent on similar-maturity Treasuries.
The ratio of the interest rates, a measure of relative value, is about 110 percent, compared with a five-year average of 100 percent. As the ratio increases, munis are cheaper relative to federal securities.