Photographer: Pallava Bagla/Corbis via Getty Images

Westinghouse Collapse Sparks a Nuclear Bond Buying Opportunity

  • Market punishes Santee Cooper, Scana, fearing cost overruns
  • But some investors -- and one CEO -- say fears are overblown

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.

In March, bond rater Moody’s Investors Service changed its outlook on Santee Cooper to negative. Though its debt still earns an investment grade A1 rating, analyst Dan Aschenbach said risks will continue to weigh on the agency’s borrowing costs.

“Today it’s under a cloud,” Aschenbach said.

Scana, Santee Cooper’s partner in the V.C. Summer nuclear project in Jenkinsville, South Carolina, has also suffered from diminished expectations. The project’s cost has ballooned to $14 billion after delays and overruns. Westinghouse is building the reactors for the utilities but wants to break the contract. The companies are reviewing the work and may end up with a higher estimate this month.

Scana Slump

Scana’s shares posted a 2 percent total return over the last year, compared with almost 12 percent for the Dow Jones Utility Average. Atlanta-based Southern, which is building Georgia reactors, was up about 6 percent. Of the 11 analysts following Scana, four recommend buying shares. Only two out of 22 consider Southern worth buying.

Jay Rhame, a portfolio manager at W.H. Reaves & Co. who owns 2.36 million shares of Cayce, South Carolina-based Scana, doesn’t understand the fuss.

“Scana’s relationship with their state commission is great,” Rhame said. “South Carolina really values energy diversity and so do the manufacturers that they’re able to attract like Boeing and BMW. I’m taking the company at their word that the cost increases won’t be that bad.”

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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