Deal in Focus

Massachusetts Electric Co. Deals for Nuclear Costs

The Massachusetts Municipal Wholesale Electric Co. took out $170 million of variable-rate debt last week, largely through a fixed-rate power supply revenue bond issue, to refinance costs related to its minority ownership of nuclear plants in Seabrook, N.H., and Waterford, Conn.

“The purpose is to diversify our debt portfolio with a more favorable mix of variable- and fixed-rate debt, which in turn hedges our exposure to the potential of rising interest rates,” chief executive Ronald DeCurzio said.

MMWEC, a Ludlow-based joint-action wholesale electric agency formed by Massachusetts municipal utilities in 1969, has issued more than $4.4 billion of bonds through 2010 to finance and refinance ownership in several plants.

The state legislature in 1976 enabled it to issue tax-exempt revenue bonds to finance electric generating facilities and other projects.

It owns 4.8% of Millstone 3 in Connecticut and 11.6% of the Seabrook Nuclear Station. MMWEC also operates the Stony Brook oil and gas turbine plant in Ludlow.

Moody’s Investors Service assigned an A3 rating to the sale of Series 2011 bonds, issued for five projects. Fitch Ratings assigned an A-plus while Standard & Poor’s gave three of the projects A-plus and rated the others A and A-minus.

All three major rating agencies placed a stable outlook on the credit.

“We had $170 million in variable-rates outstanding,” said David Tuohey, MMWEC’s director of communications and external affairs, who said holders tendered $123.1 million, while the agency Wednesday issued $96 million of fixed-rate bonds.

“We used the proceeds of the bond issue and some other available funds to take out the variable-rate debt,” he said.

The bonds mature from 2013 to 2019. Yields ranged from 1.22% to 3.4%. The transaction involved no swaps, insurance or call dates.

MMWEC had scheduled the offering for last November but withdrew it at the time, according to Tuohey. “The tender at that time was very successful, but the market to issue new bonds was not favorable,” he said.

The plants are projected to operate through 2045.

“There will be many years of debt-free operation. That significantly enhances value,” Tuohey said.

The outlook wasn’t always that upbeat for MMWEC. The company was ensnared in lawsuits in the late 1980s and early 1990s that led to agencies suspending its credit rating.

In September 1988, Vermont’s Supreme Court ruled that six utilities in that state had lacked the authority to enter into contracts to buy power through MMWEC for the Seabrook plant.

The Vermont utilities had shares in Project 6, which amounted to more than half of agency’s involvement in Seabrook.

When the Vermont contracts were voided, MMWEC redistributed shares among Massachusetts Project 6 participants, citing a contract provision. The Bay State utilities then challenged the contracts, citing the long-stalled Seabrook’s problems.

Moody’s suspended MMWEC’s Baa bond rating and Standard & Poor’s placed it on credit watch.

In August 1991, the Massachusetts Supreme Judicial Court upheld the contracts. The U.S. Supreme Court refused to hear the case, ending a battle that lasted nearly three years, and the rating agencies restored MMWEC’s credit rating.

“We’ve had a dramatic turnaround since the old days,” Tuohey said.

Gary Hunt was MMWEC’s turnaround CEO from 1988 to 1991. Hunt negotiated a settlement with Seabrook owners to cap costs and also developed a long-term power supply plan to guide future resource negotiations.

“My job was to get to the bottom of that,” Hunt said last week in a telephone interview. Today, he is the president of a San Francisco-based clean technology consulting firm, Scalable Growth Strategy Advisors.

“They figured, 'Hey, maybe it’s time for us to refinance,’ ” Hunt said of MMWEC’s recent move, calling it “a very productive decision.”

He added: “I see Moody’s gave them an A3, which I think is a pretty good indicator on where they are. They’ve followed through well on our strategy.”

The bonds were sold in five series.

Nixon Peabody LLP was bond counsel for the offering. Ferriter Scobbo & Rodophele PC was general counsel to MMWEC, and Fulbright & Jaworski LLP was counsel to the underwriters.

Morgan Stanley was the lead manager, with BMO Capital Markets and Bank of America Merrill Lynch as co-managers. Public Financial Management Inc. was financial adviser and U.S. Bank National Association was bond-fund trustee.

Moody’s said MMWEC’s strengths included competitive retail rates for participants compared with other regional electricity providers, the solid operating record of late by Seabrook Nuclear Station and operational improvements at Millstone 3 due to staffing changes, and modest projected five-year capital needs at both plants.

Moody’s also noted that the carbon regulatory environment increases the value of nuclear power.

Challenges, according to Moody’s, include “attendant risks” of nuclear generation ownership such as long-term decommissioning-cost uncertainty, and the fact that several participating companies have large commercial customers, who could be the first to pressure for a competitive choice of a power supplier.

Fitch said key rating drivers included the strong credit profiles of project participants, especially the largest, to which bondholders have direct exposure.

It also cited the continued satisfactory performance of the nuclear units amid intensified regulatory scrutiny of the industry, which could add capital costs over time.

Last month, MMWEC and the 14 Massachusetts utilities that comprise the Berkshire Wind Power Cooperative Corp. dedicated the state’s biggest wind farm to date, a 10-turbine, 15-megawatt project atop Brodie Mountain in Hancock.

“It’s one of our recent highlights,” Tuohey said. “It really puts MMWEC and the participating utilities at the forefront of wind power.”

Last month the company said it may sue Connecticut, challenging the state over the constitutionality of its tax on its electricity generators, which passed in early May.

Connecticut lawmakers initially proposed a tax on electricity that would have raised about $330 million per year from the two-unit Millstone nuclear facility. The tax that was enacted reduced the tax burden on Millstone, but spread the tax to other electric generators, including those fueled with natural gas.

ISO New England, a regional transmission organization based in Holyoke, Mass., said last week that the tax, through an increase in the energy clearing price, would cost New England ratepayers an extra $58 million.

MMWEC projects its share of the tax for Millstone’s electricity to be about $1.2 million per year.

“This estimate is based on 2010 data only; the results for other years may be higher or lower.” ISO New England’s report said.

Massachusetts Attorney General Martha Coakley requested the report after MMWEC asked her office to examine the matter.

“We are hoping that there is a case for the Massachusetts AG or any of the other New England AGs to take some action against the tax because it raises costs for consumers throughout the region without any corresponding benefit to them,” Tuohey said.



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