BRADENTON, Fla. – Public power agencies in Georgia and South Carolina with stakes in uncompleted nuclear plants face new warnings about rising costs and potential rating downgrades amid the contractor’s bankruptcy.
At the same time, two public pension funds with stock in Southern Co., the investor-owned utility leading the work at Georgia’s Plant Vogtle, are among investors who want Southern directors ousted due to the project’s cost overruns and oversight problems.
The new developments arise as concern mounts about the stability of Toshiba Corp., which placed subsidiary Westinghouse Electric Co. – the contractor for new nuclear units in both states - into Chapter 11 bankruptcy on March 29.
On Monday, Toshiba apologized to shareholders, investors and stakeholders as it once again postponed the release of audited annual earnings results, blaming the delay on an incomplete investigation into billions of losses at Westinghouse.
The announcement creates new doubt about the financial guarantee Toshiba provided to backstop Westinghouse’s engineering, procurement, and construction contracts at Plant Vogtle and V.C. Summer in South Carolina.
“We believe the contracts are legal, valid and enable the utilities to recover the costs related to nuclear construction, including the substantial cost increase from initial estimates,” said Fitch Ratings analyst Dennis Pidherny.
Pidherny said Monday that the cost and time estimates to complete both projects could be substantially higher than the fixed-price contracts currently in place, and Fitch expects the public power issuers will recover the added costs through higher retail rates if construction continues.
If the issuers operate with slimmer margins, higher leverage or less cash in order to limit rate increases and ease the financial burden on retail ratepayers, he said that could weaken leverage and debt service metrics to a degree that would result in rating downgrades.
Fitch assigns ratings of A-plus to the $4.2 billion of bonds issued by the South Carolina Public Service Authority’s Santee Cooper and the $2.92 billion of bonds issued by the Municipal Electric Authority of Georgia to finance portions of their projects. Both ratings carry negative outlooks.
Bankrupt Westinghouse has said in court filings that its goal is to shed billions in debt incurred because of the nuclear units it agreed to build in Georgia and South Carolina. The company could negotiate haircuts with the plant owners or reject the contracts while restructuring.
Southern’s Georgia Power Co. filed a notice Friday with the bankruptcy court saying that an interim assessment agreement with Westinghouse has been extended through June 3.
The agreement allows Vogtle's owners, who include MEAG, Oglethorpe Power Corp., and the city of Dalton, Ga., to continue an examination of the build-out costs for the partially built nuclear reactors.
At V.C. Summer Plant, where two new reactors are being built by SCANA Corp.-subsidiary South Carolina Electric & Gas and Santee Cooper, a similar assessment agreement extends through June 26.
“We expect credit pressure to remain on these issuers well after the expiration of interim assessment agreements, which are currently in place,” Pidherny said. “The agreements provide payments to the contractors to continue work and give the co-owners time and access to previously unavailable information in order to calculate new cost estimates and timelines.”
Project owners are expected to determine if they will complete the projects or abandon construction, he said.
Construction at the Summer plant is approximately 34% complete and Santee Cooper's 45% share is currently estimated to cost $6.2 billion, according to Fitch.
At Vogtle, construction is about 40% complete. Oglethorpe, which has issued $1.5 billion of bonds, owns 30% of the project and projects its share of the cost at $5 billion. MEAG owns 27.7% and estimates its cost at $4.5 billion.
Public power agencies aren’t the only ones feeling the heat as the bankruptcy case progresses and completion costs are sorted out.
Public pension funds and other investors are calling for stockholders next week to oust two of Southern Co.’s directors because of missteps and cost overruns at Plant Vogtle and the Kemper integrated coal gasification combined cycle plant in Mississippi.
“The problems plaguing Kemper and Vogtle, Southern’s two largest construction projects, suggest that the Nuclear/Operations Committee has fallen short in its oversight responsibilities,” said an April 24 letter signed by the California State Teachers’ Retirement System, the Seattle City Employees’ Retirement System and two private entities.
In filings with Southern and the Securities and Exchange Commission, they said that the new Vogtle units 3 and 4 are three years behind schedule and their original cost estimate of $14.3 billion is currently $3 billion over budget, as Georgia regulators contemplate whether the nuclear project should continue because of Westinghouse’s bankruptcy.
The Kemper project, begun in 2014, is $4 billion over its original $2.4 billion budget.
“Top executive pay at The Southern Co. has become increasingly decoupled from performance due to the Compensation and Management Succession Committee’s decision to shield top executives from the financial impact of poorly executed key projects,” the letter said.
The letter urges urged shareholders to vote against the reelection of Directors Steven R. Specker and Dale E. Klein at Southern’s annual meeting on May 24. Specker and Klein are members of the Nuclear/Operations Committee and the Compensation Committee overseeing executive salaries.
On Monday, Reuters said it was told by people familiar with negotiations at Plant Vogtle that project owners have agreed to cap Toshiba's guarantees for the delayed nuclear units. Reuters said the agreement placed Toshiba's guarantees for work at the Vogtle plant at about $3.6 billion, payable over at least three years. The deal was not yet final, according to the sources.
The deal reportedly is contingent on the owners of V.C. Summer reaching a similar agreement with Toshiba, Reuters said it was told by people who could not be identified because the talks are not public.
“We remain in discussions with Toshiba to add structure to their payment obligation under the $3.68 billion parent guarantee,” Southern Co. spokesman Jacob Hawkins told Reuters. “We will take all actions necessary to hold Westinghouse and Toshiba accountable for their financial obligations, including the parent guarantee.”
MEAG said in its annual report last month that co-owners at Vogtle are working to provide for a transition that will allow work to continue. That includes the full-scale schedule and cost-to-complete assessment that is underway to determine the impact of the contractor’s bankruptcy.
“MEAG Power does not believe that the current scheduled in-service dates of June 30, 2019 for Vogtle Unit 3 and June 30, 2020 for Vogtle Unit 4 appear to be achievable,” the report said.
Both the Georgia and South Carolina nuclear reactors are using Westinghouse’s new AP1000 reactor design. The projects have been beset by construction delays and changes.
China is expected to complete the first Westinghouse AP1000 reactor in the first quarter of 2018, according to a Reuters report on Wednesday.
Westinghouse’s consolidated bankruptcy case is pending in the United States Bankruptcy Court for the Southern District of New York. The main case number is 17-10751.