BRADENTON, Fla. – Georgia’s public power and investor-owned utilities reached a milestone agreement with Japan’s Toshiba Corp. in the bankruptcy case of the contractor building nuclear reactors for them.
Georgia Power Co., which owns 45.7% of the two new units under construction at Plant Vogtle, agreed to a guarantee settlement agreement in which Toshiba will honor a $3.68 billion financial guarantee of project costs on behalf of subsidiary Westinghouse Electric Co.
The settlement, which is contingent on bankruptcy court approval, also extends a review period for the project owners to determine completion costs and would ultimately turn management of the project to an affiliate of Southern Co., the parent of Georgia Power.
The settlement is a credit positive event for public power agencies with stakes in Vogtle, according to Moody's Investors Service.
Municipal Electric Authority of Georgia owns 22.7% of the project and has issued $2.92 billion of bonds; the nonprofit Oglethorpe Power Corp. has issued $1.5 billion of first mortgage bonds for its 30% ownership share; and the city of Dalton, Ga., has a 1.6% share that its utility is funding on its own.
“The agreement on the parental guarantee is credit positive for MEAG Power and the other owners because it requires Toshiba to honor the guarantee for contract performance and provides some protection that can mitigate the impact of the Westinghouse bankruptcy,” Moody’s analyst Dan Aschenbach said Tuesday.
The deal provides a defined future payment schedule from Toshiba to each project owner that begins in October 2017, he said.
Toshiba’s $3.68 billion guarantee is a cap on payments to the four project owners that Moody’s said correlates to 40% of the engineering, procurement and construction contract that Westinghouse entered to build the Vogtle units.
For MEAG, the estimated value of the Toshiba guarantee is $835 million, Aschenbach said.
The financial guarantee has been in question since Toshiba-owned Westinghouse, the main contractor for the Georgia project and a similar project in South Carolina, filed for Chapter 11 bankruptcy on March 29.
Toshiba also has its own fiscal problems, including complaints filed by more than 500 individual shareholders and 15 corporations seeking compensatory damages due to accounting discrepancies, the company has said.
Under the Guarantee Settlement Agreement, co-owners of the Georgia project will “forbear from exercising remedies in respect of the Toshiba Guarantee, including drawing on the Westinghouse Letters of Credit until June 30, 2020” unless Toshiba defaults on the deal, MEAG reported on the Municipal Securities Rulemaking Board’s EMMA filing system Monday.
Toshiba said in a June 10 filing that the $3.68 billion had already been incorporated into its financial outlook, which includes a reserve for losses.
If construction costs are less than the reserved amount, Toshiba said it will benefit from the difference as Westinghouse’s creditor.
Toshiba also said that Vogtle owners had agreed to “cooperate” with the company in Westinghouse’s bankruptcy proceedings.
Georgia Power, which is leading negotiations on behalf of the owners, also extended an interim assessment agreement to June 22 to continue a “cost-to-complete” analysis of the project, the company said in a June 9 filing with the Securities and Exchange Commission.
As part of the agreement extension, Georgia Power said it entered into a contingent pact for Westinghouse to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear Operating Co., a Birmingham, Ala.-based affiliate of Southern Co.
Southern Nuclear operates two existing nuclear reactors at Plant Vogtle.
Westinghouse, whose new AP1000 nuclear reactor designs are being built at the Georgia plant, will provide ongoing design, engineering, and procurement services to Southern Nuclear, according to the Guarantee Settlement Agreement.
The transition is contingent on Westinghouse rejecting its contract at Vogtle, and approval from the bankruptcy court, the SEC filing said.
The U.S. Department of Energy, which has guaranteed $2.6 billion of loans for the project from the U.S. Federal Financing Bank, has approved Georgia’s service agreement with Toshiba, according to Moody’s analyst Michael Haggarty.
“The service agreement allows for Westinghouse to provide engineering, procurement, and licensing support for the Vogtle project, and gives Georgia Power and its parent Southern Co. access to the all-important intellectual property associated with the Westinghouse AP 1000 reactor design,” Haggarty said. “The continued involvement of Westinghouse is critical to the successful completion of the project.”
Haggarty also said the transition of project management to Southern and Georgia Power is a credit negative for them because their credit risk profiles will increase “materially” as they become involved in overseeing nuclear construction, an area outside their core competency of operating regulated electric utility businesses.
Although the agreement with Toshiba is a positive step, Aschenbach also said there are still risks for the public power owners.
MEAG continues to work with Georgia Power on the analysis of the estimated costs and the commercial operation dates for Vogtle Units 3 and 4, he said, adding that a report to the Georgia Public Service Commission has not been delayed until August.
“MEAG Power’s decision on whether to proceed on the project is not subject to state regulatory board approval and does not require external approval,” Aschenbach said. “But MEAG Power could not finish construction without the participation of the other project owners.”
The remaining construction on the new reactors could have further cost overruns, and the participating owners would bear the costs due to the fact that there will be no fixed-price contract in place, he said.
Construction at Plant Vogtle is about 42.7% complete.
Westinghouse is also building two AP 1000 reactors in South Carolina.
Toshiba said in its June 10 filing that negotiations are continuing regarding its financial guarantee for the reactors that are under construction in South Carolina.
The reactors at the V.C. Summer Plant are being built by SCANA Corp.-subsidiary South Carolina Electric & Gas and the South Carolina Public Service Authority, also known as Santee Cooper.
SCE&G and Santee Cooper also have entered an interim agreement to assess its cost to complete the V.C. Summer project. The agreement is set to expire June 22, unless extended.
Santee Cooper said in its annual report Tuesday that it had spent $3.8 billion of its anticipated $6.2 billion cost of the South Carolina project as of Dec. 31.
The state-run public power agency owns 45% of the new V.C. Summer units, and has issued about $4.2 billion of debt for them.