WASHINGTON - Moody's Investors Service sent an early warning last week to municipal and investor-owned utilities that unless they strengthen their financial portfolios before building nuclear generation facilities, they will face possible negative rating actions.

The agency announced last week that it may take a "more negative view" in rating bonds from public power issuers that seek to build new nuclear power plants.

It appears that utilities venturing into nuclear territory are not adjusting their financial policies to create a safety net for "construction risk, huge capital costs, and continual shifts in national energy policy," the agency observed.

"Partnerships, balance sheet strengthening, bolstering liquidity reserves, and 'back-to-basics' approaches to core operations could help would-be nuclear utilities maintain their ratings," Moody's said. "Moreover, recent broad market turmoil calls into question whether new liquidity is even available to support such capital-intensive projects."

If there is inaction on the part of utility financial managers, rating actions from Moody's could be negative, especially if trends follow historical precedent, the agency said. The vast majority of utilities building nuclear facilities that Moody's evaluated were downgraded - either partly or primarily due to their nuclear projects - during the last nuclearconstruction boom, between 1965 and 1995. The average downgraded issuer's rating fell four notches.

Moody's tempered its warning with the acknowledgment that nuclear plants are inexpensive to operate once they've been built, and that they leave no carbon footprint, making them desirable in the event that strict climate change legislation becomes law.

Additionally, the federal government has agreed to provide $18 billion of loan guarantees to help finance construction of nuclear plants, said Moody's senior vice president Dan Aschenbach.

The loan backing would lower costs, "but will only modestly mitigate increasing business and operating risk profile," Moody's said.

Three of four projects that are proceeding on a "fairly expedited basis" and have been given federal loan guarantees are being carried out with involvement from municipal bond-issuing authorities, Aschenbach said.

The muni bond issuers rated by Moody's who have a portion share - from 22.7% to 50% - of nuclear generation projects are the A1-rated Municipal Electric Authority of Georgia, which had $3.39 billion of debt last year, the Aa2-rated South Carolina Public Service Authority, or Santee Cooper, which had $3.715 billion of debt last year, and San Antonio's Aa1-rated CPS, which had $3.6 billion of debt last year.

MEAG has already issued debt to finance its in-the-works nuclear projects. They sold about $500 million of debt including $156 million of bond anticipation notes, according to Aschenbach. He said MEAG parceled out the debt through a purchase power agreement with public power entities in Jacksonville, Fla., and south Alabama.

Another 21 projects are "in different phases on the drawing board" for nuclear power plant construction, he said.

"For the most part, many of the utilities have not strengthened their balance sheets" by taking actions such as increasing rates or building up enough liquidity to manage the project costs, Aschenbach said.

"MEAG did build up a very strong municipal competitive trust fund - unrestricted liquidity that is helpful for these types of things," he added.

Moody's expects investor-owned utilities to need more preparation than municipal issuers before diving into nuclear power, Aschenbach said. Municipal utilities are generally unrestrained in their ability to raise rates, he noted. In addition, the projects now moving forward with muni involvement are located adjacent to existing units, possibly eliminating the need for water supply and transmission line construction.

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