WASHINGTON — The South Carolina Public Service Authority, the state’s largest issuer in 2008, will begin selling $418.6 million of tax-exempt and taxable new-money and refunding bonds today as the power utility begins to shift toward nuclear energy and away from coal-generated electricity.
Known as Santee Cooper, the state-owned utility generates electricity for about two million people in South Carolina. The authority’s largest source of electricity comes from coal, which accounts for about 70% of its power generation. Facing the economic and political issues involving coal-generated electricity, the authority’s board last year suspended a permit application for a coal power plant in favor of an investment in a partnership project to construct a $5 billion, two-unit nuclear facility next to the Summer Nuclear Station in Fairfield County.
A portion of proceeds from the authority’s new-money bonds will fund pre-construction costs for the Summer project. Moody’s Investors Service cautioned in a report that Santee Cooper’s participation in the Summer expansion project “adds significant execution and nuclear generation construction risk which would likely exert downward pressure on financial metrics and ultimately on the credit rating.”
Santee Cooper’s deal is rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch Ratings. All the agencies have a stable outlook for the authority. The bonds are to be sold to retail investors today and to institutional investors on Thursday.
The bonds are to be offered in three series: $39.4 million of Series D refunding bonds maturing in two to four years that will refund revenue bonds issued in 1999; $279.1 million of tax-exempt Series E new-money bonds maturing in four to eight years; and $100 million of Series F taxable bonds maturing between 26 and 31 years.
Santee Cooper had considered but opted not to issue Build America Bonds because it wanted a call option, said Mollie Gore, a spokesperson for Santee Cooper. Investors in taxable bonds typically do not want callable bonds. Gore said the authority would consider issuing BABs in 2010.
Part of Santee Cooper’s decision to invest in nuclear power stems from the spike in coal prices in 2008. The spot price of coal from most regions of the country surged by as much as 100% in the first half of 2008, according to data from the Department of Energy. The economic recession has dampened coal prices this year, and Santee Cooper estimates that prices will stabilize in 2010 if current market conditions continue. Fuel costs account for 60% of the authority’s expenses.
“The cost of coal is higher, and not that the cost of nuclear power is lower, but the nuclear playing field has been leveled,” Gore said.
Federal efforts to limit carbon emissions also played into Santee Cooper’s decision, Gore said. Two bills have been introduced in Congress that would establish a cap-and-trade system for carbon emissions. The House has passed its version of a cap-and-trade bill.
Utilities “definitely see emission regulations on the horizon,” said Joanne Ferrigan, Fitch’s lead analyst covering the deal. “There are some large utilities in the U.S. that are looking at and are interested in pursuing large nuclear projects.”
The shift to nuclear power adds risks to Santee Cooper’s $4.2 billion of revenue bonds and $123.8 million of commercial paper that are outstanding.
“We’re going to continue to look at [Santee Cooper’s] progress,” said Chris Jumper, an analyst with Fitch. “Right now they’re financially in a strong position.”
Santee Cooper will partner with South Carolina Electric and Gas, a subsidiary of SCANA Corp., to complete the Summer facility construction. Both Santee Cooper and SCANA last year filed for applications with the Department of Energy’s loan guarantee program for nuclear facilities.
Goldman, Sachs & Co. will be lead underwriter on the deal with Citi, Merrill Lynch & Co., and Morgan Stanley as co-underwriters. Haynsworth Sinkler Boyd PA will be bond counsel. McNair Law Firm P.A. will be underwriters’ counsel. Barclays Capital Inc. will be financial adviser.