Nuclear Plans Set Off Alarm Bells For Moody's Credit Ratings

Power companies pursuing construction of new nuclear plants may find it harder to get credit, meaning ratepayers could end up shouldering a greater financial burden for the costly projects.

Moody's Investors Service, a leading independent credit rating firm, recently released a report that says it's considering taking a "more negative view" of debt obligations issued by companies seeking to build new nuclear plants.

Titled "New Nuclear Generation: Ratings Pressure Increasing," the report raises concerns that investing in new nuclear plants involves significant risks and huge capital costs at a time when national energy policy is uncertain. Yet companies investing in new nuclear projects — cost estimates for which are hovering in the $6 billion range — haven't adjusted their finances accordingly, according to Moody's:

"Few, if any, of the issuers aspiring to build new nuclear power have meaningfully strengthened their balance sheets, and for several companies, key financial credit ratios have actually declined. Moreover, recent broad market turmoil calls into question whether new liquidity is even available to support such capital-intensive projects."

Fourteen companies have submitted applications to the U.S. Nuclear Regulatory Commission to build 17 new reactors, with the first approvals expected beginning in 2011. Pursuing new nuclear generation increases a company's business and operating risk profile, which in turn puts pressure on credit ratings. While Moody's is optimistic that utility regulators will authorize recovery of costs, that ultimately means higher bills for ratepayers.

The report warns of potential "future rate shock" for electricity customers. It also says that proposed federal loan guarantees for nuclear plant construction would "only modestly mitigate increasing risks."

Moody's distinguishes between new reactors located adjacent to existing units and brand-new projects, with the former benefiting from existing infrastructure. But the ratings service still views new nuclear plants as what it calls "bet-the-farm" endeavors, making it more likely that the projects will lead to ratings downgrades, as happened during the last round of plant construction in the 1970s and 1980s.

A Step Above Junk

Of the 17 proposed reactor projects on Moody's list, two already have obligations rated speculative or "junk" grade. Both are in Texas: NRG Energy's South Texas Project in Bay City, which is rated Ba3 ("questionable credit quality"), and Energy Future Holdings' Comanche Peak in Somervell County, rated B3 ("generally poor credit quality").

Thirteen other proposed nuclear construction projects have credit ratings between Baa1 and Baa3 — one step above junk status. They include eight in the South: Dominion's North Anna in Louisa County, Va.; Duke Energy's William S. Lee in Cherokee County, S.C.; Entergy's Grand Gulf in Port Gibson, Miss. and River Bend in St. Francisville, La.; Exelon's proposed two-unit plant in Victoria County, Texas; Progress Energy's plant in Levy County, Fla., and its Shearon Harris plant in Wake County, N.C.; and SCANA's Virgil C. Summer plant in Fairfield County, S.C.

The financing problems have already caused some companies to back away from nuclear projects.

Earlier this month, AmerenUE announced that it was suspending plans to build a new reactor at its Callaway plant in Missouri. A factor was that state's ban of "Construction Work in Progress" (CWIP), a financing scheme that allows a nuclear utility to recover the construction costs of a reactor from ratepayers before the reactor is up and running.

Earlier this year, Georgia passed a law embracing CWIP. Perhaps not coincidentally, one of only two nuclear projects that Moody's report deemed investment-worthy was the Southern Co.'s planned reactor at Plant Vogtle in Burke County, Ga., which netted an upper-medium grade A3 rating.