July 27, 2009
Low Bond Ratings of Duke Energy and Progress Energy May Force NC Treasurer to Divest
Utilities’ bond ratings near junk status due to ‘‘bet the farm’’ risks of planned nuclear plants; the low rating also supports calls for halting Duke’s Cliffside coal plant due to financing risks
DURHAM, NC — Citing a North Carolina law prohibiting the state from holding devalued investments, a watchdog group today called on Treasurer Janet Cowell to ensure that various state funds exclude bonds issued by both Duke Energy and Progress Energy. NC WARN also said Duke’s downgraded status bolsters the group’s pending motion for the NC Utilities Commission to revoke Duke’s permission to build the Cliffside coal-fired plant.
In a letter to Treasurer Cowell, attorney John Runkle cited a new report by Moody’s Investors Services, showing downgraded status of the two NC-based utilities and others contemplating new nuclear plants. He also urged her to guard against stock investments that could become devalued based on similar risks, to inform the Local Government Commission about the prohibition, and report her findings to the public.
Moody’s June report shows both Duke Energy and Progress Energy rated at ‘‘Baa2,’’ one step up from speculative grade or junk bond status, due to plans by both utilities for what Moody’s calls a ‘‘bet-the-farm risk’’ of building new nuclear plants.
The credit rating agency warned it is considering an even more negative view for bond ‘‘issuers seeking to build new nuclear plants,’’ and said that proposed Federal Loan Guarantees would ‘‘only modestly mitigate increasing risks.’’ Projects abandoned after being started cannot be ruled out, according to Moody’s, which also warned of potential ‘‘future rate shock and/or disallowances of cost recovery’’ from electricity customers.
Duke has indicated that it will not go forward with its Lee nuclear project without more risk being shifted to ratepayers. And last month, the power giant filed for an 18% rate increase, in part for up-front payment of construction for the ongoing Cliffside coal-fired plant. Although Duke has stated that it is financing Cliffside ‘‘from its balance sheet,’’ utilities regularly borrow and roll various forms of debt; early this year, a bond sale attempted by Duke was ‘‘panned by investors,’’ and the company had to repackage the offering, apparently with higher interest rates.
NC WARN’s motion for the Utilities Commission to halt construction at Cliffside cites risks of financing and possible cancellation of the controversial project. Although the current Moody’s report focuses on nuclear, lenders have warned about increasing risks as coal plant projects tumble across the nation amid rapid changes in energy markets. This month, two dozen public interest groups joined the call for revocation and/or for the Commission to conduct evidentiary hearings in the Cliffside case. The Commission sought comments but has not yet ruled on the motion.
The state treasurer handles over a dozen pots of money on behalf of taxpayers, state employees and others. As attorney Runkle pointed out, General Statute 147-69.2(b) requires all debt holdings to be in top-rated securities. In years past, electric utilities have often been seen as stable investments. But two years ago, ratings agencies lowered Duke Energy’s ratings due to its ambitious plans for billions of dollars worth of new coal and nuclear plants.
A key concern for nuclear investors cited by Moody’s is the dynamic change occurring across the U.S. energy sector, and the potential that new technologies could cause nuclear projects to be outdated before they could come on-line. Among other reasons, it cited ‘‘daunting’’ price tags, the ‘‘sheer size and complexity’’ of nuclear projects, and a history that ‘‘gives us reason to be concerned …’’. Apparently, Moody’s was unaware of reactor design problems that have already caused delays and consternation with many U.S. projects, including those involving Duke and Progress.
‘‘We really need Treasurer Cowell and the Utilities Commission to protect North Carolinians from the power companies’ dreams of expansion,’’ said Jim Warren of NC WARN today. ‘‘Both Progress and Duke should be turning away from huge, risky — and unnecessary — power plants, but state officials must ensure the public doesn’t get burned by the utilities’ actions.’’