While stocks fell and Treasury bonds rallied in response to Japan’s catastrophic earthquake and tsunami, reaction in the municipal bond market was muted.
Analysts said the biggest long-term impact could be felt by municipal agencies involved in the nuclear power industry. They said regulation will be stepped up given reports of explosions and partial meltdowns at nuclear power plants in Japan following the giant temblor and subsequent tsunami Friday.
Members of the House Energy and Commerce Committee on Monday called for an investigation and hearings into nuclear safety.
Major ports on the West Coast are unlikely to see any major economic impact as trade with Japan is significant but dwarfed by imports and exports from nearby economic giant China. Analysts raised some concern about the impact on U.S. airlines if travel between U.S. and Japan is affected.
Ana Sandoval, a spokewoman for Standard & Poor’s, said the agency’s analysts are not expecting any impact to public finance ratings due to the disaster.
Moody’s Investors Service said the nuclear incidents “will be viewed as a material credit negative for the U.S. nuclear generation industry but are not sufficient enough to result in a change to individual issuer ratings or rating outlooks at this time.”
Moody’s said it assumed operating costs for U.S. nuclear generation facilities will likely rise. It specifically cited two nuclear projects involving public financing that could be affected by heightened regulation and scrutiny of applications for new capacity: The Vogtle station in Georgia, partially owned by the Municipal Electric Authority of Georgia, and the VC Summer station in South Carolina, with an ownership interest involving the South Carolina Public Service Authority, known as Santee Cooper.
“The nuclear generating sector operates within a global and national fraternity,” said Jim Hempstead, senior vice president at Moody’s, “so contagion risk factors, especially with respect to safety, are high.”
MEAG sold $2.67 billion of Build America Bonds and $48 million of tax-exempt bonds in March 2010 to finance its 22.7% ownership in two new nuclear units to be built adjacent to two existing units at the Vogtle Nuclear Power Plant near Augusta. MEAG also has been granted $1.8 billion in federal loan guarantees for the project from the U.S. Department of Energy.
The project is the first nuclear project to get the go-ahead in the U.S. since the 1980s, when large cost overruns plagued the industry.
About $2.1 billion of the bond proceeds remain invested and have not been spent, said James Fuller, MEAG’s senior vice president and chief financial officer.
He said MEAG is well-positioned to complete its project without any additional bonds.
“Financially our bondholders should be secure because we’ve got take or pay, hell or high water, contracts where our participants as well as off-takers have to pay whether the units are ever completed or operate,” Fuller said.
MEAG’s bonds were sold in three series and securitized with payments from 41 cities and two other public agencies. In addition to the pledged revenues, the cities have also pledged their general obligation taxing power.
“Had we not financed as much up-front, I think the events in Japan would have a larger impact on the cost of financing,” he said.
MEAG’s bonds also have redemption provisions with full cost recovery should the project be delayed or cancelled, said Dan Aschenbach, who is the primary analyst for MEAG with Moody’s.
Investors may look toward the longer impact on nuclear projects, he said.
“Vogtle is considered to be a strong project because it has infrastructure in place and political support and financing in place,” Aschenbach said. The current units at Vogtle “have operated for a long period and have good performance and safety records so questions about earthquake safety have been addressed.”
If the NRC requires more stringent designs because of Japan’s problems, the construction and operating licenses for Vogtle could be delayed, he said. “Given what we know, the project is still a sound project.”
The Vogtle site, where there are two existing nuclear units, differs significantly from the sites of Japan’s plants. Vogtle is about 130 miles from the coast, 220 feet above sea level, in an area with very low seismic activity, said Steven Jackson, vice president of power supply at MEAG.
Unlike Japan’s reactors which are primarily dependent on electricity to power cooling water, he said, Vogtle’s new units are designed with Westinghouse AP1000 technology that relies on passive safety systems such as gravity, natural circulation, convection, compressed gas, and condensation to maintain safe operation and shut down safely.
Bonds sold for the Vogtle project received ratings of Baa2 and A2 from Moody’s, and A-minus and A-plus from Fitch Ratings and Standard & Poor’s.
In December, Santee Cooper issued $300 million of BABs for the Summer project. The utility expected to spend $1.4 billion through 2012 for its portion of the $5 billion project. Little of the proceeds have been spent, analysts said.
Momentum already was swinging away from new nuclear power projects following the death of carbon legislation in Washington last year. Meanwhile, the recession lowered fossil fuel costs after prices spiked in 2008.
“The biggest issue, probably, in the long-term is the lack of clarity of how utilities can go forward with building a new generation” of power plants, particularly for public utilities that want to own their plants independently, Aschenbach said.
The crisis at the Japanese plants raised concerns about two new reactors planned for the South Texas Project in Matagorda, Texas.
The plants would use the same boiling water technology from Toshiba.
The cities of San Antonio and Austin, which partnered in STP’s original two reactors, had already dramatically reduced their planned investments in the new reactors, citing high cost and other factors. That left investor-owned NRG Energy looking for additional purchasers of future power from the reactors that could cost up to $6 billion.
In a note to clients Monday, Wunderlich Securities noted that the incidents in Japan poses an additional risk for NRG and the South Texas Project.
“We expect the nuclear incident in Japan will further complicate these efforts and is likely to increase the potential that the company ceases or materially delays (measured in years) the development,” the analysts wrote. “It also could further delay the nuclear loan guarantees NRG is awaiting.”
West Coast Ports
The Port of Los Angeles is the busiest container port in the county and the Port of Long Beach is the second busiest.
“There may be some small impact [on West Coast facilities] but nothing that we are concerned about,” said Fitch analyst Emma Griffith, who covers the Port of Long Beach.
Griffith said imports from Japan amount to only 5% of the volume coming from China. Japan is the second-largest destination for exports, though much less than China.
She also noted that Japan’s major ports did not suffer debilitating damage. No West Coast ports have reported any major damage as a result of the tsunami waves that hit there on Friday.
“[Los Angeles and Long Beach] are doing very well. They are up almost to their pre-recession levels,” said Seth Lehman, who covers the Port of Los Angeles for Fitch. He noted that Japan is the third-largest export partner for the Los Angeles port, about 11.5% of exports, and second largest for imports at 5.8%.
Both analysts agreed that West Coast airports could see minor passenger traffic declines though no one airport relies heavily on Japan traffic.
Hawaii would bear the brunt of any real downturn.
“For Hawaii ports and airports, we will have to see if there is a little more of a direct impact,” Lehman said.
But as a potential positive, Lehman also noted that exports to Japan from the U.S. could increase later this year as it rebuilds from its disaster.
In a report on transportation companies potentially hit by the disaster released Monday, Standard & Poor’s said Hawaii’s economy could see some fallout as a result of Japan’s troubles.
“Hawaii’s economy depends heavily on tourism, much of it from Japan, though at this point it’s unclear what the ultimate impact on Hawaii might be,” said Standard & Poor’s analyst Philip Baggaley.
Baggaley said the most direct impact of the disaster would be on U.S. airlines as travel to and from the country falls off in response to the tragedy.
In municipal trading Monday, tax-exempt yields on the short end fell slightly. Some economists said the steepening Treasury yield curve could be due to insurance companies selling liquid assets to cover claims owing to the Japanese earthquake. As for munis: “We haven’t seen that yet,” a trader said.
