What do bankruptcy, computer chips, nuclear power plants and municipal bonds have in common? The answer may surprise you – Toshiba Corporation. The Japanese global conglomerate owns and operates a wide variety of businesses. One of those business units is Westinghouse Electric Company. Westinghouse builds, operates and maintains nuclear energy facilities around the globe.
One of Westinghouse’s largest projects in the U.S. is the construction of four next generation nuclear power units in Georgia and South Carolina. Westinghouse won the contract to build the nuclear power units by entering into a fixed price engineering, procurement and construction contract (or EPC contract). The contract means that any cost overruns must be absorbed by Westinghouse or, in this case, Toshiba Corp is on the hook.
The Georgia and South Carolina nuclear power plant projects are now years behind schedule and costs have ballooned. Toshiba is a non-investment grade entity and is liable for the additional costs. To protect Toshiba’s limited balance sheet strength and to maintain its going concern status, Westinghouse was allowed to seek bankruptcy protection. There are real risks that the bankruptcy of Westinghouse could also force Toshiba into bankruptcy. To stabilize the situation, Toshiba is in the process of selling its flash memory chip unit, valued at nearly $20 billion, to a consortium of players that may include Apple, Foxconn, Amazon, or the government of Japan.
The bankruptcy headline and on-going concerns about Toshiba created a material selloff in a number of municipal energy utilities in the Southeast United States, specifically the South Carolina Public Service Authority (Santee Cooper) and the Municipal Electric Authority of Georgia (MEAG Power). These municipal electric power generators own a large portion of the nuclear power plants, as do investor owned utilities like Southern Company and SCANA Corp. The risk is that these utilities will be responsible for the cost overruns from the projects. We view the selloff as a buying opportunity for a number of reasons. First, a key component of our southeast region power sector thesis is that nuclear electricity generation will play an important role in a diversified low carbon electricity generating portfolio. This view dovetails well with investor-owned utilities’ outlook in the region. Kevin March, CEO/Chairman of SCANA Corp, is bullish on the plants, saying:
“We built these plants because we needed generation for our service territory. We were looking for a long-term clean energy solution, which these plants provide, and we want to make sure we’ve got the energy our state needs as we go forward and it continues to develop.”
In addition, strong credit fundamentals support the names impacted by the Westinghouse bankruptcy and Toshiba risk. In the case of Santee Cooper, the utility’s board has unlimited rate setting authority. When a municipal power entity sets electricity rates it is required to charge an amount that covers operating, maintenance, expenses and debt service. Even in the event the nuclear plants are never built and become a sunk cost, the rate setting board must continue to set a rate to pay for any debt outstanding on the project. Other credit factors supporting Santee Cooper are high liquidity levels, long-term take or pay contracts and a diversified revenue stream from wholesale water sales. At this point in time we see a low probability that the nuclear plants fail to get built.
The headline risk surrounding Westinghouse’s bankruptcy, Toshiba’s flash memory chip sale and nuclear power trends are presenting attractive opportunities in the marketplace.
Source: SNWAM Research
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