After a decade of uncertainty, it may be time to draft the final obituary for Washington Public Power Supply System projects 1 and 3.
The ultimate parent of units 1 and 3 bonds, the Bonneville Power Administration, has finally conceded it probably is best to unplug the life-support system sustaining the mothballed nuclear power plants.
Bonneville notes in the preliminary official statement for this week's $700 million refunding that "it is likely that projects 1 and 3 will be terminated or converted" to other uses, as long as all pertinent legal issues and other matters can be resolved.
In some ways the decision almost seems anticlimactic.
WPPSS estimates it will cost at least $1.6 billion to complete just one of the plants. Many power officials question whether the investment would make sense, primarily because other generating alternatives now appear more cost effective.
From a practical standpoint, it is exceedingly doubtful whether WPPSS and Bonneville could ever rally the enormous political and financial support required to complete construction.
In any event, municipal finance participants believe it is time to decide the fate of the plants.
"Bond investors certainly would like to see a resolution of the status" of units 1 and 3, said William Fish, senior vice president and manager of municipal research for Donaldson, Lufkin & Jenrette Securities Corp.
The decision on whether to terminate the projects is expected by early next year.
Termination is not expected to affect the credit quality of the bonds for units 1 and 3, Moody's Investors Service said in a recent report.
But certain ambiguities and inconsistencies between units 1 and 3 net billing agreements -- which obligate Bonneville to secure the bonds -- and related project and ownership contracts have raised questions about whether termination and the subsequent disposition of property might constitute an event of default. Such a declaration in turn might raise questions about whether principal payments would be accelerated.
To allay market concern, WPPSS and Bonneville are expected to file a declaratory judgment action in federal court. The action would be aimed at resolving ambiguities in the net-billed resolutions and related contracts to clarify termination procedures and the potential legal effects.
WPPSS also has entered a covenant not to sell salvageable parts of the plants until it is certain that such a move would not constitute an event of default.
"We're not taking any final action until those issues are resolved," James Curtis, Bonneville's assistant administrator of financial management. stressed in a recent interview.
Fish noted that the serious discussions about termination have certainly "reawakened interest" among investors over the ramifications.
Nevertheless, when investment bankers for WPPSS held a conference call last week with about two dozen potential institutional investors to discuss the new refunding sale, analysts had no questions after the supply system provided a brief synopsis on the termination study, a municipal analyst recalled.
That does not necessarily indicate a lack of interest in termination-related issues, some analysts said.
At this point, however, they believe there are more pressing credit-related questions pertaining to the $6.7 billion of various revenue bonds secured by Bonneville, the federal power marketing agency serving the Pacific Northwest.
Last week, for example, Fitch Investors Service affirmed its AA rating on the bonds, but changed its credit trend to negative from stable.
"The declining credit trend reflects serious deterioration in [Bonneville's] financial position, caused by abnormally low streamflows on its hydroelectric system, a resulting sharp falloff in [power] sales outside the Pacific Northwest region, and continued softness in the aluminum industry," Fitch said in a release.
Standard & Poor's Corp. rates the bonds AA, but has them on CreditWatch with negative implications. Moody's rates the bonds Aa.
Given such problems, the potentially imminent funeral for units 1 and 3 could provide yet another demarcation point that puts the WPPSS nuclear power debacle a little deeper in the memory banks though certainly not forgotten.
At the National Federal of Municipal Analysts annual conference in Seattle this week, analysts will look back at WPPSS and discuss the lasting effects of the supply system's $2.25 billion default in 1983 on units 4 and 5 debt.
Those bonds, unlike units 1, 2, and 3 debt, did not feature the Bonneville security arrangement. A Washington State Supreme Court ruling handed down on June 15, 1983, said that participating utilities lacked authority to secure debt for the terminated plants.
Much of the litigation over the default is over, though loose ends remain. Some proceeds from a roughly $900 million out-of-court settlement fund have yet to be distributed, pending the clarification of certain details such as legal expenses.
Separately, a federal judge is searching for a settlement master to try to bring another case -- involving a cost-sharing dispute -- to a close. Chemical Bank, the trustee for the unit 4 and unit 5 bonds, alleges that those plants improperly bore some expenses belonging to units 1 and 3. Bonneville would fund any judgment in that case.
WPPSS terminated units 4 and 5 in January 1982 and mothballed units 1 and 3 in an extended construction delay shortly thereafter. Unit 2 was the only plant completed and put into operation.
Municipal analysts said they learned some hard lessons from the default, lessons that changed the way people analyze bonds.
Among other things, the default taught market participants to question the sanctity of certain contracts, especially contracts that are not fully court-tested.
Analysts also recognize that other factors -- such as the economic attractiveness of power or the importance and necessity of a service provided by an issuer -- can supersede contractual obligations. In other words, a power purchaser is more likely to live up to an obligation if an energy source is truly competitive.
Analysts also became more sophisticated about forecasts for power demand in the wake of WPPSS, using sensitivity analysis that gives investors scenarios about prospective returns based on assumptions about future power needs. It is now common for issuers in many fields to utilize sensitivity analysis.
The WPPSS experience also helped fuel the debate over appropriate disclosure practices, a topic that remains extremely relevant today for analysts and others in the municipal market.
Given the increasing level of sophistication among analysts, it is now "more and more difficult for any major issuer to flood the market with bonds" for which the risks are undisclosed or misunderstood, said Howard Sitzer, senior vice president and director of municipal research at Greenwich Partners Inc.
"If something really is dubious, it's harder to get it done." he said.
Sitzer, who was among the first analysts to recognize the serious problems brewing at WPPSS, recalls that there were maybe "70 or 80 bond analysts" -- mainly working out of lower Manhattan -- when he entered the municipal industry almost 16 years ago.
Today, he observed by contrast, there are more than a thousand analysts, spread across the country. There are "several sizable bureaucracies out there" to monitor municipal bonds, especially when bond insurers are added to the mix, Sitzer said.
Increasingly on the buy side there is "an arsenal of strong research," Sitzer said, though he fears that it some instances "sell-side analysts are still eclipsed by the investment banking units they work with." He said "I think that's unfortunate" to the extent it ever dampens the free venting of opinions.
In contrast to some of the project-related risk associated with issuers like WPPSS, Sitzer believes that certain conventional issuers, such as older major cities with unresolved structural problems, could present some of the fundamental risks in the decade ahead.
There are "still lingering challenges" in regard to their overall financial integrity, he said.
Regarding the Pacific Northwest power scene, Sitzer agrees with his colleagues that "it's going to be an interesting couple years ahead."
Curtis of Bonneville said "these are uniquely adverse circumstances we find ourselves in," which might be another way of saying everything is hitting the fan at once.
Bonneville officials believe they would have to go back about 50 years to find two years of drought that match the current dry period plaguing the Northwest, Curtis said. Those dry conditions in turn are crimping Bonneville's hydro-electric production, the linchpin of its power network.
In addition to the drought, Bonneville faces expensive solutions for protecting endangered species, such as salmon. And parts of the region -- ranging from timber-dependent towns to cities with aerospace ties -- are trying to cope with economic slowdowns, which can can further complicate power planning.
Some of these factors explain why Bonneville reported a net operating loss of $274 million in fiscal 1992, which ended last Sept. 30. Bonneville projects a loss of $482 million in the current fiscal year.
Curtis succinctly summarizes Bonneville's challenge when he says the agency must "cut costs, raise rates, and put into place a longer-term business plan."
Bonneville is exploring a rate increase of 15% to 25% for the two-year period beginning Oct. 1. The proposed increase is a highly charged issue in the region, and some of Bonneville's customers are weighing other potential power sources.
"We believe Bonneville needs a rate increase," said Jerry Sailer, finance director of Snohomish County Public Utility District.
But when it comes to Bonneville's cost structure, "we think they haven't worked that side of the equation" as much as possible, Sailer said.
Sailer can recall a time years ago when rating agency officials would express concern about his district's reliance on Bonneville for a high percentage of power. For many years, Sailer would reply it was "not such a bad weakness" since Bonneville's hydroelectric production provided power at extremely low costs.
Today, however, "we're looking at moving away from Bonneville," Sailer said, adding that Snohomish over the next decade may move toward purchasing as much as half of its power from non-Bonneville sources, compared to only 20% now.
According to Sailer, a key point for Northwest power utilities through the mid-1990s hinges on how Bonneville restructures itself. If Bonneville's rates rise to the point where the agency is less competitive with other power sources, "the issue will be how many customers they lose in terms of megawatt load," Sailer predicted.
