Chemical Bank moved yesterday to force Washington Public Power Supply System into default on $2.25 billion in bonds sold to finance two abandoned nuclear plants in Washington State.
For all practical purposes, WPPSS is now the largest municipal bond default in history, according to Chemical Bank officials. The default is likely to shake investor confidence in the municipal bond market in general and nuclear power financing in particular.
The default on the two canceled plants could endanger the bonds of three other uncompleted projects. The bonds on all five projects total $8.3 billion. Aside from losses suffered by individual and institutional bondholders--including a number of large insurance companies--the ripple effect on the entire bond market could be considerable.
At a time when interest rates are on the rise once again, Howard Sitzer, municipal research director for Thomson McKinnon Securities in New York, predicts that a default could force municipal bond issuers to increase rates by half a percentage point. That would cost municipalities hundreds of millions of extra dollars in financing charges.
An official of WPPSS, often referred to as "Whoops," said yesterday that "everybody knew this was coming. There is no money, and there is no money coming in."
John Fleming, Chemical's vice president in charge of the corporate trust department, said "we fully expected what happened today. Yes, WPPSS is now in default."
The end came yesterday afternoon when the Washington State Supreme Court refused to review its 7-2 decision of June 15 that the Northwest utilities and municipalities that signed contracts with WPPSS were not obligated to pay for the two abandoned nuclear power projects. Immediately thereafter, a King County Superior Court judge lifted an order that prevented Chemical from acting until the state high court reviewed its judgment.
That cleared the way for Chemical, the trustee for the bonds, to start the default process by serving a 90-day notice on WPPSS that it must pay approximately $75 million in overdue interest payments by Oct. 22 or Chemical would make the entire $2.25 billion debt due immediately.
Because WPPSS is unlikely to pay, the bank then will ask the court to appoint a receiver and seek a money judgment against WPPSS, Fleming said. Chemical hopes to get some money back for the bondholders--most of whom are individual investors--by going after the assets of WPPSS and the 88 utilities.
Chemical also announced that it will ask the U.S. Supreme Court to review the Washington State court decision that the utilities are not responsible for paying their share of the abandoned plants.
The utilities originally advised WPPSS to build five nuclear power projects. One is nearing completion, and two others are partially completed. Less than three months after WPPSS borrowed the final $200 million from investors in March 1981 for the fourth and fifth reactors, it announced that the cost had jumped from an estimated $15.9 billion to $23.9 billion. All work was halted because slumping demand for power in the region did not warrant continuation.
Secretary of Energy Donald Hodel, who was chief of the Bonneville Power Administration, the government agency that lent its AAA credit rating to WPPSS, advised against the government imposing a solution through a federal bailout on what he called "a barroom brawl."
However, Rep. George V. Hansen (R-Idaho), many of whose constituents owned WPPSS bonds, last May introduced a bill calling for a $5 billion pool of federal funds, rate surcharges placed on the utilities involved in all the projects, and reserves of the Bonneville Power Administration to reimburse current bondholders. The bill has gone nowhere in the House.
But a Senate committee last week passed an amendment to the Interior Department's appropriation bill proposed by Sen. James A. McClure, another Idaho Republican, that would take some of the heat off bondholders. The amendment, which is scheduled to reach the floor next week, would give Bonneville the authority to create a new corporate entity to issue $960 million in bonds to complete the third reactor.