ML23156A141

PRM-030-059 - 56FR48445 - General Electric Company and Westinghouse Electric Corporation; Filing of a Petition for Rulemaking

ML23156A141
Person / Time
Issue date:	09/25/1991
From:	Chilk S NRC/SECY
To:
References
PRM-030-059, 56FR48445
Download: ML23156A141 (1)

Text

ADAMS Template: SECY-067 DOCUMENT DATE: 09/25/1991 TITLE: . PRM-030_-059 - 56FR48445 - GENERAL ELECTRIC COMPANY AND WESTINGHOUSE ELECTRIC CORPORATION; FILING OF A PETITION FOR RULEMAKING CASE

REFERENCE:

PRM-030-059 56FR48445 KEYWORD: RULEMAKING COMMENTS Document Sensitivity: Non-sensitive - SUNSI Review Complete

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STATUS OF RULEMAKING PROPOSED RULE: PRM-030-059 OPEN ITEM (Y/N) N RULE NAME: GENERAL ELECTRIC COMPANY AND WESTINGHOUSE ELECTRIC CORPORATION; FILING OF A PETITION FOR RULEMAKING PROPOSED RULE FED REG CITE: 56FR48445 PROPOSED RULE PUBLICATION DATE: 09/25/91 NUMBER OF COMMENTS: 5 ORIGINAL DATE FOR COMMENTS: 11/12/91 EXTENSION DATE: I I FINAL RULE FED. REG. CITE: 58FR68726 FINAL RULE PUBLICATION DATE: 12/29/93 NOTES ON PET. REQUESTED ISSUANCE OF RULE ON SELF-GUARANTEE OF DECOM. FUNDIN ATUS G COSTS BY CERTAIN NON-ELECTRIC UTILITY REACTOR LICENSEES. GRANTED RUI?.f- AT 58FR68*726 AND PR 30 1 40,50,70 & 72 AT 58FR3515. FILE ON Pl.

TO FIND THE STAFF CONTACT OR VIEW THE RULEMAKING HISTORY PRESS PAGE DOWN KEY HISTORY OF THE RULE PART AFFECTED: PRM-030-059 RULE TITLE: GENERAL ELECTRIC COMPANY AND WESTINGHOUSE ELECTRIC CORPORATION; FILING OF A PETITION FOR RULEMAKING

.oposi!GI-RULE ,,. __

PROPOSED RULE DATE PROPOSED RULE SECY PAPER: 90-217 SRM DATE: 07/25/90 SIGNED BY SECRETARY: I I FINAL RULE FINAL RULE DATE FINAL RULE SECY PAPER: 92-174 SRM DATE: I I SIGNED BY SECRETARY: 12/22/93 STAFF CONTACTS ON THE RULE CONTACTl: JOSEPH WANG MAIL STOP: NLS-139 PHONE: 492-3746 CONTACT2: MICHAEL LESAR MAIL STOP: P-223 PHONE: 492-7758

DOCKET NO. PRM-030-059 (56FR48445)

In the Matter of GENERAL ELECTRIC COMPANY AND WESTINGHOUSE ELECTRIC CORPORATION; FILING OF A PETITION FOR RULEMAKING DATE DATE OF TITLE OR DOCKETED DOCUMENT DESCRIPTION OF DOCUMENT 07 /11/91 06/25/91 LTR KRAEMER TO SECRETARY RE JOINT PETITION FOR RULEMAKING FROM THE GENERAL ELECTRIC COMPANY AND WESTINGHOUSE ELECTRIC CORPORATION 07/26/91 07/26/91 LTR KRAEMER TO JULIAN PROVIDING COPYRIGHT RELEASE MOODY'S INVESTORS SERVICE 09/18/91 09/17 /91 FEDERAL REGISTER NOTICE - RECEIPT OF PETITION FOR RULEMAKING 09/23/91 09/19/91 LTR GRIMSLEY TO KRAEMER ADVISING THAT THE GE AND WESTINGHOUSE JOINT PETITION HAS BEEN DOCKETED AS PRM-30-59 09/23/91 09/19/91 LTR GRIMSLEY TO COWAN ADVISING THAT THE GE AND

- 11/12/91 11/13/91 11/12/91 11/08/91 WESTINGHOUSE JOINT PETITION HAS BEEN DOCKETED AS PRM-30-59 COMMENT OF CABOT CORPORATION (ANTHONY CAMPITELLI)

COMMENT OF ALLIED-SIGNAL INCORPORATION

( 1)

(STANLEY R. STEVINSON) ( 2) 11/14/91 11/10/91 COMMENT OF MARVIN I. LEWIS ( 3) 11/21/91 11/11/91 COMMENT OF OMAHA PUBLIC POWER DISTRICT (W. G. GATES) ( 4) 12/17 /91 12/11/91 COMMENT OF HARRIS CORPORATION (DENNIS R. ERDLEY) ( 5) 12/23/93 12/22/93 SEE FINAL RULE PUBLISHED ON 12/29/93 AT 58FR68726.

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: )~4:;L NUCLEAR REGULATORY COMMISSION 10 CFR Parts 30, 40, 50, 70, 72 *94 JAN 22 P2 :36 RIN 3150-AE16

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Self-Guarantee as an Additional Financial Assurance Mechanism; Correction AGENCY: Nuclear Regulatory Commission.

ACTION: Final rule: correction.

SUMMARY

This document corrects a final rule that appeared in the Federal Register on December 29, 1993 (58 FR 68726), that amended NRC regulations for decommissioning licensed facilities to allow certain non-electric utility licensees to use self-guarantee as a means of financial assurance. This action is necessary to correct the designation of an appendix in the final rule.

EFFECTIVE DATE: January 28, 1994.

FOR FURTHER INFORMATION CONTACT: Clark Prichard,.Office of Nuclear Regulatory Research, U.S. Nuclear Regulatory Commission, Washington DC 20555, telephone (301) 492-3734.

SUPPLEMENTARY INFORMATION:

1. On page 68730, in the first column, in the last line of

§30.8(b) the reference to "appendix A and B" should be changed to

.,0~ .~ 1I1-~ / 1L/

a- s-,FYl /t,IJ-1

2 read "appendix A and C".

2. On page 68730, in the first column, in the 20th line of

§30.35(f)(2), the reference to "appendix B" should be changed to read "appendix C".

3. On page 68730, in amendatory instruction number 4, the reference to "appendix B" should be changed to read "appendix C".

4. On page 68730, in the first line of the second column, "Appendix B" should be changed to read "Appendix C".

5. On page 68731, in the first column, in the 20th line of

§40.36(e)(2), the reference to "appendix B" should be changed to read "appendix C".

6. On page 68731, in §50.75(e)(2)(iii), in the third column, in the sixth line, the reference to "appendix B" should be changed to read "appendix C".

7. On page 68731, in §70.25(f)(2), in the last line of the

- third column, the reference to "appendix B" should be changed to read "appendix C".

8. On page 68732, in §72.30(c)(2), in the second column, in the 12th line, the reference to "appendix B" should be changed to read "appendix_ C".

-Ii.

Dated at Bethesda, Maryland, this {p --day of January 1994.

For the Nuclear Regulatory Commission.

David L. Meyer, Chief Rules Review and Directives Branch, Division of Freedom of Information and Publications Services, Office of Administration.

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[7590-01-P)

NUCLEAR REGULATORY COMMISSION *93 or-r 23 ,*.h, U_*

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10 CFR Parts 30, 40, 50, 70. 72 I *, ; - ~: ~

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RIN 3150-AE16 Self-Guarantee as an Additional Financial Assurance Mechanism

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- AGENCY: Nuclear Regulatory Carmnission.

ACTION: Final rule.

SUMMARY

The Nuclear Regulatory Commission is amending its regulations for decommissioning licensed facilities to allow certain non-electric utility licensees to use self-guarantee as a means of financial assurance. The rule reduces the cost burden of financial assurance while providing NRC with sufficient assurance that decommissioning costs w;11 be funded. This rule

- grants a petition for rulemaking (PRM-30-59) from General Electric Company and Westinghouse Electric Corporation and completes action on the petition.

EFFECTIVE DATE: (Insert Date - 30 days after date of publication in the Federal Register)

FOR FURTHER INFORMATION CONTACT: Clark Prichard, Office of Nuclear Regulatory Research, U.S. Nucrear Regulatory Commission, Washington, DC 20555, telephone (301) 492-3734.

1

SUPPLEMENTARY INFORMATION:

Background

On January 11, 1993 (58 FR 3515), the NRC published a notice of proposed rulemaking that would allow self-guarantee as an additional mechanism for complying with the regulations on financial assurance for deconunissioning.

This action was in response to a petition for rulemaking (PRM-30-59) from the General Electric Company (GE) and the Westinghouse Electric Corporation (Westinghouse). The notice of receipt of the petition was published on September 25, 1991 (56 FR 48445). The petitioners requested that the NRC amend its decommissioning regulations contained in 10 CFR Parts 30, 40, 50, 70, and 72 to provide a means for self-guarantee of decommissioning funding costs by certain NRC licensees who meet stringent financial standards and related reporting and oversight requirements. The petitioners proposed that

- electric utility reactor licensees under 10 CFR Part 50 not be affected by the proposals in the petition.

Under the original decommissioning regulations (53.FR 24018; June 27, 1988), licensees were permitted to provide financial assurance for decommissioning funding through prepayment, insurance, surety bond, letter of credit, or parent company guarantee. Electric utilities were also allowed to establish an external sinking fund. The proposed rule sought public comments 2

on amendments to Parts 30, 40, SO, 70, and 72 to allow self-guarantee as an additional method of complying with the decommissioning requirements in those parts.

The objective of this rule is to reduce the licensee's cost burden without causing adverse effects on public health and safety. The regulatory analysis developed for this rule estimates that the annual industry cast savings would be approximately S730,000 if all licensees meeting the criteria use the self-guarantee. This estimate is based on rather conservative

- assumptions (i.e., S750,000 total decommissioning cast per license)i the actual cost savings may be considerably greater.

The cast savings would result from the elimination of the cost of third party financial assurance for licensees qualifying to use the self-guarantee.

Annual fees far letters of credit, surety bonds, and other forms of third party financial assurance typically are approximately 1.5 percent of the amount of financial assurance provided.

A. Proposed Criteria The proposed criteria for corporate self-guarantee included these financial criteria:

(1) Tangible net worth of at least Sl billion; (2) Tangible net worth at least 10 times the current decorranissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities for which the company is responsible as self-guaranteeing licensee and as parent-guarantor; (3) Assets located in the United States amounting to at least 3

90 percent of total assets or at least 10 times the current decom~1ssioning cost estimate (or the current amount required if certification is used); for all decommissioning activities for which the company is responsible as self-guaranteeing licensee and as parent-guarantor; (4) A current bond rating of AAA, AA, or A as issued by Standard and Poors (S&P), or Aaa, Aa, or A as issued by Moodys.

Procedural requirements proposed were:

• (1) The company must have at least one class of equity securities registered under the Securities Exchange Act of 1934; (2) The company shall provide the Comission with copies of all reports filed with the Securities and Exchange Commission under Section 13 of the Securities Exchange Act of 1934; (3) The company's independent certified public accountant must compare the data used by the company in the financial test with the company's independently audited yearend financial statements;

{4) The company must repeat passage of the test within 90 days after the close of each succeeding fiscal year; and (5) The company must notify NRC within 90 days of any matters that may come to the attention of the auditor that may cause the auditor to believe that the data specified in the financial test should be adjusted and that the company no longer passes the test.

The self-guarantee would be available only for an applicant or licensee having no parent company holding majority control of its voting stock.

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B. Alternative Criteria Because a majority of commenters on the notice of receipt or the petition questioned the need for the finantial criteria to be so stringent.

the Commission offered an alternative set of criteria to that of the petition as contained in the proposed rule. The alternative was the same financial criteria presented in the proposed rule, without the $1 billion net worth requirement.

A company's tangible net worth is an important factor in determining its bond rating. The rating itself, combined with the other criteria, may be a sufficient indicator of financial stability. Because all firms qualifying would need an A or better bond rating, this alternative may not be riskier in terms of financial assurance than the proposed rule. The regulatory analysis examined the effects on availability of the self-guarantee to licensees of deleting the Sl billion tangible net worth requirement from the financial criteria in the proposed rule, all other criteria remaining constant. The conclusion was that this alternative, if adopted, would allow an additional 7 firms to use the proposed self-guarantee. (Approximately 20 firms would qualify with the Sl billion criterion included.) The additiona1 availability would save industry an estimated $130,000 annually and, since all firms would need an A or better bond rating, would maintain a high level of assurance. An A or better bond rating indicates that a company has substantial net worth. A company which merits an A or better bond rating has passed a stringent review by the independent ratings agencies of its ability to meet its financial obligations. A report by Moody's gives the default rate associated with companies whose bonds are rated A or above in 1 of the 3 years prior to 5

1 default as only 0.13 percent annually. In addition. all companies.

irrespective of their overall size, must demonstrate that they possess tangible net worth of at least 10 times the current decommissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities for which the company is responsible as self-guaranteeing license and as parent granter.

The alternate criteria, as well as the criteria in the proposed rule, do

• not apply to electric utilities. Electric utilities would be excluded from using self-guarantee under either set of criteria. Public comments were requested on this alternative financial criteria--the criteria in the proposed rule without the Sl billion tangible n~t worth requirement.

Minor Wording Changes The proposed rule deleted the phrase "should the licensee default" from Secs. 30.35(f}(2}, 40.36(e}(2), 50.75(e}(l)(iii), 70.25(f}(2), and

§ 72.30(c)(2) to accorrmodate self-guarantee.

Summary of Public Comments The Commission received fourteen comment letters in response ta the publication of the notice of proposed rulemaking. All but one of the letters supported a revision of the Commission 1 s regulations ta allow self-guarantee.

The following is a summary of significant public comments and the Commission's 1

Corporate Bond Defaults and Default Rates, Moody 1 s Special Report, January, 1991, p. 32.

6

response. A more detailed analysis of public comments has been prepared.

This analysis is available for inspection in the NRC Public Document Room.

2120 L Street. NW. (Lower Level), Washington. DC.

Opposition to Self-Guarantee One commenter opposed the proposed self-guarantee mechanism on the grounds that current capabilities of electronically transferring funds make

• self-guarantee meaningless even if a firm has initially demonstrated that it has the required assets. The commenter argued that recent failures of pensions and health benefits assured by self-guarantee indicate that self-guarantees cannot be trusted.

Response NRC does not agree that a well-designed self-guarantee mechanism cannot be trusted ta provide financial assurance. Self-guarantees have been used in a number of applications without incurring the problems painted out by the cementer. The Environmental Protection Agency currently allows self-guarantee as a means of financial assurance for cleanup of hazardous waste treatment, storage, and disposal facilities. Because the qualification to use self-guarantee is based in large part on a specified bond rating, the NRC believes that it is tying the self-guarantee ta an accurate measure of the financial strength of the self-guarantor. By requiring annual recertification, and submission of SEC reports, the NRC believes that potential problem situations will be identified and addressed in a timely manner.

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Use of Self-Guarantee bv Electric Power Utility Licensees One commenter indicated that electric utilities licensed under Part 50.

which are prohibited from using the proposed self-guarantee, should be allowed to use that option. The commenter, pointing to the Regulatory Analysis, argued that NRC's stated reasons do not create a strong technica.l basis far not allowing nuclear powe1* licensees to use self-guarantee.

Response The objective of the rule is to reduce the licenseeis cost

• burden without causing adverse effects on public health and safety.

Commission already allows electric utilities to accumulate decommissioning funds in an external sinking fund.

The Unlike other lic~nsees who are subject to financial assurance for decommissioning, electric utilities do not have to provide the full amount of required financial assurance "up front" but can instead build up their sinking funds over time. Thus, electric utilities already are pennitted a cost-reducing financial assurance mechanism.

Requirement that 90 Percent of Total Assets be in the U.S.

One co11111enter suggested dropping what is described as the requirement that self-guarantors demonstrate that 90 percent of their total assets are located in the United States, because otherwise some large, multinational companies will be excluded from using the self-guarantee simply because a majority of their assets may be outside the U.S.

Response The proposed self-guarantee financial test included a provision requiring the self-guarantor ~o show that it had assets located in the United States amounting of at least 90 percent of total assets or at 1east 10 times the total current decommissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities 8

for whicn the company 1s responsible as a self-guaranteeing license~ ~na ~~

parent-guarantor. A 1 icensee using self-guarantee does not have t: snow ihat 90 percent of its assets are in the United States. The licensee ccuid snow that it has assets in the U.S. amounting ta at least 10 times decallillission1ng costs. A large, multinational corporation should readily be able t demonstrate that it has assets in the United States amounting ta at least 10 times the decommissioning responsibilities.

e Net Worth Criterion Several coimnenters favored the self guarantee concept but argued for less stringent financial criteria.

Resoonse The Conmission has considered various alternative financial criteria. It has decided to drop the Sl billion tangible net worth criterion.

However, tangible net worth will be an important factor in the requirements for self-guarantee for several reasons:

(1) The financial criteria in the final rule contain the requirement that to qualify to use self-guarantee, a licensee must have tangible net worth at least 10 times decommissioning costs, and (2) A company must have at least an A bond rating. The A or better bond rating indicates that a compariy has substantial net worth. Net worth is an important factor in comprisir.g a bond rating.

Bond ratings are reviewed often, and changed in response to changes in the issuer 1 s financial condition. A bond rating of A or better assures that the financial strength of a licensee offering a self-guarantee has been independently reviewed and affirmed. It provides an excellent guide to the ability of a company to meet its obligations. According to Moodys. default 9

rates associated with companies whose bonds are rated A or above 1n 1 of the 3 years prior to defau1t are 0.13 percent annually.~

The criteria for parent guarantee were given consideration as financial criteria for self-guarantee in the fina1 ru1e. Under current NRC decommissioning regulations, the parent company of a licensee that meets the financial criteria in 10 CFR Part 30, Appendix A may guarantee that funds will be available to decommission the facility of its subsidiary licensee. The financial criteria for the NRC parent guarantee include a lower bond rating (BBB or Baa) requirement and a lower net worth times decommissioning cost requirement (6, rather than 10 times decommissioning costs) than the criteria in this rule.

The Co111t1ission has decided against using the criteria for parent guarantee in the rule. This is the first instance in which self-guarantee is being allowed under the Cammission,s decommissioning regulations. The Commission prefers that the more conservative criteria be used. At some future time, when the Commission has gained some experience with self-guarantee, it may consider an appropriate revision of the financial criteria.

Use of Self-Guarantee by Non-Profit Entities Several commenters suggested that NRC should amend the proposed rule to allow universities and other non-profit entities to use self-guarantee. They argued that many non-profit entities have been in existence and been financially stable for long periods of time. These commenters proposed 2

Corporate Bond Defaults and Default Rates, Moody's Special Report, January 1991, p.32.

10

several alternative criteria. including size of endowments. that :hey said could be used to assess the financial strength of non-profit entities.

Response. NRC plans to begin shortly a study of extending the availability of cost-saving financial assurance alternatives to non-profit entities other than universities. A similar study for un~versities will be deferred until afte* planned rulemaking on fee recovery. However, including these non-profit entities in the self-guarantee program established by this rulemaking presents certain problems. The analysis which was prepared to evaluate the financial criteria in the proposed rule did not include non-profit entities. In order to extend the use of self-guarantees to non-profit entities, new criteria would have to be developed to assess the financial strength of the non-profit licensees. Development of financial criteria to assess the qualifications of a non-profit entity to provide a self-guarantee is likely to require detailed consideration of the different financial accounting methods used by medical institutions. The financial accounting and reporting of non-profit entities are unique and substantially different from the accounting and reporting of for-profit entities.

The financial reporting practices of public and private hospitals generally follow standards for these institutions established by the American Institute of Certified Public Accountants. Development of financial criteria for a self-guarantee for hospitals also would involve analysis of the various accounting funds utilized and establishment of adequate criteria.

NRC's review of decommissioning financial assurance submissions identified third-party financial mechanisms, such as surety bonds and letters of credit, as well as escrows and trusts, as the financial mechanisms used most often by private non-profit entities. In a few instances, private non-11

profit entities have sought to use parent company guarantees. Pubiicly owne<.1 non-profit entities. particu1ar1y pub1ic universities, have sougnt to use statements of intent (a financial assurance mechanism avai1able only to government licensees). To the extent that non-profit entities have been able to make use of guarantees or stattments of intent, cost saving financial assurance alternatives already exist for those licensees.

The Camission anticipates that in the future it will carry out a study of potential self-guarantee criteria for non-profit licensees other than universities. Because of the time required for such a study however, it cannot include non-profit entities in the self-guarantee program established by this rulemaking. The NRC will review the situation relative to universities after its planned rulemaking on fee recovery.

Requiring Additional Written Commitment by Self-Guarantors One co11111enter recommended adding a requirement that self-guarantors execute a binding commitment to make the necessary funds available for decommissioning. Under this recommendation, in addition to submitting proof of the required financial strength, the self-guarantor would a1so have to submit a written agreement that, upon issuance of an order by the Commission to undertake decommissioning, the licensee will set up a trust fund in favor of the Comission, or obtain other surety accessible to the Commission.

Response The addition of a written commitment is a useful suggestion.

A provision is being included in the self-guarantee requirements calling for the 1icensee to provide the Commission with a written guarantee (a written commitment by a corporate officer) stating that the licensee will fund and carry out the required decommissioning activities, or, upon issuance of an 12

order by the Commission. it will set up and fund a standby trust *...-1th sufficient funds to carry out the required decommissioning activiti~s based on the current cost estimates.

Changes From the Proposed Rule There are only three changes from the proposed rule. First, the

• specific $1 billion. tangible net worth criterion has been deleted from the financial criteria required for a _non-electric utility licensee to use self-guarantee. The financial criteria included in the final rule are:

(1) Tangible net worth at least 10 times the total current decommissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities for which the company is responsible as self-guaranteeing licensee and as parent-guarantor.

(2) Assets located in the United States amounting to at least 90 percent of total assets or at least 10 times the total current decommissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities for which the company is responsible as self-guaranteeing licensee and as parent-guarantor.

(3) A current rating for its most recent _bond issuance of AAA, AA, or A as issued by Standard and Poors (S&P), or Aaa, Aa, or A as issued by Moodys.

As used by the ratings agencies, an A rating marks a discrete point on the ratings scale, different from A-. An A- or lower rating would not be acceptable.

The second change is the addition of the requirement for the licensee to provide the Commission with a written guarantee.

13

The third change is that additional language has been added to Appendix B to clarify procedural requirements for notification of the Commission ana provision of alternate financial assurance if a licensee no longer meets the requirements for self-guarantee.

Agreement State Compatibility Section 72.30 is assigned Division 4 compatibility, since regulation of independent storage of spent nuclear fuel and high-level radioactive waste are functions reserved to the NRC pursuant to the Atomic Energy Act.

Sections 30.35, 40.36, and 70.25 are currently considered Division 2 compatibility. The addition of the self-guarantee mechanism for providing the required financial guarantee does not change the d;v;sion of compatibility.

Division 2 compatibflity allows the Agreement States flexib;lity to be more stringent. The agreement States must provide mechanisms in their regulations, but due to the specific State f;nancial regulations, certain mechanisms may not be acceptable in their States. Limiting the mechanisms to a subset of those provided for in the NRC regulations is within the flexibility provided in Division 2 compatibility.

Environmental Impact: Categorical Exclusion 14

The NRC has determined that this regulation is the type of action described as a categorical exclusion in 10 CFR 51.22(c)(lO)(i). Therefore.

neither an environmental impact statement nor an environmental assessment has been prepared for this regulation.

Paperwork Reduction Act Statement This rule amends information collection requirements that are subject to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501, et seq.). These requirements have been approved by the Office of Management and Budget.

approval numbers: 3150-0017, -0020, and -0009.

The public reporting burden for this collection of information is estimated to average 19 hours2.199074e-4 days <br />0.00528 hours <br />3.141534e-5 weeks <br />7.2295e-6 months <br /> per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the Information and Records Management Branch (MNBB-7714), U.S. Nuclear Regulatory Commission, Washington, DC 20555, and to the Desk Officer, Office of Information and Regulatory Affairs, NEOB-3019, (3150-0017, -0020, and -0009),

Office of Management and Budget, Washington, DC 20503.

Regulatory Analysis The Commission has prepared a regulatory analysis on this regulation.

The analysis examines the costs and benefits of the alternatives considered by 15

the Commission. The analysis is available for inspection in the :,~C Pub\il:

Document Room. 2120 L Street. NW. (Lower Level), Washington. DC. Single copies of the analysis may be obtained from Clark W. Prichard, Office of Nuclear Regulatory Research, U.S. Nuclear Regulatory Commission, rlashington, DC; 20555 telephone (301) 492-3734.

Regulatory Flexibility Certification In accordance with the Regulatory Flexibility Act, 5 U.S.C. 605(b), the Co1TD11ission certifies that this rule will not have a significant economic impact upon a substantial number of small entities. The licensees affected by this rule do not fall within the scope of the definition of "small entities" set forth in the Regulatory Flexibility Act or the size standards of the NRC applicable to a small business (56 FR 56671; November 6, 1991).

Backfit Analysis The NRC has determined that the backfit rule, 10 CFR 50.109, does not apply to this rule and, therefore, that a backfit analysis is not required for this rule, because these amendments do not involve any provisions which would impose backfits as defined in 10 CFR 50.109(a)(l).

List of Subjects 10 CFR Part 30 16

Syproduct materia1. Criminal penalty, Government contracts.

fntergovernmental relations. Isotopes. Nuclear material, Radiation orotection.

Reporting and recordkeeping requirements.

10 CFR Part 40 Criminal penalty, Government contracts, Hazardous materials transportation, Nuclear materials, Reporting and recordkeeping requirements, Source material, Uranium.

10 CFR Part 50 Antitrust, Classified information, Criminal penalty, F;re protection, Intergovernmental relations, Nuclear power plants and reactors, Radiation protection, Reactor siting criteria, Reporting and recordkeeping requirements.

10 CFR Part 70 Criminal penalty, Hazardous materials transportation, Material control and accounting, Nuclear materials, Packaging and containers, Penalty, Radiation protection, Reporting and recordkeeping requirements, Scientific equipment, Security measures, Special nuclear material.

10 CFR Part 72 Manpower training programs, Nuclear materials, Occupational safety and health, Reporting and recordkeeping reqµirements, Security measures, Spent fuel.

For the reasons set out in the preamble and under the authority of the Atomic Energy Act of 1954, as amended, the Energy Reorganization Act of 1974, 17

as amended. and 5 U.S.C. 552 and 553, the NRC is adopting the following amendments to 10 CFR Parts 30, 40, 50, 70. and 72.

PART 30 - RULES OF GENERAL APPLICABILITY TO DOMESTIC LICENSltlG OF BYPRODUCT MATERIAL

1. The authority citation for Part 30 continues to read as follows:

AUTHORITY: Secs. 81, 82, 161, 182, 183, 186, 68 Stat. 935, 948, 953, 954, 955, as amended, sec. 234, 83 Stat. 444, as amended (42 U.S.C. 2111, 2112, 2201, 2232, 2233, 2236, 2282); secs. 201, as amended. 202, 206, 88 Stat.

1242, as amended, 1244, *1246 (42 U.S.C. 5841, 5842, 5846).

Section 30.7 also issued under Pub. L.95-601, sec. 10, 92 Stat. 2951 (42 U.S.C. 5851). Section 30.34(b) also issued under sec. 184, 68 Stat. 954, as amended (42 U.S.C. 2234). Section 30.61 also issued under sec. 187, 68 Stat. 955 {42 U.S.C. 2237).

2. In§ 30.8 paragraph (b} is revised ta read as follows:

§ 30.8 Information collection requirements: 0MB approval.

(b) The approved information collection requirements contained in this part appear in §§ 30.9, 30.11, 30.15, 30.19, 30.20, 30.32, 30.34, 30.35, 30.36, 30.37, 30.38, 30.50, 30.51, 30.55, 30.56, and Appendix A and B.

3. In§ 30.35, the introductory text of paragraph (f){2) is revised to read as follows:

§ 30.35 Financial assurance and recordkeeping for decommissioning.

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( f) * * *

( 1) * * *

(2} A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of this part. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decormiissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of this part. A guarantee by the applicant or licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the

- voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

4. A new Appendix Bis added to Part 30 to read as follows:

Appendix B to Part 30 - Criteria Relating to Use of Financial Tests and Self Guarantees for Providing Reasonable Assurance of Funds for Decommissioning.

I. Introduction 19

An aoplicant or licensee may provide reasonable assurance cf the availability of funds for decommissioning based on furnishing its Jwn guarantee that funds will be available for decommissioning costs and on a demonstration that the company passes the financial test of Section II of this appendix. The terms of the self-guarantee are in Section III of this appendix. This appendix establishes criteria for passing the financial test for the self guarantee and establishes the terms for a self-guarantee.

II. Financial Test A. To pass the financial test, a company must meet all of the following criteria:

(1) Tangible net worth at least 10 times the total current decormnissioning cost estimate (or the current amount required if certification is used) for. all decommissioning activities for wh;ch the company is responsible as self-guaranteeing licens~e and as parent-guarantor.

(2) Assets located in the United States amounting to at least 90 percent of total assets or at least 10 times the total current decommissioning cost estimate (or the current amount required if certification is used) for all decommissioning activities for which the company is responsible as self-guaranteeing licensee and as parent-guarantor.

(3} A current rating for its most recent bond issuance of AAA, AA, or A as issued by Standard and Poors (S&P}, or Aaa, Aa, or A as issued by Moodys.

B. To pass the financial test, a company must meet all of the following additional requirements:

(l} The company must have at least one class of equity securities registered under the Securities Exchange Act of 1934.

20

(2) The company's independent certified public accountant ~ust have compared the data used by the company in the financial test which 1s derived from the independently audited, yearend financial statements for the latest fiscal year, with the amounts in such financial statement. In connection with that procedure, the licensee shall inform NRC within 90 day~ of any matters coming to the attentiJn of the auditor that cause the auditor to believe that the data specified in the financial test should be adjusted and that the

• company no longer passes the test *

(3) After the initial financial test, the company must repeat passage of the test within 90 days after the close of each succeeding fiscai year.

C. If the licensee no longer meets the requirements of Section II.A. of this appendix, the licensee must send immediate notice to the Canmission of its intent to establish alternate financial assurance as specified in the Commission's regulations within 120 days of such notice.

Ill. Company Self-Guarantee The terms of a self-guarantee which an applicant or licensee furnishes must provide that:

A. The guarantee will remain in force unless the licensee sends notice of cancellation by certified mail ta the Commission. Cancellation may not occur, however, during the 120 days beginning on the date of receipt of the notice of cancellation by the Commission, as evidenced by the return receipt.

B. The licensee shall provide alternative financial assurance as specified in the Commission's regulations within 90 days following receipt by the Commission of a notice of cancellation of the guarantee.

21

C. The guarantee and financial test provisions must remain 1n effect until the Commission has terminated the license or until another financial assurance method acceptable to the Commission has been put in effect by the licensee.

D. The licensee will promptly-forward to the Commission and the licensee's independent auditor all reports covering the latest fiscal year filed by the licensee with the Securities and Exchange Commission pursuant to

• the requirements of Section 13 of the Securities and Exchange Act of 1934 .

E. If, at any time, the licensee's most recent bond issuance ceases to be rated in any category of "A" or above by either Standard and Poors or Moodys, the licensee will provide notice in writing of such fact to the Commission within 20 days after publication of the change by the rating service. If the licensee's most recent bond issuance ceases to be rated in any category of A or above by both Standard and Poors and Moodys, the licensee no longer meets the requirements of Section II.A. of this appendix.

F. The applicant or licensee .must provide to the Commission a written guarantee (a written commitment by a corporate officer) which states that the licensee will fund and carry out the required decommissioning activities or, upon issuance of an order by the Commission, the licensee will set up and fund a trust in the amount of the current cost estimates for decommissioning.

PART 40 - DOMESTIC LICENSING OF SOURCE MATERIAL

5. The authority citation for Part 40 continues ta read as follows:

AUTHORITY: Secs. 62, 63, 64, 65, 81, 161, 182, 183, 186, 68 22

Stat. 932. 933. 935, 948, 953, 954, 955. JS amended. secs. lle(2). 33. 84.

Pub. -* 95-604. 92 Stat. 3033. as amended. 3039. sec. 234. 83 Stat. 444. as amenaed (42 U.S.C. 2014(e)(2), 2092, 2093, 2094, 2095, 2111, 2113. 2114, 2201, 2232. 2233, 2236, 2282); sec. 274, Pub. L.86-373, 73 Stat. 688 (42 U.S.C.

2021); secs. 201, as amended, 202, 206, 88 Stat. 1242, as amended. 1244, 1246 (42 U.S.C. 5841, 5842, 5846); sec. 275, 92 Stat. 3021, as amended by Pub. L.97-415, 96 Stat. 2067 (42 U.S.C. 2022).

Section 40.7 also issued under Pub. L.95-601, sec. 10, 92 Stat. 2951 (42 U.S.C. 5851). Section 40.3l(g) also issued under sec. 122, 68 Stat. 939 (42 U.S.C. 2152). Section 40.46 also issued under sec. 184, 68 Stat. 954, as amended (42 U.S.C. 2234). Section 40.71 also issued under sec. 187, 68 Stat.

955 (42 u.s.c. 2237).

6. In§ 40.8 paragraph (b) is revised to read as follows:

§ 40.8 Information collection requirements: 0MB approval.

(b) The approved information collection requirements contained in this part appear in §§ 40.25, 40.26, 40.31, 40.35, 40.36, 40.42, 40.43. 40.44, 40.60, 40.61, 40.64, 40.65, and Appendix A.

7. In§ 40.36 the introductory text of paragraph (e)(2) is revised to read as follows:

§ 40.36 Financial assurance and recordkeeping for decommissioning.

(e) * *

• 23

(2) A surety method. insurance, or other guarantee method. -hese methoas guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may 1ot be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

PART 50 - DOMESTIC LICENSING OF PRODUCTION AND UTILIZATION FACILITIES

8. The authority citation for Part SO continues to read as follows:

AUTHORITY: Secs. 102, 103, 104, 105, 161, 182, 183, 186, 189, 68 Stat.

936, 937, 938, 948, 953, 954, 955, 956, as amended, sec. 234, 83 Stat. 1244, as amended (42 U.S.C. 2132, 2133, 2134,. 2135, 2201, 2232, 2233. 2236, 2239, 2282); secs. 201, as amended, 202, 206, 88 Stat. 1242, as amended, 1244, 1246 (42 u.s.c. 5841, 5842, 5846).

24

Section 50.7 a1so issued under Pub. L.95-601. sec. 10. 92 ~:at. Z951 (42 U.S.C. 5851). Section 50.10 also issued under secs. 101. 185. ~a Stat.

936, 955, as amended (42 U.S.C. 2131, 2235); sec. 102, Pub. L.91-190, 83 Stat. 853 (42 U.S.C. 4332). Sections 50.13, 50.54(dd), and 50.103 a1s~ issued under sec. 108, 68 Stat. 939~ as amended (42 U.S.C. 2138). Sections 50.23, 50.35, 50.55, and 50.56 also issued under sec. 185, 68 Stat. 955 (42 U.S.C.

2235). Sections 50.33a, 50.SSa and Appendix Q also issued under sec ..102, Pub. L.91-190, 83 Stat. 853 (42 U.S.C. 4332). Sections 50.34 and 50.54 a1so issued under sec. 204, 88 Stat. 1245 (42 U.S.C. 5844). Sections 50.58, 50.91, and 50.92 a1so issued under Pub. L.97-415, 96 Stat. 2073 (42 U.S.C. 2239).

Section 50.78 also issued under sec. 122, 68 Stat. 939 {42 U.S.C. 2152).

Sections 50.80 - 50.81 also issued under sec. 184, 68 Stat. 954, as amended (42 U.S.C. 2234). Appendix Falso issued under sec. 187, 68 Stat. 955 (42 u.s.c 2237).

9. In § 50.8 paragraph (b) is revised to read as follows:

§ 50.8 Infonnation collection requirements: OHB approval.

(b) The approved information collection requirements contained in this part appear in § § 50.30, 50.33, 50.33a, 50.34, 50.34a, 50.35, 50.36, 50.36a, 50.48, 50.49, 50.54, 50.55, 50.55a, 50.59, 50.60, 50.61, 50.63, 50.64, 50.65, 50.71, 50.72, 50.75, 50.80, 50.82, 50.90, 50.91, and Appendices A, B, E, G, H, I, J, K, M, N, 0, Q, and R.

10. In§ 50.75 the introductory text of paragraph (e)(l)(iii) and paragraph (e)(2)(iii) are revised to read as follows:

25

§ 50.75 Reporting and recordkeeping for decommissioning plann1ng.

(e) * * *

(1) * * *

(iii} A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. Any surety method or insurance used to provide financial assurance for decommissioning must contain the fallowing conditions:

(2) * * *

{iii) A surety method, insurance, or other guarantee method. A parent company guarantee of funds far decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee far decormnissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any ~ituation where the applicant or licensee has a parent company holding majority control of the voting stock of the company.

26

PART 70 - DOMESTIC LICENSING OF SPECIAL NUCLEAR MATERIAL

11. The authority citation for Part 70 continues to read as follows:

AUTHORITY: Secs. 51, 53, 161, 182, 183, 68 Stat. 929, 930, 948, 953, 954, as amended. sec. 234, 83 Stat. 444, as amended (42 U.S.C. 2071, 2073, 2201, 2232, 2233, 2282); secs. 201, as amended, 202, 204, 206, 88 Stat. 1242, as amended, 1244, 1245, 1246 (42 U.S.C. 5841, 5842, 5845, 5846).

Sections 70.l(c) and 70.20a(b) also issued under secs. 135, 141, Pub. L.97-425, 96 Stat. 2232, 2241 (42 U.S.C. 10155, 10161). Section 70.7 also issued under Pub. L.95-601, sec. 10, 92 Stat. 2951 (42 U.S.C. 5851).

Section 70.2l(g) also issued under sec. 122, 68 Stat. 939 (42 U.S.C. 2152).

Section 70.31 also issued under sec. 57d, Pub. L.93-377, 88 Stat. 475 (42 U.S.C. 2077). Sections 70.36 and 70.44 also issued under sec. 184, 68 Stat.

954, as amended (42 U.S.C. 2234). Section 70.61 also issued under secs. 186.

187, 58 Stat. 955 (42 U.S.C. 2236, 2237). Section 70.62 also issued under sec. 108, 68 Stat. 939, as amended (42 U.S.C. 2138).

12. In§ 70.25, the introductory text of paragraph (f)(2) is revised to read as follows:

§ 70.25 Financial assurance and recordkeeping for decommissioning.

(f) * *

• 27

(2) A surety method. insurance. or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained.in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

PART 72 - LICENSING REQUIREMENTS FOR THE INDEPENDENT STORAGE OF SPENT NUCLEAR FUEL AND HIGH-LEVEL RADIOACTIVE WASTE

13. The authority citation for Part 72 continues to read as follows:

AUTHORITY: Secs. 51, 53, 57, 62, 63, 65, 69, 81, 161. 182, 183, 184, 186, 187, 189, 68 Stat. 929, 930, 932, 933, 934, 935, 948, 953,954, 955, as amended, sec. 234, 83 Stat. 444, as amended (42 U.S.C. 2071, 2073, 2077, 2092.

2093, 2095, 2099, 2111, 2201, 2232, 2233, 2234, 2236, 2237, 2238, 2282); sec. 274, Pub. L.86-373, 73 Stat. 688, as amended (42 U.S.C. 2021); sec. 201, as 28

amended. 202, 206. 88 Stat. 1242. as amended. 1244. 1246 (42 U.S.C. 5841.

5842. 5846); Pub. L.95-601. sec. 10. 92 Stat. 2951 (42 U.S.C. 5851); sec. 102, Pub. L.91-190, 83 Stat. 853 (42 U.S.C. 4332); Secs. 131, 132. 133, 135.

137, 141, Pub. L.97-425, 96 Stat. 2229, 2230, 2232, 2241, sec. 148, Pub. L.

100-203, 101 Stat. 1330-235 (42 U.S.C. 10151, 10152, 10153, 10155, 10157, 10161, 10168).

Section 72.44(g) also issued under secs. 142(b) and 148(c), (d), Pub. L.

100-203, 101 Stat. 1330-232, 1330-236 (42 U.S.C. 10162(b), 10168(c), (d)).

Section 72.46 also issued under sec. 189, 68 Stat. 955 (42 U.S.C. 2239)~ sec. 134, Pub. L.97-425, 96 Stat. 2230 (42 U.S.C. 10154). Section 72.96(d) also issued under sec. 145(g), Pub. L. 100-203, 101 Stat. 1330-235 (42 U.S.C.

10165(g)). Subpart J also issued under secs. 2(2), 2(15), 2(19), 117(a),

14l(h), Pub. L.97-425, 96 Stat. 2202, 2203, 2204, 2222, 2244 (42 U.S.C.

10101, 10137(a), 1016l(h)). Subparts Kand Lare also issued under sec. 133, 98 Stat. 2230 (42 U.S.C. 10153) and sec. 218(a), 96 Stat. 2252 (42 U.S.C.

10198).

15. In § 72.30 the introductory text of paragraph (c)(2) is revised to read as follows:

§ 72.30 Decommissioning Planning including financing and recordkeeping.

(c) * * *

(2) A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning ~osts.will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in 29

Appendix A of 10 CFR Part 30. A parent company guarantee may not te used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee far decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

Dated at Rockville, Maryland, thisJr~day of December I 1993.

For the Nucl r Regulatory Commission.

30

LJU0t\cJ NUMBEH 'J O_ _s 'f PETITION RULE ~R~ f' f<.. y ~ '/ </ ~

mHARRIS (

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USNHC LEGAL DEPARTMENT December 11, 1991 '91 DEC 17 P2 :39 CERTIFIED MAIL 0FF!Cf: OF S[CRETARY DOCKETING ,\ SHlVICf:

BR.~NCl-i Secretary, U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Attention: Docketing and Service Branch Re: September 25, 1991 Notice of Receipt of Petition for Rulemaking Concerning Financial Assurance Sections of Title 10, Parts 30, 40, 50, 70 and 72 of the Code of Federal Regulations/General Electric Co. and Westinghouse Electric Corp.

[Docket No. PRM-30-59]

Dear Sir or Madam:

This letter, commenting on the above-referenced Petition for Rulemaking, is submitted on behalf of Harris Corporation ("Harris"). Harris is a Fortune 200 company with annual sales in the $3 billion range. Throughout the country and around the world Harris manufactures a variety of high technology electronic components and communication and information systems.

For reliability testing purposes, Harris operating divisions have at least one small radiation source licensed with the Nuclear Regulatory Commission ("NRC"). In addition, Harris operating divisions have several similar sources licensed with several Agreement States. As a consequence, Harris is concerned with the Petition for Rulemaking and the form of any company guarantee formally adopted by the NRC.

It is Harris' position that the existing criteria for the parent company guarantee, found in the above-referenced regulations, adequately insure that sufficient resources will be available to properly decommission licensed sources. When analyzing the legal and financial aspects of this issue in light of contemporary legal developments and financial practices, there is no rational basis for establishing criteria for the company guarantee which differ significantly from those which currently exist for the parent company guarantee. In either instance, the adequacy of the financial assurance provided is based on the value of the assets securing the decommissioning obligation. If the assets are held in two separate pools, each technically owned by a different but related company, the level of financial security provided does not increase in any significant measure. In virtually all instances, where the parent company guarantee is utilized, the subsidiaries are wholly or substantially owned by the parent such that the financial and other elements of the two entities are substantially the same. The management and administration of the two entities are generally integrated and their financial success or weakness interdependent.

As a consequence, it is Harris' position that the NRC should adopt the same financial criteria for the company guarantee that applies in the context of the parent company guarantee.

DEC 3..0 19~

Acknowledged by card .. ~....- ..'"-"""'""'

HARRIS CORPORATION MELBOURNE, FLORIDA 32919 PHONE 407-727-9100

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Alternatively, Harris recommends that the NRC adopt the financial test proposed by the Petitioners with two modifications to make the test fairer. Additional, highly solvent businesses, not so fortunate to be among the 50 or so largest companies in this country, should also be able to utilize this test. An investment grade bond rating not lower than BBB from Standard & Poors or Baa from Moody's, coupled with the other financial criteria of the test, will provide adequate financial assurance. In addition, the minimum tangible net worth standard should be reduced from $1 billion to at the most $100 million dollars.

As indicated above, there is no rational basis for treating subsidiaries which are licensees different than divisions which are legally part of the corporate parent. No greater financial assurance is provided in the former situation. As a consequence, Harris recommends the NRC conform any financial assurance standards under a company guarantee regulatory scheme to the existing parent co111pany guarantee requirements. In the alternative, in adopting rules for a company guarantee, we recommend the NRC reasonably modify the Petitioner's *criteria as

- indicated above.

Any questions or comments concerning this submission should be forwarded to Dennis R. Erdley, Environmental Counsel, Harris Corporation, Corporate Legal Department, 1025 W.

Nasa Blvd., Melbourne, FL. 32919. Please notify Harris at the above address of any public meetings to discuss the Petition for Rulemaking and any related rules.

Thank you for your kind consideration of this matter.

Yours truly, Dennis R. Erdley Environmental Counsel DRE/fa cc: J. R. Potter R.R. Sands R. E. Sullivan E910912

DOCKET NUMBER PETITION RULE PRM 3 D- ?'f ,.r- )

( 5,f/<1& 'l'-13/

November 11, 1991 Omaha Public Power District LIC 307R 444 South 16th Street Mall ~1 NOV 21 P3 :53 Omaha. Nebraska 68102-2247 402/636-2000 Oft*1cc- OF SEC £TARY Mr. Samuel J. Chilk OOCKf1 ING Sr i'VICL Secretary of the Commission l~ANCH U. S. Nuclear Regulatory Commission Washington, DC 20555 Attention: Docketing and Service Branch (3)

Reference:

Docket No. 50-285

SUBJECT:

Comments on General Electric Company (GE) and Westinghouse Electric Corporation (Westinghouse) Petition for Rulemaking (Docket No. PRM-30-59)

Omaha Public Power District (OPPD) has the following comments on the petition for rulemaking published in the Federal Register on September 25, 1991 (56 FR 48445). In this petition, GE and Westinghouse requested that the NRC amend the decommissioning regulations contained in 10 CFR Parts 30, 40, 50, 70, and 72 to provide a means for self-guarantee of decommissioning funding costs by certain NRC licensees who meet stringent financial assurance and oversight requirements.

Electric utility reactor licensees under 10 CFR Part 50 are not included in this petition. It is OPPD's position that any decommissioning regulations should apply to all licensees equally and that compliance alternatives contingent on licensee financial status and size should also be available to utilities.

If you should have any questions, please contact me.

Sincerely, W. G. Gates Division Manager Nuclear Operations WGG/sel c: LeBoeuf, Lamb, Leiby &MacRae R. D. Martin, NRC Regional Administrator, Region IV D. L. Wigginton, NRC Senior Project Manager R. P. Mullikin, NRC Senior Resident Inspector Document Control Desk DEC 3 0 1991 Acknowledged by card ...- ....."..._..,.....snesssx 45-5124 Employment with Equal Opportunity Male/Female

U.S. NUCLEAR REGULATORY COMMISSION DOCKETING & SERVICE SECTION OFFICE OF THE SECRETARY OF THE COMMISSK>N Document Statistics Postmark Dall / f /

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'91 NOV 14 P4 :57 JF~!CE. OF SECRETArfY i)OCKrT ING S(lV tcr:

Marvin I. Lewis RANCK 7801 Roosevelt Boulevard Suite 62 Phila., PA 19152

( 215) 624--157£~

USNRC Washington, D. C. 20555 Docketing and Service Branch

r Cc,mmissic,ners; l Please accept the following letter as my comments upon the Pe ition of GE and Westinghouse, Docket No. PRM 30-59.

I object strongly to the Petition. In this day and age of very large companies being eaten up and taken over by smaller companies for the purpose of disposing of the larger company for short term gain, the arrangement described in the Petition is very dangerous. The Philadelphia Inquirer has recently run a nine part series showing the many problems in financing in the United States. (October 21-27, 1991, Philadelphia Inquirer, Bartlett and Steele.)

Self financing and self guarantees are a matter of faith at best. The present arrangement of outside guarantees is not perfect, but it has some historical justification which self guarantees cannot approach.

Admittedly, outside guarantees are more expensive than self guarantees. You get what you pay for. The higher assuredness of

- side guarantees comes with a higher price tag.

W The present rule for assuring or guaranteeing decommissioning costs is not perfect, but its a heck cf a lot better than the remedy proposed by GE and Westinghouse.

Respectfully subm' 1/~10-91.

DEC 3 0 1991 AcknowJedged by card ,. . ...... ,zs,1<Mua1 I n1zu*1111 .. ,

U.S. NUCLEAR REGULATORY COMMISSION OOCi<ETING & SERVICE SECTION OFFICE OF THE SECRETARV Of THE COMMISSION Document StatlsUcs Postmark Date--,-------

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~Hied (5J, f t:. LJK '14V Signal r: , LL Allled*Slgnal Inc.

~L;::>Ni* C Law Department P.O. Box 2245 Morristown, NJ 07962*2245 November 8, 1~ NOV 13 A9 :GS Secretary Nuclear Regulatory Commission Washington, DC 20555 Re: Docket No. PRM-30-59

Dear Sir/Madam:

A!!ied-Signal Inc. ("Allied-Signal") operates a uranium hexafluoride conveiSion facility at A Metropolis, Illinois, pursuant to a Commission license. We file this statement in support of the w petition of General Electric Company and Westinghouse Electric Corporation requesting the Commission to amend its regulations establishing general requirements for decommissioning licensee facilities to provide for a means for self guarantee of decommissioning funding costs by certain Commission non-electric utility reactor licensees who meet stringent financial assurance and related reporting and oversight requirements.

Allied-Signal has no shareholder owning a majority of its shares, is subject to the reporting requirements of the Securities Exchange Act of 1934 and, subject to the comments below, believes the financial stability tests proposed by GE and Westinghouse in their petition to be a reasonable alternative to the current third party decommissioning funding requirements.

Allied-Signal believes that the financial stability test should be tied to the current estimate

_ of decommissioning costs rather than to the size of the licensee. It is our belief that there are 4I many companies, some of which may be Commission licensees potentially subject to the proposed financial stability tests, which have a credit rating of "A" or above and a substantial tangible net worth although less than one billion dollars. If the concept of a self guarantee is acceptable to the Commission, not to make such option readily available to otherwise credit worthy entities not having the size of GE and ~Vestinghouse, seems unfair. It would seem to be a fairer position for the Commission to establish a net worth requirement of ten times the estimated decommissioning costs or, in the case of licensees with multiple facilities requiring decommissioning, five hundred million dollars to one billion dollars depending on the number of such facilities.

Very truly yours, Stanley R. evinson Assistant General Counsel DEC 3 0 1991 Acknowledged by card.. ,., .... ummlt 1 *

• S. 'UCU:AR REGULATORY COMMISSiON DOCKETING & SERVICE SECTION OFFICE OF THE SECRETARY OF THE COMMISS'ON Document Statisttcs mark Dat, F £

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.:' ::~L, l, l { LI, U5NRC "91 OV 12 P4 :l 6 November 12, 1991 Secretary U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Attention: Docketing and Service Branch Re: Comments of Cabot Corporation on a Pet i tion for Proposed Rulemaking Filed by General Electric Co. and Westinghouse Electric Corp.,

56 Fed. Reg. 48445 (Sept. 25, 1991)

Dear Secretary:

These comments are submitted by and on behalf of Cabot Corporation ("Cabot") with respect to the above-captioned petition for rulemaking filed by General Electric Co. ("GE") and Westinghouse Electric Corp. ("Westinghouse"). The petition filed by GE and Westinghouse requests

• that NRC revise its existing financial assurance regula t ions in 10 C.F.R. Part 30, et seq. to allow one additional means of demonstrating financial responsibility for decommissioning costs to those curren t ly authorized, specifically, a "self - guarantee" for certain companies that could satisfy stringent financial tests. Cabot is affected by NRC's regulations and by the petition to add another financial assurance option because, like GE and Westinghouse, Cabot owns a facili t y licensed by NRC and is subject to financial assurance requirements at that faci l ity.

As a general matter, Cabot strongly supports the petition and agrees that the current regulations should be revised to allow an additional financial assurance mechanism, a "self -

guarantee" by qualifying companies. The arguments made by GE and Westinghouse in support of such an option are well reasoned and persuasive. In particular, Cabot strongly supports the following points made by GE and Westinghouse:

Cabot Corporation County Line Road Boyertown, Pennsylvania 19512 Phone: 215 367-218 1 Aelcnowledged by cant.  !!: !! ~

U.S. NUCLEAR REGULATORY COMMISSION DOCKETING & SERVICE SECTION OFFICE OF THE SECRETARY OF THE COMMISSION Documint Statistics

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CABOT Secretary, U.S. Nuclear Regulatory Commission Attention: Docketing and Service Branch November 12, 1991 Page Two

• The current financial assurance regulations are irrational in that they allow relatively poorly capitalized, weak institutions, such as savings and loan institutions and insurance companies, to issue letters of credit satisfying financial assurance requirements but do not allow large, blue-chip corporations to self-guarantee their obligations.

• By the same token, it is irrational to allow a parent corporation with a net worth of a mere

$10 million to issue a guarantee for a subsidiary, yet.not allow companies.with assets many times greater to guarantee their own obligations.

• The current, restrictive rules create incentives for companies to create corporate subsidiaries to hold their NRC-licensed facilities for no other reason than to avoid third-party bonding or letter-of-credit costs by creating a parent-subsidiary structure in which the parent could issue a guarantee for the subsidiary. All things considered, it cannot be in the public interest to have licensed, regulated facilities held by smaller, less well capitalized subsidiaries rather than by larger, wealthier companies.

• Except for companies that create subsidiaries in order to avoid such costs as described above, the current rules will require many large, well-capitalized companies to spend substantial sums of money on third-party financial assurance mechanisms such as letters of credit. Over the lifetime of a typical licensed facility, such costs can easily total millions of dollars. In most if not all cases, this money will simply be wasted because the licensee will satisfy its obligations without recourse to the third-party guarantors.

Cabot Corporation County Line Road Boyertown, Pennsylvania 19512 Phone: 215 367-2181

CABOT Secretary, U.S. Nuclear Regulatory Commission Attention: Docketing and Service Branch November 12, 1991 Page Three

• The effect of these peculiar distinctions and incentives is to create economic and competitive imbalances between companies that are neither fair nor rational. There is no justification for requiring one facility to spend, e.g., $100,000 per year on a standby letter of credit (because it is owned directly and not through a subsidiary) while an identical facility is spared this expense because it is owned by a subsidiary of another company. It is unfair to the company that is forced to spend the money; puts that company at a competitive disadvantage; and in most cases, is

.. *. money, wasted rather than spent on compliance or production.

For all these reasons, Cabot heartily agrees with GE and Westinghouse that companies that satisfy a reasonable financial test should be allowed to self-guarantee. Cabot does not, however, support the financial test proposed by GE and Westinghouse to allow such self-guarantees. That test is far too restrictive and out of proportion to any reasonable requirements. The proposed test is so restrictive that it will benefit very few companies (quite possibly, only GE and Westinghouse) and thus, would fail to address or resolve most of the unfair and irrational effects of the current regulations.

GE and Westinghouse propose a financial test that is modeled on the provisions of the current rules (applicable to parent companies only) but is far more restrictive in almost every respect. The current rules require that the guarantor's net working capital and tangible net worth each equal at least six times the estimated decommissioning costs; GE and Westinghouse propose a minimum of ten times decommissioning costs. The current rules require that the guarantor either pass certain ratios concerning assets, liabilities and net worth or have an investment-grade bond rating; GE and Westinghouse propose to require a more stringent investment-grade bond rating (disallowing Standard and Poor's BBB and Moody's Baa) and would not allow the alternative financial ratio tests at all. The current rules require the guarantor to have a net worth of at Cabot Corporation County Line Road Boyertown, Pennsylvania 19512 Phone: 215 367-2181

CABOT Secretary, U.S. Nuclear Regulatory Commission Attention: Docketing and Service Branch November 12, 1991 Page Four least $10 m1llion: GE and Westinghouse would set the minimum at an astronomical $1 billion -- one hundred times the minimum for parent company guarantees!

Cabot submits that there is no justification for such drastic increases in the financial requirements of the current rules. These rules and tests were essentially adopted wholesale from EPA's hazardous waste program, which by now has a body of experience with financial assurance matters.1/ The current test is already exceedingly conservative in that it requires a net worth that is: (1) much (six times) larger than estimated costs: (2) substantial in itself ($10 million): and (3) supported by-either an investment-grade bond rating or by passing a stringent financial ratio test. Companies that are not both large and solvent will not satisfy both (2) and (3):

and the requirement that net worth also be at least six times estimated decommissioning costs ensures that even large, sound companies will not be able to guarantee liabilities that are too large in relation to their net worth. In short, the current rules already constitute a "belt-and-suspenders" approach to financial assurance. No increased stringency is necessary, and certainly nothing even remotely approaching the increases suggested by GE and Westinghouse.,

Cabot respectfully suggests that NRC simply use the same requirements now applicable to parent company guarantors and make these the requirements for self-guarantees. If any changes are made, they should be limited so as to avoid making the new self-guarantee alternative inaccessible and hence worthless. A net worth of $1 billion is a preposterous requirement, particularly where the decommissioning costs in question might be only a few million. If $10 million is too low, perhaps the minimum should be $25 million, or $50 million, but certainly no 1/ Because numerous NRC-licensed facilities are also "mixed waste" facilities now subject or soon to be subject to EPA's RCRA program as well as the NRC program, it is particularly desirable for the two agencies to maintain consistent requirements for financial assurance.

Cabot Corporation County Line Road Boyertown, Pennsylvania 19512 Phone: 215 367-2181

CABOT Secretary, U.S. Nuclear Regulatory Commission Attention: Docketing and Service Branch November 12, 1991 Page Five higher. NRC has no experience in bond ratings, and certainly no basis to substitute its judgment concerning what is "investment-grade" for that of SEC and of the experts, S&P and Moody's. Ratings of BBB and Baa are considered investment-grade by the markets, and are satisfactory in EPA's RCRA program; on what basis would NRC determine that they are inadequate for its purposes? In any event, the alternative financial ratio tests should be retained as an alternative to bond rating so the proposed increase in minimum net worth from six to ten times estimated decommissioning costs is the least extreme aspect of GE's and Westinghouse's proposal, but it too appears to lack justification.

In summary, then, Cabot strongly endorses the petition'to add a self-guarantee mechanism for satisfying financial assurance requirements, but disagrees just as strongly that the self-guarantee option should be subject to such extraordinary financial requirements. NRC should take action to fix the problem in the current system, but should do so in a way that provides meaningful relief and benefits all large, financially sound companies. The existing financial tests are already stringent; they do not need enhancement, and certainly do not need to be as restrictive as GE and Westinghouse propose. In effect, that proposal might benefit literally no one but those two companies, which would be both unfair to other financially sound companies and inconsistent with much of the petition's basis, which is that the current rules impose unnecessary costs, encourage irrational corporate structures, and create competitive distortions. The problems are real, and deserve a real solution.

Respectfully submitted, Anthony C pitelli Environmental Officer Electronic Materials and Refractory Metals Division Cabot Corporation County Line Road Boyertown, Pennsylvania 19512 Phone: 215 367-2181

DOCKET NUMBER 7J ~ d PETITION RULE PRM 3 {'.J - 5 7

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[15~16~01 J NUCLEAR REGULATORY COMMISSION *91 SEP 18 P4 :02 10 CFR Parts 30, 40, 50, 70, and 72 DFf:'!C::* OF st:.* /\i~Y

[Docket No. PRM-30-59] DiJCh[1 INC.\. '.-:.:f__ i*:V!Cf-

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General Electric Co. and Westinghouse Electric Corp.;

Filing of a Petition for Rulemaking AGENCY: Nuclear Regulatory Commission.

ACTION: Notice of receipt of petition for rulemaking.

SUMMARY

The General Electric Company and the Westinghouse Electric Corporation request that the Nuclear Regulatory Commission (NRC) amend its regulations establishing general requirements for decommissioning licensee facilities. The petitioners request that the NRC issue a rule that would provide

- a means for the self-guarantee of decommissioning funding costs by certain NRC non-electric utility reactor licensees who meet stringent financial assurance and related reporting and oversight requirements.

111,1r1 DATES: Submit comments by (45 days following publication in the Federal Register). Comments received after this date will be considered if it is practical to do so, but assurance of consideration cannot be given except as to comments received on or before this date.

ADDRESSES: Submit comments to: Secretary, U.S. Nuclear Regulatory Commission, Washington, DC 20555. Attention:

Docketing and Service Branch. For a copy of the petition, write:

Rules Review Section, Regulatory Publications Branch, Division of Freedom of Information and Publications Services, Office of Administration, Washington, DC 20555.

FOR FURTHER INFORMATION CONTACT: Joseph Wang, Chief, Engineering

- and Decommissioning Section, Radiation Protection & Health Effects Branch, Division of Regulatory Applications, Office of Nuclear Regulatory Research, U.S. Nuclear Regulatory Commission, Washington DC. 20555, Telephone (301)-492-3746 or Michael T.

Lesar, Chief, Rules Review Section,* Regulatory Publications Branch, Division of Freedom of Information and Publications Services, Office of Administration, Washington, DC. 20555, Telephone: (301)492-7758 or Toll Free: 800-368-5642.

SUPPLEMENTARY INFORMATION:

Background

The NRC has received a joint petition for rulemaking submitted by the General Electric Company (GE) and the Westinghouse Electric Corporation (Westinghouse). The petition was assigned Docket No. PRM-30-59 on July 11, 1991. The petitioners request that the NRC amend its decommissioning regulations contained in 10 CFR Parts 30, 40, 50, 70, and 72 to provide a means for self-guarantee of decommissioning funding 2

costs by certain NRC licensees who meet stringent financial assurance and related reporting and oversight requirements.

Electric utility reactor licensees under 10 CFR Part 50 are excluded from this petition.

On June 27, 1988 (53 FR 24018), the NRC published a final rule that established general requirements for decommissioning nuclear facilities. These requirements provide assurance that licensed facilities will be decommissioned in a safe and timely

- manner and that adequate funds will be available for decommissioning. Under the current decommissioning requirements, licensees are permitted to provide financial assurance of decommissioning funding through prepayment, insurance, a surety bond, a letter of credit, a line of credit, a parent company guarantee, or the establishment of a sinking fund.

In March 1990, the petitioners each sought a specific exemption from the financial assurance instrument requirements discussed in the previous paragraph. The requested exemptions would have enabled the petitioners to demonstrate financial assurance by submitting a self-guarantee that otherwise met or exceeded the criteria for qualifying parent company guarantees under Appendix A to 10 CFR Part 30. The Commission denied the requests for exemptions on July 31, 1990. The petitioners each submitted a Petition for Reconsideration on August 20, 1990. The Commission denied these Petitions for Reconsideration on March 7, 1991, but invited GE and Westinghouse to submit a petition for 3

rulemaking to address the issues raised concerning self-guarantee for decommissioning funding.

The Petitioners The petitioners each hold NRC licenses issued under the regulations in 10 CFR Chapter I or comparable licenses issued by an Agreement state. Therefore, the petitioners are subject to the Commission's requirements. The petitioners state that they have sufficient resources to provide the degree of financial assurance necessary to meet the stated requirement that adequate funds be available for decommissioning. The petitioners assert that they are in excellent financial condition, possess vast assets, enjoy premier credit standing, and have long-lived records of prosperity. The petitioners contend that few financial institutions in the business of extending letters of credit or other forms of third-party guarantees can demonstrate the same degree of financial capacity. The petitioners believe that this recognized standing in the financial community supports their contention that self-guarantee by licensees of similar financial substance is more than sufficient to meet the financial assurance requirements of the decommissioning rule.

Need for the Suggested Amendments The petitioners have submitted this petition for rulemaking because they believe that they have been adversely and unreasonably affected by the limitations in the current decommissioning rule. The petitioners state that, under the current rule, companies like the petitioners are unable to 4

guarantee decommissioning funding costs when they themselves are NRC licensees. However, according to the petitioner, less financially strong institutions, such as insurance companies, banks, and savings and loan institutions, are permitted to guarantee the decommissioning funding costs of NRC licensees without providing any evidence of financial strength.

Furthermore, according to the petitioners, licensees without the financial capabilities of the petitioners may provide qualifying parent company guarantees solely because these parent companies are legal entities distinct from the subsidiary licensees whose decommissioning funding they guarantee.

The petitioners state that the lack of an internal decommissioning funding method imposes unwarranted compliance costs upon them. The current rule compels the petitioners to either restructure their licensed activities into less financially secure licensee subsidiaries for which the petitioners could then provide parent company guarantees or to obtain external financial assurance at a cost that would be significant over the term of their licensed activities.

The Solution The petitioners suggest that the NRC amend its regulations pertaining to decommissioning funding to permit an additional method for providing the required financial assurance. The petitioners also suggest that the NRC add provisions in which it would establish the criteria to be used in determining the qualifications of a licensee to provide a self-guarantee of 5

funds. According to the petitioners, the suggested criteria for self-guarantee of funds are more stringent than those currently required for a parent company guarantee.

The suggested amendment would provide for the self-guarantee of funds for decommissioning costs by any licensee, other than an electric utility licensed to operate a reactor under 10 CFR Part 50, that (1) Has no majority shareholder, that is, a company without a parent company; (2) Is subject to the reporting requirements of the Securities Exchange Act of 1934; and (3) Demonstrates a level of present and future financial stability sufficient to meet the required financial test.

Need for the Amendments The petitioners believe that their suggested amendments are in the public interest. The petitioners state that the proposed amendments would encourage direct licensee responsibility by financially strong companies. The petitioners believe that the current rule may encourage a financially strong, independent company to create less financially secure subsidiaries to hold NRC licenses in order to avoid the additional cost of available decommissioning funding assurance methods. The petitioners assert that the consolidation of financial resources in a single licensed organization would enhance the performance of all licensee responsibilities thereby better achieving the stated purpose of the required financial assurance provisions.

6

In addition, the suggested amendments would permit licensees without parent companies to conserve valuable resources by executing a self-guarantee rather than expending increasing amounts of money for a line or letter of credit. According to the petitioners, the cumulative cost of a line or letter of credit is estimated to be in excess of several million dollars for each license over the next 40 years. These funds would be unrecoverable and, in the petitioners' view, this represents an unwarranted expenditure of funds.

The Petitioners' Suggested Amendments The petitioners have suggested specific amendments to the provisions of 10 CFR Chapter I to accomplish their suggested amendments. The suggested amendments, with minor editorial adjustments to codification and amendatory language necessary to meet publication requirements, are as follows:

1. In§ 30.35, the introductory text of paragraph (f) (2) is revised to read as follows:

§ 30.35 Financial assurance and recordkeeping for decommissioning.

(f) * * *

(2) A surety method, insurance, or other guarantee method.

These methods guarantee that decommissioning costs will be paid.

A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used 7

if the guarantee and test are as contained in Appendix A to this part. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B to this part. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

2. A new Append-ix Bis added to Part 30 to read as follows:

Appendix B to Part 30 -- Criteria Relating To Use of Financial Tests and Self Guarantees for Providing Reasonable Assurance of Funds for Decommissioning I. Introduction.

An applicant or licensee may provide reasonable assurance of the availability of funds for decommissioning based on furnishing its own guarantee that funds will be available for decommissioning costs and on a demonstration that the company passes a financial test. This appendix establishes criteria for passing the financial test for the self guarantee.

II. Financial Test.

8

A. To pass the financial test, the company must meet all of the following criteria. The company must have:

(i) A current rating for its most recent bond issuance of AAA, AA, or A, as issued by Standard and Poor's or Aaa, Aa, or A, as issued by Moody's; and (ii) Tangible net worth at least ten times the current decommissioning cost estimate (or prescribed amount if a certification is used); and

- (iii) Tangible net worth of at least $1 billion; and (iv) Assets located in the United States amounting to at least 90 percent of total assets or at least ten times the current decommissioning cost estimates (or prescribed amount if certification is used).

B. The company's independent certified public accountant must have compared the data used by the company in the financial test, which is derived from the independently audited, year end financial statements for the latest fiscal year, with the amounts in such financial statement. In connection with that procedure, the licensee shall inform NRC within 90 days of any matters coming .to the auditor's attention which cause the auditor to believe that the data specified in the financial test should be adjusted and that the company no longer passes the test.

c. The company must have at least one class of equity securities registered under the Securities Exchange Act of 1934.

9

D. 1. After the initial financial test, the company must repeat the passage of the test within 90 days after the close of each succeeding fiscal year.

2. If a company no longer meets the requirements of paragraph A of this section, the licensee must send notice to the Commission of intent to establish alternate financial assurance as specified in the Commission's regulations. The notice must be sent by certified mail within 90 days after the end of the fiscal year for which the year end data show that the company no longer meets the financial test requirements. The licensee must provide alternate financial assurance within 120 days after the end of such fiscal year.

III. Company Guarantee.

The terms of self guarantee which an applicant or licensee furnishes must provide that:

A. The guarantee will remain in force unless the licensee sends notice of cancellation by certified mail to the Commission.

cancellation may not occur, however, during the 120 days beginning on the date of receipt of the notice of cancellation by the Commission, as evidenced by the return receipt.

B. The licensee will provide alternate financial assurance as specified in the Commission's regulations within 90 days after receipt by the Commission of a notice of cancellation of the guarantee.

C. The guarantee and financial test provisions must remain in effect until the Commission has terminated the license or 10

until another financial assurance method acceptable to the Commission has been put into effect by the licensee.

D. The licensee will promptly forward to the Commission and the licensee's independent auditor all reports filed by the licensee (in its capacity as a registrant) with the Securities and Exchange Commission pursuant to the requirements of section 13 of the Securities Exchange Act of 1934.

E. If at any time the licensee's most recent bond issuance ceases to be rated in any category of A or above by either Standard and Poor's or Moody's, the licensee will provide notice in writing of such fact to the Commission within 20 days after publication of the change by the rating service.

3. In§ 40.36, the introductory text of paragraph (e) (2) is revised to read as follows:

• § 40.36 Financial assurance and recordkeeping for decommissioning.

(e) * * *

(2) A surety method, insurance, or other guarantee method.

These methods guarantee that decommissioning costs will be paid.

A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the 11

requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of

- the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

4. In§ 50.75, the introductory text of paragraphs (e) (1) (iii) and (e) (2) (iii) are revised to read as follows:

§ 50.75. Reporting and recordkeeping for decommissioning planning.

- (e)

(1)

(iii) A surety method, insurance or other guarantee method.

These methods guarantee that decommissioning costs will be paid.

A surety method may be in the form of a surety bond, letter of credit, or line of credit. Any surety method or insurance used to provide financial insurance for decommissioning must contain the following conditions.

12

(2) * *

(iii) A surety method, insurance, or other guarantee method. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company.

5. In§ 70.25, the introductory text of paragraph (f) (2) is revised to read as follows:

§ 70.25 Financial assurance and recordkeeping for decommissioning.

(f) * * *

(2) A surety method, insurance, or other guarantee method.

These methods guarantee that decommissioning costs will be paid.

A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds 13

for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:*

6. In§ 72.30, the introductory text of paragraph (c) (2) is revised to read as follows:

§ 72.30 Decommissioning planning, including financing and recordkeeping.

(c) * * *

(2) A surety method, insurance, or other guarantee method.

These methods guarantee that decommissioning costs will be paid.

A surety method may be in the form of-a surety bond, letter of credit, or line of credit. A parent company guarantee of funds 14

for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or the licensee may not be used in combination with any other financial methods to satisfy the requirements of this section or in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions:

(Note: The petitioners' suggested amendment to 10 CFR Part 72 was presented as an amendment to§ 72.18, which was amended by the final rule published June 27, 1988 (53 FR 24055). When Part 72 was revised on August 19, 1988 (53 FR 31658), the section containing the provisions applicable to decommissioning was recodified as§ 72.30.)

Supporting Information The petitioners assert that, coupled with an appropriately demanding financial test and annual recertification, self-guarantee by a licensee clearly provides reasonable assurance 15

that sufficient decommissioning funds will be available. The petitioners state that whatever incremental assurance of funding availability may be achieved by a separate parent guarantee may also be achieved by a licensee's self-guarantee when the licensee can show that it is substantially less likely to face bankruptcy than a parent guarantor qualifying under Appendix A to 10 CFR Part 30. The stricter financial test criteria suggested by the petitioners, in their view, more than offset the benefits derived

• from segregating a parent company's assets in the event of a bankruptcy by the subsidiary licensee.

The petitioners believe that an adequate early warning system can be established to predict a licensee's inability to meet its financial obligations. Therefore, there is no reason not to accept the assets of the licensee itself as the basis for decommissioning funding assurance for its own licenses.

According to the petitioners, the Environmental Protection Agency accepts self-guarantee as a method of providing financial assurance of funding of the closure of hazardous waste facilities.

The petitioners believe that the bond rating requirements contained in their suggested amendments provide an effective early warning system concerning changes in a licensee's financial condition which may adversely affect the availability of funds for decommissioning. Bond ratings are assigned by independent entities such as standard and Poor's or Moody's and are based on their evaluations of relative investment qualities of bonds and 16

the creditworthiness of their issuers. The bond rating given an issuance reflects past, present, and future risks. Bond ratings are not static. They change in time to reflect the changing financial condition of an issuer.

According to the petitioners, statistics indicate that rating systems work as predictive tools. The petitioners state that bonds holding ratings of "A" or better, the petitioners' suggested threshold, have an extremely low default rate over both short and long periods of time. The petitioners indicate that the incidence of any issuer rated "A" or better defaulting within 6 years following the receipt of a rating of "A" or better is less than one percent. The petitioners state that this attests to both the financial quality of the issuers who are rated "A" or better as well as the integrity of the ratings system as a method of assessing the current and future strength of the issuers.

The petitioners note that the average default rates since 1970 for issuers rated "Baa" is more than four times higher than the average one year default rates for issuers rated "A" or better. In addition, 6 years after the ratings were issued the average cumulative default rates for issuers rated "Baa" are approximately two and a half times greater than the default rates for issuers rated "A" or better, 3 to 5 years after the ratings were issued the average default rates for issuers rated "Baa" were approximately three times the rates for issuers rated "A" or better, and in the second year after the ratings were issued the default rates for issuers rated "Baa" were at least 17

five times the rates for issuers rated "A" or better. The petitioners point out that a rating of "Baa" constitutes an acceptable rating for parent company guarantors under the current decommissioning rule.

The petitioners state that these statistical.comparisons clearly demonstrate that a guarantee by a licensee holding an "A" bond rating offers substantially greater protection than a company holding a "Baa" bond rating. Therefore, the petitioners

• believe that their suggested amendments provide more than reasonable assurance of adequate funds for decommissioning.

In addition, the petitioners believe that the suggested requirement that a licensee notify the NRC of a change in its bond rating that removed the licensee using a self-guarantee of "A" or better provides the NRC ample early warning of a licensee's potential economic distress. Coupled with the other reports that the NRC would receive if the suggested amendments were adopted, the petitioners believe that the NRC would be apprised of significant financial developments in time to require a licensee to take any appropriate corrective action.

Request for Comments In addition to comment on the proposed petition and the petitioners' proposed criteria, the NRC is soliciting public comment on --

(1) What other criteria, if any, might be proposed for self-guarantee and the basis for the criteria; and 18

- - - - - - - - - - - - - - - - - - - - - ~

(2) Information as to the number or percentage of NRC licensees that might be able to comply with the self-guarantee criteria proposed by the petitioners or any other self-guarantee criteria proposed by the commenter.

Dated at Rockville, Maryland, this /?1day of September 1991.

For the Nuclear Regulatory Commission.

ctor r Operations 19

DOCKET NUMBER UNITED STATES NUCLEAR REGULATORY COMMISSION PETJTION RULE PAM er ~b 3 0 -Si ,Ld' ")

WASHINGTON, D. C. 20555 .;, IP rn... '/ 3'TT 1 /

.SEP 1 9 1991

'91 SEP 23 AlO :14 Mr. Barton Z. Cowan Eckert, Seamans, Cher i n, &Mellot Attorneys at Law 600 Grant Street, 42nd Floor Pittsburgh, Pennsylvania, 15219

Dear Mr. Cowan:

This i s i n regard to the petition for rulemaki ng you f i led with the Commiss ion on behalf of the Westinghouse Corporation. In the petition, which was filed jointly with the General Electric Company, you requested that the Commission issue a rule that would provide a means for the self-guarantee of decommissioning funding costs by certain NRC licensees who meet stri ngent f inancial assurance and re l ated reporting and oversight requirements.

Your petition has been docketed pursuant to 10 CFR 2.802 to recogn i ze your request for amendment of the Commission's regulations. The petition has been assigned Docket Number PRM-30-59. The enclosed notice, which acknowledges receipt of the petition and requests public comment, will be published in the Federal Register.

As staff review progresses on your pet ition, it may be necessary to request additional information. Please reference the assigned docket number on any correspondence you may have concerning the petition. Upon expiration of the comment period, we shall provide you with copies of any comments that have been received in response to the notice of rece i pt for your petition for ru 1ema ki ng .

Sincerely, Donnie H. Grimsley, Director Division of Freedom of Information and Publications Services Office of Administration

Enclosure:

As st ated cc: E. Julian , SECY J. Wang, RES

DOCKET NUMBER UNITED STATES PETITION RULE _PR___M~3~ 0. - ,/G Cjc "'\

NUCLEAR REGULATORY COMMISSION (? ~ i-,'(~

WASHINGTON, D. C. 20555

• 91 SEP 23 AlO :14 Mr. Jay R. Kraemer Fried, Frank, Harris, Shriver, &Jacobson ,_1Fr 1C:

• _!:_l, t 11V 1001 Pennysylvania Avenue, NW., Suite 800 LHJ Ki j I iG 1

, i * *!Cf Washington, DC 20004-2505 uR NL!*

Dear Mr. Kraemer:

This is in regard to the petition for rulemaking you filed with the Commission on behalf of the General Electric Company. In the petition, which was filed jointly with the Westinghouse Corporation, you requested that the Commission issue a rule that would provide a means for the self-guarantee of deco111nissioning funding costs by certain NRC licensees who meet stringent fi nanc ial assurance and related reporting and oversight requirements.

Your petition has been docketed pursuant to 10 CFR 2.802 to recognize your request for amendment of the Commission's regulations. The petition has been assigned Docket Humber PRM-30-59. The enclosed notice, which acknowledges receipt of the petition and requests public comment, will be published in the Federal Register.

As staff review progresses on your petition, it may be necessary to request additional information. Please reference the assigned docket number on any correspondence you may have concerning the petition. Upon expiration of the comment period, we shall provide you with copies of any comments that have been received in response to the notice of receipt for your petition for ru 1ema ki ng

• Sincerely, Donnie H. Grimsley, Director Division of Freedom of Information and Publications Services Office of Administration

Enclosure:

As stated cc: E. Julian, SECY J. Wang, RES

DCi.;"r:T NUMBE~RM 5 0_ S 1

• PETlTION RULE (_5 bFte c/ r 'I- If ?)

FRIED , FRANK. HARRIS , SHRIVER & J ACOB SON A. P A A T N E R S H I P I N C l U D I N G P R O F E S S I O N A l C O R P .0 A A T~ I .0. N S

• ..;CI\L I LL!

U)Ni~C 1001 PEN N SYLVANIA AVENUE , N . W., SUITE 800 WAS HINGTON , DC 20004

• 2505 202

• 639

• 7000 FAX

• 202

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• 7008 "91 JUL 26 P1 :Q3 Jtft,l,,  :.vt'!

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!'t At'-1 " W RITE R'S DIRECT LI NE July 26, 1991 BY HAND Office of the Secretary U.S. Nuclear Regulatory Commission one White Flint 11555 Rockville Pike Rockville, Maryland 20852 Attn: Mr. Emile Julian Docketing & Service Branch Re: GE/Westinghouse Petition for Rulemaking

Dear Mr. Julian:

Enclosed you will find the original executed Release document, executed on July 24, 1991, with the same text as that in the telecopy sent to you by Bart Cowan of Eckert, Seamans (outside counsel to Westinghouse) on July 9. Unless we hear from you to the contrary, we will assume that NRC consideration of the GE/Westinghouse Petition for Rulemaking concerning the Decommissioning Rule, submitted on June 25, 1991, is under way.

Thank you for your cooperation.

Very truly yours, J,t-~

Jay R. Kraemer NEW YO RK

• W AS HINGTON

• LOS AN GELES

• LON DON

RELEASE OF COPYRIGHT M:x:dy's Investors Se-rvica, for itself and its sucx:::essors arrl assigns, hereby waives~ a::>pyright restriction on~ exoerpts f:ran its Special Report, "Cmporate Borrl Defaults arrl Default Rates 1970-1990", which are attached as Annax B to a petition for rulemaking filed by General Electric Conpany arrl Westinghouse Electric Cm:poratian requesting ~ U.S. Nuclear Regulatory Umnission ( NRC), in ~rdanc:E with 10 C.F.R. 2.802, to pranulgate a rule providing a rreans for self-guarantee of decxmnissianing furrli.ng costs by cartain NRC licensees. ~ purpose of this release

- is to enable~ NRC to reproduce said excerpts in sufficient anount such as to enable~ NRC to carry out its regulatory and :public info:r.matian resi;xmsibilities under ~ Atanic Energy Act, as 8IlEl'rled.

This release does rut auth:>rize ~ use of copy of said excerpts by any person or organization in any manrEr mt directly associated with analyzing~ provisions of or basis for~ proposed rule or makinJ subnissions t o ~ NRC in ~ i o n with that proposed rule.

This release is effective as o f ~ date affixed belCM.

r-tX)I)Y'S INVES'IORS SERVICE By:__.a..

_. ___ a_Mfh _

Narre: <Printed) An n f/;t'l-er'

DOCKET NUMBER PETITION RULE PAM 5 0 - 59

~b Ff. 'I- {1(q 0 FRIED , FRA K, HARRIS , SHRIVER & J ACOBSO N A PA R T N ERS H IP INCLUDING P R OFESS I ONAL CORPO R ATIONS 1001 PENNSYLVANIA AVENUE , N . W., SUITE 800 WASH I NGTON , OC 20004

• 2505 202

• 639

• 7000 FAX

• 202

• 639

• 7008 WRITER ' S Ol!IECT LINE June 25, 1991 ...

RECEtVEO Secretary JUN 2 5 1991 U.S. Nuclear Regulatory Commission Ofl\ce of the Washington, D.C. 20555 secretary Attn: Chief, Docketing and Services Branch ~

Re: Joint Petition for Rulemaking from the General Electric Company and Westinghouse Electric Corporation

Dear Sirs:

On behalf of our client, the General Electric Company

("GE"), and pursuant to 10 C.F.R. 2.802, we submit herewith two

( 2) copies of a Petition for Rulemaking which is being filed jointly by GE and the Westinghouse Electric Corporation

("Westinghouse"). On March 7, 1991, NRC Executive Director for Operations, James M. Taylor, notified each of GE and Westinghouse that the Commiss ion would not grant their requests for specific exemptions from the financial assurance requirements of the Commission's Decommissioning Rule. Mr.

Taylor's letters invited GE and Westinghouse, if they wished to pursue the acceptability of self-guarantees as a method of assuring decommissioning funding, to submit a petition for rulemaking on the subject. The enclosed Petition for Rulemaking responds to that invitation.

As noted in the Petition (see fn. 2), GE and Westinghouse incorporate therein by reference the ir respective requests for specific exemptions, filed in March 1990, and their petitions for reconsideration of the denial of those requests, filed on August 20, 1990, as well as the NRC's responses thereto (dated July 31, 1990 and March 7, 1991, respectively, incl uding the attachments thereto), and Commissioner Curtiss's dissent from the denial of the GE request for exemption.

NEW YOR K

• WASHINGTON

• LOS ANGELES

• lONDON

U.i. Cl.E A.A RE:Citiw T0R CC'rf..i.lS~IUN DOCKETING & SERVICE ('ECTK)N OFFICE OF THE SECRETARY Of THE COMMISSION Doarnent Stdsticl f'oatmllt Datt ...;...a~

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FRrED, FRANK, HARRIS, SHRIVER & JACOBSON Secretary June 25, 1991 Page 2 The notifications of March 7, 1991, indicated that, if a rulemaking were requested, the Commission would conduct it on an expedited basis. On behalf of GE, we respectfully request such an expedited rulemaking, so that, if possible, a revised rule could be made effective by mid-March 1992. Such an expedited rulemaking would, assuming the revised rule proposed by the enclosed Petition were adopted, enable GE to avoid the additional expense of renewing the financial assurance mechanism it has provided to the Commission to comply with the current Decommissioning Rule.

Thank you for your prompt attention to this matter.

Sincerely yours, ht!~

Jay R. Kraemer

Enclosure:

Petition for Rulemaking and Attachments/Annexes

ECKERT SEAMANS CHERIN & MELLOfT ATTORNEYS AT LAW 42ND FLOOR 600 GRANT STREFf PITTSBURGH, PA 15219 (412) 566-6000 UN 2 5 199 FACSIMILE: (412) 566-6099 omce ot the TELEX: 866172 secretary BARTON Z . COWAN (4U) 566-6029 June 25, 1991 Secretary U.S. Nuclear Regulatory Commission Washington, D. C. 20555 Attention: Chief, Docketing and Service Section Re: Joint Petition for Rulemaking from the General Electric Company and Westinghouse Electric Corporation

Dear Sirs:

On behalf of our client, Westinghouse Electric Corporation

("Westinghouse"), and pursuant to 10 C.F.R. 2.802, we submit herewith two (2) copies of a Petition for Rulemaking which is being filed jointly by Westinghouse and the General Electric Company ("GE). On March 7, 1991, NRC Executive Director for Operations, James M. Taylor, notified GE and Westinghouse that the Commission would not grant their requests for specific exemptions from the financial assurance requirements of the Commission's Decommissioning Rule. Mr. Taylor's letters invited GE and Westinghouse, if they wished to pursue the acceptability of self-guarantees as a method of assuring decommissioning funding, to submit a petition for rulemaking on the subject. The enclosed Petition for Rulemaking responds to that invitation.

As noted in the Petition (see fn.2), GE and Westinghouse incorporate therein by reference their respective requests for specific exemptions, filed in March 1990, and their petitions for reconsideration of the denial of those requests, filed on August 20, 1990, as well as the NRC's responses thereto (dated July 31, 1990 and March 7, 1991, respectively, including the attachments thereto), and Commissioner Curtiss's dissent from the denial of the GE request for exemption.

The notifications of March 7, 1991, indicated that, if a rulemaking were requested, the Commission would conduct it on an expedited basis. On behalf of Westinghouse, we respectfully request such an expedited rulemaking, so that, if possible, a revised rule could be made effective by mid-March 1992. Such an expedited rulemaking would, assuming the revised rule proposed PITI'SBURGH

• HARRISBURG

• ALLENTOWN

• PHILADELPHIA BOSTON

• BUFFALO

• WASHINGTON, D.C.

• WEST PALM BEACH

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Secretary June 25, 1991 Page 2 by the enclosed Petition were adopted, enable Westinghouse to avoid the additional expense of renewing the financial assurance mechanism it has provided to the Commission to comply with the current Decommissioning Rule.

Thank you for your prompt attention to this matter.

Sincerely yours,

• BZC:dtk Barton z. Cowan

Enclosures:

Petition for Rulemaking w/Attachments

• ... 4 RfCEIV£0 C JllM 2 5 1991

• ottice ot the secreta PETITION FOR RULEMAKING UNDER 10 C.F.R. 2.802

• I. INTRODUCTION General Electric Company ("General Electric" or "GE") and Westinghouse Electric Corporation ("Westinghouse"),

• collectively referred to herein as the Petitioners, hereby

• request "Commission II promulgate that a

or the "NRC")

rule Nuclear Regulatory Commission exercise its rulemaking authority and providing a means for self-guarantee (the of I decommissioning funding costs by certain NRC licensees who meet stringent financial assurance and related reporting and

1. oversight requirements. The Commission's current decommissioning rulel./ permits licensees to provide financial assurance of decommissioning funding through several mechanisms, including prepayment, establishment of a sinking fund, insurance, a line or letter of credit, and a parent company guarantee. The Petitioners propose that the NRC's

• Decommissioning Rule be revised to permit an additional means

• 1/

Nuclear Facilities, See General 53 Fed.

("Decommissioning Rule" or "Rule") .

Requirements Reg. 24018 for Decommissioning (June 27, 1988)

of providing such assurance of decommissioning funding a self-guarantee for decommissioning costs by a licensee, other than an electric utility reactor licensee, that has no majority owner, is subject to the reporting requirements of the

• Securities Exchange Act of 1934 (the "Exchange Act") ,Y and meets certain stringent financial criteria far in excess of those required by the Commission for a parent company guarantor.

A resume of the Petitioners' efforts to obtain NRC approval of self-guarantees provides the administrative context of this Petition for Rulemaking. In March of 1990, GE and

• Westinghouse, respectively, sought specific exemptions from the financial assurance instrument requirements of Parts 30, 40, 50 and 70 of the Decommissioning Rule . .1/ Under those requested

• exemptions, GE and Westinghouse would have been able to satisfy the subject financial assurance requirements in those Parts by

• • submitting a self-guarantee that otherwise met or exceeded the

• criteria for qualifying parent C.F.R. Part 30, Appendix A ("Appendix A").

company guarantees under On July 31, 1990, 10 the Commission denied the requests for exemptions. On

• August 20, 1990, GE and Westinghouse each submitted a Petition for Reconsideration. On March 7, 1991, the NRC denied those Y See 15 u.s.c. § 78 et seq. (1988) *

.1/ Note that the March 1990 GE specific exemption

• request addressed only Parts 50 and 70 *

• petitions . In the Commission's denial of the reconsideration

• petitions, it invited a petition for rulemaking to address the issues raised by GE and Westinghouse concerning self-guarantees for decommissioning funding . This Petition responds to that 1nv1' t a t 'ion. y II. PETITIONERS' GROUNDS FOR AND INTEREST IN THE RULEMAKING GE and Westinghouse hold NRC and/or Agreement state licenses under Parts 30, 40, 50, 70, and 72 and, accordingly, have a direct interest in the revisions to the Rule that are proposed herein. Each of the Petitioners has resources that are more than adequate to provide the Commission, and (ultimately) the public, with the degree of financial assurance I necessary to effectuate the declared aims of the Decommissioning Rule. Moreover, both GE and Westinghouse have

• • a recognized standing in the financial community, decades confidence of that successful the operation, Commission's that objectives further in earned over supports establishing that Rule can be met through a self-guarantee by them and other

• licensees of similar financial substance .

• Y Petitioners incorporate herein by reference their Requests for Specific Exemptions and their Petitions for Reconsideration, as well as the NRC's responses thereto and Commissioner curtiss's dissent from the denial of the GE

• request for exemptions .

• GE and Westinghouse are, by the most exacting standards

• for measurement, in excellent financial condition~ they possess vast assets, enjoy premier credit standing, and have long-lived records of prosperity. As of December 31, 1990, the end of its

• most recently completed fiscal year, GE had total assets (on a consolidated basis) in excess of $153 billion and total share owners' equity of nearly $21.7 billion. As of the end of its most recently completed fiscal year, Westinghouse had total

,. assets (on a consolidated basis) of $22 billion and total share owners' equity of $3.9 billion. Very few banks financial institutions in the business of extending letters of or other credit or other forms of third-party guarantees can demonstrate financial capacity of such magnitude.

Under the Rule, companies like the Petitioners, which are of unquestionable financial strength and are capable of

• • satisfying the most unable to themselves guarantee stringent measure decommissioning are NRC licensees.

of that funding By contrast, strength, costs less when are they financially strong ins ti tut ions ( such as insurance companies, banks, and

• savings and loan associations) are not only permitted to guarantee the decommissioning funding costs of NRC licensees, but they are permitted to do so without evidencing to the NRC

• any degree of financial strength whatsoever. Moreover, and at the heart of this Petition, licensees' parent companies whose financial capacities pale in the face of those of the

• Petitioners are nonetheless permitted by the Rule.2/ to

• provide qualifying "parent guarantees" solely because such parent companies are legal entities distinct from the subsidiary-licensees whose decommissioning funding they

• guarantee. Paradoxically, although GE is, and Westinghouse would be, able to provide a guarantee for subsidiary-licensees under the Rule, the Petitioners are nonetheless required to seek external decommissioning funding assurances because, in most instances, they themselves are the licensees . ..§/ The anomalous nature of the Rule is thus readily apparent. What is

• proposed in this Petition is a means by which licensees like the Petitioners can provide a level of assurance of timely and adequate decommissioning funding that is at least the

• functional equivalent of that provided by the "parent-guarantee" mechanism*.

• • The dispense Petitioners with external show herein methods of that it funding is reasonable assurance to when

• .2/ Even without assuming that any particular parent company's guarantee will be accepted by the Commission, it is reasonable for the Petitioners to expect ( and to base their assertions herein on such expectation) that a parent guarantee which meets all of the express requirements of the Rule will be

• so accepted .

..§/ Commissioner Curtiss' s dissent to the denial of the GE request for specific exemption recognizes that the current Rule, and its failure to provide for a self-guarantee for licensees like the Petitioners, has led to anomalous

• results. See Commissioner Curtiss's comments on SECY-90-217 (a copy of which is attached, at Annex A)

• dealing with licensees of overwhelming financial stability.

Licensees like the Petitioners simply do not present more than a remote risJcLI of near-term, unanticipated bankruptcy or other severe financial distress that might otherwise make

• reliance on a licensee's self-assurances less than reasonable.Y By not allowing a self-guarantee in the limited circumstances advocated by the Petitioners, the existing Rule unnecessarily increases the cost to the Petitioners, and other similarly situated licensees, of achieving the Commission's stated objective in promulgating the

• Rule .

1/ The risk of near-term failure presented by licensees such as Petitioners, see infra notes 20, 27-32 and accompanying text, compares favorably, for. example, with the projected risk of failure associated with letters of credit issued by banks. As calculated in a report recently prepared for the Commission Staff by an outside contractor, the failure

• rate of such bank letters of credit is estimated to be 0.5 percent. "Report on Analysis of Criteria for Self-Guarantee by NRC Licensees," ICF Incorporated (March 1991), NRC-02-91-001, at 27) [hereinafter, ICF Report]. Note that such letters of credit are an acceptable form of providing decommissioning funding assurances under the present Rule .

• Y As noted by Commissioner Curtiss, licensees of a financial strength such as the Petitioners do not seem to present the problem of diversion of decommissioning reserves to other purposes in the face of financial difficulties that apply to less financially secure licensees. See Commissioner

• Curtiss!s comments, supra note 6 *

• General Electric and Westinghouse submit this Petition21 because they are affected adversely and unreasonably by the limitations in the Decommissioning Rule.

The lack of an internal method of decommissioning funding

• assurance imposes unwarranted compliance costs upon them. In sum, the Petitioners currently are being affected adversely by the terms of the Rule due to the business form they have adopted to conduct licensed activities. The existing Rule compels GE and Westinghouse either to restructure their licensed activities into less financially secure

• licensee-subsidiaries (for which the Petitioners could then provide parent guarantees) or to obtain external assurances at a cost (in future years, literally hundreds of thousands of

• dollars annually in non-recoverable charges) that will be quite significant over the lives of their licensed activities.

• • For these reasons, GE and Westinghouse ask that the NRC recognize a new, appropriately limited category of V Since this is a Petition for Rulemaking, rather than a request for a specific exemption, the Petitioners need not demonstrate herein (as section 50.12 of the NRC regulations required in the exemption context) that they are adversely affected vis-a-vis their competitors in nuclear fuel

• fabrication or other businesses who have availed themselves of a no-cost method of providing financial assurances under the Rule -- a method that is unavailable to the Petitioners. In a rulemaking, it is enough to show that the Petitioners' proposal meets the Commission's declared goal of reasonable assurance of adequate funding for decommissioning by providing an equivalent

• degree of protection for public health and safety to that currently required by the Rule

• decommissioning funding assurance, which is described more fully below.

III. THE REMEDIAL RULE CHANGE ADVOCATED BY THE PETITIONERS

• The Petitioners propose that the Commission amend Parts 30, 40, 50, 70 and 72 of its regulations to permit an additional method for providing the requisite financial

• assurance for decommissioning funding. In addition, the Petitioners propose that the Commission add a new "Appendix B" to Part 30 of the regulations, in which it would set forth the

• criteria for qualifying self-guarantors.

Specifically, the Petitioners submit that a rule should be promulgated to provide for the self-guarantee of funds for

• decommissioning costs by any licensee, except an electric utility reactor licensee, that (i) has no majority shareholder (that is, a company without a "parent"), lO/ . (ii) is subject to the reporting requirements of the Exchange Act, and (iii) demonstrates a level of present and, to the extent predictable, future financial stability sufficient to meet the demanding

• financial test in proposed Appendix B.

• .lQ/ In Regulatory Guide 3.66, Item 5 of section

4. 7. 6, a parent company is described as the shareholder with majority control of the licensee's voting stock. The rule proposed by the Petitioners specifies that only licensees with no shareholder meeting that criterion could avail themselves of

• the new rule. This limitation is proposed because only such licensees would be structurally incapable of fulfilling the NRC's existing financial assurance requirements through a "parent" guarantee .

• The Petitioners propose that the Commission amend Part 30

• of its regulations by adding a new "Appendix B~" setting forth the stringent financial test that must be met by licensees seeking to avail themselves of the self-guarantee method of

• providing decommissioning funding assurances. The financial test that the Petitioners urge the Commission to adopt for this "Appendix B" would require that the licensee meet all of the

• following standards:

(i) a current rating for its most recent bond issuance of AAA, AA or A as issued by Standard and Poor's

• Inc. ( "S&P") or Aaa, Aa or A as issued by Service ("Moody's");

Moody's Investors (ii) tangible net worth of at least 10 times the current decommissioning

• cost estimate (or prescribed amount if a certification is used);

(iii) tangible net worth of at least

$1 billion; and

- (iv) assets least located 10 times in the States amounting to at least 90 percent of total assets or at the decommissioning cost estimate ( or prescribed amount if United current a

• certification is used) .

The Petitioners further propose that, under "Appendix B",

licensees be required to follow the procedures found in

• Sections II B, II C and (to the extent germane)

Appendix A in the same manner as those sections are applicable III of

• to parent companies under the existing Rule. 111 In addition,

• licensees using a self-guarantee would be required to forward

i. promptly to both the NRC and the licensee's independent auditor all reports filed with the Securities and Exchange Commission (the "SEC"). Finally, in the event that the licensee's most recent bond issuance at any time ceased to be rated "A" or above by either Moody's or S&P, the licensee would be required to provide the NRC with notice of that fact within 2 o days after the change was published by the relevant rating service .

• 11/ Section II B states that the company's independent certified public accountant must have compared the statist.ics used by the company in the financial test with the amounts reported on the company's independently audited, year-end financial statements for the most recent fiscal year.

The licensee is required to inform the NRC within 90 days if that comparison reveals that the company no longer satisfies the financial test.Section II C states that the company must repeat its passage of the financial test within 90 days of the end of each fiscal year and that if at that time the company does not pass that test, the company must send the NRC notice

• that the company will provide alternative financial assurance within 120 days of the end of such fiscal year. Section III provides that the terms of a qualifying guarantee must include statements that the guarantee will remain in force unless cancelled, such cancellation to take effect 120 days after notice thereof to the NRC, and within 90 days of such notice,

• alternative financial assurance must be provided.Section III further provides that the financial test provisions remain in force until the NRC terminates a licensee's license and any trust established for decommissioning costs must be acceptable to the NRC .

• IV. STATEMENT IN SUPPORT OF THE PETITION FOR RULEMAKING

• A. Further Needed Refinement of the Decommissioning Rule is Sanctioning a mechanism for self-guarantees is fully

• consistent with the fundamental objective decommissioning funding assurance requirement as stated in the of the Rule. The Rule was promulgated expressly in order to "provide

• reasonable operations, assurance adequate that, funds at the are time of available termination so of that decommissioning can be carried out in a safe and timely

. . . . .. l.Y

• manner with an appropriately The Petitioners demanding submit financial that, test if and coupled annual re-certification, a self-guarantee by a licensee can clearly provide "reasonable assurance" that such funds will be available.

The crux of the rationale for denial of the Petitioners' August 20, 1990 requests for reconsideration *1ay in the conclusion that a self-guarantee, like an internal reserve, did not provide the same degree of assurance of the timely

• availability of funding for decommissioning as would a parent company guarantee. This conclusion was, in turn, premised on the view, stated in the Staff's Safety Evaluation Report (SER) e accompanying the March 7, 1991 denials, that "a parent company

• 12/ 53 Fed. Reg. at 24033

• can isolate its assets from claims against assets of a

• subsidiary in bankruptcy" leaving the parent company "free from these claims and possessing assets to assure timely decommissioning of its subsidiary's facility."

• Petitioners submit that whatever incremental assurance of decommissioning funding availability may be achieved by the NRC obtaining a separate, secondary parent guarantee can also be achieved by a licensee's self-guarantee when the licensee can show, through the very indicia relied on by the financial markets, that it is substantially less likely to face

• bankruptcy than is a parent guarantor qualifying under Appendix A. Put another way, the stricter financial test criteria proposed herein by the Petitioners more than offset those benefits described in the SER as deriving from the possible segregation of a parent company's assets in the event

• • of a bankruptcy limited to its subsidiary-licensee.

proposal urged by the Petitioners will result in no reduction of the level of assurance of decommissioning funding compared Thus, the to that achieved by the present Rule *

• The Rule, as currently drafted, needs refining because financially stable and substantial NRC licensees without "parents" do not have any means to comply with the Rule other

• than prepayment, creating an external sinking fund* or paying a third party to secure insurance or some other* surety device, each of which is highly burdensome financially. Under the

existing Rule, however, such licensees are able to provide

• guarantees for their subsidiaries that hold NRC licenses. If, as Petitioners believe, an adequate "early warning system" can be established to foreshadow a licensee's slide toward

• inability to meet its financial obligations, no reason would remain not to accept the assets of the licensee itself as the basis for decommissioning funding assurance for its own

• licenses. Once the reliability of such an "early warning" is recognized, a rule that uniformly rejects all forms of self-guarantees, but permits parent guarantees by less

• financially stable entities, is clearly arbitrarily discriminatory against qualifying licensees that elect not to reorganize their corporate structures to create a

• parent/licensee relationship . .1.Y Clearly, there is nothing inherent in a self-guarantee

• • that makes responsibility it an for inappropriate means the future of clean-up assuring of financial contaminated

• .lY such reorganizations are by no means simple or cost-free exercises to be lightly undertaken. They would disrupt existing chains of command and long-established customer relationships. In some instances, they might require the consent of lenders or customers (and such consents might be

• obtained only if commercial parent guarantees were given for the new subsidiary's obligations) .

reorganizations would require At a minimum, parallel and such duplicative structures (e.g., Boards of Directors, managers, reporting requirements) that would be inherently wasteful. We question, moreover, whether it is sound regulatory pol icy to provide

• encouragement for fractionating responsibility for the conduct of NRC-licensed activities.

• facilities . The U.S. Environmental Protection Agency, from

• which the Rule's financial test standards for the parent company guarantee were borrowed, accepts the self-guarantee as a method of providing financial assurance of funding the

• closure of hazard ous was t e f aci'l't' 1 ies. .l.i/ What is called for in refining the Rule is not the rejection of all self-guarantees, but the identification of the appropriate

• criteria for their use.

The existing Rule imposes costs upon licensees without parents that are significantly in excess of the costs incurred

• by licensees who are otherwise similarly situated, except that they do have a majority shareholder. As detailed in the August 1990 reconsideration petitions, various licensees, including certain competitors of GE and Westinghouse, met the decommissioning funding assurances requirement of the Rule

• • either by obtaining guarantees from existing parents, which are of much less financial capacity than Petitioners, or by forming parents that could provide a guarantee at no expense to the licensee or its parent. In other cases, state governmental

• licensees provided the Commission with virtually no-cost assurances in the form of mere promises to obtain the funds when necessary. Meanwhile, those companies, such as the

!8 I

I Petitioners, that, for significant and valid commercial

• 14 1 See 40 C.F.R. Parts 264 and 265. The Petitioners also note that even the Commission's own rules permit self-guarantees by licensees, through annual certified financial statements, of payments of deferred premiums which might become due under the Price-Anderson Act's nuclear liability regime.

See 10 C.F.R. §140.2l(e) .

,. reasons, have not reorganized their corporate incurred the cost of obtaining a line or letter of credit.

structures, The cost of satisfying the Rule through a line or letter of credit is significant to Petitioners -- especially when compared with other licensees who are able to satisfy the Rule through essentially no-cost methods. When the licensees required to incur such extra cost are manifestly capable of satisfying the

• objectives of the Decommissioning Rule through an annually re-certified self-guarantee, the unnecessarily disparate treatment resulting from the Rule is inconsistent with the

• public interest in cost-effective regulation.

The Petitioners also propose that the revision to the Rule be limited to licensees other than electric utility licensees

• under Part 50 of the Commission's regulations. Electric utilities licensed under Part 50 do not need the requested alternative to the present Rule. Under 10 C.F.R. § 50.75, electric utilities are permitted to build up their financial assurances for decommissioning over the life of the reactor, periodically placing such monies as are accumulated in an external sinking fund. 151 Other (i.e., non-utility) Part 50

• 15/. This "step-wise" procedure available to electric utilities under § 50.75 was apparently recognized by the Commission as a basis for less diversity in the acceptable methods by which such a utility licensee could provide financial assurance for decommissioning, because the Rule does

• not permit electric utility reactor licensees to provide assurance through a parent company guarantee.

§ 50. 75 (e) (3) .

See 10 C.F.R.

• licensee*s and all materials licensees must provide the full

• amount of financial assurance required for decommissioning from the commencement of operations (or from July 26/27, 1990 for pre-existing licenses). Thus, electric utility Part 50

• licensees are not subjected to the same level of immediate financial burden under the Rule as are other licensees.

Accordingly, relief from the strictures -of the current Rule, in

• the form of the Petitioners' proposal, is not sought on behalf of Part 50 licensees who are electric utilities.

The modifications proposed by the Petitioners will remedy

• the current shortcomings of the Rule described above. In sum, the Rule should be revised because it imposes costs on Petitioners and other financially sound licensees that are not

• necessary to achieve the Commission's goal of reasonable assurance of the timely availability of adequate funds for decommissioning.

B. NRC Concerns Respecting Self-Guarantees Will Be Satisfied by the Proposed Rule Commissioner Curtiss, in his strong disagreement with i* the Staff proposal to deny GE's exemption request, expressly recognized "that the concerns that the Commission had [during the original rulemaking] about internal reserves and

• self-insurance should not preclude GE from using such

• decommissioning funding methods here. 11161 He specifically

• explained that concern "that a financially-troubled licensee might find it necessary to divert its decommissioning reserves to other purposes . . . would not seem to apply to a licensee

• that has exhibited the level of financial stability and assets of GE. 1117 / Commissioner Curtiss correctly saw as anomalous the fact that "GE's assets and financial qualifications far

• exceed those required to satisfy the Appendix A financial tests for parent company guarantees, 11 but that it could not rely on those same assets to guarantee decommissioning under its own

• licenses. In sum, he concluded that, notwithstanding the concerns expressed by the Commission in 1988 about internal reserves, "the degree of financial assurance that we would

• have if we were to grant this exemption is no less than that which would be afforded by the option of a parent company guarant ee . . . . 11 18/ Commissioner Curtiss's comments are, if anything, even more compelling in the present context, where the Petitioners propose even higher financial standards for a self-guarantee than are required by the Rule for a parent

• company guarantee .

• 16/

(Annex A).

Commissioner Curtiss's comments, su12ra note 6 17/ Id.

• 18/ Id .

• As noted above, when the Commission denied the exemption and reconsideration petitions submitted by General Electric and Westinghouse, the staff expressed concern over potential bankruptcy of a self-guarantor licensee. The SER concluded

• that one protection against that eventuality (and, assertedly, a better protection than the licensee's own self-guarantee) is a guarantee issued by the licensee's parent that potentially is

• not responsible for the licensee's other debts. The instant Petition presents means by which a self-guarantee can be given by certain licensees that will be of at least equal reliability

• with a parent guarantee permitted by the Rule.

Congress has mandated that the NRC protect the public health and safety, and has given the Commission broad authority

• in that regard. In promulgating the Decommissioning Rule, the Commission found that the public heal th and safety could be protected best by requiring licensees to provide "reasonable assurance" that sufficient funds would be available to effect decommissioning in a manner that was both safe and timely. 191 The rule revision proposed by the Petitioners

• meets that same regulatory objective.

The amendment to the Rule that GE and Westinghouse advocate provides, principally through the stringent financial

• criteria proposed in "Appendix B", more than just "reasonable

• 19/ 53 Fed. Reg. 24033 .

• assurance" that timely and adequate decommissioning funding

• will be available. As discussed in detail below, the minimum bond rating required by proposed Appendix B -- "A" as issued by Moody's or S&P provides significantly greater protection

• than the minimum rating currently required by Appendix A. The tangible net worth requirement of the proposal is one hundred times that specified in Appendix A.2.Q/ Moreover, companies

• that could provide assurances through a self-guarantee would be required to have a tangible net worth that is ten times the estimated decommissioning costs (or prescribed level of certification) rather than six times such amounts, which is required by the Appendix A parent company guarantee financial test . The Petitioners' proposal would also require that

• companies forward to the Commission all periodic reports filed with the SEC.

• • and The most compelling reason the proposed rule is justified in requirement.

the public Bond interest ratings are lies in assigned the by bond rating independent entities, such as Moody's or standard & Poor' s based on their

• evaluations of relative investment qualities of bonds and the 2.Q/ According to the ICF Report, the failure rates of manufacturing firms (such as the Petitioners) fall markedly as net worth rises above $10 million. ICF Report, supra note 7, at 6-8 .

• -20,-

creditworthiness of their .

issuers . .ill Bond rating systems

• were originated to provide investors with a method of assessing the relative investment qualities of bonds. However, Moody's also notes that bond ratings are used by bank regulators "to

• classify bonds in their bank examination procedure. nW Rating symbols are used by the rating services to indicate gradations of investment quality (i.e., reliability of payment

• of principal and interest obligations of the issuer). In broad terms, ratings ranging from "Aaa/AAA" to "Baa/BBB" as issued by Moody's and S&P, respectively, are considered to be "investment

• grade," while ratings ranging from "Ba/BB" to "C/C" are "speculative grade."

In assigning ratings, Moody's and S&P collect statistics and information about an issuer and its bond issuances, such information being provided by that issuer as well as being 21 1 See, ~ , Rating Bonds: A Few Notes on Who and How, Points of Interest, Vol. III, No. 3, (Spring 1991) (Dean Witter Publication) (both Moody's and Standard & Poor's rate

• bonds by looking "primarily at the overall financial heal th of the issuer, its repayment history, and what kind of collateral, if any, stands behind the bond").

W Moody's Corporate Bond Ratings. The first several pages of Moody's rating publications contain a key to

• Moody's rating system and investor services. That key includes the following topics: Moody's Corporate Bond Ratings; Key to Moody's Corporate Bond Ratings. See, ~ , Moody's Public Utility Manual, Vol. I, Vl.l. (1989); Moody's Transportation Manual x (1989). citation in this Petition to information found in those topic sections shall be to Moody's Corporate

• Bond Ratings or to Key to Moody's Corporate Bond Ratings .

• gathered by the rating services from other sources that those

• services consider reliable.2li The rating symbol ultimately accorded to an issuance reflects past, present and future risks . As explained by Moody's, "ratings involve judgments

• about the future . . . [but are also] used by investors as a means of protection . [therefore] the effort is made when assigning ratings to look at 'worst' potentialities in the

• 'visible' future, rather than solely at the past record and the

• status of the present. 11 W An issuer's financial condition may change over time;

• therefore, the bond rating for any issuance is not static.

Moody's describes the requirement for bond rating review and revision as follows:

• The quality of most bonds

• is not fixed and steady over a period of time, but tends to undergo change. For this reason changes in ratings occur so as to reflect these variations in the intrinsic position of individual bonds. A change in rating may thus occur at any time in the case of an individual issue. Such rating change should serve notice that Moody's observes some alteration in the investment risks of the bond or that the previous rating did not

• fully reflect the quality of the bond as now seen. While because of their very nature, changes are to be expected more frequently among bonds of lower ratings than among bonds of higher ratings, nevertheless the 2V See Standard & Poor's Bond Guide 10 (July 1989)

[hereinafter Bond Guide].

• w Moody's Corporate Bond Ratings, supra note 22 .

user of bond ratings should keep close and constant check on all ratings -- both high and low ratings -- thereby to be able to note promptly any signs of change in investment status which may occur.25/

Bond ratings may be suspended or withdrawn by a rating service,

• for example effects of if which "new and preclude material circumstances satisfactory analysis" arise, or the if available data are not sufficiently up to date to allow an

• e opinion of investment quality to be formed. 261 ratings are infinitely sensitive to a broad range of factors Thus, bond relating to an issuer and a particular debt issuance. In

• addition, statistics show that the rating systems predictive tools -- bonds holding ratings of "A" or better have work as an extremely low default rate over both short and long periods of time.

In a study published by Moody's on Corporate Bond Defaults and Default RatesW from 1970 through 1990, it is reported that average one year default rates over that entire

• 2..§./

Id.

Id.

W Corporate Bond Defaults and Default Rates 1970-1990, Moody's Special Report (Jan. 1991) [hereinafter

• Moody's Report]. Relevant excerpts from the Moody's Report are attached (at Annex B) for the Commission's information and convenience. The *Moody 6 s Report used the actual or implied (i.e., adjusted) rating on each issuer 6 s senior unsecured debt, intended to "yield an assessment of risk that is relatively unaffected by special considerations of collateral or of a I

• subordinated position within the capitol structure." Id. at 7.

twenty-one-year period for bonds rated "A" or better are less than four one-hundredths of a percent (i.e., less than four in ten thousand).2.Y Moreover, the Moody's Report also demonstrates that the incidence of any issuer rated "A" or

• better defaulting within six years following receipt of such an "A" or better rating is still less than one percent. w Those statistics attest to both the financial quality of

• issuers that are rated "A" or better and the integrity of the ratings system as a method of assessing the current and future creditworthiness of issuers . The "A" rating is assigned

• to

• bonds with a "strong capacity to pay interest and repay

• 2Y See id. at 32, Table 2. These data reflect just three such defaults during the period studied. See note 36, below. The Moody's Report calculated one-year default rates based on the rating assigned to an issuer on January 1 and followed that rating through the calendar year. Moody's defines default very broadly to include any missed or delayed disbursement of interest and/or principal. This definition includes distressed exchanges where ( i) the issuer offered bondholders a new security or

• package of securities containing diminished financial obligation (such as preferred or common stock or debt with a a

lower coupon or par amount) and ( ii) the exchange had the apparent purpose of helping the borrower avoid default .... Moody's

• default definition also includes companies that make a delayed payment within the grace period provided in the indenture.

Id. at 6 .

• W See id. at 33, Table 4 *

• principal .. dQ; and the Moody's Report clearly shows the

• accuracy with which such ratings have been assigned in the past.

In contrast, the average one year default rates since 1970 for issuers rated "Baa", which constitutes an acceptable rating

• for parent company guarantors, is more than four times higher than the average one year default rates for issuers rated "A" or better . .11/ Statistics in the Moody's Report also show

• that average cumulative default rates for issuers rated "Baa" are approximately 2 1/2 times greater than such default rates for issuers rated "A" or better six years after such ratings

• were issued; that three to five years following the issuance of such ratings, "Baa" rated issuers' average default rates are approximately 3 times such default rates for issuers rated "A"

• or better; and that in the second year following the issuance of such ratings, "Baa" rated issuers have average cumulative dQ; Debt carrying a rating of "A" is described by S&P as follows:

• Debt rated 'A' has a strong capacity to pay interest and repay principal al though it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories .

• Bond Guide, supra note 2 3 ,

bonds in a similar fashion.

at 10. Moody's defines "A" rated See Key to Moody's Corporate Bond Ratings, supra note 22 .

.11/ See Moody's Report, supra note 27, at 32, Table

• 2*

• default rates that are at least 5 times such default rates for

• issuers rated "A" or better.n./

It has been stated that the mortality rates for bonds rated BBB/Baa "begin to increase almost immediately after

• issuance, n.111 and the statistics in Moody's Report bear that out -- from 1970 through 1990, fourteen issuers had a rating of "Baa" on the January 1st of the calendar year during which they

• 9 defaulted.211 rated "Baa" such statistics are not surprising; constitute the lowest level of investment grade, bonds and, indeed (unlike bonds rated "A"), have "speculative

,e characteristics" according to Moody's.J..a/

See id. at 33, Table 4 .

.111 E. Altman, Measuring Corporate Bond Mortality and Performance, The Journal of Finance, vol. XLIV, no. 4, at 913 (Sept. 1989).

211 Moody's Report, supra note 27, at 8, Figure 5.

J..a/ As explained in the Key to Moody's Corporate Bond Rating,

[b] onds which are rated Baa are considered medium grade obligations, i.e., they are

• neither secured.

highly protected nor poorly Interest payment and principal security appear adequate for* the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack

• outstanding investment characteristics and in fact have speculative characteristics as well.

Key to Moody's Corporate Bond Ratings, supra note 22. S&P describes bonds rated BBB in a similar manner. See Bond Guide,

• supra note 23, at 10 .

i *-

• Statistical comparisons clearly demonstrate that a

• guarantee issued by a licensee holding an "A" bond rating provides substantially greater protection than a guarantee issued by a parent company holding a "Baa" bond rating. Thus,

• the ratings required in the rule revision proposed by the Petitioners provide the NRC with more than "reasonable assurance" of decommissioning funding, not only over the course

• of the year during which the annual certification required for a self-guarantee would operate, but also, in light of the very low long-term default rate of bonds rated "A" or better, for several years into the future. Moreover, the proposed rule offers further protection over the test for parent-guarantors because, under the proposed rule, the Commission would be

• promptly informed by the licensee of any change in its bond rating that removed a licensee using the self-guarantee from the "A" or better rating category as issued by either rating service.

The independent bond rating agencies are exceedingly vigilant, reviewing and/or revising the ratings of issuances as

• needed throughout the year to account for changes that affect the creditworthiness of the issuer. Their reputations, and therefore their livelihood, depend on the reliability of these

• ratings. As the Moody's Report shows, they have a very good record for predicting the approach of default. Thus, if the Commission adopts the proposed rule revisions, it can have a

• high level of assurance of ample warning of future financial

• difficulties of licensees using the self-guarantee and will be able to require a suitable alternative method for assurance of funding long before any such licensee might become unable to

• meet its financial obligations. Bonds with a rating of "A" or better virtually never go into default in the near term, w nor do their issuers descend into bankruptcy without ample

• prior warning signs -- ample enough for the Commission then to require alternative means of financial assurance for decommissioning funding in future years .

• Specific questions might be raised during the requested rulemaking about the large-scale and much publicized defaults of Texaco Inc. ("Texaco") and the Washington Public Power

• Supply System ( "WPPSS II) O The bond rating history of those well-known defaults, in fact, further supports the reliability of the rating system.

W The Moody's Report indicates that in the entire

• twenty-one-year period covered, only three issuers defaulted within the calendar year at the beginning of which they held a rating of "A" or better. See Moody's Report, supra note 27, at 8, Figure 5. The default of DFC New Zealand and its subsidiary DFC New Zealand overseas Investment (collectively, "DFC"),

which held "Aa" ratings at the beginning of the year in which

• they defaulted, occurred as a result of the New Zealand Government's privatization of DFC. The default of Manville corporation ("Manville"), which held an A rating at the time it defaulted, occurred when that company declared bankruptcy to avoid potentially vast liability resulting from asbestos poisoning litigation. The DFC and Manville defaults clearly

• represent highly unusual instances, and are consistent with the Petitioners' position that the proposed rule revision offers "reasonable assurance" of adequate and timely decommissioning funding *

• Texaco originally commanded a "triple A" rating. That

• rating declined over a five-year period, ending in 11 default 11 .d.1.I (bond payments were deferred) as a result of litigation over its acquisition of Getty Oil. In January of

• 1984, Texaco acquired Getty Oil, taking on $9 billion of debt.

Pennzoil Co. brought suit against Texaco for tortious interference with Pennzoil's allegedly pre-existing merger

• agreement with Getty Oil. In late 1985, Pennzoil won the suit and was awarded $10. 53 billion in damages. In 1987, Texaco filed for bankruptcy protection under Chapter 11 and bonds

• issued by both Texaco and Getty Oil were in default. The following table documents the downrating, as issued by S&P, suffered by Texaco and its subsidiary, Getty Oil, over the

• course of that suit and its aftermath. Both issuers lost their 11 A11 ratings more than a full year before the Texaco default .

• .d.1./ Texaco went into 11 default 11 because it deferred interest payments on its bonds. However, eventually both principal and interest were paid by Texaco on those obligations when Texaco emerged from bankruptcy .

• DATE Original TEXACO RATING GETTY OIL RATING Rating AAA AAA 1983 AA+

Mar 84 AA- AA-May 85 A+ A+

Jul 85 NR

• Dec 85 B Apr 87 D

• The WP PSS default on bonds issued for nuclear projects 4 and 5 involved a similar history of repeated downrating over a long period of time. The bonds issued for projects 4 and 5

• were originally rated "A" by Moody's. Due to cost overruns and diminished demand for power, WP PSS debt issued on projects 4 and 5 experienced rating cuts over a two"".'year period. WPPSS debt issued on projects 4 and 5 ultimately went into default in July of 1983, when a Washington State court determined that the contracts funding the bonds' repayment obligations were

• unenforceable. The table below documents WPPSS rating cuts by Moody's. Again, a rating below "A" long pre-dated the bonds' default .

• WASHINGTON PUBLIC POWER SUPPLY SYSTEM

• (WPPSS)

RATING OF BONDS FOR PROJECTS DATE 4 & 5 Original Rating Al Jun 81 Baal

• Jun 83 Caa

• the The history of the rating agencies' success in predicting likelihood of default in any year, and their ability to keep pace with changing conditions, indicate that the judgments of the financial marketplace are a highly reliable predictor of an issuer's ability to meet its future financial obligations (even obligations many years into the future); they should be no less reliable as a predictor of a licensee's capacity to provide timely and adequate decommissioning funding.1-Y The rating agencies clearly are very adept at gauging changes in an

• issuer's creditworthiness . Thus, the bond rating requirement of the proposed rule provides a sound means for the NRC to be 1-Y Indeed, the rating agencies take an issuer's other financial obligations into account, including environmental cleanups and decommissioning responsibilities,

• when issuing and adjusting the ratings they publish *

• assured of the future 2V availability of decommissioning

• funding. In addition, the downrating notice requirement will assure that the NRC can monitor and gauge closely the value of a licensee's self-guarantee over time.~

Under the proposed rule the NRC would also receive, on a timely basis, copies of periodic reports filed by the licensee under the Exchange Act. Notably, in addition to the licensee's

• audited annual reports, the Commission would receive the licensee's Quarterly Reports filed with the SEC on Form 10-Q

(

11 10-Q") and current Reports filed with the SEC on Form 8-K

• (

11 8-K"). The 10-Q must be submitted to the SEC within 45 days after the end of each of the issuer's first three fiscal quarters. The 10-Q contains, among other things , unaudited interim financial statements and a discussion of the W The licensee's current capability to provide decommissioning funding will be amply demonstrated by the other financial test criteria in proposed Appendix B, all of which are much more stringent than are required of a parent company guarantor .

• ~ If the certification could not be provided at the end of the licensee's fiscal year, an alternative means of providing financial assurance of decommissioning would be required of the licensee. Moreover, since the licensee might still have an II investment grade" bond rating, there is no reason to expect it would then have difficulty in providing an alternative means of assurance. Again, by contrast, if a parent company holding the lowest bond rating accepted under the existing Rule experienced a downrating, that downrating necessarily would remove it from the "investment grade" rating category. As a result, the parent company could no longer give

• a parent guarantee and its subsidiary might well have a greater degree of difficulty obtaining a line or letter of credit .

• registrant's financial condition, changes in financial

• condition and results of operations.ill The discussion must be focused on "material events and uncertainties known to management that would cause reported financial information not

• to be necessarily indicative of future operating results or of future financial condition."~

The 8-K must be filed within 15 days after the occurrence of an event that is required to be reported. Such events include changes in control, the acquisition or disposition of assets, bankruptcy or receivership proceedings, the resignation I* or dismissal of the certifying accountant (including information abo~t any disagreement over accounting principles),

and the resignation of a director if the director sent the

• registrant a letter describing a disagreement and the director requests that the matter be *disclosed. In addition, the registrant may use Form 8-K to *report any other material changes that it deems of importance to its shareholders. The general instructions to Form 8-K caution registrants to "have due regard for the accuracy, completeness and currency of the 41/ The 10-Q also contains information about legal

• proceedings, changes in securities, defaults upon senior securities, matters submitted for shareholder vote, and other information, not reported on an 8-K, that the registrant is required to report.

~ 17 C.F.R. § 229.303, Instructions to Paragraph

• 303 (a) (1990).

• information" previously reported to the SEC when considering

• whether to report events of material importance on Form 8-K.W Moreover, federal securities regulations require that no officer and director "make or cause to be made a

• materially false or misleading statement" on reports required by the federal securities laws.ill Through the receipt of those reports, the NRC would be

• apprised of significant events occurring during the course of the year. These reports would equip the NRC with another mechanism to monitor continuously the licensee's ability to

• satisfy its decommissioning funding obligations. Furthermore, these same reports are used by the bond rating agencies, who review their ratings in light of, inter alia, the information

• therein.

The stringent requirements of the financial test in proposed Appendix B -- the high bond rating coupled with a notification requirement should a company fall below the specified bond* rating from either ratings service during the W Exchange Act Release No. 26589 (Mar. 2, 1989).

44/ 17 C.F.R. § 240.13b2-2 (1990). Investors rely on

• the reports a registrant files with the SEC when deciding whether to purchase or sell that registrant's securities.

this regard, the antifraud provisions of the federal securities In laws prohibit misstatements of material facts and omissions of material facts if such facts make previous statements misleading in connection with the purchase or sale of

• securities. See 17 C.F.R. § 240.l0b-5 (1990) .

• course of a fiscal year, and the forwarding of all periodic

• reports required under the federal securities laws -- operate to provide the NRC with assurance of Q.ecommissioning funding equal to or greater than the assurances already accepted by the

• NRC under the present Rule. The rule proposed by the Petitioners is sufficiently demanding to outweigh the concerns expressed in the SER over the lack of a separate guarantor

• entity with segregated financial resources. As noted above, the Moody's Report demonstrates that "Baa/BBB" issuers have a significantly greater likelihood of default within the course

• of a calendar year after being so rated than companies with "A" or better ratings have. Thus, parent companies tha:t merely satisfy the "Baa/BBB" bond rating requirement in Appendix A

• clearly cannot provide better financial assurance, merely by virtue of their "separateness, 11 than can qualified self-guarantors under proposed Appendix B.

Not only does the proposed rule adequately alleviate concerns over the lack of a separate entity as guarantor, but any possible risk caused by that lack of segregated financial

• resources is no different in kind or substance from the risk of a parent that supplied a guarantee for its subsidiary-licensee going bankrupt. A parent company could declare bankruptcy and

• put decommissioning funds at the risk of creditors' superior claims in the same manner a licensee could. Indeed, it is not at all unusual that, when a parent company enters bankruptcy,

• many (if not all) of its majority-owned subsidiaries likewise

• enter bankruptcy. In the case of wholly-owned subsidiaries, resort to bankruptcy simultaneous with the parent is even more frequent. In the words of Commissioner Curtiss, "the

e Commission found that risk to be tolerable for a parent company guarantee; I see no reason to differentiate the situation [of a self-guarantee], particularly in view of the undisputed

• financial health of [one of the Petitioners].".1.2/

Other concerns expressed by the NRC are equally inapposite in light of the stringency of the proposed rule revisions .

• When the Commission promulgated the Decommissioning Rule, it was concerned over the internal reserve method of providing funding assurances * .i..§/ The Staff raised those issues again

• when the NRC rejected the exemption and reconsideration petitions submitted by GE and Westinghouse. However, the rule revisions proposed by the Petitioners do not involve the same issues that concerned the NRC when it rejected the internal reserve method in the original Rule. The internal reserve was rejected, at least in large part, in light of the financial

• risks taken, and financial difficulties experienced, by utilities. The proposed rule revisions to Part 50 do not cover 45/ Commissioner Curtiss's comments, supra note 6 (Annex A) .

• See 53 Fed. Reg. 24032-33 .

• electric utility licensees. Moreover, the NRC did not consider

• whether a self-guarantee or internal reserve would have been adequate if the licensee had (and demonstrated annually) the financial strength required by some test more demanding than I* that for a parent company guarantor. The proposed rule revisions are supported by empirical evidence that demonstrate such adequacy *

• Moreover, the NRC now has information about the financial capabilities of its licensees that was unavailable at the time the Decommissioning Rule was adopted. 471 This information

• demonstrates that the number of licensees who could qualify to give a self-guarantee under the proposed rule is relatively small,!Y meaning that the administrative burden on the NRC

• staff of monitoring continuing fulfillment of the financial criteria would likewise be quite modest. The Commission no longer faces uncertainty about a licensee's ability to provide decommissioning funding assurances, and licensees capable of satisfying the proposed rule have financial strengths far in excess of companies from which the NRC has stated that it will

• accept parent company guarantees . The Commission should also

• note 7.

47/ SECY-91-142 (May 16, 1991); ICF Report, supra 48/ Using the information in the ICF Report, it seems very likely that fewer than 100 NRC licensees would qualify as

• self-guarantors under the proposed rule revision *

• note that, because the proposed rule revisions require a

• company to be subject to the Exchange Act and to forward to the NRC copies of all SEC filings made by that company, the NRC would receive financial information on a timely basis that it*

was not assured of receiving at all when it rejected an internal reserve method of assurance. Finally, as explained in previous petitions, the self-guarantee of the proposed rule is

• different from, and more demanding than, an internal reserve because of the annual re-certification requirement.

c. The Rule Requested By the Petitioners Is in the

• Public Interest The proposed rule encourages direct licensee responsibility by financially strong companies rather than by

• structural artifices possibly conjured up to meet the letter of the Rule's parent company guarantee requirements. As discussed in previous petitions, the failure of the current Rule to allow

- for self-guarantees by financially strong, non-subsidiary) companies may discourage independent such companies becoming licensees, due to the additional cost of the available (i.e.,

from

• decommissioning licensees.

funding assurances methods if The current Rule thereby appears to provide such they become companies with an incentive to create less financially secure subsidiaries to hold NRC licenses. Quite the contrary, consolidation of financial resources in a single licensed organization is in the public interest because the performance of all licensee responsibilities is thereby enhanced

• I I

7

• . The proposed rule further promotes the public interest by

• allowing licensees without parents to conserve valuable resources by executing a self-guarantee rather than expending increasing amounts of money for a letter or line of credit (the

• cumulative cost of which, during the next 40 years, is estimated to be in excess of several million dollars for each of the Petitioners). Funds expended on a letter or line of

• credit are unrecoverable and, although it is expected that each of the Petitioners will continue to be financially strong throughout this period, the expenditure of such funds is

• unwarranted. It cannot be in the best interest of the public to have such large amounts devoted to the Petitioners' providing funding *assurance when a self-guarantee provides the

• NRC with more than adequate decommissioning funding assurance.

v. CONCLUSION The relief sought by GE and Westinghouse in this Petition is the promulgation of a revised rule providing for decommissioning funding assurances through the execution of

• self-guarantees by certain NRC licensees under 10 C.F.R. Parts 30, 40, 50, 70 and 72, subject to their satisfying strict financial criteria. The Petitioners have attached a copy of

• such a rule revision as Exhibit A.

In this Petition, GE and Westinghouse have shown that, should the Commission adopt the proposed rule revision,

concerns over the absence of a segregated fund source or the risks of an internal reserve would be more than overcome by the creditworthiness of the qualifying licensee/obliger. This creditworthiness, after all, goes to the heart of the level of

• assurance that timely and adequate decommissioning funding will be provided. A licensee who can meet all the tests established by the proposed revised rule must -- by virtue of meeting those demanding criteria more than satisfy the standard of "reasonable assurance." Accordingly, and because to do so would further the Commission's statutory mandate and better serve the overall public interest, the Petitioners urge the Commission to adopt the attached rule revision .

0457w/0463w

EXHIBIT A

• ATTACHMENT TO PETITION FOR RULEMAKING Proposed Rule

1. Section 30.35(f)(2) is amended to read as follows:

(2) A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety *bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A to this part. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for

• decommissioning costs based on a financial test may be used if the guarantee and test are-as contained in Appendix B to this part. A guarantee by the applicant or licensee may not be used (1) in combination with any other financial methods to satisfy the requirements of this section or (2) in any situation where the

• applicant or licensee has a parent company holding majority control of the voting stock of the company.

Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions . . .

2. A new Appendix Bis added to Part 30 to read as follows:

Appendix B -- Criteria Relating to Use of Financial Tests and Self Guarantees for Providing Reasonable Assurance of Funds for Decommissioning

• I. Introduction An applicant or licensee may provide reasonable assurance of the availability of funds for decommissioning based on furnishing its own guarantee that funds will be available for

• decommissioning costs and on a demonstration that the company passes a financial test. This appendix establishes criteria for

-passing the financial test for the self guarantee.

II. Financial Test A. To pass *the financial test, the company must meet all of .the following criteria:

The company must have:

• (i) A current rating for its most recent bond issuance of AAA, AA, or A, as issued by Standard Peer's or Aaa, Aa, or A, as issued by Moody's; and (ii) Tangible net worth at least ten times the current decommissioning cost estimate (or prescribed amount if

• a certification is used); and (iii) Tangible net worth of at least $1 billion; and (iv) Assets located in the United States amounting to at least 90 percent of total assets or at least ten times

• the current decommissioning cost estimates (or prescribed amount if"certification is used).

B. The company's independent certified public accountant must have compared the data used by the company in the financial test, which is derived from the independently

• audited, year end financial statements for the latest fiscal year, with the amounts in such financial statement. In connection with that procedure the licensee shall inform NRC within 90 days of any matters coming to the auditor's attention which cause the auditor to believe that the data specified in* the

• financial test should be adjusted and that the company no longer passes the test.

C. The company must have at least one class of equity securities registered under the Securities Exchange Act of 1934.

D. 1. After the initial financial test, the company must repeat the passage of the test within 90 days after the close of each succeeding fiscal year.

2. If the company no longer meets the requirements of

• paragraph A of this section, the licensee must send notice to the Commission of intent to establish alternate financial assurance as specified in the Commission's regulations. The notice must be sent by certified mail within 90 days after the end of the fiscal year for which the year end financial data show

• that the company no longer meets the financial test requirements. The licensee must provide alternate financial assurance within 120 days after the end of such fiscal year .

• III. Company Guarantee The terms of a self guarantee which an applicant or licensee furnishes must provide that:

A* The guarantee will remain in force unless the licensee

• sends notice of cancellation by certified mail to the Commission. Cancellation may not occur, however, during the 120 days beginning on the date of receipt of the notice of cancellation by the Commission, as evidenced by the return receipt .

• B. The licensee will provide alternate financial assurance as specified in the Commission's regulations within 90 days after receipt by the Commission of a notice of cancellation of the guarantee.

C* The guarantee and financial test provisions must remain

• in effect until the Commission has terminated the license or until another financial assurance method acceptable to the Commission has been put into effect by the licensee.

D* The licensee will promptly forward to the Commission

• and the licensee's independent auditor all reports filed by the licensee (in its capacity as a registrant) with the Securities and Exchange Commission pursuant to the requirements of section 13 of the Securities Exchange Act of 1934.

E. If at any time the licensee's most recent bond issuance ceases to be rated in any category of A or above by either Standard and Poor's or Moody's, the licensee will provide notice in writing of such fact to the Commission within 20 days after publication of the change by the rating service .

3. Section 40.36(e)(2) is amended to read as follows:

(2) A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for

• decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or

• licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or licensee may not be used (1) in combination with any other financial methods to satisfy the requirements of this section or (2) in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions . . .

• 4. Section 50.75(e)(l)(iii) is amended to read as follows:

(iii) A surety method, insurance or other guarantee method.

These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of.

5. Section 50.75(e)(2)(iii) is amended to read as follows:

(iii) A surety method, insurance, or other guarantee method. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in

• Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A guarantee of funds by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as

• contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or licensee may not be used (1) in combination with any other financial methods to satisfy the requirements of this section or (2) in any situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company.

6. Section 70.25(f)(2) is amended to read as follows:

• (2) A surety method, insurance, or other guarantee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommis~ioning costs based on a financial test may be

• used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this section. A -guarantee of funds *by the applicant or licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or licensee may not be used (1) in combination with any other financial methods to satisfy the requirements of this section or (2) in any situation where the applicant or licensee has a parent

• company holding majority control of the voting stock of the company *. Any surety* method or insurance used to provide financial assurance for decommissioning must contain the following conditions * * *

7. Section 72.18(c)(2) is amended to read as follows:

• ( 2) A surety method, insurance, or other guarant.ee method. These methods guarantee that decommissioning costs will be paid. A surety method may be in the form of a surety bond, letter of credit, or line of credit. A parent company guarantee of funds for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix A of 10 CFR Part 30. A parent company guarantee may not be used in combination with other financial methods to satisfy the requirements of this

• section. A guarantee of funds by the applicant or

• licensee for decommissioning costs based on a financial test may be used if the guarantee and test are as contained in Appendix B of 10 CFR Part 30. A guarantee by the applicant or licensee may not be used (1) in combination with any other financial methods to satisfy the requirements of this section or (2) in any

• situation where the applicant or licensee has a parent company holding majority control of the voting stock of the company. Any surety method or insurance used to provide financial assurance for decommissioning must contain the following conditions . . .

A

• com~issicn*r Curtiss' oommant on StCY-9O-217:

diaappr~v* th* statt's prcpoeal to dany GE's requQst !or an axamp~ion from the regulation* requiring lioansees to establish

• ex~ernal funds or~** 1;m1 ether indopendent, external re1chani1m t~ ensure tn* availability of f~nda for dac0mmisai0ninq.

Although I am awara 9: the r~ot that tfta coui,1ign R~~eifio~lly

~~~1iderRd ~nd rojee~ed ~Ul*makinq prcpoaala that wcul~ hlVI permitted the ~~* gf i.nt rn1.l !l~S,U."v-== IJ~ *1 se.Lr-1nauran.ce 1' tor oeconunission1ng tunding, as GE proposes in it* ap~lieation for

• exemption, several eonsideraticna lead me to the conclusion that the eoncerns that th* Commi*sion had about internal reser.1as and self-insurance should not precluae GE from using such decommissionin; tunding methodff h1:1. In partioula~, ? wgu1d not~ i~& f~llcwin9:

• L '.,:ne NRC st~tt' s ccnsultant. cn*--ffl*thods t.o tiriance

• dec0m.misaionin9 has ;;n;l \H:!ad that th* us!: ul internal

~aser'Ves "18 aocapt&ble and provides exoellent as*u~anca of availability of funds." (NURZG/CR-3899 -

1 Utility Financial Stability and \tha Availability of Fun~s for Deccmmis ioning, septeinl:,er 1984, p. lJ)

• Oe pite th* tact that internal reserves cannot~*

• ttactively protected from creditors in the avant ot ban~ruptcy by the licensee, th* NRC staff ccnoludad that the internal r***rv* 1;;r~11ch providet& ~easv1'ua~~1 ASIU.1'~Jl'il th.I~ c:1*nr,1T1mi*1 L1ft,ftl 'tlHnl will .ee 6Vtd.1a.b1*

• wn,h they ara naeded by licensees ~nd raccmmendad that t.h* tinal deeominissioning ru1** allow th* uae of intarnai ~***n11 (SIC~*87*30g! ,ropoaed Final Rules on Oeccai aioninq, Oacember 17, 1987, Appendix pp. 5-7, S*l3). The Commission** congern in rej*ctinq that staff reccwn*ndation -- that a financially*trouDl*d lioenseo miqnt find it nee***ary to divert its decommiaaionin; ra atv*s to othar purposes-* wo~lg ngt 111m tea ar,ply to 3 lie6l~*a* tha,:: nas eX.hibitad the level of financial stability and aa at of GE.

• 2* In premul;ating dacommisaicnin; tunding requiremants in the low*leval waste ar,a, the Commission decided not t9 par.mit, on a qenftric 0111i , ,h1 "\ii** 0! 1-canc alone salf-insurance 0 to tund low*leval waste sit*

stabilization end clcaura. At the same time, the commission did indicate that it woul~ evaluate the usa

• ot :financial tests and **lf-in uranc* 11 pr0posed by licensees on a oaae*by-case basis." (Statements of ccnsidaration: Licensini R*i\&~~1mant1 fgr Land Oi£pOGll of Lew-wvel waata, 47 t,d,81s, 57446, Oagember 27, 1982), Tnu1, despite its lack of contidence that the selt*insurance ap~roaoh would provide the naca sary:

• raasonablo assurance that ill licenseas would have site elosura tun~s available when needed, th* commi1si0n held open ~he possibility that the salt-insurance approacn could be jus~ifiad ror licensees wno

• -2* (SECY*90-217)

• demonstrate their ~Jrna.nQiftl '11"' 1 ifici.tia"*. :h Ii)'

view, tno logi~ of th* ~pproac~ ~~X1n tQr low*lovel W&~tu dec0mmia ion1ng appli** with aqual force nera, where GE ha mad8 just such a demonstration with regard to th* licenmes whieh it holda .

• 3. While the deccmmia i0nin9 regulation de not allow tha uaa of internal raat'l':'Ve8 or *e~t-,uaiantH~a, they uo

~6L~iL ncn*licenaae parent company guarantee* wher a parent organization meats certain tinancial taata a*t o~t in lO eta Part 30, Appendix A. GZ'* aaaata and

• tinancial qualification* tar exceed these required to satisty thaa* financial te ta far parent co=pany guaranteea. In tact, GI will satisfy the decommi**i0nin9 fundin; r*quire~ents tor a GE

• u.b*1"1~:ry, Reut r*Stokea, by providini 4 parent:

cc~pany guarant** baaed on GE's o'W'n intarnal financial

• capabilitiaa. It would b* an anomaly t0 parmit GE to prcvida an intarnally*tunded parant c~mpany qua~,n~II tQr ft 1ubaidil~ but ~~~Uir* vi tg 1stabli1h *x**~~al

~eserves to run~ decou!sioning whera GI ita&lf is the named licen****

4. *l:y, it appears to=* that th& d&gree of fi~~-nc~1l t .::;.,,ll~an1;11 that we wcul.d have it we we.re to qr~~1t. th.111

• ~Qmption is no l*** than that whioh would be afforded by the opti~n of a parant company 9uarantae, an option that 1* explicitly allowad bf the d9;;uiaaioning Nl*** !fi tact, ~n* very ooncarns that hava bean expressed about ;rantin9 this typ* ot axampti0n -* that a company mi;ht declare bankruptcy, thereby placing decommisaicning tunds at th* risk 0t creditors' auparior claims -- are no different than the situation that w* would :ace under the option of a pArent company

• guarantee. Th* Commission found that riak to 0*

t01erabl1 1'011 a para1,t (;cmpany guarantea; I see no raason to ditterentiate th* situation h*re, p~rtioularly in view.ot th* undisputad tinanoial health ot the applicant. *

• tor -Cha f0regoing rea11c,n1, I would grant th* exemption, subj eet to the requirament that GE be required to ~1;1rtifY en ,n, P1nm1al b*a ia 1!l\a~ it ~*ad. the rinanc1a! teat cri t&ria as required by 10 er~ Part JO, App. A, 11ctign1 IItA.l and A.~ c.

B OFFICE OUTFITTERS INC.

450 SPRING PARK PLACE HERNDON, VIRGINIA 22070 (703) 478-0400

Moody's Special Report January 1991 Contacts

• Jerome S. Fons Andrew E. Kimball (212) 553-1655 Susan M. Kulakowski

• Corporate Bond Defaults and Default Rates 1970-1990

• Summary This study brings previous Moody's studies of corporate bond defaults current through 1990. The purpose of these studies is twofold. First, the data are intended to provide bond market investors with bench mark guidelines on historical

• default experience by rating category. Second, they aid in assessing the credit support needed for structured securities backed by pools of corporate bonds.

Briefly, the study found:

In 1990, 96 corporate issuers defaulted on $22.0 billion of Moody's-rated and public corporate debt. Of this total, 78 issuers were rated by Moody's -- all

• were rated speculative grade as of January 1, 1990. These companies had

$20.4 billion of debt outstanding at default.

The default rate for speculative grade issuers rose to 8.8% from 1989's 5.6%.

These represent the highest back-to-back default rates on record.

Average default rates across investment horizons spanning one to twenty years clearly show that default rates for lower-rated issuers exceed those of high-grade issuers.

Defaults reached across many industries, with casinos & hotels, retail, and airlines particularly hard hit.

• Many ill-conceived LBOs came apart in 1990. The year also saw an increase in the use of distressed exchange offers and grace period payment delays to extract concessions from bondholders.

In view of the current recession and Middle East conflict, Moody's anticipates a

• continued high pace of defaults for 1991. Through the first three weeks of 1991, 11 firms have defaulted on $2.9 billion of public or Moody's-rated bonds. As further evidence of potential difficulties, Moody's reports that Caa outstandings grew by 23% in 1990 to $27 billion, three times the level at the beginning of 1989 .

CONTENTS Discussion of Recent Default Experience Major Defaults of 1990 3 C

(U a,

Some Industries Particularly Hard Hit in 1990 Other Aspects of 1990 Defaults 3

5

-0 C:

(U Methodology_

fl)

~

J as Definition of Default 6 a, Moody's Rating Database 6 C

-0 C: Corporate Default Rates 0

• m

-a,

....as Major Defaults and Historical Ratings Usefulness of Default Rates 8 7

0 a.

.... One-Year Default Rates 9 0

0 Default Rates for Periods Longer Than a Year 10

• Results Default Rate Volatility by Rating Category Dollar Default Rates 10 13 13 Tables

• 1.

2.

3.

1990 Corporate Bond Defaults One-Year Default Rates by Year and Rating One Year Default Rates by Year and Modified Rating 15 32 32

4. Average Cumulative Default Rates 33

5. Cumulative Default Rates for Cohorts Formed 1971 through 1990 33 Copyright'£, 1991 t>y Moody's Investors Service, 99 Church Street, New York, NY 10007.

S:ITOR" S NOTE-All information contained herein 1s copyrighted in trle name of Moody" s Investors Service. Inc.

('*Moody's"'). anc none of suer, information may be copied or otherwise reproduced, repackaged, further transmit-

'.ed, transferred, 01ssem1nated, redistributed or resold, or stored for subseQuent use for any such purpose, 1n wrole or 1n part, 1n any form or manner or by any means whatsoever, by any person without Moody's prior written consent.

All information contained herein 1s obtained by Moody's from sources believed t,y it to be accurate and reliable.

3ecause of the poss1b1l1ty of "uman and mechanical error as well as other factors, however, such information 1s orov;ded "as 1s" without warranty of any kind and Moody's, 1n particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Under no circum-stance shall Moody's have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negli;ent or otherwise) or other circumstance involved In pro-curing, collecting, compiling, interpreting, analyzing, editing, transcribing, transmitting, communicating or deliv-ering any such information, er (b) any dfrect, indirect, special, conseQuential or incidental damages whatsoever, e*,en 1f MOOCly' s is advised in advance of the poss1tl1lity of such damages. resulting from the use of, or inat,1iity to

,,se any such Information.

n*-e credit ratings and other opinions contained herein are, and must be construed solely as, statements of cp,r1on and rot statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY.

EXP8ESS OR IMPLIED, AS TO THE ACCURACY, TIMELINt:SS, COMPLETENESS, MERCHANTABILITY OR FIT-NESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must tie we1gned solely as one factor 1n any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security-and of eacn issuer and guarantor of, and each provider of credit support for, each security that it may consider purchas-

ng. holding or selling.

P1..rsuant to Section 17 (b) of the Securities Act of 1933, MOOdy' s hereby discloses that most issuers of debt securities (Including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated tly Moody's have, prior to assignment of any rat1r,g. agreed to pay Moody's for the appraisal and rating services rendereo by it fees ranging from $1.000 to $125,000. PRINTED IN U.S.A.

2 Corporate Bond Defaults

Discussion of Recent Default Experience Major Defaults of 1990

• In 1990, 96 corporate issuers -- 78 of them rated by Moody's -- defaulted on $22.0 billion of long-term debt. The year saw the largest number and highest dollar volume of defaults since Moody's began tracking default statistics in 1970. Of all speculative-grade issuers at the start of 1990, 8.8% had defaulted by year end, up from 1989's 5.6%, the highest back-to-back default rates on record .

• Figure 1 Defaults and Distressed Exchanges on Long-Term Debt in 1990 (in $millions) *

• Straight Convertible Total 20,495.4 1,524.1 22,019.5 Two Campeau companies, Allied Stores and Federated Department Stores, accounted for the largest default on public debt in 1990: $2.7 billion. Allied was

• purchased by Campeau in 1986 for $3.5 billion; Federated was purchased in 1988 for

$6.7 billion. But operating profits were not strong enough to pay down bank debt as well as make interest payments to subordinated bondholders. Nor could asset sales fetch the prices needed to reduce the huge debt burden. A lackluster retail environ-ment and mounting liquidity problems ultimately led to the bankruptcy filing in January 1990.

• Other major defaults, in descending order of dollar amount of public debt affected:

Southland Corporation, owner of the 7-Eleven convenience store chain, defaulted on $1.763 billion; USG Corporation, a building materials manufacturer, defaulted on $1.561 billion; Continental Airlines and its parent, Continental Airlines Holdings, Inc.-- formerly Texas Air Corporation -- defaulted on

$1.204 billion; lnterco, Inc, a St. Louis-based footwear and furniture maker, defaulted on $1.155 billion; Trump Taj Mahal Funding, Inc. and Trump Castle Funding, Inc., the financial conduits of two Atlantic City casino/hotels, together defaulted on $1.027 billion; National Gypsum Company, the second-largest U.S. gypsum producer, defaulted on $1.024 billion.

All other 1990 issuer defaults each affected less than $1 billion. Table 1 lists 1990's

• defaulting companies, giving business descriptions, descriptions of public debt issues outstanding, relevant dates, and a short summary of factors leading to default.

Some Industries Particularly Hard Hit in 1990

• When 1990 defaults are grouped by industry, some clear patterns of risk emerge (Figure 2). The clearest example is the casino/lodging industry where ten speculative-grade companies defaulted, including two Trump-related companies with $1 billion of debt between them. Defaulters account for 40.6% of all speculative-grade debt in this industry and had $2.5 billion of public debt outstanding; that was about 11.1 % of the

• Corporate Bond Defaults 3

dollar volume of 1990'S defaults (Figure 3). The casino industry saw rapid deterioration in credit strength in 1990. Gaming revenue slowed dramatically, just as new capacity came on line, hurting Trump and Bally in the Atlantic City market. Similar conditions contributed to troubles in Divi Hotels' Caribbean market and Goldriver's Nevada property. *The hotel industry's troubles have been much publicized also. It was badly overbuilt in the 1980s, which left it vulnerable to loss of business due to reductions in corporate travel.

• Eight issuers in the Figure 2 retail industry defaulted on Industry Default Rates

$5.6 billion of public debt, A* a Percent of Spec:ulatlve Grade Industry Debt representing 25.3% of all de- Percent faulting corporate debt in 1990. 5()'11, . - - - - - - - - - - - - - - - - - - - ,

Department stores and apparel '°"

specialty stores have been and will continue to be highly sus- ~

ceptible to failure. Federated ~

and Allied, among the largest defaults in 1990, completed ,~

leveraged buyouts only to face liquidity problems. Conven-ience food retailers such as Southland and Circle K, with historically more stable cash flows, were also capsized by

.overwhelming debt. Excessive prices paid in these and other LBOs' resulted in over-leverage. Severely limited financial flexibility forced cuts in capital spending, thus thwarting efforts to improve store productivity and raise future operating profits.

Slack demand and higher oil prices in the wake of Figure 3 Iraq's invasion of Kuwait con-tributed to Continental Airlines' Share of Defaulting Debt by Industry (and its holding company's) default on $1.2 billion of debt, which was 5.5% of the dollar defaults in this study. Conti-nental's default affected 26.1 %

of speculative-grade airline Corttums Prcxh.ctl 5.4%

industry debt. The Gulf war will continue to tax the airline ConaMlon ,a, ...

industry on into 1991. Already in January 1991 Pan Am had filed for protection under Chap-ter 11 of the bankruptcy code, and Eastern Airlines, which had been under court protec-tion, was shut down. Other airlines could follow.

Softening real estate prices, on the heels of rapid price appreciation throughout most of the 1980s, caused problems for many industries in 1990, particularly construction. During the year, the 15 defaulting issuers in the construction industry --

mainly residential construction and building products firms -- had $3.5 billion worth of bonds outstanding at time of default, affecting 16.1 % of total dollar defaults. 1 Following major financial restructurings within the past few years, two gypsum producers, USG 1

Major commercial contractors were not a factor, as they generally do not issue public debt, relying instead on bank and insurance company loans .

.4 Corporate Bond Defaults

and National Gypsum, each had more than $1 billion debt outstanding at default.

Based on average 1990 industry debt levels, 22.9% of speculative-grade construction industry debt was in default during 1990 .

Major sectors plagued by problems during the 1980s, but not significant contributors to 1990 defaults, were the oil industry and financial institutions. Many weak oil-related firms failed after the dramatic oil price decline of late 1985, leaving only the healthiest firms. Those that survived the earlier shake-out were less prone to fail this time around. Moreover, the sharp rally in oil prices following Iraq's invasion of Kuwait should help some firms in the industry .

• Depository institutions, including thrifts, were not a major contributor in dollar terms to 1990 defaults for a different reason. Despite their widely reported difficulties, few of the smaller institutions have publicly-held debt, preferring instead to rely on federally-insured deposits for their funding needs. Out of some $15 billion in Moody's-rated long-term depository institution debt, only $41 O million defaulted during 1990.

However, depository institutions did account for over 10% of defaults in terms of the

• number of rated issuers. Junk bond holdings played a part in this statistic. Noteworthy defaults included Centrust Savings, the Miami thrift that lived and died by the junk bond.

In addition, new thrift investment restrictions and the subsequent decline in the junk bond market contributed to the seizures of Far West Savings, Columbia Savings and Imperial Corporation. The distressed exchange offer by the One Bancorp of Maine, however, is more indicative of the wider problems facing depository institutions:

• overbuilt real estate markets in a slowing economy. The recent failure of the Bank of New England and the unexpectedly high year-end provisions at many banks and thrifts indicate that deflation in the nation's real estate markets has yet to abate. Continued real estate woes, as well as the need to meet increasingly stringent capital require-ments, will continue to stress financial institutions in the U.S. throughout 1991. Default risk, especially among bank and thrift holding companies, will continue to rise as

• regulators focus their efforts on protecting both insured depositors and the federal deposit insurance funds.

Other Aspects of 1990 Defaults Interestingly, eight years after Manville's surprise voluntary bankruptcy filing in response to asbestos-related litigation, asbestos continues to figure in default numbers. It played a minor part in National Gypsum's troubles and it was at least a factor in USG's restructuring strategies. But it played its most direct role with the January 1991 bankruptcy filing of Eagle-Picher Industries, where a controversial class-action

• settlement covering current and future asbestos-related claims was superseded by the company's inability to cover required January and February asbestos claim payments.

The single most common thread in the pattern of 1990 defaults was a prior leveraged refinancing or LBO done during the 1980s. In fact, some form of debt recapitalization provides at least a partial explanation for over a fifth of all 1990 defaults. The transformation from a publicly-controlled corporation to private control

• saddled these firms with debt obligations that ultimately proved destructive. In the heyday of LBO activity, companies rated investment grade could overnight become single-B issuers with much higher default prospects. Such transformations were nearly always unforeseeable by investors holding surviving pre-LBO debt, even taking into account such covenant protections against recapitalization as might exist in loan indentures. However, the recent dramatic decline in investor interest in highly

• leveraged financings, coupled with the eclipse for now of the new-issue junk bond market, reduces the risk of unexpected changes in an issuer's financial structure.

The success of many LBOs completed during the latter part of the 1980s depended crucially upon subsequent sales of assets at relatively high prices. But in many cases, markets refused to cooperate with such expectations and subsequent sales either did not materialize or occurred at much lower prices than deals required.

Corporate Bond Defaults 5

Moreover, planned asset sales which were abandoned or delayed could trace their difficulties to banks' reluctance to extend financing in the face of tightening regulatory pressure. Finally, in a number of leveraged financings -- Southland, Allied, and Federated Department Stores come to mind -- clearly the buyout team overpaid for the operating assets.

Methodology Definition of Default Moody's defines default as any missed or delayed disbursement of. interest and/or principal. This definition includes distressed exchanges where (i) the issuer offered bondholders a new security or package of securities containing a diminished financial obligation (such as preferred or common stock or debt with a lower coupon or par amount) and (ii) the exchange had the apparent purpose of helping the borrower avoid default.

There were at least 21 distressed exchange offers or other efforts to extract concessions from bondholders during 1990, up from at least 15 in 1989. In many cases, defaulting companies, such as lnterco, offered equity securities in exchange for debt. Others, such as Western Union, offered bondholders a cash tender for something less than the full face value of the debt.

Moody's default definition also includes companies that make a delayed payment within the grace period provided in the indenture. In 1990 at least seven issuers missed an interest payment on the scheduled payment date only to make the contractual payment within the "grace period" of the bond indenture. For instance, MGM-Pathe waited 27 days past the payment date to pay interest due on $400 million of its public debt. Although payment was made within the grace period (that is, prior to the trigger date that would permit bondholders to accelerate the due date for principal repayment), Moody's included the company as a defaulter. Our rationale is straightforward, that a contractual payment obligation was not made when due. The delay amounted to an involuntary 27-day loan to MGM-Pathe, a clear abuse of bondholders' legitimate expectations as to payment. Moreover, several defaylters in 1990 appeared to u~e grace period delay as a strategic club with which to beat bondholders, possibly with a debt restructuring in mind.

Moody's Rating Database The default rates and other figures cited in this report are calculated using Moody's proprietary database of public long-term debt ratings on U.S. and non-U.S. industrial companies, utilities, financial institutions, sovereign issuers, and structured finance entities. Municipal debt issuers were excluded, as were issuers with short-term debt ratings only. In total, our database includes more than 4,000 issuers that met the criteria during the 21-year period studied. At the beginning of 1990, the database contained the ratings for 3,046 companies. These issuers account for a large part of the outstanding dollar amount of U.S. public long-term cqrporate debt. Moody's database also tracks defaults and distressed exchanges. The date of default used in the study is the earliest announcement of intent to default, distribution of a distressed exchange offer, failure to pay interest or principal when due, or a filing for bankruptcy.

Rating statistics reported in the first part of this study are based on the number of debt issuers that default rather than on par amount of defaulted debt and are limited to one count for each legal entity. Separately tabulating multiple issues of a single issuereflt.iould bias the results toward the default characteristics of issuers with multiple

• issues. Different issuers within an affiliated group of companies were counted separately because not all subsidiaries have cross-default provisions nor are affiliated 6 Corporate Bond Defaults

companies always rated the same.

A Moody's rating is an opinion as to both default likelihood and severity of loss in the event of default. For purposes of this study, in which ratings are used to indicate default probability, we have tried to back severity considerations out of the rating. That is done by taking the rating on each company's senior unsecured debt or, if there is none, implying such a rating and using it as a proxy for default probability. In most cases, this will yield an assessment of risk that is relatively unaffected by special considerations of collateral or of a subordinated position within the capital structure.

A breakdown of issuers by implied senior unsecured rating for selected years is shown in Figure 4. [Rapid growth in Moody's structured finance business, as opposed to improving corporate credit quality, accounts for the jump in the number of A.aa- and Aa-rated issuers between 1985 and 1990.]

Figure 4

• Number of Rated Issuers

• • .1,000 BOO 600 As of January 1 400

• 200 0

1970 1975 1980 1985 1990 Aaa Aa A ~ Baa }] Ba B Moody's compiled the default histories used in this study from a variety of sour-ces, including our own library of financial reports, press releases, press clippings, internal memorandums, and records of analyst contact with rated issuers. Moody's also examined documents from the Securities and Exchange Commission, Dun &

Bradstreet, the New York Stock Exchange, and the American Stock Exchange .

• Corporate Default Rates Major Defaults and Historical Ratings

• From 1970 through year-end 1990, 355 rated issuers defaulted on their debt; six issuers defaulted twice. 2 All of the issuers except one -- Manville Corporation, which was rated A -- had actual or implied speculative-grade ratings at the senior unsecured

• 2 The six two-time defaulters were Continental Airlines Corp. ('83 & '90); Digicon, lnc.('86 & '90); Harvard Industries, Inc ('72 & '90); Texas International Company ('85'

& '88); United Merchants and Manufacturers, Inc. ('77 & '90); and Western Union

('87 & '90). Moreover, Continental Airlines defaulted twice on the same issue (3-1/2% Convertible Subordinated Debentures due 1992) .

• Corporate Bond Defaults 7

debt level at the time of default. 3 As expected, when one traces a defaulted bond back in time, one encounters a number of investment grade ratings on future defaulters.

Figure 5 traces the rating history of defaulting issuers from one to 20 years prior to default. It shows, for example, that at default, no issuer was rated Baa. But moving back in time to January 1 of the calendar year in which they defaulted, 14 issuers were rated Baa.

At the start of the second year before default, 28 issuers were rated Baa, and so forth. As mentioned above, only one issuer was rated investment grade at default; 17 issuers were rated investment grade on January 1 of the year they defaulted; 36 were rated investment grade at the start of the second year before default, and so on.

The ratings of six defaulting issuers were withdrawn before they defaulted.

Still looking at Figure 5, the company with the Aaa rating as of the fourth January prior to default was Getty Oil, a subsidiary of Texaco. The default of Texaco and its affiliates stemmed from the parent's litigation with Penzoil over the purchase of Getty Oil. As of the fifth January prior to default, both Texaco and Getty Oil were rated Aaa. Texaco and Federated Department Stores were the two companies with Aaa ratings between six and 15 years prior to default. As previously mentioned, Manville Corporation was the sole issuer with an A rating at default.

Figure 5 Rating History of 350 Defaulting Issuers Calendar Years Prior to Default Rating at Default 1 2 3 .4 5 10 15 20 Aaa 0 0 0 0 1 2 2 2 1 Invest.

Aa 0 2 2 4 7 6 0 1 2 Grade A 1 1 6 15 12 10 13 5 4 Baa 0 14 28 30 33 28 30 24 13 Ba 39 97 138 119 102 94 47 26 23 Spec.

B 215 197 134 98 67 49 19 17 7 Grade Cs 95 39 15 11 11 10 8 7 3 Usefulness of Default Rates Figure 6 shows the annual number of rated issuer defaults for the period 1970 through 1990. While these figures are of interest to some observers, they don't answer the often asked question "What is the likelihood of default on a portfolio of corporate bonds?" Default rates have been constructed with this question in mind. They are typically based on the experience of the entire corporate bond market and are most useful to investors who hold portfolios which imitate the behavior of the overall corporate bond market. But they can equally serve small investors by acting as indicators of market stress.

The default rates presented in the following tables are calculated with the issuer as the unit of study, rather than on the more commonly-used basis of outstanding dollar amounts. The denominator used for Moody's issuer default rates consists of the number of rated issuers -- a calculation Moody's makes with a high degree of confi-dence. Equal weight is placed on large and small issuers, since the number of rating 3 The implied issuer rating is the rating that would be assigned on an issuer's senior unsecured debt, if the issuer had such debt outstanding.

8 Corporate Bond Defaults

decisions (or in the case of an investor, buy/sell decisions) does not rise with the size of the issuer. This approach sidesteps the measurement-error problem associated with estimates of dollars outstanding in the murky speculative-grade market.

Figure 6 Number of Defaulting Issuers By Year (1970-1990) 60

• 40

• • 20 0

1m 1971 1m 1973 1m 1m 1975 1977 1m 1~ 1m 1979 1981

~-

1983 1'

1985 1m 1m 1987 1989 I

One-Year Default Rates

• The most commonly reported default number is the one year speculative-grade default rate. Moody's calculates this statistic by dividing the number of issuers defaulting over a calendar year by the number of speculative-grade issuers outstanding at the beginning of the year. Figure 7 plots one-year speculative-grade default rates from 1970 through 1990.

Figure 7 One Year Speculative Grade Default Rates (1970-1990)

Percent 1m 1m 1m 1m 1m 1~ 1m 1

• 1' 1m 1m 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989

• Table 2 is a fuller representation of one-year default rates for each of the rating categories. These are computed as the number of defaulting issuers with a given rating at the beginning of a year divided by the number of outstanding issuers with the same rating on January 1 of that year. The last two rows of Table 2 give the one-year

• Corporate Bond Defaults 9

issuer default rates for investment-grade issuers and speculative-grade issuers, respectively. Note that for all but seven of the past 21 years, the one-year issuer default rate for investment-grade issuers was zero .

• Moody's refined its rating categories in 1982 by adding numerical modifiers.

Table 3 repeats the above exercise for the additional rating categories for the period covering 1983 through 1990. Both tables confirm the notion that issuer default rates have been higher for lower-rated issuers .

• Default Rates for Periods Longer Than a Year Although the one-year issuer default rate has garnered much media attention, a more relevant summary of issuer experience for many corporate bond investors is. the cumulative default rate for groupings -- or cohorts -- of issuers. The idea is similar to

• one-year default rates except that cohorts are constructed at fixed points in time and

• are followed .for longer periods. Thus, cumulative default rates indicate the share of a portfolio of bonds formed at a given date that subsequently default.

Starting in 1971, Table 5 traces annually the cumulative default rates for cohorts of Moody's-rated issuers formed at the beginning of each year and followed to year-end 1990. Cohort groups are separated* into different Moody's rating categories.

Table 5 can be used to answer, for example, the question "What percent of 8-rated issuers with bonds outstanding in 1983 defaulted by 1990?" The answer is found in the last row and last column of the section labeled "Cohort Formed January 1, 1983":

36.2% The first column of each section, by definition, is the one-year issuer default rate and corresponds to that year's entry in Table 2.

Other studies generally form cohorts of bonds issued during a given year and track the bonds' performance. In contrast, Moody's approach, which forms cohorts of

• all Moody's-rated issuers outstanding at January 1 of each year, provides an indicator of the experience of a portfolio of seasoned bonds purchased in a given year. Table 4 gives average default rates for investment horizons spanning one to twenty years. 4 Results

• The statistics in Tables 2 through 5 clearly show that lower rated issuers are more likely to default. On average over the last 21 years, 4.2% of speculative-grade issuers defaulted within one year, compared with 0.07% of investment-grade issuers (Table 2).

Average one-year default rates, displayed in Figure 8, climb from 0.00% for Aaa issuers to over 8% for issuers rated single B.

• Figure 9 suggests that the relationship between ratings and defaults also holds generally for issuers .ranked by numerical-rating category over the period for which that system has been in effect: 1983 through 1990. Default rates climb from 0.00% for Aaa-down to A2-rated issuers to more than 17% for issuers rated 83.

Finally, the higher default risk for lower-rating categories remains evident as one considers investment periods exceeding one year. For example, as seen in Figure 1o, average default rates for five-year holding periods climb uniformly from 0.2% for issuers rated Aaa to 24.3% for issuers rated B. The same pattern holds for average default rates for ten-year holding periods (Figure 11) and fifteen-year holding periods (Figure 12).

Throughout the study period, there was a sharp distinction between companies in the investment-grade Baa category and companies in the upper-speculative-grade 4

Incremental increases in cumulative default rates are calculated and weighted by the number of issuers in the cohort; the average increase is then added to the previous year's average cumulative default rate.

1O Corporate Bond Defaults

Figure 8 Average One-Year Default Rates 1970-1990 Percent 10% ~ - - - - - - - - - - - - - - - - - - - - - - - - - ,

8%

6%

4%

- 2%

0%

0%

Aaa 0.04%

Aa 0.01%

A 0.17%

Baa Ba B

• Figure 9 Average One-Year Default Rates 1983-1990 Percent 20% . - - - - - - - - - - - - - - - - - - - - - - - - - - ,

17.58%

Aaa-Aa2 Aa3 A1-8aa1 8aa2 8aa3 8a1 8a2 Ba3 81 82 83

• Corporate Bond Defaults 11

Figure 10 Average Five-Year Default Rates Percent 25%

1Q71"1 20%

15%

10%

5%

• 0%

0.12, Ai.a A.a A Baa Ba B Figure 11 Average Ten-Year Default Rates

• Percent 30%

25% 24.17'"11, 20%

• 15%

10%

5%

• 0%

0..:11'11, Aaa 0.55 ..

A.a A Baa Ba B Figure 12' Average Fifteen-Year Default Rates

• Percent 30%

2&"'

25%

20%

• 15%

10%

5%

• 0%

12 Corporate Bond Defaults

Ba category. In the past 21 years, Ba companies have been two to ten times more prone to default than Baa-rated companies over any time horizon. And B-rated

• companies have been over four times more prone to default than Ba-rated companies .

Default Rate Volatility by Rating Category Moody's also looked at the evenness of default rates from year to _year. We found that the one-year default rate for speculative-rated companies varied from a high of 10.9%

• in 1970 to 0.4% in 1979 (Figure 7). This volatility of default rates is significantly higher for the lower rating categories. That is, not only are default rates higher at the low end of the rating scale, but the rate of default is more volatile and less predictable in any given year. For example, the standard deviations for one-year default rates during the study period range from zero to 0.3% in the investment-grade categories. The Ba standard deviation rises to 1.8% and the B standard deviation is 5.0% (Figure 13) .

• A look at standard deviations of default rates over longer bond holding periods shows a similar finding. The standard deviations of five- and ten-year default rates of investment-grade issuers were below 0.9% (Figures 14 and 15). Default rates of speculative-grade issuers, by contrast, were five to eight times more volatile than those of investment-grade issuers .

• Dollar Default Rates Beginning with this study, Moody's will report, in addition to issuer default statistics, one-year default rates based on the dollar amount of defaulting Moody's-rated and public corporate debt. We believe providing this statistic facilitates comparison to other

• reports of corporate bond experience and makes fuller use of Moody's database.

Moody's estimates that $208.0 billion par value of Moody's rated and/or publicly registered speculative-grade corporate bonds were outstanding as of January 1, 1990.

Of these, approximately $21.9 billion (including convertible bonds) belonged to companies that defaulted during 1990. We therefore estimate the dollar default rate for 1990 to be 10.5%.

This default rate is somewhat higher than the one calculated using issuer count figures. Among other things, it suggests that defaulting companies in 1990 had greater than average levels of debt outstanding .

• Corporate Bond Defaults 13

Flgur* 13 Standard Deviation of One-Year Default Rates Percent

• e~ . . - - - - - - - - - - - - - - - - - - - - ,

w I\) TABLE 2 One year Default Rates by Year and Rating 1970-1990

-, HlZQ H!ZJ HlZ2 mz3 H!H H!ZS HlZ2 H!ZZ H,!78

"'O H!Z9 H!BQ ms 1 H!62 H!63 Hl64 mas H!!H! l!:1!:!Z 198!;! 1989 1Q~O 0

8~9 (l) r+ Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CD Aa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.00% 0.00%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CD A 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.00% 0.04%

0 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

, Baa 0.3% 0.0% 0.0% 0.5% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.00% 0.01 %

0.. Ba 8.4% 1.5% 0.5% 0.5% 0.0% 0.6% 0.0% 1.1% 0.0% 0.0% 0.5% 0.00% 0.17%

0.0% 1.6% 1.1 % 0.6% 1.1 % 0.5% 0.0% 0.0% 2.6% 1.0% 0.5% 2.0% 1.9%

D 8 21.6%. 0.0% 11.8% 3.4% 6.9% 3.0% 0.0% 8.8% 2.6% 1.5% 2.7% 3.34% 1.80%

(D 5.3% 0.0% 4.4% 4.1% 2.2% 6.0% 7.3% 8.7% 11.6% 5.3% 5.7% 8.6% 12.93% 8.08%

a:'

C:

Investment Grade

,..... 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.2% 0.0%

VI 0.3% 0.0% 0.0% 0.2% 0.0% 0.07%

Speculative Grade 10.9% 1.6% 3.7% 1.4% 1.4% 2.3% 1.4% 1.9% 1.8% 0.4% 1.5% 0.7% 3.4% 3.4% 3.5% 4.4% 5.7% 4.0% 3.4% 5.8% 8.8% 4.18%

TABLE 3 One-Year Default Rates By Year and Modified Rating

]983 ]984 ]985 ]986 J98Z ]988 ]989 ]990 8vg Aaa-Aa2 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Aa3 0.0% 0.0% 0.00% 0.00%

0.00/o 0.0% 0.0% 0.0% 0.0% 1.1%

Al-Baal 0.0% 0.0% 0.00% 0.17%

0.0% 0.0% 0.0% 0.0% 0.0% 0.00%

Baa2 0.0% 0.0% 0.0% 0.00%

2.5% 0.0% 0.0% 0.7% 0.00% 0.40%

Baa3 0.0% 1.8% 0.0% 0.9% 0.0% 0.0%

Bal 0.9% 0.00% 0.45%

0.0% 0.0% 0.0% 1.2% 5.1% 0.0% 1.0%

Ba2 0.0% 1.5% 3.26% 1.51%

4.6% 1.1% 0.8% 0.0% 1.7% 3.42%

Ba3 2.4% 0.0% 1.8% 2.6% 1.59%

2.4% 2.9% 3.8% 3.45% 2.72%

81 1.3% 9.5% 4.4% 9.8% 4.2% 5.0%

82 18.5%

7.3% 9.51% 6.73%

3.7% 17.9% 7.0% 6.8% 7.0% 11.7%

83 11.1 % 0.0% 5.0% 12. 73% 10.40%

26.9°/~ 8.7% 8.3% 11.8% 41. 18% 17.58%

J

• com~issicn*r Curtiss' oommant on StCY-9O-217:

diaappr~v* th* statt's prcpoeal to dany GE's requQst !or an axamp~ion from the regulation* requiring lioansees to establish

• ex~ernal funds or~** 1;m1 ether indopendent, external re1chani1m t~ ensure tn* availability of f~nda for dac0mmisai0ninq.

Although I am awara 9: the r~ot that tfta coui,1ign R~~eifio~lly

~~~1iderRd ~nd rojee~ed ~Ul*makinq prcpoaala that wcul~ hlVI permitted the ~~* gf i.nt rn1.l !l~S,U."v-== IJ~ *1 se.Lr-1nauran.ce 1' tor oeconunission1ng tunding, as GE proposes in it* ap~lieation for

• exemption, several eonsideraticna lead me to the conclusion that the eoncerns that th* Commi*sion had about internal reser.1as and self-insurance should not precluae GE from using such decommissionin; tunding methodff h1:1. In partioula~, ? wgu1d not~ i~& f~llcwin9:

• L '.,:ne NRC st~tt' s ccnsultant. cn*--ffl*thods t.o tiriance

• dec0m.misaionin9 has ;;n;l \H:!ad that th* us!: ul internal

~aser'Ves "18 aocapt&ble and provides exoellent as*u~anca of availability of funds." (NURZG/CR-3899 -

1 Utility Financial Stability and \tha Availability of Fun~s for Deccmmis ioning, septeinl:,er 1984, p. lJ)

• Oe pite th* tact that internal reserves cannot~*

• ttactively protected from creditors in the avant ot ban~ruptcy by the licensee, th* NRC staff ccnoludad that the internal r***rv* 1;;r~11ch providet& ~easv1'ua~~1 ASIU.1'~Jl'il th.I~ c:1*nr,1T1mi*1 L1ft,ftl 'tlHnl will .ee 6Vtd.1a.b1*

• wn,h they ara naeded by licensees ~nd raccmmendad that t.h* tinal deeominissioning ru1** allow th* uae of intarnai ~***n11 (SIC~*87*30g! ,ropoaed Final Rules on Oeccai aioninq, Oacember 17, 1987, Appendix pp. 5-7, S*l3). The Commission** congern in rej*ctinq that staff reccwn*ndation -- that a financially*trouDl*d lioenseo miqnt find it nee***ary to divert its decommiaaionin; ra atv*s to othar purposes-* wo~lg ngt 111m tea ar,ply to 3 lie6l~*a* tha,:: nas eX.hibitad the level of financial stability and aa at of GE.

• 2* In premul;ating dacommisaicnin; tunding requiremants in the low*leval waste ar,a, the Commission decided not t9 par.mit, on a qenftric 0111i , ,h1 "\ii** 0! 1-canc alone salf-insurance 0 to tund low*leval waste sit*

stabilization end clcaura. At the same time, the commission did indicate that it woul~ evaluate the usa

• ot :financial tests and **lf-in uranc* 11 pr0posed by licensees on a oaae*by-case basis." (Statements of ccnsidaration: Licensini R*i\&~~1mant1 fgr Land Oi£pOGll of Lew-wvel waata, 47 t,d,81s, 57446, Oagember 27, 1982), Tnu1, despite its lack of contidence that the selt*insurance ap~roaoh would provide the naca sary:

• raasonablo assurance that ill licenseas would have site elosura tun~s available when needed, th* commi1si0n held open ~he possibility that the salt-insurance approacn could be jus~ifiad ror licensees wno

• -2* (SECY*90-217)

• demonstrate their ~Jrna.nQiftl '11"' 1 ifici.tia"*. :h Ii)'

view, tno logi~ of th* ~pproac~ ~~X1n tQr low*lovel W&~tu dec0mmia ion1ng appli** with aqual force nera, where GE ha mad8 just such a demonstration with regard to th* licenmes whieh it holda .

• 3. While the deccmmia i0nin9 regulation de not allow tha uaa of internal raat'l':'Ve8 or *e~t-,uaiantH~a, they uo

~6L~iL ncn*licenaae parent company guarantee* wher a parent organization meats certain tinancial taata a*t o~t in lO eta Part 30, Appendix A. GZ'* aaaata and

• tinancial qualification* tar exceed these required to satisty thaa* financial te ta far parent co=pany guaranteea. In tact, GI will satisfy the decommi**i0nin9 fundin; r*quire~ents tor a GE

• u.b*1"1~:ry, Reut r*Stokea, by providini 4 parent:

cc~pany guarant** baaed on GE's o'W'n intarnal financial

• capabilitiaa. It would b* an anomaly t0 parmit GE to prcvida an intarnally*tunded parant c~mpany qua~,n~II tQr ft 1ubaidil~ but ~~~Uir* vi tg 1stabli1h *x**~~al

~eserves to run~ decou!sioning whera GI ita&lf is the named licen****

4. *l:y, it appears to=* that th& d&gree of fi~~-nc~1l t .::;.,,ll~an1;11 that we wcul.d have it we we.re to qr~~1t. th.111

• ~Qmption is no l*** than that whioh would be afforded by the opti~n of a parant company 9uarantae, an option that 1* explicitly allowad bf the d9;;uiaaioning Nl*** !fi tact, ~n* very ooncarns that hava bean expressed about ;rantin9 this typ* ot axampti0n -* that a company mi;ht declare bankruptcy, thereby placing decommisaicning tunds at th* risk 0t creditors' auparior claims -- are no different than the situation that w* would :ace under the option of a pArent company

• guarantee. Th* Commission found that riak to 0*

t01erabl1 1'011 a para1,t (;cmpany guarantea; I see no raason to ditterentiate th* situation h*re, p~rtioularly in view.ot th* undisputad tinanoial health ot the applicant. *

• tor -Cha f0regoing rea11c,n1, I would grant th* exemption, subj eet to the requirament that GE be required to ~1;1rtifY en ,n, P1nm1al b*a ia 1!l\a~ it ~*ad. the rinanc1a! teat cri t&ria as required by 10 er~ Part JO, App. A, 11ctign1 IItA.l and A.~ c.

Moody's Special Report January 1991 Contacts

• Jerome S. Fons Andrew E. Kimball (212) 553-1655 Susan M. Kulakowski

• Corporate Bond Defaults and Default Rates 1970-1990

• Summary This study brings previous Moody's studies of corporate bond defaults current through 1990. The purpose of these studies is twofold. First, the data are intended to provide bond market investors with bench mark guidelines on historical

• default experience by rating category. Second, they aid in assessing the credit support needed for structured securities backed by pools of corporate bonds.

Briefly, the study found:

In 1990, 96 corporate issuers defaulted on $22.0 billion of Moody's-rated and public corporate debt. Of this total, 78 issuers were rated by Moody's -- all

• were rated speculative grade as of January 1, 1990. These companies had

$20.4 billion of debt outstanding at default.

The default rate for speculative grade issuers rose to 8.8% from 1989's 5.6%.

These represent the highest back-to-back default rates on record.

Average default rates across investment horizons spanning one to twenty years clearly show that default rates for lower-rated issuers exceed those of high-grade issuers.

Defaults reached across many industries, with casinos & hotels, retail, and airlines particularly hard hit.

• Many ill-conceived LBOs came apart in 1990. The year also saw an increase in the use of distressed exchange offers and grace period payment delays to extract concessions from bondholders.

In view of the current recession and Middle East conflict, Moody's anticipates a

• continued high pace of defaults for 1991. Through the first three weeks of 1991, 11 firms have defaulted on $2.9 billion of public or Moody's-rated bonds. As further evidence of potential difficulties, Moody's reports that Caa outstandings grew by 23% in 1990 to $27 billion, three times the level at the beginning of 1989 .

CONTENTS Discussion of Recent Default Experience Major Defaults of 1990 3 C

(U a,

Some Industries Particularly Hard Hit in 1990 Other Aspects of 1990 Defaults 3

5

-0 C:

(U Methodology_

fl)

~

J as Definition of Default 6 a, Moody's Rating Database 6 C

-0 C: Corporate Default Rates 0

• m

-a,

....as Major Defaults and Historical Ratings Usefulness of Default Rates 8 7

0 a.

.... One-Year Default Rates 9 0

0 Default Rates for Periods Longer Than a Year 10

• Results Default Rate Volatility by Rating Category Dollar Default Rates 10 13 13 Tables

• 1.

2.

3.

1990 Corporate Bond Defaults One-Year Default Rates by Year and Rating One Year Default Rates by Year and Modified Rating 15 32 32

4. Average Cumulative Default Rates 33

5. Cumulative Default Rates for Cohorts Formed 1971 through 1990 33 Copyright'£, 1991 t>y Moody's Investors Service, 99 Church Street, New York, NY 10007.

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('*Moody's"'). anc none of suer, information may be copied or otherwise reproduced, repackaged, further transmit-

'.ed, transferred, 01ssem1nated, redistributed or resold, or stored for subseQuent use for any such purpose, 1n wrole or 1n part, 1n any form or manner or by any means whatsoever, by any person without Moody's prior written consent.

All information contained herein 1s obtained by Moody's from sources believed t,y it to be accurate and reliable.

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,,se any such Information.

n*-e credit ratings and other opinions contained herein are, and must be construed solely as, statements of cp,r1on and rot statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY.

EXP8ESS OR IMPLIED, AS TO THE ACCURACY, TIMELINt:SS, COMPLETENESS, MERCHANTABILITY OR FIT-NESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must tie we1gned solely as one factor 1n any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security-and of eacn issuer and guarantor of, and each provider of credit support for, each security that it may consider purchas-

ng. holding or selling.

P1..rsuant to Section 17 (b) of the Securities Act of 1933, MOOdy' s hereby discloses that most issuers of debt securities (Including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated tly Moody's have, prior to assignment of any rat1r,g. agreed to pay Moody's for the appraisal and rating services rendereo by it fees ranging from $1.000 to $125,000. PRINTED IN U.S.A.

2 Corporate Bond Defaults

Discussion of Recent Default Experience Major Defaults of 1990

• In 1990, 96 corporate issuers -- 78 of them rated by Moody's -- defaulted on $22.0 billion of long-term debt. The year saw the largest number and highest dollar volume of defaults since Moody's began tracking default statistics in 1970. Of all speculative-grade issuers at the start of 1990, 8.8% had defaulted by year end, up from 1989's 5.6%, the highest back-to-back default rates on record .

• Figure 1 Defaults and Distressed Exchanges on Long-Term Debt in 1990 (in $millions) *

• Straight Convertible Total 20,495.4 1,524.1 22,019.5 Two Campeau companies, Allied Stores and Federated Department Stores, accounted for the largest default on public debt in 1990: $2.7 billion. Allied was

• purchased by Campeau in 1986 for $3.5 billion; Federated was purchased in 1988 for

$6.7 billion. But operating profits were not strong enough to pay down bank debt as well as make interest payments to subordinated bondholders. Nor could asset sales fetch the prices needed to reduce the huge debt burden. A lackluster retail environ-ment and mounting liquidity problems ultimately led to the bankruptcy filing in January 1990.

• Other major defaults, in descending order of dollar amount of public debt affected:

Southland Corporation, owner of the 7-Eleven convenience store chain, defaulted on $1.763 billion; USG Corporation, a building materials manufacturer, defaulted on $1.561 billion; Continental Airlines and its parent, Continental Airlines Holdings, Inc.-- formerly Texas Air Corporation -- defaulted on

$1.204 billion; lnterco, Inc, a St. Louis-based footwear and furniture maker, defaulted on $1.155 billion; Trump Taj Mahal Funding, Inc. and Trump Castle Funding, Inc., the financial conduits of two Atlantic City casino/hotels, together defaulted on $1.027 billion; National Gypsum Company, the second-largest U.S. gypsum producer, defaulted on $1.024 billion.

All other 1990 issuer defaults each affected less than $1 billion. Table 1 lists 1990's

• defaulting companies, giving business descriptions, descriptions of public debt issues outstanding, relevant dates, and a short summary of factors leading to default.

Some Industries Particularly Hard Hit in 1990

• When 1990 defaults are grouped by industry, some clear patterns of risk emerge (Figure 2). The clearest example is the casino/lodging industry where ten speculative-grade companies defaulted, including two Trump-related companies with $1 billion of debt between them. Defaulters account for 40.6% of all speculative-grade debt in this industry and had $2.5 billion of public debt outstanding; that was about 11.1 % of the

• Corporate Bond Defaults 3

dollar volume of 1990'S defaults (Figure 3). The casino industry saw rapid deterioration in credit strength in 1990. Gaming revenue slowed dramatically, just as new capacity came on line, hurting Trump and Bally in the Atlantic City market. Similar conditions contributed to troubles in Divi Hotels' Caribbean market and Goldriver's Nevada property. *The hotel industry's troubles have been much publicized also. It was badly overbuilt in the 1980s, which left it vulnerable to loss of business due to reductions in corporate travel.

• Eight issuers in the Figure 2 retail industry defaulted on Industry Default Rates

$5.6 billion of public debt, A* a Percent of Spec:ulatlve Grade Industry Debt representing 25.3% of all de- Percent faulting corporate debt in 1990. 5()'11, . - - - - - - - - - - - - - - - - - - - ,

Department stores and apparel '°"

specialty stores have been and will continue to be highly sus- ~

ceptible to failure. Federated ~

and Allied, among the largest defaults in 1990, completed ,~

leveraged buyouts only to face liquidity problems. Conven-ience food retailers such as Southland and Circle K, with historically more stable cash flows, were also capsized by

.overwhelming debt. Excessive prices paid in these and other LBOs' resulted in over-leverage. Severely limited financial flexibility forced cuts in capital spending, thus thwarting efforts to improve store productivity and raise future operating profits.

Slack demand and higher oil prices in the wake of Figure 3 Iraq's invasion of Kuwait con-tributed to Continental Airlines' Share of Defaulting Debt by Industry (and its holding company's) default on $1.2 billion of debt, which was 5.5% of the dollar defaults in this study. Conti-nental's default affected 26.1 %

of speculative-grade airline Corttums Prcxh.ctl 5.4%

industry debt. The Gulf war will continue to tax the airline ConaMlon ,a, ...

industry on into 1991. Already in January 1991 Pan Am had filed for protection under Chap-ter 11 of the bankruptcy code, and Eastern Airlines, which had been under court protec-tion, was shut down. Other airlines could follow.

Softening real estate prices, on the heels of rapid price appreciation throughout most of the 1980s, caused problems for many industries in 1990, particularly construction. During the year, the 15 defaulting issuers in the construction industry --

mainly residential construction and building products firms -- had $3.5 billion worth of bonds outstanding at time of default, affecting 16.1 % of total dollar defaults. 1 Following major financial restructurings within the past few years, two gypsum producers, USG 1

Major commercial contractors were not a factor, as they generally do not issue public debt, relying instead on bank and insurance company loans .

.4 Corporate Bond Defaults

and National Gypsum, each had more than $1 billion debt outstanding at default.

Based on average 1990 industry debt levels, 22.9% of speculative-grade construction industry debt was in default during 1990 .

Major sectors plagued by problems during the 1980s, but not significant contributors to 1990 defaults, were the oil industry and financial institutions. Many weak oil-related firms failed after the dramatic oil price decline of late 1985, leaving only the healthiest firms. Those that survived the earlier shake-out were less prone to fail this time around. Moreover, the sharp rally in oil prices following Iraq's invasion of Kuwait should help some firms in the industry .

• Depository institutions, including thrifts, were not a major contributor in dollar terms to 1990 defaults for a different reason. Despite their widely reported difficulties, few of the smaller institutions have publicly-held debt, preferring instead to rely on federally-insured deposits for their funding needs. Out of some $15 billion in Moody's-rated long-term depository institution debt, only $41 O million defaulted during 1990.

However, depository institutions did account for over 10% of defaults in terms of the

• number of rated issuers. Junk bond holdings played a part in this statistic. Noteworthy defaults included Centrust Savings, the Miami thrift that lived and died by the junk bond.

In addition, new thrift investment restrictions and the subsequent decline in the junk bond market contributed to the seizures of Far West Savings, Columbia Savings and Imperial Corporation. The distressed exchange offer by the One Bancorp of Maine, however, is more indicative of the wider problems facing depository institutions:

• overbuilt real estate markets in a slowing economy. The recent failure of the Bank of New England and the unexpectedly high year-end provisions at many banks and thrifts indicate that deflation in the nation's real estate markets has yet to abate. Continued real estate woes, as well as the need to meet increasingly stringent capital require-ments, will continue to stress financial institutions in the U.S. throughout 1991. Default risk, especially among bank and thrift holding companies, will continue to rise as

• regulators focus their efforts on protecting both insured depositors and the federal deposit insurance funds.

Other Aspects of 1990 Defaults Interestingly, eight years after Manville's surprise voluntary bankruptcy filing in response to asbestos-related litigation, asbestos continues to figure in default numbers. It played a minor part in National Gypsum's troubles and it was at least a factor in USG's restructuring strategies. But it played its most direct role with the January 1991 bankruptcy filing of Eagle-Picher Industries, where a controversial class-action

• settlement covering current and future asbestos-related claims was superseded by the company's inability to cover required January and February asbestos claim payments.

The single most common thread in the pattern of 1990 defaults was a prior leveraged refinancing or LBO done during the 1980s. In fact, some form of debt recapitalization provides at least a partial explanation for over a fifth of all 1990 defaults. The transformation from a publicly-controlled corporation to private control

• saddled these firms with debt obligations that ultimately proved destructive. In the heyday of LBO activity, companies rated investment grade could overnight become single-B issuers with much higher default prospects. Such transformations were nearly always unforeseeable by investors holding surviving pre-LBO debt, even taking into account such covenant protections against recapitalization as might exist in loan indentures. However, the recent dramatic decline in investor interest in highly

• leveraged financings, coupled with the eclipse for now of the new-issue junk bond market, reduces the risk of unexpected changes in an issuer's financial structure.

The success of many LBOs completed during the latter part of the 1980s depended crucially upon subsequent sales of assets at relatively high prices. But in many cases, markets refused to cooperate with such expectations and subsequent sales either did not materialize or occurred at much lower prices than deals required.

Corporate Bond Defaults 5

Moreover, planned asset sales which were abandoned or delayed could trace their difficulties to banks' reluctance to extend financing in the face of tightening regulatory pressure. Finally, in a number of leveraged financings -- Southland, Allied, and Federated Department Stores come to mind -- clearly the buyout team overpaid for the operating assets.

Methodology Definition of Default Moody's defines default as any missed or delayed disbursement of. interest and/or principal. This definition includes distressed exchanges where (i) the issuer offered bondholders a new security or package of securities containing a diminished financial obligation (such as preferred or common stock or debt with a lower coupon or par amount) and (ii) the exchange had the apparent purpose of helping the borrower avoid default.

There were at least 21 distressed exchange offers or other efforts to extract concessions from bondholders during 1990, up from at least 15 in 1989. In many cases, defaulting companies, such as lnterco, offered equity securities in exchange for debt. Others, such as Western Union, offered bondholders a cash tender for something less than the full face value of the debt.

Moody's default definition also includes companies that make a delayed payment within the grace period provided in the indenture. In 1990 at least seven issuers missed an interest payment on the scheduled payment date only to make the contractual payment within the "grace period" of the bond indenture. For instance, MGM-Pathe waited 27 days past the payment date to pay interest due on $400 million of its public debt. Although payment was made within the grace period (that is, prior to the trigger date that would permit bondholders to accelerate the due date for principal repayment), Moody's included the company as a defaulter. Our rationale is straightforward, that a contractual payment obligation was not made when due. The delay amounted to an involuntary 27-day loan to MGM-Pathe, a clear abuse of bondholders' legitimate expectations as to payment. Moreover, several defaylters in 1990 appeared to u~e grace period delay as a strategic club with which to beat bondholders, possibly with a debt restructuring in mind.

Moody's Rating Database The default rates and other figures cited in this report are calculated using Moody's proprietary database of public long-term debt ratings on U.S. and non-U.S. industrial companies, utilities, financial institutions, sovereign issuers, and structured finance entities. Municipal debt issuers were excluded, as were issuers with short-term debt ratings only. In total, our database includes more than 4,000 issuers that met the criteria during the 21-year period studied. At the beginning of 1990, the database contained the ratings for 3,046 companies. These issuers account for a large part of the outstanding dollar amount of U.S. public long-term cqrporate debt. Moody's database also tracks defaults and distressed exchanges. The date of default used in the study is the earliest announcement of intent to default, distribution of a distressed exchange offer, failure to pay interest or principal when due, or a filing for bankruptcy.

Rating statistics reported in the first part of this study are based on the number of debt issuers that default rather than on par amount of defaulted debt and are limited to one count for each legal entity. Separately tabulating multiple issues of a single issuereflt.iould bias the results toward the default characteristics of issuers with multiple

• issues. Different issuers within an affiliated group of companies were counted separately because not all subsidiaries have cross-default provisions nor are affiliated 6 Corporate Bond Defaults

companies always rated the same.

A Moody's rating is an opinion as to both default likelihood and severity of loss in the event of default. For purposes of this study, in which ratings are used to indicate default probability, we have tried to back severity considerations out of the rating. That is done by taking the rating on each company's senior unsecured debt or, if there is none, implying such a rating and using it as a proxy for default probability. In most cases, this will yield an assessment of risk that is relatively unaffected by special considerations of collateral or of a subordinated position within the capital structure.

A breakdown of issuers by implied senior unsecured rating for selected years is shown in Figure 4. [Rapid growth in Moody's structured finance business, as opposed to improving corporate credit quality, accounts for the jump in the number of A.aa- and Aa-rated issuers between 1985 and 1990.]

Figure 4

• Number of Rated Issuers

• • .1,000 BOO 600 As of January 1 400

• 200 0

1970 1975 1980 1985 1990 Aaa Aa A ~ Baa }] Ba B Moody's compiled the default histories used in this study from a variety of sour-ces, including our own library of financial reports, press releases, press clippings, internal memorandums, and records of analyst contact with rated issuers. Moody's also examined documents from the Securities and Exchange Commission, Dun &

Bradstreet, the New York Stock Exchange, and the American Stock Exchange .

• Corporate Default Rates Major Defaults and Historical Ratings

• From 1970 through year-end 1990, 355 rated issuers defaulted on their debt; six issuers defaulted twice. 2 All of the issuers except one -- Manville Corporation, which was rated A -- had actual or implied speculative-grade ratings at the senior unsecured

• 2 The six two-time defaulters were Continental Airlines Corp. ('83 & '90); Digicon, lnc.('86 & '90); Harvard Industries, Inc ('72 & '90); Texas International Company ('85'

& '88); United Merchants and Manufacturers, Inc. ('77 & '90); and Western Union

('87 & '90). Moreover, Continental Airlines defaulted twice on the same issue (3-1/2% Convertible Subordinated Debentures due 1992) .

• Corporate Bond Defaults 7

debt level at the time of default. 3 As expected, when one traces a defaulted bond back in time, one encounters a number of investment grade ratings on future defaulters.

Figure 5 traces the rating history of defaulting issuers from one to 20 years prior to default. It shows, for example, that at default, no issuer was rated Baa. But moving back in time to January 1 of the calendar year in which they defaulted, 14 issuers were rated Baa.

At the start of the second year before default, 28 issuers were rated Baa, and so forth. As mentioned above, only one issuer was rated investment grade at default; 17 issuers were rated investment grade on January 1 of the year they defaulted; 36 were rated investment grade at the start of the second year before default, and so on.

The ratings of six defaulting issuers were withdrawn before they defaulted.

Still looking at Figure 5, the company with the Aaa rating as of the fourth January prior to default was Getty Oil, a subsidiary of Texaco. The default of Texaco and its affiliates stemmed from the parent's litigation with Penzoil over the purchase of Getty Oil. As of the fifth January prior to default, both Texaco and Getty Oil were rated Aaa. Texaco and Federated Department Stores were the two companies with Aaa ratings between six and 15 years prior to default. As previously mentioned, Manville Corporation was the sole issuer with an A rating at default.

Figure 5 Rating History of 350 Defaulting Issuers Calendar Years Prior to Default Rating at Default 1 2 3 .4 5 10 15 20 Aaa 0 0 0 0 1 2 2 2 1 Invest.

Aa 0 2 2 4 7 6 0 1 2 Grade A 1 1 6 15 12 10 13 5 4 Baa 0 14 28 30 33 28 30 24 13 Ba 39 97 138 119 102 94 47 26 23 Spec.

B 215 197 134 98 67 49 19 17 7 Grade Cs 95 39 15 11 11 10 8 7 3 Usefulness of Default Rates Figure 6 shows the annual number of rated issuer defaults for the period 1970 through 1990. While these figures are of interest to some observers, they don't answer the often asked question "What is the likelihood of default on a portfolio of corporate bonds?" Default rates have been constructed with this question in mind. They are typically based on the experience of the entire corporate bond market and are most useful to investors who hold portfolios which imitate the behavior of the overall corporate bond market. But they can equally serve small investors by acting as indicators of market stress.

The default rates presented in the following tables are calculated with the issuer as the unit of study, rather than on the more commonly-used basis of outstanding dollar amounts. The denominator used for Moody's issuer default rates consists of the number of rated issuers -- a calculation Moody's makes with a high degree of confi-dence. Equal weight is placed on large and small issuers, since the number of rating 3 The implied issuer rating is the rating that would be assigned on an issuer's senior unsecured debt, if the issuer had such debt outstanding.

8 Corporate Bond Defaults

decisions (or in the case of an investor, buy/sell decisions) does not rise with the size of the issuer. This approach sidesteps the measurement-error problem associated with estimates of dollars outstanding in the murky speculative-grade market.

Figure 6 Number of Defaulting Issuers By Year (1970-1990) 60

• 40

• • 20 0

1m 1971 1m 1973 1m 1m 1975 1977 1m 1~ 1m 1979 1981

~-

1983 1'

1985 1m 1m 1987 1989 I

One-Year Default Rates

• The most commonly reported default number is the one year speculative-grade default rate. Moody's calculates this statistic by dividing the number of issuers defaulting over a calendar year by the number of speculative-grade issuers outstanding at the beginning of the year. Figure 7 plots one-year speculative-grade default rates from 1970 through 1990.

Figure 7 One Year Speculative Grade Default Rates (1970-1990)

Percent 1m 1m 1m 1m 1m 1~ 1m 1

• 1' 1m 1m 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989

• Table 2 is a fuller representation of one-year default rates for each of the rating categories. These are computed as the number of defaulting issuers with a given rating at the beginning of a year divided by the number of outstanding issuers with the same rating on January 1 of that year. The last two rows of Table 2 give the one-year

• Corporate Bond Defaults 9

issuer default rates for investment-grade issuers and speculative-grade issuers, respectively. Note that for all but seven of the past 21 years, the one-year issuer default rate for investment-grade issuers was zero .

• Moody's refined its rating categories in 1982 by adding numerical modifiers.

Table 3 repeats the above exercise for the additional rating categories for the period covering 1983 through 1990. Both tables confirm the notion that issuer default rates have been higher for lower-rated issuers .

• Default Rates for Periods Longer Than a Year Although the one-year issuer default rate has garnered much media attention, a more relevant summary of issuer experience for many corporate bond investors is. the cumulative default rate for groupings -- or cohorts -- of issuers. The idea is similar to

• one-year default rates except that cohorts are constructed at fixed points in time and

• are followed .for longer periods. Thus, cumulative default rates indicate the share of a portfolio of bonds formed at a given date that subsequently default.

Starting in 1971, Table 5 traces annually the cumulative default rates for cohorts of Moody's-rated issuers formed at the beginning of each year and followed to year-end 1990. Cohort groups are separated* into different Moody's rating categories.

Table 5 can be used to answer, for example, the question "What percent of 8-rated issuers with bonds outstanding in 1983 defaulted by 1990?" The answer is found in the last row and last column of the section labeled "Cohort Formed January 1, 1983":

36.2% The first column of each section, by definition, is the one-year issuer default rate and corresponds to that year's entry in Table 2.

Other studies generally form cohorts of bonds issued during a given year and track the bonds' performance. In contrast, Moody's approach, which forms cohorts of

• all Moody's-rated issuers outstanding at January 1 of each year, provides an indicator of the experience of a portfolio of seasoned bonds purchased in a given year. Table 4 gives average default rates for investment horizons spanning one to twenty years. 4 Results

• The statistics in Tables 2 through 5 clearly show that lower rated issuers are more likely to default. On average over the last 21 years, 4.2% of speculative-grade issuers defaulted within one year, compared with 0.07% of investment-grade issuers (Table 2).

Average one-year default rates, displayed in Figure 8, climb from 0.00% for Aaa issuers to over 8% for issuers rated single B.

• Figure 9 suggests that the relationship between ratings and defaults also holds generally for issuers .ranked by numerical-rating category over the period for which that system has been in effect: 1983 through 1990. Default rates climb from 0.00% for Aaa-down to A2-rated issuers to more than 17% for issuers rated 83.

Finally, the higher default risk for lower-rating categories remains evident as one considers investment periods exceeding one year. For example, as seen in Figure 1o, average default rates for five-year holding periods climb uniformly from 0.2% for issuers rated Aaa to 24.3% for issuers rated B. The same pattern holds for average default rates for ten-year holding periods (Figure 11) and fifteen-year holding periods (Figure 12).

Throughout the study period, there was a sharp distinction between companies in the investment-grade Baa category and companies in the upper-speculative-grade 4

Incremental increases in cumulative default rates are calculated and weighted by the number of issuers in the cohort; the average increase is then added to the previous year's average cumulative default rate.

1O Corporate Bond Defaults

Figure 8 Average One-Year Default Rates 1970-1990 Percent 10% ~ - - - - - - - - - - - - - - - - - - - - - - - - - ,

8%

6%

4%

- 2%

0%

0%

Aaa 0.04%

Aa 0.01%

A 0.17%

Baa Ba B

• Figure 9 Average One-Year Default Rates 1983-1990 Percent 20% . - - - - - - - - - - - - - - - - - - - - - - - - - - ,

17.58%

Aaa-Aa2 Aa3 A1-8aa1 8aa2 8aa3 8a1 8a2 Ba3 81 82 83

• Corporate Bond Defaults 11

Figure 10 Average Five-Year Default Rates Percent 25%

1Q71"1 20%

15%

10%

5%

• 0%

0.12, Ai.a A.a A Baa Ba B Figure 11 Average Ten-Year Default Rates

• Percent 30%

25% 24.17'"11, 20%

• 15%

10%

5%

• 0%

0..:11'11, Aaa 0.55 ..

A.a A Baa Ba B Figure 12' Average Fifteen-Year Default Rates

• Percent 30%

2&"'

25%

20%

• 15%

10%

5%

• 0%

12 Corporate Bond Defaults

Ba category. In the past 21 years, Ba companies have been two to ten times more prone to default than Baa-rated companies over any time horizon. And B-rated

• companies have been over four times more prone to default than Ba-rated companies .

Default Rate Volatility by Rating Category Moody's also looked at the evenness of default rates from year to _year. We found that the one-year default rate for speculative-rated companies varied from a high of 10.9%

• in 1970 to 0.4% in 1979 (Figure 7). This volatility of default rates is significantly higher for the lower rating categories. That is, not only are default rates higher at the low end of the rating scale, but the rate of default is more volatile and less predictable in any given year. For example, the standard deviations for one-year default rates during the study period range from zero to 0.3% in the investment-grade categories. The Ba standard deviation rises to 1.8% and the B standard deviation is 5.0% (Figure 13) .

• A look at standard deviations of default rates over longer bond holding periods shows a similar finding. The standard deviations of five- and ten-year default rates of investment-grade issuers were below 0.9% (Figures 14 and 15). Default rates of speculative-grade issuers, by contrast, were five to eight times more volatile than those of investment-grade issuers .

• Dollar Default Rates Beginning with this study, Moody's will report, in addition to issuer default statistics, one-year default rates based on the dollar amount of defaulting Moody's-rated and public corporate debt. We believe providing this statistic facilitates comparison to other

• reports of corporate bond experience and makes fuller use of Moody's database.

Moody's estimates that $208.0 billion par value of Moody's rated and/or publicly registered speculative-grade corporate bonds were outstanding as of January 1, 1990.

Of these, approximately $21.9 billion (including convertible bonds) belonged to companies that defaulted during 1990. We therefore estimate the dollar default rate for 1990 to be 10.5%.

This default rate is somewhat higher than the one calculated using issuer count figures. Among other things, it suggests that defaulting companies in 1990 had greater than average levels of debt outstanding .

• Corporate Bond Defaults 13

Flgur* 13 Standard Deviation of One-Year Default Rates Percent

• e~ . . - - - - - - - - - - - - - - - - - - - - ,

w I\) TABLE 2 One year Default Rates by Year and Rating 1970-1990

-, HlZQ H!ZJ HlZ2 mz3 H!H H!ZS HlZ2 H!ZZ H,!78

"'O H!Z9 H!BQ ms 1 H!62 H!63 Hl64 mas H!!H! l!:1!:!Z 198!;! 1989 1Q~O 0

8~9 (l) r+ Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CD Aa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.00% 0.00%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CD A 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.00% 0.04%

0 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

, Baa 0.3% 0.0% 0.0% 0.5% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.00% 0.01 %

0.. Ba 8.4% 1.5% 0.5% 0.5% 0.0% 0.6% 0.0% 1.1% 0.0% 0.0% 0.5% 0.00% 0.17%

0.0% 1.6% 1.1 % 0.6% 1.1 % 0.5% 0.0% 0.0% 2.6% 1.0% 0.5% 2.0% 1.9%

D 8 21.6%. 0.0% 11.8% 3.4% 6.9% 3.0% 0.0% 8.8% 2.6% 1.5% 2.7% 3.34% 1.80%

(D 5.3% 0.0% 4.4% 4.1% 2.2% 6.0% 7.3% 8.7% 11.6% 5.3% 5.7% 8.6% 12.93% 8.08%

a:'

C:

Investment Grade

,..... 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.2% 0.0%

VI 0.3% 0.0% 0.0% 0.2% 0.0% 0.07%

Speculative Grade 10.9% 1.6% 3.7% 1.4% 1.4% 2.3% 1.4% 1.9% 1.8% 0.4% 1.5% 0.7% 3.4% 3.4% 3.5% 4.4% 5.7% 4.0% 3.4% 5.8% 8.8% 4.18%

TABLE 3 One-Year Default Rates By Year and Modified Rating

]983 ]984 ]985 ]986 J98Z ]988 ]989 ]990 8vg Aaa-Aa2 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Aa3 0.0% 0.0% 0.00% 0.00%

0.00/o 0.0% 0.0% 0.0% 0.0% 1.1%

Al-Baal 0.0% 0.0% 0.00% 0.17%

0.0% 0.0% 0.0% 0.0% 0.0% 0.00%

Baa2 0.0% 0.0% 0.0% 0.00%

2.5% 0.0% 0.0% 0.7% 0.00% 0.40%

Baa3 0.0% 1.8% 0.0% 0.9% 0.0% 0.0%

Bal 0.9% 0.00% 0.45%

0.0% 0.0% 0.0% 1.2% 5.1% 0.0% 1.0%

Ba2 0.0% 1.5% 3.26% 1.51%

4.6% 1.1% 0.8% 0.0% 1.7% 3.42%

Ba3 2.4% 0.0% 1.8% 2.6% 1.59%

2.4% 2.9% 3.8% 3.45% 2.72%

81 1.3% 9.5% 4.4% 9.8% 4.2% 5.0%

82 18.5%

7.3% 9.51% 6.73%

3.7% 17.9% 7.0% 6.8% 7.0% 11.7%

83 11.1 % 0.0% 5.0% 12. 73% 10.40%

26.9°/~ 8.7% 8.3% 11.8% 41. 18% 17.58%

J

TABLE 4 Average Cumulative Default Rates 1 to 20 Years Years: 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Aaa 0.0% 0.0% 0.0% 0.1% 0.2% 0.3% 0.5% 0.6% 0.8% 1.0% 1.3% 1.6% 1.9% 2.3% 2.8% 3.4% 3. 8°,o 4.2% 4.2% 4.2%

Aa 0.0% 0.1% 0.2% 0.4% 0.6% 0.9% 1.1% 1.2% 1.4% 1.4% 1.5% 1.6% 1.7% 2.0% 2.0% 2.0% 2.2% 2.5% 2.9% 3.6%

A 0.0% 0.1% 0.3% 0.5% 0.6% 0.8% 1.0% 1.3% 1.5% 1.8% 2.2% 2.5% 2.9% 3.1% 3.3% 3.5% 3.8% 4 1% 4.3% 4.3%

Baa 0.2% 0.5% 1.0% 1.4% 1.8% 2.3% 2.8% 3.4% 3.9% 4.4% 4.9% 5.5% 5.9% 6.5% 7.2% 7.9% 8.6% 9.3% 9.9% 10.6%

Ba 1.8% 4.2% 6.3% 8.3% 10.2% 11.7% 12.8% 13.9% 15.1% 16.1% 17.0% 17.9% 18.8% 19.5% 20.1% 20.7% 21.4% 21.7% 21. S"lo 22.0%

B 8.1% 13.7% 18.3% 21.7% 24.3% 26.8% 28.7% 30.5% 31.2% 31.6% 32.1% 32.5% 33.2% 33.4% 33.7% 34.0% 34.0% 34.0~*o 34. 0°1c, 34.0%

Investment Grade 0.1% 0.2% 0.5% 0.7% 1.0% 1.3% 1.6% 1.9% 2.3% 2.6% 3.0% 3.4% 3.8% 4.2% 4.6% 5.1% 5 5%, 6.0% 6.5% 6.8%

Speculative Grade 4.2% 7.7% 10.6% 12.9% 15.0% 16.8% 18.1% 19.2% 20.3% 21.2% 22.0% 22.8% 23.7% 24.2% 24.8% 25.3% 25.8% 26.0% 26.1% 26.3%

TABLE 5 Cumulative Default Rates for Cohorts Formed 1971 through 1990 Years: 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Cohort Formed January 1, 1971 Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.1% 2.1% 2.1% 2.1%

Aa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%

A 0.0% 0.0% 0.0% 0.0% 0.4% 0..4% 0.4% 0.4% 0.4% 0.7% 0.7% 1.1% 1.4% 1.4% 1.4% 1.8% 1.8% 2.5% 2.5% 2.5%

f;>

--, Baa 0.0% 0.3% 0.9% 1.1% 1.1% 1.4% 2.0% 2.6% 2.6% 2.8% 2.8% 3.7% 4.0% 4.3% 4.8% 5.7% 6.6% 6.8% 7.1% 8.3%

'O 0

Ba 1.5% 2.0% 3.0% 3.6% 5.1% 5.6% 6.1% 7.1 % 7.1% 7.1% 8.1% 8.6% 9.1% 9.1% 9.6% 12.2% 12.2% 12.2% 12.7% 12.7%

O> B 0.0% 8.3% 8.3% 11.1% 11. 1 % 11.1 % -16.7% 16. 7% 16.7% 16.7% 16.7% 22.2% 22.2% 22.2% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

,-+

m CD 0

Cohort Formed January 1, 1972

a. Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% *0.0% 1.9% 1.9% 1.9% 1.9%

D 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%

ID Aa 0.0% 0.0% 0.0% 0.0%

a, A 0.0% 0.0% 0.0% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.6% 1.0% 1.0% 1.0% 1.3% 1.3% 1.9% 1.9% 2.3%

C

,.... Baa 0.0% 0.5% 0.8% 0.8% 1.1% 1.6% 2.2% 2.2% 2.7% 2.7% 3.3% 3.5% 3.8% 4.3% 5.1% 6.0% 6.2% 6.8% 8.1%

11'1 Ba 0.5% 1.5% 2.0% 3.5% 4.0% 4.5% 5.6% 5.6% 5.6% 6.6% 7.6% 8.1% 9.1% 10.1% 12.6% 12.6% 12.6% 13.1% 13.1%

w 8 11.8% 11.8% 14.7% 14.7% 14.7% 20.6% 20.6% 20.6% 20.6% 20.6% 26.5% 26.5% 26.5% 29.4% 29.4% 29.4% 29.4% 29.4% 29.4%

w

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TABLE 4 Average Cumulative Default Rates 1 to 20 Years Years: 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Aaa 0.0% 0.0% 0.0% 0.1% 0.2% 0.3% 0.5% 0.6% 0.8% 1.0% 1.3% 1.6% 1.9% 2.3% 2.8% 3.4% 3. 8°,o 4.2% 4.2% 4.2%

Aa 0.0% 0.1% 0.2% 0.4% 0.6% 0.9% 1.1% 1.2% 1.4% 1.4% 1.5% 1.6% 1.7% 2.0% 2.0% 2.0% 2.2% 2.5% 2.9% 3.6%

A 0.0% 0.1% 0.3% 0.5% 0.6% 0.8% 1.0% 1.3% 1.5% 1.8% 2.2% 2.5% 2.9% 3.1% 3.3% 3.5% 3.8% 4 1% 4.3% 4.3%

Baa 0.2% 0.5% 1.0% 1.4% 1.8% 2.3% 2.8% 3.4% 3.9% 4.4% 4.9% 5.5% 5.9% 6.5% 7.2% 7.9% 8.6% 9.3% 9.9% 10.6%

Ba 1.8% 4.2% 6.3% 8.3% 10.2% 11.7% 12.8% 13.9% 15.1% 16.1% 17.0% 17.9% 18.8% 19.5% 20.1% 20.7% 21.4% 21.7% 21. S"lo 22.0%

B 8.1% 13.7% 18.3% 21.7% 24.3% 26.8% 28.7% 30.5% 31.2% 31.6% 32.1% 32.5% 33.2% 33.4% 33.7% 34.0% 34.0% 34.0~*o 34. 0°1c, 34.0%

Investment Grade 0.1% 0.2% 0.5% 0.7% 1.0% 1.3% 1.6% 1.9% 2.3% 2.6% 3.0% 3.4% 3.8% 4.2% 4.6% 5.1% 5 5%, 6.0% 6.5% 6.8%

Speculative Grade 4.2% 7.7% 10.6% 12.9% 15.0% 16.8% 18.1% 19.2% 20.3% 21.2% 22.0% 22.8% 23.7% 24.2% 24.8% 25.3% 25.8% 26.0% 26.1% 26.3%

TABLE 5 Cumulative Default Rates for Cohorts Formed 1971 through 1990 Years: 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Cohort Formed January 1, 1971 Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.1% 2.1% 2.1% 2.1%

Aa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%

A 0.0% 0.0% 0.0% 0.0% 0.4% 0..4% 0.4% 0.4% 0.4% 0.7% 0.7% 1.1% 1.4% 1.4% 1.4% 1.8% 1.8% 2.5% 2.5% 2.5%

f;>

--, Baa 0.0% 0.3% 0.9% 1.1% 1.1% 1.4% 2.0% 2.6% 2.6% 2.8% 2.8% 3.7% 4.0% 4.3% 4.8% 5.7% 6.6% 6.8% 7.1% 8.3%

'O 0

Ba 1.5% 2.0% 3.0% 3.6% 5.1% 5.6% 6.1% 7.1 % 7.1% 7.1% 8.1% 8.6% 9.1% 9.1% 9.6% 12.2% 12.2% 12.2% 12.7% 12.7%

O> B 0.0% 8.3% 8.3% 11.1% 11. 1 % 11.1 % -16.7% 16. 7% 16.7% 16.7% 16.7% 22.2% 22.2% 22.2% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

,-+

m CD 0

Cohort Formed January 1, 1972

a. Aaa 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% *0.0% 1.9% 1.9% 1.9% 1.9%

D 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%

ID Aa 0.0% 0.0% 0.0% 0.0%

a, A 0.0% 0.0% 0.0% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.6% 1.0% 1.0% 1.0% 1.3% 1.3% 1.9% 1.9% 2.3%

C

,.... Baa 0.0% 0.5% 0.8% 0.8% 1.1% 1.6% 2.2% 2.2% 2.7% 2.7% 3.3% 3.5% 3.8% 4.3% 5.1% 6.0% 6.2% 6.8% 8.1%

11'1 Ba 0.5% 1.5% 2.0% 3.5% 4.0% 4.5% 5.6% 5.6% 5.6% 6.6% 7.6% 8.1% 9.1% 10.1% 12.6% 12.6% 12.6% 13.1% 13.1%

w 8 11.8% 11.8% 14.7% 14.7% 14.7% 20.6% 20.6% 20.6% 20.6% 20.6% 26.5% 26.5% 26.5% 29.4% 29.4% 29.4% 29.4% 29.4% 29.4%

w

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