What did Santee Cooper know, and when did it know it?
Legal problems for South Carolina’s state-owned Santee Cooper utility continue to intensify in a class-action lawsuit that pits it against its biggest customer.
The Central Electric Power Cooperative Inc., which supplies more than half of Santee Cooper’s revenues, filed sweeping cross claims in the class-action suit contending that Santee Cooper officials “candidly discussed” problems about building two nuclear reactors with South Carolina Electric & Gas but concealed the truth from the public.
“Only after the project was abandoned in July 2017 did the true, alarming facts about the project start coming out,” attorneys for the cooperative wrote. “Until then, Central, like so many others, was kept in the dark.”
While some of the claims Central Electric makes in an Aug. 9 court filing are not new, emails, texts and quotes from documents suggest that Santee Cooper worked with SCE&G to keep the severity of construction problems quiet.
One problem “afflicting” the project was the off-site fabrication and delivery of parts to the reactor site, causing completion dates for the two units to be pushed back by years, the filing said.
By October 2011, Santee Cooper’s then-chief executive officer, Lonnie Carter, said he was “well aware” of production and delivery problems and asked the utility’s new vice president of nuclear operations and construction, Michael Crosby, to look into it, the latest brief said. Delays and cost overruns continued and in October 2013, according to the filing, Carter said that he had “received so many new schedules that they are meaningless.”
In a Sept. 8, 2014 email, Carter said that he was “concerned that we have become tied to artificial dates, both past and future, often driven by disclosure considerations.”
“Santee Cooper was telling the public a different story,” the Central Electric brief said, adding that in its 2014 annual report the utility included a new schedule saying that one reactor would be substantially complete in June 2019 and the second reactor would be done in June 2020.
The annual report also said that Santee Cooper and SCE&G were continuing discussions with the construction consortium “to identify potential mitigation strategies to accelerate the substantial completion dates of the units.”
In the summer of 2015, the brief said, the owners “secretly” retained Bechtel Power Corp. to assess the project. That report, later uncovered through records requests and distributed to the public and press by Gov. Henry McMaster, showed that commercial operations of the reactors would be delayed eight months to a year.
Although the brief said the schedule was deleted from the final “watered-down” report, other problems were identified and “Bechtel confirmed what Santee Cooper already knew — the project was in dire shape. Nevertheless, the owners forged ahead with construction. Unsurprisingly, matters did not improve.
“Santee Cooper continued to pour money into the project for almost two more years before it was finally abandoned in July 2017,” the brief said.
Central Electric is asking the court to rule that it is not liable for any acts or omissions of SCE&G, Santee Cooper, or Santee Cooper’s board of directors for the “design, construction, or abandonment” of the project, as well as the liability for paying the rates charged by Santee Cooper.
The South Carolina-owned utility can’t by law impose rates on customers for the failed project in the future and those charged in the past because there is no useful asset, Central Electric contends. The cooperative also wants the judge to claw back the securitized payment Santee Cooper received from Toshiba, owner of nuclear contractor Westinghouse, for the construction delays and Westinghouse's ultimate bankruptcy.
The $831.2 million from Toshiba should be allocated to customers, and Central should receive 70% of the total, the court filing said.
In a brief filed on Aug. 16, Santee Cooper denied the allegations made by Central Electric and contended that the cooperative was “kept informed” about progress on the project, including scheduling delays and cost overruns. Santee Cooper also said that in a contract between the two utilities, known as the coordination agreement, Central Electric agreed to pay for the project regardless of whether it was completed.
Santee Cooper owned 45% of the reactors and issued $4.2 billion of debt between 2008 and 2016 to finance its share of the project before it was shelved. The utility has been using the Toshiba funds to pay down debt early and to fund operations in an effort to avoid issuing bonds and raising electric rates.
SCANA Corp.-owned SCE&G, an investor-owned utility with a 55% share of the project, also oversaw construction. SCANA merged with Virginia-based Dominion Energy Inc. on Jan. 2, 2019.
Central Electric purchases power from Santee Cooper and supplies it to member cooperatives in all 46 counties in South Carolina. As Santee Cooper’s largest customer, Central also helps pay debt service on the bonds issued to support the defunct reactor project.
The continued uncertainty created by the claims filed by Central Electric are included in the profile that supports Moody's Investors Service’s A2 rating and negative outlook on Santee Cooper’s bonds, Moody’s said in an Aug. 12 credit opinion.
“While the credit profile factors in our belief that the terms of the contract between Santee Cooper and Central will remain intact, the litigation, if it ends up with an adverse outcome, could affect Santee Cooper's financial strength and would lead to a further credit deterioration,” said analyst Jennifer Chang.
The rating outlook also remains negative because of the uncertainty relating to the claims made by Central Electric along with the “political risks” that Santee Cooper faces as it manages its plan to maintain targeted debt service coverage ratio and rate competitiveness, she said.
The latest allegations concerning the failed reactor project surfaced in a class-action lawsuit filed by residential ratepayers on Aug. 22, 2017. Santee Cooper and its board of directors, Central Electric Power Cooperative, Palmetto Electric Cooperative, SCE&G and its former parent SCANA Corp. are defendants.
While the ratepayers’ suit alleges that Santee Cooper “lacks the statutory authority” to collect rates associated with the nuclear project, it has also morphed into an increasingly complex legal challenge in which the defendants have filed numerous cross-claims against each other. Santee Cooper has filed claims against SCE&G, including breach of contract accompanied by fraudulent act, gross negligence, breach of fiduciary duties, and breach of contract accompanied by bad faith.
In May, an investor in Santee Cooper’s “mini-bond” program sued the utility alleging that the unrated debt was sold at artificially deflated interest rates because details about its troubled nuclear project were hidden from the public.
The federal complaint seeking class-action status alleges that Santee Cooper violated federal securities law anti-fraud provisions for failing to disclose pertinent information to investors about the project.
On July 12, Santee Cooper requested that the suit be dismissed.
“Plaintiff’s case is nothing more than an ill-fated attempt to shoehorn a tort-based theory into a securities fraud class action - akin to trying to fit a square peg in a round hole - perhaps resulting from an attempt to identify claims that are not duplicative of those already asserted against Santee Cooper in the ongoing state and federal putative class actions,” attorneys for Santee Cooper wrote in a memorandum supporting the motion to dismiss.
The suit, filed by Murray C. Turka as the lead plaintiff, represents a “twist on an artificially inflated price theory, normally asserted in stock cases where the materialization of a concealed risk led to an immediate drop in the stock’s price,” the July 12 brief said.
The allegations, said Santee Cooper, are based on a “speculative theory” that Turka suffered an actual monetary injury because the interest rate of the mini-bonds he purchased may have been lower than the interest rate could have been on a hypothetical bond issued with complete disclosures.
"The MiniBonds Plaintiff holds today have exactly the same value as they did when Plaintiff purchased them, and he has not suffered any concrete, non-speculative loss," the brief says.
Santee Cooper said in a footnote that its mini-bond program is based on the utility’s enabling act and the program’s master resolution, and it is exempt from South Carolina’s registration requirements.
“Santee Cooper’s mini-bonds were sold by Santee Cooper directly to investors in an intrastate offering without the use of an underwriter and so the mini-bonds were not subject to the continuing disclosure requirements of Rule 15c2-12 of the Securities Exchange Act of 1934,” the brief said.
Citing documents uncovered publicly and in other lawsuits, such as the report by Bechtel, Turka asked the court on Aug. 9 not to dismiss his case.
While bond documents included general statements about the risks associated with the nuclear reactor program, Turka said they were “false and disclosed none of the actual information about the nuclear project that Santee Cooper knew while it was selling the mini-bonds.”
The judge has yet to rule on the latest motions in the securities litigation.
The case number is 2:19-cv-01102, and has been filed in the Charleston division of the U.S. District Court of South Carolina.