Legal and political risks push Santee Cooper’s rating down again
South Carolina-owned Santee Cooper took another rating hit due to ongoing legal and political problems related to its ownership share in a shelved nuclear reactor project.
S&P Global Ratings cut its rating to A from A-plus on $7 billion in senior-lien debt and retained a negative outlook on Santee Cooper, known formally as the South Carolina Public Service Authority.
In addition to legal and political challenges, S&P also said its downgrade reflects the application of its rating criteria for municipal electric and gas utilities published in September. The criteria include an assessment of economic fundamentals, industry risk, market position and operational management.
S&P said Santee Cooper’s operational management has been vulnerable since the decision was made in July 2017 to abandon the construction of two nuclear reactors being built at the V.C. Summer Nuclear Generating Station in partnership with South Carolina Electric & Gas. SCE&G merged with Dominion Energy last year.
“Abandoning the V.C. Summer nuclear project exposes [Santee Cooper] to multiple operational, political, and litigation challenges,” wrote S&P analyst David Bodek. “In our view, these exposures place significant demands on management. We believe they have the potential to divert attention from strategic planning.”
Santee Cooper issued about $4.5 billion of bonds to finance its 45% ownership share in the V.C. Summer project. Work on the reactors ended after the prime contractor, Westinghouse Electric Co., filed for bankruptcy in March 2017 and reports later estimated that completing the project would cost 75% more than originally planned.
Since the project was shelved, Gov. Henry McMaster has called for selling the state-owned utility, and lawmakers have filed, but not passed, bills to place it under the Public Service Commission. Several committees have studied whether to sell it.
Earlier this year, the Legislature decided to get bids from interested buyers and firms interested in managing the utility. They also ordered Santee Cooper to propose changes that would strengthen its management and operations. Those proposals will be considered during next year’s legislative session.
Santee Cooper reported in its 2018 annual report that it was involved in five class-action lawsuits related to the nuclear reactor project. Three have been voluntarily dismissed but two suits are ongoing.
In May, another potential class-action suit was filed when an investor in the minibond program sued the utility alleging that the unrated debt was sold at artificially deflated interest rates at a time when details about its troubled nuclear project were hidden from the public. The lead plaintiff wants the litigation to be designated as a class-action suit.
Despite not having revenue from the reactors to repay $4.5 billion of debt issued to build them, S&P said Santee Cooper’s financial profile is strong in part because of good debt service coverage metrics and liquidity, and an “adequate” 76% debt-to-capitalization ratio.
The utility’s 2018 continuing disclosure agreement said it ended the year with debt service coverage of 1.54 times on revenue obligations and lease payments.
“We consider 2018's unrestricted cash and investments representing days' cash equal to more than nine months' operating expenses to be very strong and capacity available under credit lines further strengthens liquidity,” Bodek said. “However, the utility will likely reduce cash as it applies to debt reduction and capital projects funds it received from Toshiba Corp., as guarantor of the V.C. Summer nuclear plant's construction contractor.”
S&P’s action Tuesday was its second Santee Cooper downgrade in almost two years. S&P lowered its rating to A-plus from AA-minus shortly after the decision was made to abandon the reactor project.
In August 2018, Moody's Investors Service lowered its rating to A2 from A1, and Fitch Ratings downgraded the utility’s bonds to A-minus from A-plus in November 2018.
All three rating agencies have negative outlooks.
Santee Cooper is headquartered in Moncks Corner, a town in Berkeley County. The utility was created by the state in 1934 to provide electric power and wholesale water in South Carolina. It also has an economic development program that offers loans and develops industrial commerce parks.