More pressure for South Carolina to sell Santee Cooper

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Pressures are mounting on South Carolina to jettison Santee Cooper, the state’s largest power provider.

The South Carolina Club for Growth, a conservative group that advocates for free markets, has launched a statewide radio campaign urging people to tell lawmakers that they should sell the state-owned public utility.

A sale, the organization said, would free ratepayers from paying back $7.14 billion of outstanding debt, half of which was spent on Santee Cooper’s share of two nuclear reactors scuttled last year by it and co-owner South Carolina Electric & Gas, a subsidiary of investor owned SCANA Corp.

“It’s time for South Carolina’s leaders to pursue a quick, market-based sale of Santee Cooper that protects customers and taxpayers from further pain,” the Club for Growth said on its website. “There is no scenario in which Santee Cooper and its underlying assets will rise in value. In fact, its problems are only going to fester.”

A state committee is already investigating whether to sell Santee Cooper, formally known as the South Carolina Public Service Authority.

Earlier this year, the Legislature created the Public Service Authority Evaluation and Recommendation Committee, which has hired Virginia-based ICF International to solicit non-binding bids of interest in purchasing the public utility.

Bids will be evaluated based on a series of criteria. The most weight will be given to how the purchase impacts customers’ rates, the amount of the bid, and plans for transitioning the organization, its pensions and salaries.

Other factors will examine each bidders’ technical capacity to operate a utility reliably and safely, financial capability, the impact on Santee Cooper’s current location in the Monck’s Corner area, plans for economic development, generation diversification, and plans for employee retention.

The committee, composed of Gov. Henry McMaster, four senators and four representatives, is expected to make a recommendation about whether to sell the utility to the full Legislature during its session, which begins Jan. 8.

McMaster, a Republican who has said on numerous occasions that Santee Cooper should be sold, won a full four-year term as governor in the Nov. 6 election. He ascended from the lieutenant governor's office to become governor in 2017 after Nikki Haley resigned to become ambassador to the United Nations.

The governor has threatened to veto any attempt by the utility to raise rates, and has said that ratepayers shouldn’t have to pay for money spent on reactors that will never be used.

Earlier this year, McMaster appointed former South Carolina Attorney General Charlie Condon as the new chairman of Santee Cooper’s Board of Directors. The state Senate challenged the appointment in court because Condon had not been confirmed.

The South Carolina Supreme Court ruled last week that McMaster had authority to appoint a board chairman when the Legislature wasn’t in session.

“Charlie Condon will be a tremendous asset at Santee Cooper and I know he will lead with the transparency and accountability that the people of South Carolina deserve from their public servants,” McMaster said after the ruling. “It is critical that we have a steady hand at the helm while we determine the best path forward for Santee Cooper and its customers, and the Supreme Court’s ruling ensures that we will have just that.”

Santee Cooper isn’t aware of any official purchase offers that have been submitted to the state, Shawan Gillians, the utility’s treasurer and associate general counsel, said in a presentation to investors last week.

“If Santee Cooper were sold, a condition precedent to the closing of such a sale would be the retirement or defeasance of all outstanding debt, both tax-exempt and taxable,” Gillians said.

If there is a sale, the utility’s largest wholesale customer, Central Electric Power Cooperative, has the right to terminate its long-term power purchase agreement with Santee Cooper, she said.

Central Electric provided about 59% of Santee Cooper’s revenues in 2017 and is under contract to purchase power from the state utility through 2058.

Santee Cooper Senior Vice President and Chief Financial Officer Jeff Armfield, who plans to retire in April, said the utility continues to provide “reliable and competitively priced power” to more than two million retail and wholesale customers while maintaining a strong financial profile.

“We are also actively defending in state and federal court our statutory obligation to collect rates sufficient to pay debt service and fund operations,” he said. “In addition, we have begun implementing a debt retirement program to reduce cost and offset nuclear project debt.”

Santee Cooper is involved in several class-action lawsuits, two of which concern the construction and July 2017 suspension of work on the nuclear reactor project.

“An adverse final decision on these two class actions related to the V.C. Summer Nuclear Units 2 and 3 may have a material adverse effect on Santee Cooper’s operations and finances,” Gillians said.

In one suit filed in Hampton County Court of Common Pleas, Central Electric filed cross-claims contending that Santee Cooper doesn’t have authority to continue to collect charges for the shuttered nuclear reactors, and that the utility breached its agreement with the cooperative.

Central is also asking for 70% of the payment Santee Cooper received as part of a settlement from Toshiba Corp. after its subsidiary, Westinghouse Corp., filed for bankruptcy in March 2017.

Westinghouse was the engineering, procurement and construction contractor for South Carolina’s twin reactor project, as well as a similar project that is being completed in Georgia by Bechtel Power Corp.

In 2017, Santee Cooper received $895 million from the sale of its interest in the Toshiba settlement.

To date, the utility has used $627 million of the settlement to accelerate debt retirement generating about $890 million of debt service savings, according to Gillians. Plans are to use most of the settlement by 2020 to reduce the need for future capital borrowing.

On Nov. 7, Hampton County Circuit Court Judge John C. Hayes denied Santee Cooper’s motion to dismiss Central Electric’s cross-claims.

“If Central’s cross-claims were determined adversely to Santee Cooper, the action may have a material adverse impact on Santee Cooper’s ability to transact its business or meet its obligations under the revenue obligation resolution,” Gillians said.

In a separate legal action, Santee Cooper has filed a petition asking the South Carolina Supreme Court to determine its obligations to set rates to cover costs, including those related to the shelved reactors. The court’s ruling is pending.

Gillians said Santee Cooper has “solid” debt service coverage of about 1.4 times, including subordinate commercial paper and revolving credit agreements as well as its annual payment to the state, which was $17.4 million this year.

Santee Cooper has cash reserves of more than $1 billion, which represents nearly 11 months of operating expenses, and $1.1 billion of bank credit facilities with five banks. About $334 million of the facilities are currently drawn or back outstanding commercial paper.

“In light of our expected reduced capital expenditures, recent rating downgrade and the contingent funding risk associated with facilities of this type, we are currently evaluating strategies that reduce both the cost and the inherent risk associated with our current short-term financing structure,” Gillians said.

Santee Cooper incurred two rating downgrades this year due to uncertainty about its governance and legal problems.

On Nov. 14, Fitch Ratings lowered its rating to A-minus from A-plus, while Moody’s Investors Service in August downgraded its rating to A2 from A1.

S&P Global Ratings in August affirmed its A-plus rating. It lowered its rating to A-plus from AA-minus last year after worked stopped on the V.C. Summer project. All three rating agencies have negative outlooks.

Santee Cooper’s debt-to-capitalization is about 76%, and it projects a steady decline to 69% by 2023 and 65% by 2027.

“These results are achieved without substantially higher rates than current levels,” Gillians said. “Santee Cooper projects an aggregate retail base rate increase of approximately 7% beginning in years 2020 or 2021.”

The utility forecasts modest sales growth through 2027 and capital expenditures of about $250 million per year. About 78% of capital needs will be financed with internal funds, while less than $600 million will be borrowed through 2027.

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