A new legal fight has emerged for South Carolina’s state-owned Santee Cooper utility as it continues to feel repercussions from its failed nuclear power project.
Westinghouse Electric Co., the abandoned project’s prime contractor, filed an adversary complaint April 5 claiming that Santee Cooper is improperly withholding equipment worth millions of dollars that Westinghouse rightfully owns.
“To date, defendant has refused to return [Westinghouse’s] equipment” or allow the company access to the V.C. Summer site to recover it, said the 17-page complaint filed in Westinghouse’s Chapter 11 reorganization case in the United States Bankruptcy Court for the Southern District of New York.
Westinghouse, which emerged from bankruptcy in August 2018 when it was sold for $4.6 billion to Brookfield Business Partners, had an engineering, procurement, and construction agreement to purchase certain items to build two nuclear reactors using the company’s new AP 1000 technology, according to the suit.
The agreement was in force when the company filed for bankruptcy in March 2017 to avoid paying cost overruns on the South Carolina reactors and at a similar project still under construction at Plant Vogtle in Georgia led by Southern Co.’s subsidiary, Georgia Power Co.
In response to the suit, Santee Cooper said in a statement that Westinghouse avoided its responsibilities as a contractor, and that the company’s bankruptcy contributed “greatly” to the reactor project’s failure. Westinghouse is now seeking to “strip value away from Santee Cooper customers and instead profit itself,” the utility said.
Westinghouse’s claim is based on a provision in the EPC contract that Santee Cooper said the company rejected as part of its bankruptcy case, and for that reason it can’t claim rights to the equipment.
In the complaint, Westinghouse contends that rejection of a contract “does not alter the rights of the parties under the contract,” and that Santee Cooper didn’t file a claim for the equipment in the bankruptcy case. Westinghouse also said that it found potential buyers for some of the equipment, including Georgia’s Southern Co., which is continuing to build two reactors based on the new AP 1000 technology.
“Westinghouse’s claim is unconscionable, especially when considered in light of the circumstances, and is a desperate money grab attempt,” Santee Cooper said.
Santee Cooper also said it obtained an agreement to obtain the unused equipment at the nuclear reactor site from SCANA-owned South Carolina Electric & Gas, the investor-owned utility and majority partner that headed up the project before
“Santee Cooper has been preserving the high-value equipment at the Summer site to maximize its value so that we can sell it and use all proceeds to mitigate V.C. Summer costs for wholesale and retail customers, and pay off bonded indebtedness related to nuclear construction,” the utility’s statement said.
Known formally as the South Carolina Public Service Authority, Santee Cooper had amassed about $4.2 billion of debt to pay for its 45% ownership share in the failed reactor project for which there will be no asset.
Some equipment from the Summer site has already been sold, according to Santee Cooper’s 2018 comprehensive annual financial audit.
In February 2018, SCE&G and Santee Cooper sold a reactor coolant pump to China’s Haiyang Nuclear Power Plant. Santee Cooper said it made about $6.5 million from its share of the sale. The Haiyang plant is among few projects currently using the AP 1000 reactor technology.
The CAFR, which was released before Westinghouse’s complaint was filed, also disclosed that Santee Cooper and SCE&G had been notified by the company that they may not have “unencumbered title to the proceeds of the sale of the assets.” If the assets are sold, a final determination regarding ownership of the sale proceeds might be delayed.
2018 has been a “year of recovery” for Santee Cooper since the nuclear project was canceled, according to a cover letter to the audit signed by Charlie Condon, interim chairman of the utility, and James Brogdon, interim president and chief executive officer.
Santee Cooper’s board and management team focused on controlling costs and offsetting debt related to the project, they said.
“Santee Cooper remains on solid financial footing, and we have a plan to gradually pay off that debt while maintaining competitive rates,” Condon and Brogdon said. “Part of that plan includes continuing to optimize and execute the use of the Toshiba Corp. settlement proceeds to reduce customers’ cost” by defeasing current debt, paying capital expenditures and delaying debt issuance.
Toshiba, Westinghouse’s former parent company, agreed to make settlement payments under a guarantee it made to the nuclear project owners in South Carolina and Georgia.
The $898.7 million Santee Cooper received from the settlement is projected to provide approximately $1.4 billion in aggregate savings to customers, the audit letter said.
Last year, $521.3 million of the settlement was used to defease outstanding debt for debt service savings of about $693.8 million, and about $167.3 million was spent on capital needs.
The audit said that Santee Cooper had a total of $6.96 billion of bonds outstanding as of Dec. 31, 2018, compared with $7.46 billion at the end of 2017. About half of the utility’s debt was issued for the nuclear project while the remainder was sold for other capital needs.
Westinghouse’s April 5 lawsuit contributes to Santee Cooper’s ongoing legal and financial problems.
At least two class action lawsuits have been filed: one in Hampton County, South Carolina, and the other in the U.S. District Court of South Carolina’s Beaufort Division.
The Hampton County suit filed against Santee Cooper and its board of directors, SCE&G, Palmetto Electric Cooperative and Central Electric Power Cooperative contains a myriad of charges, claims and cross claims related to the failed project and fees customers paid. It also includes breach of contract and unconstitutional taking allegations.
In addition to claims regarding abandonment of the project, the federal suit alleges there was a conspiracy involving SCANA, SCE&G and Santee Cooper under the Racketeer Influenced and Corrupt Organizations Act.
Adding to the financial fallout from the project’s failure, the South Carolina Department of Revenue ruled last year that since the two nuclear reactors won’t produce electricity that the materials purchased for the project were no longer exempt from sales taxes. The DOR assessed the project owners $421 million for sales taxes it said were due on previously tax-exempt purchases.
Santee Cooper said its attorneys have submitted a protest to dispute the DOR assessment.
The nuclear debacle led the governor and some state lawmakers to call for Santee Cooper to be sold, although skeptics have questioned whether a new private owner would keep electric rates as low as the state-owned utility has projected.
Two legislative committees are examining whether to offload Santee Cooper. Lawmakers are also looking at implementing new regulations and restructuring the utility should the state keep it.
The Public Service Authority Evaluation and Recommendation Committee received initial proposals from four companies interested in buying the utility that include taking out or absorbing all of its debt, which would be required in a sale under bond covenants.
The companies were not identified but a consultant said an evaluation of their nonbinding proposals showed they could lower rates for Santee Cooper’s customers from 2% to 14%. The consultant also said additional due diligence into a sale is required to determine what it would cost to upgrade South Carolina’s electric grid in the future because it also could affect future rates.
On April 4, the South Carolina House passed a joint resolution in House Bill 4287 on a vote of 96 to 6 authorizing the Public Service Authority Committee to use state funds to obtain formal bids to sell Santee Cooper.
The resolution also requires bidders to comply with bond covenants, to “provide meaningful rate relief in the form of reduced short-term and long-term rates for all customer classes,” and to provide a diverse long-term generation portfolio to prevent rate fluctuations.
HB 4287 also requests that bidders “make suitable and reasonable” accommodations to protect Santee Cooper’s 1,600 employees and retirees. A purchaser also “must agree” to partner with the state for future economic development projects. The bill is under consideration in the Senate.
