Legal and political uncertainty factor into Santee Cooper downgrade
Litigation over South Carolina’s failed nuclear reactor project, along with uncertainty over rates and governance, factored into the latest downgrade of state-owned utility Santee Cooper.
Moody's Investors Service Friday downgraded the South Carolina Public Service Authority’s revenue bond ratings to A2 from A1, and lowered the utility’s bank bond rating to A3 from A2. The rating outlook remains negative.
The downgrade affects $7.4 billion of outstanding debt, about half of which was issued to finance Santee Cooper’s share of two reactors at the V.C. Summer Nuclear Station that were shelved before completion. Moody’s placed the ratings under review for downgrade in May.
“Our rating action today takes into consideration continued unstable governance with uncertainty about future rate setting as Santee Cooper operates without a board chairman,” said Moody’s analyst Daniel Aschenbach. “The downgrade also reflects the very high leverage that will persist for many years owing to the termination of the Summer Nuclear project.”
The fact that there is no asset associated with half the outstanding debt has introduced cost recovery challenges for the public utility, particularly in the near-to-medium term, he said.
Another consideration is the continued uncertainty about the outcome of the litigation brought by Central Power Electric Cooperative, Santee Cooper's major wholesale customer that provides more than 60% of its revenues.
“While our rating action factors in our belief that the terms of the contract between Santee Cooper and Central will remain intact, the litigation, if it concludes with an adverse outcome for the utility, could affect Santee Cooper's financial strength and would lead to a further rating downgrade,” Aschenbach said.
Central Electric filed a cross claim in a pending lawsuit over the nuclear debacle, contending that Santee Cooper doesn’t have the authority to recover costs from the cooperative for the failed reactor project. Santee Cooper has asked the state Supreme Court for a ruling on the validity of a law that allows it to set rates in amounts that allow it to pay all operational expenses and debt-service costs.
In July, Gov. Henry McMaster, who wants to sell the authority, appointed Charles Condon to serve as interim chairman of Santee Cooper’s board. McMaster had appointed Condon to the post in March, but he wasn’t confirmed by the Senate during this year’s session.
On Aug. 7, the Senate filed suit with the state Supreme Court to block Condon from taking the post. That led Santee Cooper to postpone board and committee meetings scheduled for Monday.
Aschenbach said the A2 rating considers the fact that no legislation was enacted in this year’s session that curtails Santee Cooper’s unregulated authority to establish rates and charges to meet bond covenants in a timely manner. An existing statute prohibits the state from doing anything that would impact bond covenant compliance.
“The existence of this state statute is a credit positive feature for Santee Cooper's bondholders,” he said. “We also observe that notwithstanding the governance challenges at Santee Cooper, the utility has implemented a financial recovery plan.”
While no legislation passed this year affecting Santee Cooper’s rate-setting authority, lawmakers created a nine-member panel to analyze whether to sell the utility, place it under the Public Service Commission, recommend alternative governance structures, or other measures.
The Public Service Authority Evaluation and Recommendation Committee, whose members include McMaster, holds its second meeting Wednesday.
“This commission has a lot of very important work to do,” McMaster said at an organizational meeting on Aug. 7. “We have to move forward quickly.”
Santee Cooper’s debt is “huge,” McMaster said, adding that one method of dealing with the debt is to sell some or all of the state-owned utility.
Moody’s said Santee Cooper's internal liquidity remains “very strong” with access to low-cost external liquidity through commercial paper and several revolving credit facilities.
Because Santee Cooper doesn’t need to replace the abandoned nuclear generation immediately, the potential need for new borrowing in the intermediate term is limited, Aschenbach said. Santee Cooper has a debt ratio in the range of 1.4 times.
Santee Cooper’s revenue bonds are rated A-plus by Fitch Ratings and S&P Global Ratings. Both have negative outlooks.