Santee Cooper is on track, for now, to settle some major lawsuits
While some legal proceedings across the country have been postponed due to the novel coronavirus outbreak, South Carolina-owned Santee Cooper is on track, so far, to get a court-approved global settlement for two of its complex class-action lawsuits.
If the global deal gets done, though, the state utility formally known as the South Carolina Public Service Authority still faces pressures from other lawsuits that resulted from canceling two nuclear reactors while still under construction, including a federal securities class-action suit filed by an investor in Santee Cooper's mini-bond program.
Judge Jean Toal on March 17 preliminarily approved a $520 million settlement filed by a class of ratepayers led by Jessica S. Cook in the Hamilton County Court of Common Pleas on Aug. 22, 2017, and a federal class-action complaint led by Timothy Glibowski in the Beaufort Division of the United States District Court of South Carolina on Jan. 31, 2018.
The Glibowski suit alleged that its class members lost more than $3 billion as a result of the project.
"At this preliminary stage, the court finds that the proposed settlement is within the realm of a fair, reasonable, and adequate resolution, and the class members should be notified of its terms," Toal ruled, setting a final hearing on the fairness of the plan for July 20.
In addition to the two class-action suits, the settlement will resolve a third lawsuit filed by Santee Cooper customers against former officers and directors of SCANA Corp. and its subsidiary South Carolina Electric & Gas in the Common Pleas Court for the First Judicial Circuit in Orangeburg County, South Carolina, on July 18, 2019. The complaint alleged that they were damaged by paying utility rates to cover the costs of the failed nuclear project.
Toal's ruling tentatively approves a term sheet that requires Santee Cooper to pay $200 million in cash over three years and to freeze rates for four years. Dominion Energy, which acquired SCANA and SCE&G in January 2019 and was brought into litigation because of the acquisition, will pay $320 million.
The money will be paid into a Common Benefit Fund, and distributed to class members on a pro rata plan that the court will approve after deducting attorneys’ fees and litigation expenses. People who want to opt out of the settlement must do so by June 15, and people who want to object to its fairness must do so by July 1.
Santee Cooper and Dominion also agreed not to attempt to recover settlement proceeds in base rates or other customer charges. For both utilities, the settlement will not be an admission of the claims and allegations made in the lawsuits.
All three legal challenges were filed after Santee Cooper decided to suspend construction on two nuclear reactors at the V.C. Summer Nuclear Station on July 31, 2017, followed by South Carolina Electric & Gas, which led construction on the failed project.
Other litigation related to the failed nuclear project has yet to be finalized, including a federal securities lawsuit filed by an investor in Santee Cooper's mini-bond program in the U.S. District Court of South Carolina’s Charleston Division on April 15, 2019.
Murray C. Turka filed the federal complaint against Santee Cooper and Lonnie Carter, the authority’s former chief executive officer, alleging violations of federal securities law anti-fraud provisions for failing to disclose pertinent information to investors about the nuclear project when the mini-bonds were sold.
During the period questioned in the lawsuit, the authority issued mini-bonds in 2014, 2015 and 2016 totaling $117.8 million. Turka certified that he purchased $15,000 of the bonds in 2014.
“Santee Cooper elected not to disclose material information,” Turka's complaint said. “Defendants knew the nuclear project was in jeopardy for years prior to announcing its abandonment. Defendants chose to actively conceal this information from mini-bond holders.”
Santee Cooper and Carter filed a motion to dismiss the case.
On Feb. 25, Federal Judge Richard Mark Gergel denied the motion. He found that Turka had standing to bring the case for himself and a class of investors like him, and that Turka "sufficiently alleged misstatements or material omissions" in bond documents and other communications about the nuclear project.
Official statements for the mini-bonds, however, represented that the project was "subject to generic financial risk factors," Gergel said. "Out of these allegations, the complaint generates a strong inference that Santee Cooper and Carter acted recklessly in that the danger of misleading mini-bond purchasers was so obvious that they must have been aware of it.
"Considering the totality of the circumstances alleged and giving 'the inferential weight warranted by context and common sense,' the court finds that plaintiff plausibly pled at least reckless scienter [or knowledge of wrongdoing] as to Santee Cooper and Carter," the judge said.
Gergel also found that Turka "plausibly pled" that he and the putative class suffered an economic loss as a result of the alleged misstatements and material omissions in official statements, and that they suffered damages by receiving artificially deflated interest payments on the mini-bonds.
Santee Cooper and Carter asked the judge to reconsider his ruling, but Gergel denied the motion on March 20.
Santee Cooper, a 45% partner in the failed twin nuclear project, and SCE&G, the 55% majority owner that headed up the construction, sunk about $9 billion into the effort before halting work on the partially built units after determining that completing them wasn't economically feasible.
Santee Cooper had $4.2 billion of outstanding debt related to the project when work was halted July 31, 2017. As of Dec. 31, 2019, $3.6 billion of nuclear-related bonds and loans were outstanding.
"Santee Cooper paid off $360 million in long-term debt in October, paying certain bonds issued in 2009 through 2013, 2015 and 2016, along with certain mini-bonds," the utility said in its annual report and comprehensive annual financial report for the year ended Dec. 31, 2019.
The report also said Santee Cooper issued $163 million of bonds in November to refund existing debt with projected debt service savings of $40 million over the next 16 years.
Net long-term debt decreased $541.6 million primarily due to a cash defeasance of $357.7 million of bonds as well as $66.1 million for transfers to the current portion of long-term debt, the CAFR said, adding that $6.9 billion of total long-term debt was outstanding at the end of the fiscal year.
The debt service ratio was 1.43 times in fiscal 2019, compared with 1.54 times in 2018, and Santee Cooper transferred $17.5 million to the state's general fund in 2019, compared with $17.4 million the year before, according to the CAFR.
Legal issues aside, Santee Cooper's fate is still far from settled.
Lawmakers who are considering whether to retain and reform Santee Cooper as a state asset still plan to proceed this year with the decision-making process, but they have temporarily adjourned the Legislature as the spread of the novel coronavirus that causes COVID-19 accelerates in the state.
As of Tuesday, there were 342 positive cases of the disease in 36 of 46 counties, and seven deaths. A month prior, the state's first two cases were reported on Feb. 26, according to the South Carolina Department of Health and Environmental Control.
Gov. Henry McMaster, a Republican and proponent of selling Santee Cooper, declared a state of emergency on March 13.
Lawmakers are expected to resume their session at some point to finish work on the state budget, deal with matters concerning the novel coronavirus, and determine Santee Cooper's fate.