South Carolina’s failed twin nuclear reactor project, partly owned by Santee Cooper, faces a widening investigation by the Securities and Exchange Commission.
The SEC inquiry focuses, in part, on a Feb. 5, 2016 project assessment report by the Bechtel Power Corp., which uncovered problems with the project and remained secret until after the nuclear reactor project at the V.C. Summer Nuclear Station was scrubbed.
Santee Cooper, formally the South Carolina Public Service Authority, has received two subpoenas from the SEC’s Atlanta Regional Office in connection with “a formal, non-public investigation” of SCANA Corp., the parent of investor-owned South Carolina Electric & Gas Co.
In a March 1, 2018 subpoena, the second received by Santee Cooper, the authority was ordered to submit documents, disclosures, and communications to the SEC, including those involving $2.07 billion of bonds the authority issued in 2015 and 2016, as well as information related to the Bechtel report.
“Santee Cooper is cooperating fully with the SEC in its investigation of V.C. Summer issues,” said spokeswoman Mollie Gore.
The SEC declined to comment on the inquiry.
SCE&G owned a 55% share of the unfinished Unit No. 2 and Unit No. 3 reactors that it was building with Santee Cooper, a 45% owner. Both utilities jointly own Unit No. 1, a reactor in service since 1984.
The SEC is seeking documents and transcripts for seven series of bonds issued between May 2015 and October 2016, according to the March 1 subpoena.
None of the official statements that were available for the deals mentioned a study by Bechtel or that an assessment of the project’s viability was underway, according to documents posted on EMMA that were reviewed by The Bond Buyer.
Gov. Henry McMaster released Bechtel’s assessment report to the public on Sept. 4, even though Santee Cooper marked it “confidential, attorney-client privileged.”
The 132-page report identified “significant issues" facing the construction of the two reactors, including problems with plans, schedules, management, contracts, and engineering designs, well before Santee Cooper made the July 31, 2017 decision to pull the plug on the project.
After McMaster released the report, Santee Cooper received its first SEC subpoena on Oct. 18, 2017 concerning the viability of the nuclear expansion project to build two AP 1000 reactors with SCE&G.
Both reactors are based on a new design by Toshiba-owned Westinghouse Electric Co., which was also the engineering, procurement, and construction contractor for the South Carolina project, and a similar twin reactor project in Georgia that remains under construction.
Westinghouse filed for bankruptcy March 29, 2017 to shed debt and extricate itself from the South Carolina and Georgia contracts. By the time of the bankruptcy filing, the 2016 Bechtel report was more than a year old.
The SEC's 2017 subpoena ordered Santee Cooper to submit copies of documents and communications between Santee Cooper, SCANA and SCE&G about the Bechtel report.
The SEC also sought information identifying “all individuals” who received a copy of Bechtel’s report before the nuclear project was canceled, a request that could be related to allegations in separate investigations that there were various drafts of the Bechtel report.
The Bechtel report is also the subject of an inquiry before the South Carolina Public Service Commission. Although Santee Cooper is not regulated by the PSC, the authority has cooperated with its investigation.
On May 24, PSC regulatory staff filed a request asking the commission to compel SCE&G and Dominion Energy to release drafts, alternative reports, working papers, references and other documents related to the Bechtel report. SCE&G and Dominion, which are planning to merge but are still waiting for approval from the PSC, have claimed the documents are protected from disclosure because they were prepared in anticipation of litigation against Westinghouse.
“Contrary to the public and outward representations by SCE&G that the owners of the project…hired Bechtel Power Corp. for legal claims consultancy, there are substantial circumstances and previously secret communications and documents that show the owners did not hire Bechtel as part of any legal advice that could possibly protect it as privileged or to perform an assessment in anticipation of litigation against Westinghouse,” PSC attorneys said in the May 24 filing.
Even if claims of protection applied to the Bechtel report and related documents, the PSC attorneys said those claims were waived when the governor ordered Santee Cooper to provide the PSC with certain documents that it had already provided to law enforcement and other agencies.
Those documents showed Santee Cooper “was the driving force behind the assessment itself” as well as a client of attorney George Wenick, who executed the professional service agreement with Bechtel on behalf of the project owners, PSC attorneys said.
“Based on the documents and communications…the assessment and report was intended to make improvement in construction of the project and not for legal advice or claims consultancy,” PSC attorneys said.
They also said SCE&G waived any privilege when it disclosed the Bechtel report, related documents and communications when it worked toward implementing its recommendations.
PSC attorneys said SCE&G “evaded” providing the information. The commission has not issued a ruling.
Santee Cooper disclosed the SEC subpoenas in its 2017 annual report, which was posted May 24 on the Municipal Securities Rulemaking Board’s EMMA filing system.
“Various executive-branch entities have requested information related to Summer Nuclear Units 2 and 3,” the annual report states. “Specifically, the authority has received subpoenas for information from the U.S. Securities & Exchange Commission and the U.S. Department of Justice.”
The Bechtel report was not mentioned in the annual report, and no other details about the SEC and DOJ inquiries appear in the document.
The annual report states that SCE&G hired High Bridge Associates and AECOM Energy & Construction Inc. in March 2017 to estimate the cost of completing the two reactors. Santee Cooper hired nFront Consulting LLC to assess the projected cost of power from the two units, if completed, compared to other alternatives to meet its future energy needs.
The estimate of completion to determine the project’s viability found that Unit 2 would be delayed at least 40 months and Unit 3 would be delayed at least 43 months, and that the completion cost including interest would increase to $11.4 billion from $8.1 billion.
On July 31, 2017, the authority’s board of directors voted to “wind-down and suspend construction” on the two units, the report said.
In addition to the SEC investigation, Santee Cooper faces at least three class-action lawsuits related to its decision to cancel work on the two nuclear units after spending $4.5 billion on the project.
The governor has said he wants to sell the utility, although that is up to the Legislature.
The state general fund also receives annual revenues from the utility, a fact that could influence a decision to sell it.
In 2017, Santee Cooper sent $17.75 million to the state, or a little more than two-tenths of a percent of its $7.95 billion general fund budget.
Lawmakers are still contemplating bills related to the V.C. Summer project, and are scheduled to return to Columbia June 27-28 to consider them.
Litigation and legislation are taking a toll on Santee Cooper’s credit ratings on $7.4 billion of outstanding bonds - $4.4 billion of which was issued for the abandoned twin reactor project for which there will be no asset.
In early May, Moody's Investors Service placed the authority’s A1 bond rating, A2 bank bond rating and the P-1 rating on outstanding commercial paper notes under review for downgrade.
The review is expected to conclude by the end of June.
“The rating action reflects the continued uncertainty around Santee Cooper's ability to maintain a self-regulated cost recovery framework, our growing concern that legislative actions may lead to some form of permanent rate reduction at Santee Cooper, increased litigation risk, and a weakened balance sheet,” Moody’s analyst Dan Aschenbach said at the time.
McMaster, a Republican who is running for a full term this year after rising from the lieutenant governor's post following the 2017 resignation of predecessor Nikki Haley, has said he wants to end all ratepayer charges for the two reactors.
In addition, one pending ratepayer lawsuit names both Santee Cooper and the Central Electric Cooperative Inc. as defendants.
Central Electric, a transmission cooperative that accounts for about 70% of Santee Cooper’s energy sales and 60% of its revenue, has filed a cross claim contending that Santee Cooper does not have the authority to recover costs from the cooperative related to the shelved reactor project.
Both Fitch Ratings and S&P Global Ratings revised their outlooks on Santee Cooper’s bonds to negative from stable in March, saying they were concerned about the litigation between Santee Cooper and Central Electric, and the ability of Santee Cooper to recover nuclear-related costs.
Fitch and S&P assign A-plus ratings to Santee Cooper’s debt.
Updated May 31, 2018 at 10:21AM: The story was updated with the amount of money Santee Cooper contributes to the South Carolina general fund.