Litigation potentially undermining Santee Cooper’s ability to recover costs for the shelved V.C. Summer nuclear reactor project could drive downgrades of the South Carolina-owned public utility’s bonds, according to rating agency reports.
Santee Cooper, formally known as the South Carolina Public Service Authority, issued $4.4 billion of bonds for the abandoned twin reactor project – debt that is co-mingled in the authority’s $7.4 billion bond portfolio.
The new legal problem stems from a lawsuit filed by a Santee Cooper ratepayer, which also names the Central Electric Cooperative Inc. as a defendant.
Citing the pending lawsuit, Fitch Ratings placed Santee Cooper’s A-plus rating on rating watch negative Wednesday, and said the legal challenge could lead to a multi-notch downgrade.
S&P Global Ratings revised Santee Cooper’s outlook to negative Monday, while affirming its A-plus long-term rating and its A-1 commercial paper rating. S&P also revised the outlook to negative on the Central Electric Cooperative Inc., while affirming its A-plus issuer credit rating.
In the suit, Central Electric filed a cross claim contending that Santee Cooper does not have the authority to recover costs from the cooperative related to the reactor project.
Central is a transmission cooperative that accounts for about 70% of Santee Cooper’s energy sales and 60% of its revenue, according to S&P, which said if the cross claim is successful both utilities likely would be downgraded.
“In our opinion, this heightens credit risk, and we believe that there exists a one-in-three chance that this lacking alignment of interests will lead to diminished credit quality within the next two years,” said S&P analyst Jeffrey Panger.
Fitch analyst Kathy Masterson said Central’s A-plus rating reflects Fitch’s view that the cooperative has been an active participant in project-related decision making and supported Santee Cooper’s decision to abandon nuclear construction. By implication, she said it was Fitch’s the understanding that nuclear construction costs incurred would still need to be paid.
“Central's current claim that it is not obligated to pay those costs represents a material departure from Fitch's understanding,” Masterson said. “To the extent we determine that Santee Cooper's financial flexibility has diminished, Fitch expects to downgrade the rating, potentially by more than one notch.”
Santee Cooper has filed a motion to dismiss the ratepayer's complaint, said Santee Cooper spokeswoman Mollie Gore.
Gore said Santee Cooper, Central Electric and the other electric cooperatives have worked together the past 66 years, and the relationship is one that Santee Cooper values.
“The cross claim is disappointing,” Gore said. “Although we will vigorously defend this matter if necessary, Santee Cooper’s preference would be to resolve this outside of court.”
Moody's Investors Service analyst Dan Aschenbach said if any court rules that Santee Cooper can’t charge for nuclear-related debt costs “it would be a significant credit negative.” Moody’s rates Santee Cooper’s bonds A1 with a negative outlook.
Aschenbach said debt service for the nuclear project is on par with Santee Cooper’s other revenue bonds that financed investments in various assets.
The master bond resolution requires Santee Cooper to comply with a rate covenant, and Aschenbach said it’s uncertain how a court would evaluate that.
“You can’t just pay debt service on one and not the other,” he said.
Gov. Henry McMaster is pursuing the sale of Santee Cooper to a private enterprise, which would require the utility’s tax-exempt bonds to be taken out.
At the same time, Santee Cooper is attempting to obtain the federal licenses for the unfinished nuclear reactors and is paying to protect the work site where they were being built to sell parts or restart construction.
In a letter to the governor Feb. 21, Santee Cooper’s acting board chairman Bill Finn said that the utility is working with Fluor to finalize a maintenance, preservation and documentation action plan to protect equipment at the site.
“The costs of this effort, approximately $8 million per six month period plus an additional $3 million annually if Santee Cooper renews the two warehouse leases and provides needed insurance coverages, will be borne by Santee Cooper,” Finn wrote.
Santee Cooper owned 45% of the project, while investor-owned South Carolina Electric & Gas was the majority owner. That investor-owned utility is now planning to merge with Dominion Energy.
Both Santee Cooper and South Carolina Electric & Gas have come under fire from the public and state lawmakers for shuttering the project after spending as much as $10 billion. Both utilities determined in July that the cost to finish the reactors was too expensive.
The South Carolina project’s meltdown came in the wake of Westinghouse Electric’s bankruptcy, the former contractor at V.C. Summer. A similar twin reactor project in Georgia is still being built.
The Japanese company Toshiba forced subsidiary Westinghouse into bankruptcy to shed costs related to the South Carolina and Georgia nuclear reactor projects.