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NextEra CEO makes pitch to SC lawmakers to acquire state utility

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The South Carolina State House in Columbia, S.C. Lawmakers once again find themselves at the center of deciding the fate of a state utility following the abandonment of the V.C. Summer nuclear expansion in July 2017.
Source: S&P Global Market Intelligence

Barely two years removed from being thrust into deciding the fate of an embattled investor-owned electric company, South Carolina lawmakers must now decide whether to sell the state's own utility.

Lawmakers are debating whether to sell water and electric utility Santee Cooper to NextEra Energy Inc., the nation's largest investor-owned utility by market capitalization, outsource its management to Richmond, Va.-headquartered Dominion Energy Inc. or let current leaders reform the government-owned entity.

The South Carolina Department of Administration, or DOA, presented these proposals in a Feb. 11 report to state lawmakers as "three viable options" that could help Santee Cooper, known legally as South Carolina Public Service Authority, improve its operational and financial performance following the July 2017 abandonment of the V.C. Summer nuclear expansion project.

Santee Cooper and South Carolina Electric & Gas Co., now Dominion Energy South Carolina Inc., partnered on the unfinished V.C. Summer units before pulling the plug following the bankruptcy of primary contractor Westinghouse Electric Co. LLC. The utility owned 45% of the 1,117-MW reactors in Fairfield County, which it primarily "financed with borrowed funds," Santee Cooper had said in its 2017 annual report.

The South Carolina Legislature and the Public Service Commission of South Carolina held several months of contentious hearings on the acquisition of South Carolina Electric & Gas and parent SCANA Corp. by Dominion.

The U.S. Securities and Exchange Commission on Feb. 27 announced it charged SCANA, its subsidiary and two former executives with "defrauding investors by making false and misleading statements" about the project.

Meanwhile, Santee Cooper has pledged to reform itself through increased transparency, improved oversight, lower rates and a "greener power supply."

"Effectively, we had a leadership failure. That leadership failure was at the CEO and the board level," Dan Ray, acting chairman of Santee Cooper's board of directors, told the Senate Finance Committee in Feb. 25 testimony. "We've learned a lot of lessons from that, and we've been humbled by it."

Reform plan

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The Santee Cooper Reform Plan involves reducing headcount from 1,675 full-time employees in 2020 to 1,630 in 2025 and to 1,514 workers by 2028 through a combination of retraining, attrition and retirements. The utility believes that these changes will allow it to lower customer rates by $2.3 billion on a net present value basis over 20 years.

Santee Cooper's plan, which builds on a September 2019 business forecast, includes adding 1,500 MW of solar capacity by 2031 via power purchase agreements and 200 MW of battery storage phased in from 2024 through 2028.

The company will retire all four units at the 1,150-MW Winyah coal-fired plant, beginning with units 3 and 4 in 2023 followed by units 1 and 2 in 2027. Santee Cooper plans to co-develop a combined-cycle natural gas plant in 2027 and add gas capacity through tolling agreements. The plan also incorporates 200 MW of demand-side management programs.

Santee Cooper's plan involves paying off $3.6 billion of outstanding debt tied to the scrapped reactors in 12 years. The utility said it had about $6.6 billion of revenue obligation bonds outstanding as of Oct. 31, 2019, and pledged to reduce debt by an average of $1 billion every five years for the next 20 years.

"I encourage you to let me get this done," Santee Cooper President and CEO Mark Bonsall told Senate committee members. "I can do it."

Santee Cooper on Feb. 21 confirmed it reached a tentative agreement to resolve a class-action lawsuit tied to the V.C. Summer project. The proposed settlement, reported at $520 million, would reimburse the state-owned utility's retail customers and South Carolina's 20 electric cooperatives for charges collected on the unfinished units.

Under the agreement, Dominion Energy is expected to be on the hook for $320 million of the $520 million settlement.

NextEra's bid

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NextEra's offer is to acquire the utility through a new subsidiary, known as Santee Cooper Power & Light, according to the DOA report.

Juno Beach, Fla.-headquartered NextEra would pay off about $6.86 billion of Santee Cooper's outstanding long-term and short-term debt at closing, which includes $1.05 billion tied to "defeasance or make-whole costs."

The company also would pay $500 million to Santee Cooper "for the benefit of the state" at closing and reimburse $15 million tied to the competitive bidding process. NextEra agreed to deposit $100 million into an escrow account to fund post-closing adjustments.

NextEra's proposal includes $941 million in customer refunds or rate credits within six months of the closing date.

The customer relief includes NextEra's own, $541 million proposed settlement with attorneys representing the utility's customers. The proposal includes a total of $400 million paid to all current wholesale and retail customers.

The company would fund its proposed $9.46 billion acquisition with $5.41 billion in cash, $2.72 billion in corporate bonds and $1.3 billion in securitization bonds authorized by the General Assembly.

NextEra's proposal includes cutting Santee Cooper's headcount from 1,675 full-time employees to 970 by 2025.

In addition, NextEra and Santee Cooper's largest customer, Central Electric Power Cooperative Inc., which buys electricity for the state's co-ops, has "reached substantial agreement" on a proposed power sales contract.

NextEra's proposal involves a $161 million net increase in rates by 2039 compared to Santee Cooper's plan, when accounting for higher capital costs and higher taxes over a 20-year period.

The DOA, its consultants and NextEra negotiated improvements to the proposal, including increasing customer relief, before NextEra submitted its final bid, the report said.

NextEra Energy Chairman, President and CEO James Robo was asked by state lawmakers if the proposal is the company's final offer. "Can we squeeze you a little bit more?" Senate President Harvey Peeler Jr. said.

"The DOA did a terrific job squeezing us very hard," Robo replied Feb. 19 in testimony before the South Carolina Senate Finance Committee. "So, there is not a lot left in the lemon."

The DOA report noted that NextEra's planned transaction is conditioned on new legislation that requires the General Assembly to allow the company to skirt the purview of state regulators.

"The proposed new legislation would require legislative approval of the costs and contours of a multi-year generation plan, which contemplates capital spending by NextEra of approximately $2.3 billion," the report said. "The legislation also would fix certain customer rates and charges during a four-year period after closing of the sale, thereby limiting [Public Service Commission of South Carolina] oversight of NextEra in the first four years after closing."

NextEra, however, could "book certain unrecovered costs to charge customers later" and seek rider recovery of other cost increases.

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New generation

Key elements of NextEra's new power supply proposal, not subject to review by the PSC, include retiring the Winyah coal plant by 2024 and adding a 1,250-MW combined-cycle gas plant in Fairfield County by 2023.

In addition, NextEra proposes 300 MW of capacity upgrades at the Rainey Generating Station, 800 MW of new solar generation by 2024 and 50 MW of battery storage co-located with solar by 2023.

"I think it's important to have a mix," Robo said in testimony defending the utility's future gas-heavy generation portfolio.

The CEO added that a large gas plant offers "economies of scale."

Further pressed on the generation plan, Robo said it is "an integral part of our proposal."

"It's how we were able to pay what we're paying," Robo said. "It's an important part of the Rubik's Cube."

In addition, if NextEra were forced to go through the PSC process to get approval for its proposed generation mix, it could impact the value of the assets and the timeline for closing the acquisition.

"I would come back with a different value for Santee Cooper than the value I put on the table," Robo told the House Ways and Means Committee.

"The fact of the matter is that you all have to make the decision to sell," Robo told the Senate Finance Committee. "It has to be approved by the legislature, and I'm very uncomfortable with this thought of two bites at the apple by the state."

"Given that the legislature needed to have legislation to enable all of this to begin with, that's in the end how we approached it."

Under Dominion's plan, the utility would operate and manage Santee Cooper for 10 years and fill key executive roles, which could include the chief executive position, with Dominion veterans. Dominion would also create an internal task force to evaluate potential cost-savings for Santee Cooper. The company would not charge a fee under the management proposal, and the agreement could be terminated by either party upon a change in control.

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