Dominion-SCANA deal doomed?

Dominion’s $14.6 proposed buy of South Carolina’s troubled SCANA Corp., with the failed V.C. Summer nuclear project hanging around its neck, appears to have the blind staggers. Smart money is betting that the deal falls through.

The merger (or distress sale) is foundering because South Carolina’s politicians are facing buyers regret. They are reconsidering the 2007 law they passed to let SCANA, and its operating utility South Carolina Electric & Gas, recover the costs, plus a profit, of the two-unit, 2,000-MW new nuclear build as the utility spent the money, rather than when the plant was up and running.

Dominion’s part of the deal with SCANA was that it would continue to recover the costs of the failed nuclear project over the next 20 years. When Virginia-based Dominion’s CEO Tom Farrell made a pitch to the state’s utility regulators in mid-January, he said the failure of the merger would automatically trigger a bankruptcy filing on SCANA’s part.

Calling Farrell’s bluff, the Public Service Commission told its staff to put their pencils and spreadsheets to that claim and see if it was real. The Office of Regulatory Staff’s audit, released this week, found that Farrell’s claim was largely bogus, that SCANA has only a 35% chance of a bankruptcy filing if it were unable to recoup its failed investments from its customers.

As a result, the state legislature has been pondering a repeal of the 2007 law, the “Baseload Review Act,” they enacted to allow SCANA to recover the costs of the project while it was under construction.

S.C. Gov. McMaster

Henry McMaster, South Carolina’s Republican governor, this week said he will support legislation repealing the 2007 law. He became governor in 2017, succeeding Nikki Haley, who resigned to become U.S. ambassador to the United Nations. He is up for reelection this year. He added that he will veto any legislation that keeps the Dominion-SCANA merger alive.

The subsidized rates to complete the two-unit Summer plant, which went from an estimated capital cost of $9 billion in 2007 to $25 billion in 2017, undercut support for the project among customers and policymakers. The bankruptcy of Westinghouse, which was not only the reactor vendor but also the plant’s builder, further destroyed the economic viability of the project.

Should the state repeal the 2007 law and Dominion walk away, that could trigger the breakup provision in the pre-nuptial agreement between SCANA and Dominion. The deal calls for Dominion to pay SCANA $280 million if the Virginia utility walks. SCANA would owe Dominion $240 million if the South Carolina company takes a hike. That’s enough money at stake to keep a lot of high-priced lawyers well fed for a long period of time as they litigate who did what to whom.

There is also evidence that other companies are eying SCANA if Dominion’s deal fails. They include Florida’s NextEra Energy and North Carolina’s Duke Energy. Whether repeal of the advanced funding law plays into their plans is not known, although Farrell insists it is a show-stopper for Dominion.

Nor would a bankruptcy be a horrendous outcome. Chapter 11 reorganization exists to help troubled companies work their way out of their problems. In 2001, California’s Pacific Gas & Electric filed for Chapter 11 reorganization after the collapse of the state’s electricity market. The company emerged three years later, after paying all of its creditors and continuing to supply its customers with electricity throughout the reorganization.