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SCANA Corp. and Santee Cooper shut down their expansion of the V.C. Summer Nuclear Station last summer. The U.S. Securities and Exchange Commission is investigating how the project's problems were disclosed to investors. File/Provided

Two years before their nuclear ambitions foundered, Santee Cooper's top executives and lawyers got on the phone to talk about a top-to-bottom study of their $9 billion plant project, one that would later cast serious doubts about its viability.

They hadn't gotten results yet, but the utility wasn't expecting a positive review: They had demanded an audit by the engineering and construction giant Bechtel Corp. to show just how far off track the V.C. Summer nuclear plant project had gone. They wanted to use it as leverage to get their partner, South Carolina Electric & Gas, to hire professional help.

But while they waited for the audit's findings, someone asked a pivotal question, one that would come to define the fallout from the project's failure:

Do we need to tell our investors about this?

Their conversation is just one piece of evidence that federal investigators will consider as they sift through tens of thousands of subpoenaed records, probing South Carolina's nuclear debacle for potential criminal wrongdoing. Through a Freedom of Information Act request, The Post and Courier obtained the trove of documents that Santee Cooper handed over to the U.S. Securities and Exchange Commission, including handwritten notes about the phone call.

The notes show that the conversation in September 2015 turned to "mini-bonds," a kind of investment that Santee Cooper only offers to South Carolinians. Those bonds, which sell for as little as $200, were part of the roughly $2 billion that Santee Cooper borrowed between the executives' phone call and the end of the project, in part to keep the endeavor afloat.

It's not clear how the question was addressed at the time, but there's no dispute about how the utility ultimately answered: The so-called Bechtel report would stay hidden from the public. 

That decision has inspired enormous legal debate, as the Bechtel report proved to be a damning indictment of the project and its oversight. The investigation into whether it was appropriate to withhold the report could hold huge consequences for South Carolina if investigators turn up evidence that SCE&G or Santee Cooper misled regulators or their investors. 

That evidence would likely boost utility customers' efforts to claw back billions of dollars' worth of rate hikes and investors' hopes of recouping their losses. It could also open the door to criminal proceedings. 

Santee Cooper and its project partner, South Carolina Electric & Gas, say the audit was rightfully kept secret. It was commissioned by an attorney, and they have argued that its results were protected by attorney-client privilege, even as Santee Cooper's executives angled to use the audit to push SCANA to make changes at the construction site in Fairfield County.

But the papers Santee Cooper gave to the feds show glimmers of concern about the report and its implications. 

The question

Santee Cooper raises huge sums of money by selling bonds. Just take the two years of activity the SEC asked it about: In 2015 and 2016, it borrowed nearly $2.1 billion to refinance old debt and fund its nuclear project, the nation's first new reactors approved in three decades.

Most of that money came from big banks and investment firms. But Santee Cooper also turned to South Carolinians, selling "mini-bonds" to pay for its construction projects. They are a popular investment: Some 10,000 South Carolina residents own a mini-bond, totaling $272 million of the utility's debt.

Handwritten notes show that as Santee Cooper's top nuclear officials talked about the project in the fall of 2015, their conversation referenced the financial statements Santee Cooper publishes every time it sells bonds, then the Bechtel assessment.

Then they ask simply: "DISCLOSE OR NOT."

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Disclose or not

Handwritten notes from a September 2015 conference call of Santee Cooper executives show that one of them asked about disclosing the Bechtel report to investors in its mini-bonds.

The notes don't specify who broached the topic. But they show that the call included the utility's top two nuclear officials, two top lawyers and its former CEO, Lonnie Carter.

Santee Cooper declined to comment on the notes, saying it wouldn't discuss an ongoing federal investigation.

Over the following months, Bechtel’s auditors would go on to raise doubts about whether Santee Cooper and SCE&G could finish building a pair of nuclear reactors before federal subsidies expired. And they would log a laundry list of problems, like the utilities' poor oversight, their contractors' inefficient construction work and the reactors' sometimes unusable designs.

'Avoid disclosure'

Before the report was made final, it was subjected to a months-long "scrub," the notes show. That's when concerns about the project’s schedule were removed.

During that process, someone asked if the utilities really needed a final report at all, according to notes from a meeting of top SCE&G and Santee Cooper executives.

"Do we really need a formal written report?" the notes say, continuing: "Stakeholders can use to throw rocks at us."

SCE&G did not directly respond to questions about meeting when asked Monday. But the report was ultimately written, and by the time it was finished, the utilities agreed not to release it. In an internal memo in early 2016, Santee Cooper wrote that it would join SCE&G in not making the results public.

"We will continue to cooperate, within the law, with SCE&G's efforts to avoid disclosure," the memo says.

The report eventually came to light last fall after Gov. Henry McMaster demanded a copy and then released it to the public. The report quickly became a key focal point of legislative and legal inquiries into the project's unraveling, providing key evidence that the utilities knew the plant construction was in deep trouble while they continued to tout its potential and seek rate hikes. 

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State Rep. Micah Caskey, a former prosecutor who served on a legislative panel that investigated the nuclear project, said the utilities might have been right to think the Bechtel report could stay private. But even if the document itself was legally privileged, he said, its findings were not. Problems with engineering and construction should have come to light, he said.

Lower bar

That's the question investigators face now. They're tasked with determining whether the utilities did stay "within the law."

A year after the V.C. Summer project went bust, no one has been charged with a crime in its wake. And while investors in SCE&G's parent company, SCANA Corp., have accused executives of misleading Wall Street, the SEC has stayed quiet. It didn't respond to a request for comment on the status of its investigation.

But its conclusions will be significant because the courts tend to trust the SEC over private attorneys, according to John Coffee Jr., director of the Center on Corporate Governance at Columbia Law School. And as they weigh the situation, SEC investigators will face a different set of standards than lawyers representing the utilities' investors.

The private attorneys need to convince the court that the companies intended to mislead investors. The SEC has a different set of laws at its disposal, and it could bring a case if it can show that the utilities made a "material omission" — that is, if they failed to disclose information that would have been important to investors.

"The SEC has to show less," Coffee said.

Whether South Carolina's nuclear project reached that bar is uncertain. But the distinction between omission and intent has been raised before: It came up when SCANA executives testified about the project last September at a Statehouse hearing.

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Kevin Marsh testifies (copy) (copy)

SCANA Chief Executive Kevin Marsh testified before the S.C. House last September about the V.C. Summer project. File

"Would you agree with me that an omission is a misrepresentation?" asked state Rep. Peter McCoy, a former prosecutor who led a panel that investigated the V.C. Summer project. His question followed a line of questioning about the Bechtel report.

"I think you'd have to understand the context around the omission," responded Kevin Marsh, the CEO of SCANA, reiterating its position that the Bechtel report was confidential. "I mean, we've never done anything to intentionally mislead or deceive the commission or others associated with the project."

The SEC opened its investigation the next month.

Andrew Brown of The Post and Courier contributed to this report.

Reach Thad Moore at 843-937-5703. Follow him on Twitter @thadmoore.