In re SCANA Corporation Securities Litigation

          ORDER AND OPINION

          Margaret B. Seymour, Senior United States District Judge

         On March 30, 2018, Plaintiffs West Virginia Investment Management Board and Stichting Blue Sky Equity Active Low Volatility Fund and Stichting Blue Sky Active Large Cap Equity USA Fund, individually and on behalf of themselves and others similarly situated, filed a consolidated class action complaint against SCANA Corporation (“SCANA”), and Kevin B. Marsh, SCANA's former Chief Executive Officer (“CEO”) and Chairman of SCANA's Board of Directors; Jimmy E. Addison, CEO and former Chief Financial Officer (“CFO”) and Executive Vice President of SCANA; Stephen A. Byrne, SCANA's former Executive Vice President; and Harold C. Stowe, D. Maybank Hagood, and James W. Roquemore, members of the Board of Directors (“Individual Defendants” (collectively, “Defendants”). Plaintiffs seek certification of a class of all persons and entities who purchased, or otherwise acquired, SCANA'S publicly traded securities from October 27, 2015 through December 20, 2017, and were damaged as a result of Defendants' alleged misrepresentations and omissions with respect to the abandonment of a nuclear reactor construction project at the V.C. Summer nuclear generating station in Fairfield County, South Carolina. Plaintiffs allege the following causes of action: violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and Rule 10b-5 (against all Defendants) (Count One); and violation of Section 20(a) of the Act (against Individual Defendants) (Count Two).

         On March 4, 2019, this matter came before the court for a hearing on the following motions to dismiss:

• Motion to dismiss for failure to state a claim filed by Jimmy Addison on June 4, 2018. Plaintiffs filed an omnibus response on August 9, 2018. Addison filed a reply on September 18, 2018.

• Motion to dismiss for failure to state a claim filed by Stephen Byrne on June 4, 2018. Plaintiffs filed an omnibus response on August 9, 2018. Byrne filed a response on September 19, 2018.

• Motion to dismiss for failure to state a claim filed by Kevin Marsh on June 4, 2018. Plaintiffs filed an omnibus response on August 9, 2018. Marsh filed a reply on September 18, 2018.

• Motion to dismiss for failure to state a claim filed by Maybank Hagood, James Roquemore, SCANA Corporation, and Harold Stowe. Plaintiffs filed an omnibus response on August 9, 2018. These Defendants filed a reply on September 18, 2018.

         For the reasons set forth below, Defendants Addison's, Byrne's and Marsh's motions to dismiss are denied. SCANA's motion to dismiss is denied in part and granted in part.

         I. FACTS

         In May 2008, SCANA's subsidiary, South Carolina Electric and Gas Company (“SCE&G”), and the South Carolina Public Service Authority (“Santee Cooper”) entered into an agreement to construct two nuclear reactors at an estimated cost of $9.8 billion (the “Project”). To finance the Project, SCANA expected to qualify for tax credits under the Energy Policy Act of 2005, 42 U.S.C. §§ 15801, et seq., which would provide tax credits worth approximately $2.2 billion if the Project were completed by January 1, 2021. In addition, SCANA relied on the Base Load Review Act, SC Code Ann. §§ 58-33-210, et seq. (“BLRA”), which allowed the South Carolina Public Service Commission (“PSC”) to approve utility rate increases to cover construction costs of new nuclear reactors. Under the BLRA, SCANA was required to demonstrate to the PSC that costs were prudently incurred and decisions prudently made considering the information available to SCANA at the time. See S.C. Code Ann. § 58-33-225. SCANA selected Westinghouse Electric Company (“Westinghouse”) as its lead contractor and CBI Stone & Webster (“CB&I”), as supporting contractor.^[1] Construction commenced in March 2013.

         According to Plaintiffs, the Project was immediately beset by cost overruns and delays. In September 2015, the PSC approved a twenty-seven month extension of the construction schedule, as well as addition costs of $698 million. Plaintiffs allege that Defendants repeatedly assured the public, investors, and the PSC that SCANA was acting in a transparent and responsible manner, and that the initial risks and challenges of the construction had been overcome.

         Plaintiffs contend SCANA purposely did not publicly disclose that, in early 2015, SCANA, through counsel, had retained Bechtel Corporation (“Bechtel”), an engineering, construction, and project management company, to assess the Project's viability. In October 2015, Bechtel submitted a preliminary report that provided the following summary and contained a number of recommendations:

• The objective of the assessment was to assist the Owners [SCE&G and Santee Cooper] to better understand the current status and potential challenges of the project and to help ensure the project is on the most cost efficient trajectory to completion.

• Based on our assessment, the current schedule is at risk. Significant issues include:

To-go scope quantities, installation rates, productivity, and staffing levels all point to completion later than current forecast.

While EPC^[2] plans and schedules are integrated; the plans and schedules are not reflective of actual project circumstances.

The Consortium lacks project management integration needed for EPC.

There is a lack of a shared vision, goals, and accountability between the Owners and the Consortium.

The WEC-CB&I [Westinghouse-CB&I] relationship is extremely poor, caused to a large extent by commercial issues.

The Contract does not appear to be serving the Owners or the Consortium particularly well. The issued design is often not constructible resulting in a significant number of changes.

• The oversight approach taken by the Owners does not allow for real-time, appropriate cost and schedule mitigation.

ECF No. 95-12, 4.

         Bechtel's preliminary findings indicated that the commercial operation date for Unit 2 should be adjusted by eighteen to twenty-six months, or to December 2020 to August 2021 (as compared to the then-current commercial operation date of June 2019); and the commercial operation date for Unit 3 should be adjusted by twenty-four to thirty-six months, or to June 2022 to June 2023 (as compared to the then-current commercial operation date of June 2020).

         Also in October 2015, SCE&G, Santee Cooper, Westinghouse, and CB&I entered into an agreement (the “EPC Amendment”). ECF No. 95-13. The EPC Amendment contained a provision permitting Westinghouse to contract with Fluor Corporation, an engineering and construction firm

         (“Fluor”), for additional construction support. The EPC Amendment contained new Guaranteed Substantial Completion Dates (“GSCDs”) of August 31, 2019 for Unit 2 and August 31, 2020 for Unit 3. The EPC Amendment provided for bonuses for on-time completion as well as liquidated damages for delay of construction for each unit in the amounts for $200, 000/day for the first thirty days; $300, 000/day for the next thirty-one to ninety days; $400, 000/day for the next ninety-one to one hundred fifty days; $500, 000/day for the next one hundred fifty-one to seven hundred thirty days; and $0/day for each seven hundred thirty-one days or beyond. Id. at 4-5. The parties further agreed to allow SCE&G and Santee Cooper the option to convert the EPC Amendment to a fixed price contract no later than November 1, 2016. If exercised, the contract price would be adjusted to $6.082 billion and payments made to complete the Project after June 30, 2015 would be credited against the $6.082 billion amount. ECF No. 95-13, 23.

         On October 27, 2015, SCANA filed a Form 8-K with the Securities and Exchange Commission (SEC). ECF No. 95-14. The Form 8-K summarized the EPC Amendment, including that the GSCDs had been extended to August 31, 2019 and August 31, 2020, and reported that substantially all outstanding disputes with Westinghouse had been resolved. A press release attached to the Form 8-K stated that the fixed option price would increase to approximately $7.601 billion. SCANA also completed a Form 10-Q on November 6, 2015, which informed investors that the nuclear reactors would be operational by the end of 2020 and the Project would qualify for the Energy Policy Act tax credits. ECF No. 95-17.

         On November 9, 2015, Bechtel provided a formal assessment (the “First Bechtel Report”). ECF Nos. 105-4, 105-5. Among other things, Bechtel noted that the Project had been achieving a 0.5% progress per month rather than the anticipated 1% per month. Bechtel indicated that future needs were 2.5% to 3% per month. Bechtel reiterated its assessment that the anticipated commercial operation date for Unit 2 was December 2020 to August 2021, and for Unit 3 was June 2022 to June 2023. On February 5, 2016, Bechtel submitted a revised report (the “Second Bechtel Report”) at the request of SCANA's outside counsel. The Second Bechtel Report removed information regarding the delays in commercial operation dates for the Project. ECF Nos. 105-7, 105-8. The First Bechtel Report and the Second Bechtel Report were denominated privileged work product prepared in anticipation of litigation.

         Plaintiffs assert that Bechtel reviewed the EPC Amendment, which was signed five days after the Bechtel preliminary assessment. According to Plaintiffs, Bechtel concluded that the EPC Amendment would further delay the schedule. Plaintiffs also dispute that Defendants addressed most of Bechtel's concerns in the EPC Amendment, including the existing engineering design and the deficient oversight approach. Plaintiffs contend that Bechtel found there was no credible path for SCANA to complete the Project by the end of 2020; thus, the schedule was not simply “at risk, ” it was impossible to achieve. Plaintiffs allege that Santee Cooper urged SCANA to implement Bechtel's recommendations, including the need for new project management and leadership. Plaintiffs contend that the ...