Fitch Rates SCE&G's $500MM FMBs 'A-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to South Carolina Electric and Gas Co.'s (SCE&G) new $500 million issue of first mortgage bonds (FMBs) maturing in 2065. The Rating Outlook is Stable. Proceeds will be used to repay short-term debt, primarily incurred to fund capex, and for general corporate purposes.

KEY RATING DRIVERS

Sizeable Nuclear Construction Program: The rating for SCE&G reflects the substantial financial commitment of SCE&G's large nuclear construction program and the beneficial impact of the Base Load Review Act (BLRA). SCE&G is building two units at the V.C. Summer site that will be jointly owned with South Carolina Public Service Authority (Santee Cooper). The South Carolina Public Service Commission's (PSC) approval of the revised capital and construction schedule is critical to maintaining the existing ratings. Under the revised budget, peak nuclear spending occurs over the 2015 - 2017 period at almost $1 billion annually.

State Law Reduces Risk: The construction and financing risk for the nuclear construction program is mitigated by the BLRA. The BLRA process provided an upfront determination that the plant is used and useful that is binding on all future proceedings and that its costs are properly included in the rate base as long as the plant is constructed within the schedules and cost estimates in the approved application. The BLRA also provides for annual tariff adjustments to provide a cash return on the construction work in progress (CWIP), based on an 11% return on equity (ROE), recovery of development costs for approved projects that may ultimately be abandoned, and recovery of any additional cost if the changes are not the result of imprudence on the part of SCE&G. The 11% ROE remains in place throughout the construction program and is unaffected by the ROE determination in general rate case proceedings. To date, BLRA rate increases have been implemented in each of the past seven years. SCE&G's ability to fully recover future construction costs will be dependent on the PSC's assessment of its March 2015 petition.

Predictable Utility Earnings: SCE&G is located in a constructive regulatory jurisdiction and operates with fuel recovery adjustment mechanisms that limit commodity price exposure. In addition, SCE&G's natural gas delivery business has a weather normalization clause.

Financial Measures: The current ratings recognize that financial measures will remain well below Fitch's guidelines over the next several years, due in large measure to the elevated nuclear capex and planned debt financing, but should rebound strongly once the units are complete and SCE&G commences recovery of capital and operating costs. Fitch estimates SCE&G's ratios of adjusted Debt-to-EBITDAR will peak at 5.5x over the 2016 - 2017 period and EBITDAR-to-interest will bottom at 3.3x. Credit ratios are expected to improve as expenditures wind down, but this is not expected until 2018 at best.

Balanced Financing Plan: Management has committed to fund the nuclear expenditures with a balanced mix of debt and equity (including internally generated cash) but SCANA Corp (SCG) nonetheless expects to exceed its self-imposed to-capital target of 57% during the peak construction years, slipping closer to 60% in Fitch's estimates. The revised financing plan, using the proceeds from divestments to replace equity sales, is only modestly credit negative but it adds stress to an already challenged capital structure.

Increased Nuclear Ownership: SCE&G's management has agreed to purchase an additional 5% share of the two nuclear units from Santee Cooper in stages beginning with the commercial operation of the first new unit (Unit 2). The timing of the purchase coincides with an expected increase in cash flow associated with capital cost recovery for the nuclear investments. Consequently, the purchase is expected to be funded with internally generated cash.

Revised Construction Schedule: The revised schedule is mostly attributable to the delay in the fabrication and delivery of sub-modules from the construction consortium. Under the BLRA, it is within the PSC's purview to approve the revised schedule and recovery of the associated cost increase if not the result of imprudence on the part of SCE&G. The PSC has previously approved such revisions. Under the current schedule the substantial completion date of unit 2 is June 2019 with the substantial completion of unit 3 expected 12-months later. This exceeds the currently approved contingency schedule for substantial completion of no more than 18-months after March 2017 for unit 2 and May 2018 for unit 3. SCE&G is also seeking approval of incremental capital costs of $1.1 billion compared to the $5.8 billion approved in the 2012 order and $500 million above the $6.3 billion originally approved in 2009. Concurrently, SCE&G and South Carolina Public Service Authority (Santee Cooper) (the 45% co-owner of V.C. Summer) are negotiating with the consortium for the allocation of the contested and delay-related costs.

KEY ASSUMPTIONS

--The PSC approves the revised construction schedule and capital costs in September 2015.--No base rate case and BLRA rate increases of circa 3% annually.--Capital expenditures, including the new nuclear program, of $1.6 billion in 2015, $1.8 billion in 2016 and $1.6 billion in 2017.--Debt issuance of $825 million in 2015, $650 million in 2016, and $250 million in 2017 as well as equity issuance of $100 million in 2017.

RATING SENSITIVITIES

Positive Rating Action:--Positive rating action is not likely during the current nuclear construction cycle. A positive ruling in the pending petition before the PSC for approval of the revised construction schedule and cost is already reflected in the rating.

Negative Rating Action:--Lack of regulatory support for the revised construction schedule and full and timely recovery of any additional costs will most likely result in a ratings downgrade. While not expected, any change in the BLRA process that affects the timeliness and amount of nuclear cost recovery would adversely affect current ratings.--Change in Financing Plans: Management's inability or reluctance to issue the expected level of equity or an increase in debt financing due to further price escalation would negatively impact ratings. Fitch would consider a downgrade if FFO-to-adjusted leverage and/or Debt/EBITDAR exceed 6.5x and 5.5x, respectively, for a sustained period of time.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);--'Recovery Ratings and Notching Criteria for Utilities' (March 5, 2015);--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors) (March 11, 2014).

Applicable Criteria and Related Research:Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155Recovery Ratings and Notching Criteria for Utilitieshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150519007163/en/

Fitch Ratings
Primary Analyst
Robert Hornick
Senor Director
+1-212-908-0523
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maude Tremblay
Director
+1-312-368-3203
or
Committee Chairperson
Shalini Mahajan
Senior Director
+1-212-908-0351
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
[email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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