KEY RATING DRIVERS
Sizeable Nuclear Construction Program: SCE&G is in the midst of a sizeable nuclear construction program that has and will stress financial ratios. Staying on schedule and within budget is critical to maintaining the existing ratings. The projected cash construction cost (excluding AFUDC) is
State Law Reduces Risk: The construction and financing risk of the nuclear construction program is mitigated by the Base Load Review Act (BLRA) and subsequent rate order. 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 rate base as long as the plant is constructed within the approved schedule and cost estimate. The BLRA also provides for annual tariff adjustments to provide a cash return on construction work in progress (CWIP) based on an 11% return on equity (ROE), and recovery of invested capital if the plant is cancelled before completion.
Revised Nuclear Construction Schedule: Due to a delay in the fabrication and delivery of sub-modules, the commercial operation date of V.C. Summer unit 2 was delayed to late 2017 or early 2018 from
Increased Nuclear Ownership: Ratings and credit quality are unaffected by SCE&G's agreement to purchase an additional 5% interest (110 MW) in the two new
Financial Measures: Incorporated in the ratings is Fitch's expectation that SCE&G's financial measures will remain weak relative to its peer group through 2017 or early 2018, when the first of the two nuclear units is expected to enter commercial operation. Thereafter, cash flow and credit ratio should improve dramatically reflecting the recovery of all capital and operating costs. Fitch estimates SCE&G's ratios of debt/EBITDAR and EBITDAR/interest will approximate 4.25x and 4.50x in each of the next two years.
Conservative Financing Plan: Management has committed to fund the nuclear expenditures with a balanced mix of debt and equity, requiring regular equity sales by its corporate parent, SCANA Corp. Over the remaining construction period management expects to raise
Rate Increase: On
Positive Rating Action: Positive rating action is not likely during the current nuclear construction cycle.
Negative Rating Action: Any further delay in the nuclear construction schedule that postpones the anticipated turnaround in credit metrics beyond 2018 or price escalation above the approved construction cost will likely result in negative rating action.
Change in Financing Plans: Management's inability or reluctance to issue the expected level of equity would negatively impact ratings.
Change in the BLRA Process: While not expected, any change in the BLRA process that affects the timeliness and amount of nuclear cost recovery would adversely affect current ratings.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Parent and Subsidiary Rating Linkage' (
--'Recovery Ratings and Notching Criteria for Utilities' (
--'Rating North American Utilities, Power, Gas and Water Companies' (
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (
--'Short-Term Ratings Criteria for Non-Financial Corporates',
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Recovery Ratings and Notching Criteria for Utilities
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Short-Term Ratings Criteria for Non-Financial Corporates
Source: Fitch Ratings
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