News Column

Fitch Rates SCE&G $300MM FMBs 'A'

May 20, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to South Carolina Electric and Gas Co.'s (SCE&G) new $300 million issue of first mortgage bonds (FMBs) maturing in 2064. The Rating Outlook is Stable. Proceeds will be used to repay short-term debt, primarily incurred to fund capex, and for general corporate purposes. As of April 30, 2014, SCE&G had approximately $188 million of short-term debt outstanding.

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 $5.4 billion for SCE&G's current 55% ownership share. Approximately $2.3 billion has been expended through December 2013. Peak spending occurs over the 2014-2015 period, aggregating $1.85 billion with a peak of about $950 million in 2015.

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 March 2017. A similar delay is expected for unit 3, which had been scheduled for service in May 2018. The delay is within the 18-month construction contingency contained in the South Carolina Public Service Commission's (SCPSC) original BLRA order. Management's preliminary cost estimate of the delay is $200 million or less, which still falls within the approved $6 billion cash construction cost approved by the SCPSC in 2009. It is unclear whether the additional cost will be borne by SCE&G or the construction consortium and is likely to be shared.

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 V.C. Summer units from the minority owner Santee Cooper. The agreement is structured so that the purchase will occur in increments beginning with the commercial operation date (COD) of unit 2. SCE&G will purchase a 1% interest in the project following the unit 2 COD and two additional increments of 2% no later than the first and second anniversary date of the unit 2 COD. The estimated cost of $500 million is based on Santee Cooper's actual cost (including owner and financing costs). SCE&G expects to finance the purchase with internally generated cash.

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 $825 million of equity through public common stock offerings ($425 million) and the dividend reinvestment plan ($400 million) with remainder financed with debt and internally generated cash.

Rate Increase: On Jan. 1, 2013, SCE&G implemented a $97.1 million rate increase based on a 10.25% ROE and a 52.18% equity ratio.

RATING SENSITIVITIES

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'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2012);

--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012);

--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 9, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830975

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Robert Hornick, +1-212-908-0523

Senor Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Philippe Beard, +1-212-908-0242

Senior Director

or

Committee Chairperson

Glen Grabelsky, +1-212-908-0577

Managing Director

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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