News Column

Fitch Rates Santee Cooper 2014A Bonds 'A+'; Downgrades Revenue Obligations & CP; Outlook Stable

June 5, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to South Carolina Public Service Authority's (Santee Cooper) $400 million revenue obligations, 2014 tax-exempt series A. The 2014A revenue bonds are expected to price around June 11 via negotiation.

In addition, Fitch has downgraded $6.31 billion of Santee Cooper's outstanding parity revenue obligations to 'A+' from 'AA-' and $800 million commercial paper note program to 'F1' from 'F1+'.

BOND PROCEEDS

Proceeds will be used to fund a portion of the authority's ongoing capital improvement program. Final bond maturity is expected to approximate Dec. 1, 2054.

SECURITY

The revenue bond obligations are secured by a gross lien on system revenues and are paid prior to operating expenses and other outstanding debt obligations, including commercial paper notes.

KEY RATING DRIVERS

EXTENDED PERIOD OF WEAKER PERFORMANCE DRIVES DOWNGRADE: Santee Cooper is structurally sound and benefits from the contract extension with its largest customer, Central Electric Cooperative (Central). However, the authority faces a number of challenges over the next several years, including the ability to absorb costs associated with its 40% ownership share of the new Summer nuclear units, a large capital program and a meaningful reduction in electric sales.

SOLID CUSTOMER BASE: Santee Cooper is one of the nation's largest municipal wholesale systems. The recent extension of the Central contract to 2058 is significant, in that it provides added security to bondholders and provides the authority greater flexibility in structuring debt and setting rates.

REALIGNMENT OF GENERATING CAPACITY: The authority is actively engaged in restructuring its power supply mix, by reducing exposure to coal-fired generation and adding to its natural gas and nuclear facilities. Management's plan to reduce its 45% ownership interest in the V.C. Summer nuclear plant expansion project (units 2 and 3), to a desired 20%, was not effectuated, and the authority has now decided to retain a 40% share of the project.

FINANCIAL METRICS LESS ROBUST: Major construction and financing for new generation have pressured financial ratios in recent years. Fitch calculated debt service coverage (DSC) was a reasonable 1.48x in 2013, Debt/FADS was highly elevated at 12.9 and equity to capitalization stood at a less than robust 23.1%. Financial metrics are expected to stabilize at levels commensurate with the new ratings.

RATING SENSITIVITIES

OUTLOOK REVISION TO STABLE: The revision in Outlook reflects Fitch's view that Santee Cooper's operating performance will stabilize around current levels following the extension of the Central contract and the reduction in Summer ownership.

SIGNIFICANT CONSTRUCTION DELAYS: Any substantial changes to the Summer project schedule, design and/or budget could affect the authority's rating and Outlook.

UPSWING IN ELECTRIC DEMAND: A meaningful improvement in demand for electricity, that helps to diminish the authority's excess capacity and benefits financial metrics, would be viewed positively.

CREDIT PROFILE

Santee Cooper sells electricity to wholesale and retail customers throughout South Carolina. Direct customers include Central Electric Cooperative, 29 large industrial users and two municipal systems. The authority owns and operates various power resources (heavily coal-fired) that have a combined (summer) generating capacity of 5,182 Mw (following closure of four coal units in 2012). When combined with SEPA allocations and market purchases, the authority's approximately 6,125 Mw of current generating capability and purchases are more than sufficient to meet its customers' 5,053 Mw's 2013 peak demand.

For 2013, coal generation based on fuel mix (summer) was the largest component at 53%; natural gas and oil at 16%; nuclear at 11%; purchases at 17% and other at 3%. Following the completion of the new Summer project, the authority's goal is to achieve a balanced generating portfolio approximating 30% each for coal, natural gas and nuclear.

CENTRAL AGREEMENTS

The authority and Central successfully adopted an amendment to the existing Central Agreement on May 20, 2013 that better aligns their future interest. Central has entered into requirements agreements with all 20 of its member cooperatives that extend through Dec. 31, 2058.

In September 2009, the authority and Central entered into an agreement, which allowed Central to purchase the electric power and energy requirements necessary to serve five of its members (formerly part of Saluda Cooperative) from a supplier other than the authority. The transition of this upstate load, approximating 1,000 MW or approximately 22% of Central's current energy requirements, to another supplier will continue over a six-year period, through 2019. Santee Cooper's load forecast takes this reduction into account.

SUMMER NUCLEAR PROJECT

In January 2008, the authority's board approved a generation resource plan that included, among other things, a 45% ownership interest in Summer nuclear units 2 and 3, with South Carolina Electric & Gas (SCE&G) owning the remaining 55%. The participation in the project is a key component in the authority's strategy to address the potential for increasing costs associated with environmental regulation and carbon emissions.

In light of lower forecasted load growth (estimated at 1% annually) combined with the planned gradual loss of a portion of the Central load and a possible reduction or loss of the Alumax load, Santee Cooper has been reviewing its level of participation in Summer nuclear units 2 and 3. As a result, the authority considered reducing its level of participation in Summer nuclear units 2 and 3 below the current 45% ownership to as low as 20%, to better balance its nearer term capacity needs with the long-term benefits of nuclear power ownership. The authority has actively engaged in negotiations with several utilities, including Duke Energy Carolinas, to purchase a portion of the authority's ownership share.

In January 2014, the authority's negotiations with Duke Energy Carolinas were terminated. Subsequently, the authority entered into an agreement whereby SCE&G would purchase an additional five percent in the units. On Jan. 27, 2014, the authority's board of directors approved the sale of five percent of its ownership in V.C. Summer units 2 and 3 to SCE&G.

STATUS OF CONSTRUCTION

Because of delays in the schedule for fabrication and delivery of sub-modules for the new units, SCE&G in June 2013 announced that the substantial completion of Summer nuclear unit 2 was expected to be delayed from March 2017 to late 2017 or the first quarter of 2018 and the substantial completion for unit 3 was expected to be similarly delayed. Since August 2013, there have been additional delays in sub-module fabrication and deliveries.

During the fourth quarter of 2013, the contractor consortium began a full re-baselining of the unit 2 and unit 3 construction schedules to incorporate a more detailed evaluation of the engineering and procurement activities necessary to accomplish the schedule. The result will be a revised fully integrated construction schedule that will provide detailed and itemized information. The authority anticipates the revised schedule and the cost estimate at completion for all non-firm and fixed scopes of work will be finalized in the third quarter of 2014. The authority believes that project owner costs (e.g. engineering, procurement and construction) remain well known and firm. The authority also has a sizeable contingency built into its cost estimate. However, what is less certain is sufficiency of record documentation at the Lake Charles, Louisiana construction facility.

The authority currently estimates the total construction cost, assuming a 45% ownership interest in the Summer nuclear generating stations units 2 and 3, to be approximately $5.1 billion. To date, the authority has financed roughly $2.5 billion for construction from proceeds of bond issues sold starting in 2008. The authority intends to fund the remaining construction costs with the proceeds of bond sales projected in calendar years 2014 through 2018 and proceeds from the sale of a 5% project ownership interest to SCE&G.

RATE INCREASES

During 2013, wholesale rates averaged 6.95 cents per KWH, large industrial customers paid 5.14 cents per KWH and residential, commercial, small industrial and other users' rates averaged 9.63 cents per KWH. Santee Cooper's rates have historically compared well with surrounding investor-owned utilities, with the exception of industrial electric service rates provided by Duke Energy Carolinas, which have been quite low. Recently approved economic development rates by the authority are intended to more closely match Duke's large industrial rates. The authority's financial forecast includes several moderate rate increase between now and 2021 to cover its capital program and other obligations.

DEBT RESTRUCTURING PLAN

Traditionally the authority has amortized its debt taking into consideration the potential termination of the Central contract in 2030 and the expected lives of its capital assets. With the recent extension of the earliest possible termination date of the Central agreement to 2058, the authority intends to extend the average life of its debt in order to better match its debt amortization schedule with the expected lives of its capital assets.

FINANCIAL PROFILE

Santee Cooper reported reasonable financial performance for calendar year 2013, with Fitch calculated debt service coverage (DSC) at 1.48x. In 2013, as part of the authority's cost reduction plan, Santee Cooper cut $31.8 million from the non-fuel operating and maintenance budget and also saved $39 million in fuel costs from new initiatives implemented during the year. Future financial metrics are likely to remain compressed, but could benefit from new economic development above base-line assumptions.

REVOLVING CREDIT AGREEMENTS SUPPORT CP PROGRAM

As of March 31, 2014, there was $372 million of commercial paper notes outstanding under the authority's $800 million program. To obtain funds if needed to repay the commercial paper notes, the authority has entered into revolving credit agreements with several financial institutions. The sum of these agreements totals $800 million, with U.S. Bank National Association, Wells Fargo Bank, National Association, JP Morgan Chase Bank, National Association, TD Bank, N.A. and Barclays Bank PLC (the Banks). Expiration dates range from September 15, 2014 through November 27, 2015. The authority expects to extend the 2014 credit facilities in the very near future. There were no loans outstanding with any of the revolving credit agreements during 2013.

CUSTOMER PROFILE

The service area, much of which is along the coast, has historically grown at a rate well in excess of the national average. Recently, the rate of growth has slowed considerably. Future sales growth is likely to be lower than historical rates, and is estimated at around 1% per year. In 2013, sales to Central accounted for approximately 59% of electric revenues.

The authority has a long-term power contract with Alumax, providing 400 MW, which extends through Dec. 31, 2015. Alumax's obligations under the contract are guaranteed by its parent company, Alcoa, Inc. The contract contains a provision that Alumax must notify the authority by June 30, 2014 if it intends to cease operations after Dec. 31, 2015. At this time, conditions have been met that would allow Alumax to terminate the contact with six month's prior notice, but Alumax has not given the authority notice it intends to exercise its right to terminate. Santee Cooper believes that a termination of the Alumax contract would not have a material impact on the authority's financial results. However, the loss of associated, high paying jobs could be more meaningful to the state.

Additional information is available at 'www.fitchratings.com'.

The rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Criteria.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);

--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum -- February 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Peer Study -- June 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833236

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Fitch Ratings

Primary Analyst

Alan Spen, +1 212-908-0594

Senior Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Chris Hessenthaler, +1 212-908-0773

Senior Director

or

Committee Chairperson

Dennis Pidherny, +1 212-908-0738

Managing Director

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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