Fitch Rates Santee Cooper's 2015 E Bonds and 2016 A Refunding Bonds 'A+'; Outlook Stable
Fitch Ratings has assigned an 'A+' rating to the following South
Carolina Public Service Authority's (Santee Cooper or the Authority)
bonds:
--$300,000,000 tax-exempt revenue obligations 2015 series E;
--$200,000,000 tax-exempt revenue refunding obligations 2016 series A.
The 2015 E obligations will be used to retire certain commercial paper
(CP) notes and fund a portion of the authority's ongoing capital
improvements, while the 2016 A obligations would be used to refund all
or a portion of the 2007 A, 2008 A and 2009 B bonds.
In addition, Fitch has affirmed the outstanding ratings as follows:
--$6.88 billion outstanding parity revenue obligations at 'A+'.
The Rating Outlook is Stable.
SECURITY
The revenue bond obligations are secured by a lien upon and pledge of,
the revenues and moneys in the revenue fund on parity with other revenue
obligations, and prior to the payment of CP notes.
KEY RATING DRIVERS
SOLID CUSTOMER BASE: The authority is one of the nation's largest
municipal wholesale systems, serving either directly or indirectly
nearly one-third of the state of South Carolina. Extension of the
Central Electric Cooperative (Central) power sales agreement to 2058
(about 56% of authority's 2014 revenues) is significant in that it
provides long-term certainty to bondholders and affords enhanced
flexibility in structuring debt and setting rates.
CHALLENGES REMAIN: Santee Cooper continues to face challenges primarily
related to the cost and completion dates of the Summer nuclear units 2
and 3, which are 45% owned by the authority. A large construction
program, associated legal issues and a slower rate of electric sales
have combined to negatively impact the authority. Santee Cooper remains
structurally sound, is supported by the long-term power sales contract
with Central and should benefit from the recently announced settlement
between project owners and the consortium.
RECONFIGURING GENERATING CAPACITY: The authority is highly engaged in
restructuring its power supply mix, by reducing its exposure to
coal-fired generation and adding to its natural gas and nuclear fleet.
Efforts to reduce its ownership interest in the Summer nuclear plant
expansion project were only partly successful, and the authority has
decided to retain a significant ownership share, which is included in
its projections.
FINANCIAL RATIOS STABLE: The authority's major construction and
financing program, relating to the Summer nuclear project, has pressured
financial ratios and contributed to a previous downgrading of Santee
Cooper bonds. Financial ratios remain well below historical levels, but
appear to have stabilized, providing support for the 'A+' rating. The
authority's long-term financial model is predicated on senior-lien debt
service coverage (DSC) of 1.50x, but can fall below this ratio during
periods of major capital investment.
RATING SENSITIVITIES
ADVERSE NUCLEAR DEVELOPMENTS: Negative developments related to
completion of the Summer nuclear units 2 and 3 projects, which impinge
upon South Carolina Public Service Authority's financial metrics, could
result in a downward rating action.
ADDITIONAL LOAD GROWTH BENEFICIAL: A meaningful improvement in
electricity demand that lessens the authority's excess generating
position would benefit financial results and customer rates.
CREDIT PROFILE
The authority's primary business operation is the production,
transmission and distribution of electrical energy, both at wholesale
and retail, to customers of South Carolina. Santee Cooper sells
electricity to approximately 2 million wholesale and retail customers in
46 counties throughout the state.
The utility owns various power resources (heavily coal-fired) that have
a combined (summer) generating capacity of 5,093 megawatts (MW),
following closure of four coal units. When combined with SEPA
allocations and market purchases, the authority's approximately 5,866 MW
of current generating capability and power purchases are more than
sufficient to meet its customers' peak demand, including a 15% summer
reserve margin.
The authority and Central successfully adopted an amendment to the
existing Central Agreement on May 20, 2013 that better aligns their
future interest, formalizes how they will jointly plan for new resources
and defers the cooperative's rights to terminate the agreement prior to
Dec. 31, 2058.
STATUS OF NUCLEAR CONSTRUCTION
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 lead participants of the consortium
developing the project include Westinghouse Electric Company and
CB&I/Stone & Webster.
On Oct. 27, 2015, the EPC agreement between the parties was amended. The
October 2015 Amendment will become effective upon the consummation of
the acquisition by Westinghouse of the stock of Stone & Webster from
CB&I , and will become null and void in the event such acquisition is
not consummated by March 31, 2016. Following that acquisition, Stone &
Webster will continue to be a member of the consortium as a subsidiary
of Westinghouse instead of CB&I. Westinghouse will engage Fluor
Corporation or its affiliate(s) as a subcontracted construction manager.
Among other things, upon effectiveness, the October 2015 Amendment would
resolve by settlement and release substantially all outstanding disputes
between SCE&G, the authority and the consortium. In addition, the
Amendment would provide for an explicit definition of a Change in Law
designed to reduce the likelihood of certain commercial disputes.
Finally, it would provide the owners an irrevocable option, until Nov.
1, 2016 and subject to regulatory approvals, to further amend the EPC
Agreement to fix the total amount to be paid to the consortium for its
entire scope of work on the project after June 30, 2015 at $6.082
billion (authority's 45% portion being approximately $2.737 billion).
Under the October 2015 Amendment, the EPC date is now set at Aug. 31,
2019 for Unit 2 and Aug. 31, 2020 for Unit 3; subject to further review.
FINANCIAL PERFORMANCE STEADIES
Santee Cooper reported stable financial results for calendar year 2014,
with Fitch calculated DSC at 1.52x. The authority is also required to
make distributions to the state and payments in lieu of taxes to local
governments. Based on preliminary results for the nine-months ended
Sept. 30, 2015, actual operating income exceeded budget by 8%. The
financial forecast assumes a DSC target of approximately 1.50x, prior to
transfer payments and excluding interest charges associated with
commercial paper notes, which reduces numbers slightly.
The total cost of the capital improvement program for 2016 through 2019
is estimated to be approximately $3.27 billion, which includes about
$2.15 billion for Summer nuclear units 2 and 3 based on 45% ownership,
approximately $440 million for environmental compliance expenditures and
$680 million for general system improvements. Santee Cooper plans to
issue roughly $1.1 billion of debt in 2016 through 2018.
SUFFICIENT LIQUIDITY
As of Nov. 30, 2015, there was $606.4 million of CP notes outstanding.
The lien and pledge of revenues securing such notes is junior to that of
the revenue obligations. The board has approved a resolution that the
issuance of CP notes will not exceed 20% update of the authority's
aggregate debt outstanding, incorporating certain provisions.
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 $750 million.
Expiration dates range from August 18, 2017 to Nov. 27, 2018. Total
available liquid resources divided by maximum potential liquidity
requirement is sufficient to meet Fitch's requirement for an 'F1'
rating. The authority has also entered into a separate revolving
agreement (Direct Purchase Revolving Credit Agreement) with Barclays
Bank PLC that allows the authority to borrow up to $200 million through
Nov. 27, 2019.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996495
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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