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 December 10, 2015 - 2:23 PM EST
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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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996495

Solicitation Status

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

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
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chris Hessenthaler
Senior Director
+1-212-908-0773
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (December 10, 2015 - 2:23 PM EST)

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