NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following South Carolina Public Service Authority (Santee Cooper) bonds:
--$500,000,000 2013 tax-exempt series E bonds
Bond proceeds will be used to fund a portion of the authority's ongoing capital improvement program. The bonds will be sold to BofA Merrill Lynch, with the transaction scheduled to close October 4th.
In addition, Fitch rates the authority's outstanding debt obligations as follows:
--$5,959,049,000 revenue obligations 'AA-';
--$364,604,000 commercial paper notes 'F1+'.
The Rating Outlook is Negative.
The revenue bond obligations are secured by a gross lien on system revenues and are paid prior to operating expenses and other outstanding obligations.
KEY RATING DRIVERS
SOLID LONG-TERM CUSTOMER BASE: Santee Cooper is one of the nation's largest municipal wholesale systems, serving either directly or indirectly nearly one-third of the state of South Carolina. The recent extension of the supply contract with its largest customer, Central Electric Cooperative (Central), to 2058 is viewed positively, in that it formalizes joint planning for new resources, provides greater long-term revenue certainty and affords the authority increased flexibility in structuring debt.
RATING OUTLOOK NEGATIVE: The Negative Outlook reflects Fitch's view that although Santee Cooper will benefit from the Central contract extension, the authority faces a number of challenges over the next several years, including slower growth, a large capital program and the ability to manage its excess ownership share of the new Summer nuclear plant expansion project (units 2 and 3).
REALIGNMENT OF GENERATING CAPACITY: Santee Cooper is actively engaged in restructuring its power supply mix, by reducing its exposure to coal-fired generation and adding to its natural gas and nuclear facilities. However, because of slower demand growth and large capital requirements, the authority is also attempting to reduce its ownership interest in the Summer project from 45% to approximately 20%.
FINANCIAL METRICS EXPECTED TO STABILIZE: Financial ratios for the authority have drifted lower over the past five years. Fitch-calculated debt service coverage (DSC) stood at 1.24x in 2012, compared with 1.68x in 2009. The weaker metrics reflect participation in the capital-intensive Summer project, the slower economy and lower sales, and much higher coal stockpiles. The 10-year financial forecast assumes DSC stabilizing around 1.50x with debt to equity of around 70% to 75%.
DEBT RESTRUCTURING CONTEMPLATED: The recent extension of the earliest possible termination date of the Central agreement should enable the authority to reduce near-term debt service by extending the average life of its debt and better aligning its amortization schedule with the expected lives of its assets.
INABILITY TO LESSEN INTEREST IN SUMMER NUCLEAR: The authority's 45% ownership interest in Summer leaves the utility with significant excess generating reserves for an extended period, which could potentially pressure financial metrics below targeted levels. The authority's ability to address major challenges over the next 12 to 24 months will be instrumental in resolving the Negative Outlook.
SIGNIFICANT CONSTRUCTION DELAYS: Fitch will continue to evaluate any changes to the Summer project schedule, design and/or budget and evaluate the effect on the authority's rating and Outlook.
MEETING FINANCIAL TARGETS: A primary factor supporting the current rating is the expectation that financial metrics will stabilize, supported by the 1.50x DSC target.
Please see the release dated July 18, 2013 for additional details.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);
--'U.S. Public Power Peer Study Addendum -- June 2013', (June 13, 2013);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 13, 2013);
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Peer Study -- June 2013
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria