NEW YORK--(BUSINESS WIRE)--As expected, South Carolina Electric & Gas Co. (SCE&G, IDR 'BBB+'; Rating Outlook Negative) requested approval from regulators of a revised cost estimate and construction schedule for the V.C. Summer nuclear construction project.
The revised cost estimate of $6.8 billion for SCE&G's 55% share of V.C. Summer units 2 and 3 is $1.1 billion greater than the $5.7 billion cost estimate previously approved by the Public Service Commission (PSC) of South Carolina in 2012 and about $500 million above the $6.3 billion initially approved in 2009. The revised schedule includes a delay in the substantial completion date of V.C. Summer Unit 2 to June 2019 from March 2017 and unit 3 to June 2020 from May 2018.
The revised cost estimate and construction schedule is a refinement of the delays initially announced in August 2014 when Fitch revised SCE&G's Rating Outlook, and that of its parent, Scana Corp. (SCG) to Negative from Stable. Fitch expects to resolve the Negative Rating Outlooks once the South Carolina PSC determines if the added costs are recoverable and the revised construction schedule acceptable. Lack of regulatory support for the increased cost and revised schedule will most likely result in a downgrade. Even with full cost recovery Fitch may consider a downgrade if financial recovery is delayed much beyond 2018. The plan for financing the additional cost will also factor into the ultimate rating decision.
The $1.1 billion cost increase is somewhat higher than that anticipated by Fitch after the construction consortium of Westinghouse Electric Co. (WEC) and Chicago Bridge and Iron (CB&I) estimated the delays would increase the cost by $660 million plus owners costs (an estimated $10 million per month) in October 2014. The revised schedule and cost estimate is primarily related to delays in the production and delivery of structural sub-modules at the CB&I facility in Lake Charles, Louisiana and shield building panels at the Newport News Industries facilities in Newport News, Virginia.
Importantly, SCE&G has not accepted responsibility for the increased cost under the terms of its Engineering, Procurement and Construction (EPC) contract and is in negotiations with WEC/CBI concerning responsibility for the delays. However, the EPC contract requires SCE&G to pay WEC/CBI 90% of certain disputed amounts and permits the consortium the right to cease work if payment is not received within 30 days after proper invoicing.
The increased cost of $1.1 billion includes approximately $411 million of disputed costs. The remainder of the estimated cost increase includes $245 million of owner's costs (including $214 million associated with the delay), $128 million of uncontested costs and change orders, $374 million due to escalation and AFUDC less liquidated damages of $86 million.
It should be noted that the Base Load Review Act, which governs the rate making principles to be applied to the V.C. summer project allows for recovery of increased costs that are not the result of imprudence on the part of SCE&G. Nonetheless, Fitch remains concerned that the PSC will be unwilling to have rate payers shoulder the entire burden of the cost overruns and that further delays and/or cost increases cannot be ruled out. Moreover, the latest schedule exceeds the 18-month schedule contingency previously approved by the PSC, making full cost recovery less certain.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014;
-- 'Recovery Ratings and Notching Criteria for Utilities' (Mar. 5, 2015);
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors) (March 11, 2014).