Despite delays and cost overruns in construction of Units 2 and 3 at the V.C. Summer nuclear complex, Moody’s Investors Service says the outlook remains stable for SCANA (NYSE:SCG) and its utility subsidiary South Carolina Electric & Gas (SCE&G).
The outlook remains stable for the parent SCANA (Baa3) and its largest operating subsidiary, SCE&G (Baa2), Moody’s said March 16. But the ratings firm cautions that certain financial risks are rising. Moody’s noted that the first of the two new units probably won’t start operation until mid-2019.
The utility recently announce a filing with the South Carolina Public Service Commission seeking approval for a material cost overrun associated with its new nuclear construction project, the V.C. Summer nuclear generating reactors Units 2 and 3, located in Jenkinsville, S.C.
“The rating affirmation reflects our expectation that the SCPSC will continue to be supportive of the V.C. Summer project, by providing timely cost recovery through the legal underpinnings incorporated in South Carolina’s Base Load Review Act (BLRA),” Moody’s said.
So far, Moody’s has said there is no need for alarm over delays at either Summer or the Vogtle Units 3 and 4 being developed by a group led by Southern (NYSE:SO) utility Georgia Power.
On March 12, SCE&G filed a petition with the South Carolina PSC seeking approval for both higher capital construction costs and the revised construction schedule. The PSC’s final decision and ruling are expected in September.
“SCANA and SCE&G are completely exposed to and dependent on the BLRA,” said Susana Vivares, Vice President — Senior Analyst at Moody’s, “The utility has exhausted its financial cushion, is over-budget and still years away from commercial operation. We think the risk that South Carolina’s electric consumers become less willing to absorb these cost increases is going to rise. In turn, the filing will likely turn up the heat on the regulators,” Vivares said.
From a credit perspective, SCE&G’s Baa2 issuer rating is slightly better positioned than SCANA’s Baa3 senior unsecured rating, because SCE&G directly benefits from the legal underpinnings of the BLRA and the supportive regulatory environment in South Carolina. In addition, SCE&G’s financial profile should remain stable, with ratios of cash flow to debt staying in the mid-teen’s range, and retained cash flow to debt ratios around 10%.
That said, the execution risks associated with the V.C. Summer project are rising. After six months of negotiations with the construction consortium, SCE&G is seeking regulatory approval for a new total project cost of approximately $6.8bn, representing a net increase of approximately $500m compared to the $6.3bn budget approved in 2007. The revised fully integrated construction schedule indicates new substantial completion dates for Units 2 and 3 of 2Q 2019, and 2Q 2020, respectively, about three years behind the original schedule outlined in 2007.
“The biggest risks for SCE&G are the “first-of-a-kind” project risks, the willingness of the SCPSC to continue approving the higher costs as prudently incurred and recoverable, and the legal terms and conditions embedded in the confidential EPC contract,” added Vivares.