Following the abandonment of the V.C. Summer expansion, Fitch Ratings and Moody's on Aug. 1 both affirmed the ratings and negative outlook for SCANA Corp. and its subsidiary South Carolina Electric & Gas Co.
Fitch maintained its issuer default ratings of SCE&G at BBB and SCANA at BBB- and retained both at rating watch negative, citing the "uncertainty surrounding the recovery terms for $4.9 billion of stranded costs."
The rating agency said the decision of SCE&G and development partner Santee Cooper to halt the construction of two new 1,117-MW reactors at the V.C. Summer facility has removed financing and technological risks but raised material regulatory risks, as it will be the first application under the abandonment clause of South Carolina's Base Load Review Act.
"While the South Carolina Public Service Commission has been supportive of the nuclear project since its inception, Fitch is concerned that the magnitude of the stranded costs could result in an adverse regulatory order to the abandonment petition and constrain credit metrics for a prolonged period," analysts noted.
Fitch expects the commission will approve SCE&G's request to abandon the project but sees "material downward risk for the allowed ROE and approved rate base." The companies' rating watch negative may be resolved once the commission outlines the terms of the recovery of stranded costs by Feb. 1, 2018, according to the rating agency.
Similarly, Moody's affirmed its ratings of SCE&G at Baa2 and SCANA at Baa3, with negative outlook, on perceived regulatory risks. The rating agency also affirmed Santee Cooper's revenue bonds at A1, with negative outlook.
"Overall, Moody's views the decision to abandon the project as credit positive. However, the utility now faces regulatory risk as it will be challenged to maintain a credit supportive relationship with its regulator as it seeks to recover the costs incurred to build a plant that will never produce electricity," analysts said in a note to investors.
The negative outlook also reflects the weak financial position of project contractor Toshiba Corp., which may affect its ability to pay $2.17 billion in full satisfaction of its guaranty of obligations to SCE&G.
Santee Cooper, legally known as South Carolina Public Service Authority, owns $7.7 billion of outstanding revenue bonds, which include $4.4 billion related to financing and construction costs of the 35%-completed Summer units 2 and 3.