BRADENTON, Fla. – The decision by South Carolina’s Santee Cooper to defer rate increases over the next two years is a credit negative, Moody's Investors Service said.
The state-owned power agency’s action on rates Aug. 11 is negative because permanent cost reduction actions have not been taken, nor has Santee Cooper secured incremental revenues in the face of rising debt service, analyst Dan Aschenbach said Monday.
“We see it as an indication that customer tolerance for incremental rate increases related to investments in the Summer Nuclear Station is lacking,” Aschenbach said.
Facing backlash from ratepayers and lawmakers for canceling work on two unfinished nuclear reactors at the V.C. Summer plant, Santee Cooper announced Aug. 18 it would not need to implement planned rate increases of just under 4% each year in 2018 and 2019.
The agency, formally known as the South Carolina Public Service Authority, has $7.7 billion of outstanding bonds. Of that, $4.4 billion has been issued to pay for its 45% share of the two reactors that it will not complete in the face of significant cost increases due to the bankruptcy of the prime contractor, Westinghouse Electric Co. Westinghouse is owned by Toshiba Corp.
“We will continue to meet all debt obligations and maintain Santee Cooper’s financial integrity and strength,” said spokeswoman Mollie Gore.
Moody’s, which rates the agency’s bonds A1 with a negative outlook, said Santee Cooper has strong historical financial metrics and robust liquidity that provide a cushion for bondholders.
“But should Santee Cooper’s plan to mitigate the need for future rate increases not materialize, we would expect negative credit pressure if it did not use its cost recovery, including the unregulated capability to sufficiently raise rates to meet sound financial metrics,” he said.
Santee Cooper currently intends to rely on payments it will receive under a parental guarantee from Toshiba Corp., Aschenbach said.
The guarantee totals $976 million through 2020, and will provide several years of funds to service scheduled debt service above the 2016 level. The first payment from Toshiba is scheduled in October.
The Japanese company, which continues to have its own fiscal problems, provided for the parental guarantee in the 2016 financial results released last week.
“While a sizeable source of incremental funding, the quality and reliability of this funding is vulnerable given the challenges facing Toshiba,” Aschenbach said. “Without the Toshiba funds, costs would be 8% higher, which Santee Cooper would have to manage through new revenues, cost reductions or deferrals.”
South Carolina Gov. Henry McMaster is exploring a potential sale of Santee Cooper assets, and others are exploring the possibility of another company completing the two nuclear reactors. A sale would require the approval of the South Carolina Legislature. Regular session begins in January.
Lawmakers are conducting their own investigation into the failed nuclear project.
The Senate’s V. C. Summer Nuclear Project Review Committee meets Tuesday and the House’s Utility Ratepayer Protection Committee meets Wednesday.
On Monday, S&P Global Ratings lowered its ratings on Santee Cooper’s tender-option bond trust floater and residual issues A-plus/A-1 from AA-minus/A-1 as a result of its downgrade of the agency’s underlying bonds.
S&P lowered the South Carolina Public Service Authority’s revenue debt rating to A-plus from AA-minus on Aug. 2 after work on the Summer nuclear project was suspended.