OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of SCANA Corp (SCG) at 'BBB-'. Fitch has also affirmed the 'BBB' IDRs of its operating utility subsidiaries South Carolina Electric and Gas Co. (SCE&G) and Public Service Co of North Carolina (PSNC). In addition, Fitch has assigned an 'A-' rating to SCE&G's $425 million, 4.10% first mortgage bonds (FMBs) due June 15, 2046, and $75 million, 4.50% due June 1, 2064. The Rating Outlook for SCG, SCE&G and PSNC is Stable. A detailed list of ratings is provided at the end of this release.

KEY RATING DRIVERS FOR SCG AND SCE&G

High Project Execution Risk: Fitch's primary concerns are the construction and regulatory risks surrounding the nuclear expansion project at V. C. Summer. SCE&G jointly owns the 2,235 megawatt V. C. Summer units 2 and 3 with South Carolina Pubic Service Authority (Santee Cooper, 45% ownership). The new Summer units have experienced significant construction delays and cost increases heightening regulatory risk and delaying the expected financial recovery. The latest cost estimate announced in May 2016 rose to $7.7 billion (SCE&G's share) from $6.8 billion and the timeline slipped to August 2020 for the last unit. While gradually abating, Fitch expects significant execution risk will surround this project until the last unit is substantially completed.

Amendement of EPC Agreement: Fitch views the resolution of the dispute between the Summer's owners and the engineering, procurement, and construction (EPC) contractors, changes in the EPC agreement, and removal of Chicago Bridge & Iron Company N. V. (CB&I)as part of the construction consortium as positive developments. The amendment resolved most outstanding disputes and covers all design changes that may be required to comply with current nuclear regulatory law. However, exposure to a dispute resolution board to set a revised construction milestone payment schedule highlights lingering risks with the EPC agreement, in Fitch's view.

Deteriorating Credit Profile of Toshiba: Fitch is concerned with the weakening credit profile of Toshiba Corporation (not rated by Fitch), which is the majority owner of EPC contractor Westinghouse Electric Company, LLC. Toshiba's credit rating has been lowered well below investment grade by the other rating agencies. The escrow of all software and documentation and involvement of Fluor Corp (IDR; 'BBB+', Stable Outlook) as subcontracted construction manager only modestly, in Fitch's view, mitigate this risk.

Fixed-Price EPC Option: Fitch considers SCE&G's plan to exercise the fixed-price option in its EPC contract to be constructive as it would provide greater visibility on remaining nuclear construction costs. Even under the fixed-price contract, project costs would remain susceptible to further increases due to remaining disputed items, owner's costs of about $10 million per month related to any future delays and changes of nuclear regulatory law. SCE&G has until Nov. 1, 2016 to exercise the fixed price option.

Updated Regulatory Filing: In May 2016, SCE&G filed a petition with the PSC seeking approval of a revised construction schedule and cost estimate. The petition reflects an increase in SCE&G's total project costs of $852 million to $7.7 billion from $6.8 billion. The cost increases includes $505 million related to the fixed-price option.

Each petition to update the construction capital costs heightens the potential for the South Carolina Public Service Commission (PSC)-to impose penalties, notwithstanding the provisions of the law. While the base case scenario assumes the PSC will substantially approve the revised cost estimate, Fitch remains concerned that investors could be required to share the burden of these, or any future, cost increases in a manner that would materially weaken credit metrics. The allowed return on equity (ROE) on construction work in progress (CWIP) was lowered by 50 basis points to 10.5% (applied prospectively to the Base Load Review Act [BLRA] rate increases filed after Jan. 1, 2016) during the most recent PSC review.

Increasing Financial Leverage: Fitch expects credit metrics will remain weak for the ratings until the nuclear construction project is completed. Fitch forecasts SCG's adjusted debt-to-EBITDAR ratio will exceed 5.0x and funds from operations (FFO)-fixed charge coverage will dip around 3.0x-3.5x over the 2016-2018 period, but the credit metrics should quickly rebound to levels commensurate with the ratings once the new nuclear units are operational.

State Law Reduces Risk: The construction and financing risks for the nuclear construction program are mitigated by the BLRA. The BLRA process provided an upfront determination that the plant is used and useful, which is binding on all future proceedings. The BLRA also provides for annual tariff adjustments to recover cost of financing during the construction period and recover any additional costs if the changes are not the result of imprudence on SCE&G's part.

Constructive Regulatory Environment: Fitch views the regulatory environment in South Carolina as supportive of credit quality. SCE&G's authorized return on equity (ROE) modestly exceeds the national average at 10.25%. A fuel cost recovery clause for electricity and gas sales and weather-normalization mechanism for its gas activities enhance revenue and cash flow stability. SCE&G was able to earn about 9.75% ROE for latest 12 months (LTM) March 31, 2016, despite not having filed a general rate case (GRC) in many years.

KEY RATING DRIVERS FOR PSNC

Demand and Capex Growth: Net population immigration into the service area combined with a buoyant local economy and record low prices for natural gas prices are driving low-single-digit customer and weather-adjusted volume growth. Management expects volume growth of about 2% over the medium term. PSNC revised its capex plan upward to $689 million in 2016-2018, more than double the $318 million invested in the previous three years, to meet the increased demand and improve systemwide reliability.

Rate Case Filing: PSNC filed a GRC in March 2016 requesting a $41.6 million rate increase to reflect operating cost increases and capital investments to expand its transmission and distribution pipeline since its last GRC in 2008. PSNC is also requesting a rider for capital expenses related to transmission and distribution pipeline integrity management (PIM) programs. Fitch's base case scenario assumes a 10.2% ROE as well as approval of the PIM rider, in line with recent PSC decisions.

Strong Credit Metrics: The leverage and interest coverage measures of PSNC are among the strongest in its peer group of utility distribution companies, with adjusted debt/EBITDAR and FFO-adjusted leverage about 2.7x for LTM March 31, 2016. Fitch expects leverage metrics to weaken to 3.5x-4.0x in 2016-2018, as PSNC plans relatively meaningful debt issuances to fund its infrastructure expansion.

Limited Commodity and Volumetric Risks: PSNC operates with a purchased gas adjustment (PGA) clause and a customer utilization tracker (CUT) that together limit commodity price risk and volumetric risk exposure. The PGA provides full recovery of all prudently incurred gas costs from customers, while the CUT allows periodic rate adjustments if average consumption deviates from expected levels. The CUT applies to residential and commercial customers and is not limited to weather-related volumetric changes.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate.

Fitch's key assumptions within our rating case for SCE&G include:

--Approval by PSC of fixed-price option for V. C. Summer;

--No base rate case filings but incremental revenues from the BLRA and no material change in the ROE;

--Annual O&M growth rate of 2%;

--Capex of about $1.3 billion in 2016, $1.7 billion in 2017, then $1.3 billion in 2018, inclusive of new nuclear and nuclear fuel investments;

--Incremental debt issuance of $1 billion in 2016, $700 million in 2017 and $340 million in 2018;

--Equity infusions as needed to maintain about 50/50 debt/equity capital structure.

Fitch's key assumptions within our rating case for PSNC include:

--10.2% approved ROE and approval of PIM rider effective Nov. 1, 2016;

--Annual O&M growth rate of 2%;

--Capex of about $200 million in 2016, $280 million in 2017, $210 million in 2018;

--Incremental debt issuance of $100 million in 2016, $150 million in 2017 and $100 million in 2018;

--Equity infusions as needed to maintain about 40/60 debt/equity capital structure.

Fitch's key assumptions within our rating case for SCG include:

--The above assumptions for SCE&G and PSNC;

--No incremental parent-level debt issuance over the rating horizon;

--Equity issuance as needed to maintain close to 45% equity/capital ratio.

RATING SENSITIVITIES FOR SCG AND SCE&G

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

An upgrade is not likely during the current nuclear construction cycle given the associated risks of material costs and schedule overruns.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Lack of regulatory support for the revised construction schedule, including timely recovery of additional costs;

--Material deterioration of Toshiba's credit profile;

--Management's inability or reluctance to issue the expected level of equity and/or an increase in debt financing due to further price escalation;

--FFO adjusted leverage and/or debt/EBITDAR exceed 6.5x and 5.5x, respectively, for a sustained period.

RATING SENSITIVITIES FOR PSNC

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

An upgrade is not likely given the company's relatively small size and the financial pressure at parent SCG.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A downgrade of parent SCG below the current 'BBB-' represents the greatest likelihood of a PSNC downgrade.

--Adjusted debt/EBITDAR exceeds 4.5x on a sustained basis.

LIQUIDITY

SCG has adequate financial flexibility, in Fitch's opinion, with ample availability under existing credit facilities, stable FFO generation and ready access to the capital markets. SCG and each of its operating subsidiaries maintain separate five-year syndicated revolving credit agreements totalling $1.8 billion (maturing December 2020). SCE&G also has access to a $200 million three-year credit agreement that extends to December 2018. The credit agreements require each entity to maintain a debt ratio of no more than 70%. Each of the companies was well within this threshold at March 31, 2016.