OREANDA-NEWS. Fitch Ratings views the amendment to the engineering, procurement and construction (EPC) agreement for the new V.C. Summer nuclear units and the changes in the structure of the construction team as constructive developments for South Carolina Electric and Gas Co. (SCE&G; IDR 'BBB', Outlook Stable) and its parent SCANA Corp. (SCG; IDR 'BBB-', Outlook Stable).

The amendment resolves all outstanding disputes and covers all design changes that may be required to comply with current nuclear regulatory law. The amendment also results in a slight slippage of the project cost and completion dates, as well as increases delay-related liquidated damages. Under the amendment, SCE&G's share of the project cost increases by $286 million to $7.1 billion while the expected substantial completion date of each unit is delayed by two months to August 2019 for unit 2 and August 2020 for unit 3. The liquidated damages increase to $255 million per unit (for SCE&G) linked to the timely completion of the nuclear plants and qualification for federal production tax credits, which should motivate contractors to achieve the current deadline.

The amendment will become effective upon the acquisition by Westinghouse Electric Company, LLC of the stock of construction consortium partner CB&I Stone & Webster, Inc. (Stone & Webster) expected later this year. Fitch believes this acquisition, and potential engagement of Fluor Corporation as a subcontractor, materially mitigates concerns about coordination within the building consortium as well as the financial resilience of Stone & Webster's parent.

In addition, the amendment includes an option to convert the EPC agreement to a fixed-price contract, which would essentially cap the project costs at $7.6 billion or $774 million above the currently approved cost estimate. In Fitch's opinion, this option reduces the financial risks related to the nuclear project, since each cost increase petition heightens the potential for Public Service Commission of South Carolina (PSC)-imposed penalties, notwithstanding the provisions of the Base Load Review Act (BLRA).

Fitch expects SCE&G to petition the PSC to approve the higher project costs after evaluating the fixed-price contract option. While our base case scenario assumes substantial approval of the $286 million cost increase, 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 SCE&G's and SCG's credit metrics.

The PSC approved SCE&G's petition of a roughly two-year delay of the in-service dates of V.C. Summer units 2 and 3, and capital cost increases to about $6.8 billion in September 2015, but the PSC also lowered the allowed return on equity (ROE) on the construction work in progress (CWIP) to 10.5% (applied prospectively to BLRA rate increases filed after Jan. 1, 2016). The allowed ROE for the new nuclear program still compares favorably with the 10.25% allowed ROE on the non-new nuclear rate base and the financial impact of the ROE reduction is marginal over Fitch's 2015-2017 rating horizon.