Fitch Rates South Carolina Public Service Authority (Santee Cooper) 2006 Series M 'AA'.

NEW YORK -- Fitch assigns an 'AA' to the South Carolina Public Service Authority's (Santee Cooper) $9.9 million revenue obligation 2006 series M. The Rating Outlook is Stable. Fitch also affirms the 'AA' rating on Santee Cooper's $227 million of revenue bonds and $3 billion of revenue obligations. Debt service on revenue obligations (including the 2006 series M bonds) is payable from a pledge of revenues that is subordinate to debt service obligations on the revenue bonds. The 2006 bond transaction is scheduled to close the week of November 13, 2006. Bond proceeds will fund Santee Cooper's ongoing capital expenditure program.

With over $1.3 billion in annual revenues and nearly $5 billion in assets, Santee Cooper is one of the largest and highest-rated municipal electric utilities in the nation.

Primary credit strengths include:

--Reliable and low cost power supply, primarily fueled by coal.

--Strong financial and liquidity profile.

--Effective cost recovery mechanisms in its rate structure.

--Sound management policies.

Primary credit concerns include:

--Santee Cooper's continued need for additional base load units.

--Increasing debt amortizing beyond Santee Cooper contract expiration date with its largest customer, Central Electric Cooperative, Inc.

--Some lessening of favorable rate comparisons with neighboring utilities.

With regard to power supply, Santee Cooper is in the process of a substantial base load expansion plan to meet its customers' growth. Over the next six years, Santee Cooper will add three coal fired units with a capacity of approximately 1,700 mw. These new units are expected to generate one-third of Santee Cooper's energy in 2012. The cost and operating performance of these yet-to-be completed plants will factor into Santee Cooper's credit profile. These units are currently on budget and on schedule with the first new unit (Cross #3) expected to reach commercial operation in January 2007. Management estimates the capital cost of these units will cause Santee Cooper's debt to increase to an estimated $3.7 billion in 2012 (up from $2.8 billion in 2003 when the initial funding for these projects began); but that equity to capitalization ratios are projected to improve to 33% versus 30% currently as a result of maintaining solid operating margins.

For longer term power supply needs, Santee Cooper continues to explore and progress in the development of two new nuclear units with SCANA Corp. The extent (if any) of Santee Cooper's involvement in those projects will be determined in the next one-to-two years.

Given Santee Cooper's existing and projected financial profile, Fitch believes the additional debt burden is manageable over the intermediate term. Fitch recognizes however that Santee Cooper is increasingly amortizing its new debt beyond the expiration of Central contract (2023). While not contemplated, if Santee Cooper and Central do not renew their arrangement and Santee Cooper does not effectively manage its power supply, the loss of Central as a wholesale customer could create pressure on Santee Cooper's remaining retail and industrial customer rates.

Santee Cooper sells electricity to wholesale and retail customers through South Carolina. In 2005, wholesale sales accounted for 53% of electric revenues with large industrial and direct retail sales to residential and commercial customers accounting for 27% and 20% of electric revenues, respectively. Santee Cooper serves directly or indirectly over one-third of the state's population.

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