Scana Presents Compelling Risk/Reward Trade-Off
Market skepticism about the deal closing with Dominion is leaving plenty of potential upside.
We are reaffirming our $56 fair value estimate for Scana (SCG) after written testimony from consumer advocates suggested they won't oppose Dominion's proposed acquisition bid as long as South Carolina regulators cut rates that Scana customers are paying for its abandoned nuclear project. We also are reaffirming our narrow moat and stable moat trend ratings for Scana.
We continue to think Scana represents an attractive risk-reward opportunity. Dominion's (D) proposed 0.669 all-stock exchange ratio implied 32% upside to Scana's market price on Sept. 25 before the testimony was released. That premium dropped after Scana's stock price rallied on Sept. 26, but we still estimate the market assumes only a 25% chance that the deal will close. Our fair value estimate factors in a 75% likelihood that the all-stock Dominion deal will close and our $84 per share Dominion fair value estimate.
The testimony shows a gap remains between what Dominion has called its best and only rate plan offer and other proposed rate plans. We think the Office of Regulatory Staff, or ORS, proposal is the most important to watch.
Dominion's plan effectively front-loads the customer benefits through nuclear rate refunds and rate freezes. ORS' plan includes a sharp initial rate cut--from $445 million annualized to $86.2 million--but no nuclear rate refunds and the option for Scana to request non-nuclear base rate increases. ORS also proposes Dominion pass along $70 million of merger savings and federal tax cut adjustments, but we don't think this is a deal breaker.
If regulators reject the Dominion deal, there are several proposals presented in the testimony. Our $68 per share bull case valuation assumes regulators approve near-full nuclear project rate recovery per the state's 2007 Baseload Review Act, as Scana presents in one scenario. Our $32 per share bear case scenario follows other intervenors' proposals that Scana deserves no nuclear project rate recovery.
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Travis Miller does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.