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An Attractive Entry Point for This Narrow-Moat Utility

Travis Miller

Travis Miller: There's been a lot of attention on Southern and Scana, two southeast utilities building the first nuclear plant in several decades. These huge projects gained more attention in the last month when Westinghouse declared bankruptcy and parent Toshiba said that it was experiencing financial troubles. Westinghouse is the contractor on both projects, so, if they walk off the job or if they negotiate a different contract for the utilities, it could jeopardize the projects and lead to shareholder losses.

However, we think for Scana in particular, this is an unlikely scenario. We think the most likely scenario is that Westinghouse will stay on the job, continue to perform as expected and someone, either Westinghouse, Toshiba, or potentially Scana, will have to deal with cost overruns. That could total $1.5 billion on the project; Scana's share would be $800 million or thereabouts.

That impact is rather small for Scana, just about $3 per share. In most cases though, we think that Scana will be able to recover those costs either from Westinghouse, Toshiba, or rate-payers. We expect regulators to support the project even with the cost overruns and that Scana's earnings growth that we think will be about 5% will continue.

We are impressed that management has been able to de-risk the project as much and raise its payout ratio at the same time, which should spur dividend growth above the 5% earnings growth we expect. It still trades slightly above our fair value estimate, which is $60 per share, but we think that the price/earnings ratio is low enough, this could be an attractive entry point, as well as it trades at a discount to the median price/fair value estimate among its peers.