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Morningstar | Critical Regulatory Hearings Will Determine Scana's Fate

Scana's decision to abandon its new nuclear plant project in mid-2017 created a political, legal, and regulatory headache. But we continue to gain confidence that Dominion's acquisition offer in January 2018 will be the route to closure for everyone involved. Regulators ultimately will decide by year-end how this drama plays out.Dominion is helping Scana escape the backlash from abandoning the project when the budget climbed from $6.3 billion in 2008 to nearly $10 billion in 2017 for Scana's 55% stake. Dominion has offered to punt on as much as 70% of Scana's $5 billion investment. Dominion's all-stock offer won overwhelming support from shareholders, who would become owners of what we consider the highest-quality U.S. utility with considerable value upside if regulators approve the Dominion deal.The worst-case outcome contemplates the Dominion deal failing and regulators forcing Scana to write-off more than the $1.4 billion Scana already has agreed to forego. We expect regulators will stop short of forcing Scana into bankruptcy, but an unfavorable ruling could impair substantial equity value and prolong the token dividend. If regulators reject the Dominion deal, we expect courts will ultimately decide the constitutionality of the 2007 South Carolina Base Load Review Act, which allows Scana to collect nuclear project financing and capital costs. Despite near-unanimous political support in 2007, state legislators repealed the law and rolled back much of Scana's project-related rates in June 2018.We consider Scana's core business healthy and capable of growing 4% annually. Scana's 10.25% base return on equity in South Carolina is above many peers' allowed returns, and it has constructive rate mechanisms that allow it to earn near its allowed returns. Customer growth minimizes Scana's need to request large rate increases to support its $800 million of annual core investment through 2020.Scana's no-moat energy marketing business in Georgia holds the second-largest market share in the state, but we think high competition and low margins will be a minor drag on consolidated returns.