Morningstar | Florence Has Minimal Financial Impact on Scana; Market Losing Confidence in Dominion Deal
We are reaffirming our $56 fair value estimate for Scana after Tropical Storm Florence hit the Carolinas on Sept. 13-15, including the service territory for South Carolina Electric & Gas. We also are reaffirming our narrow moat and stable moat trend ratings.We expect Florence will have a minor financial impact on Scana. Outages in SCE&G's service territory peaked at 7,593 on Sept. 15, representing only 1% of its total customer base. For all utilities in South Carolina, peak outages hit just 4% of total statewide customers, according to the U.S. Energy Information Administration. Virtually all customers had service restored by Sept. 17. We expect regulators will allow Scana to recover any large storm expenses, resulting in little impact on shareholders.
We find no justification for Scana's 14% stock price drop since early August. The market also has turned bearish on Dominion's proposed acquisition. Scana now trades at a 25% discount to its deal-implied price as of Sept. 17. This is the widest spread since February and up from 13% in early August. We estimate the market is assuming just a 5% probability that regulators will approve the deal. Scana would realize 33% upside if the deal closes.
We assume a 75% probability that South Carolina regulators approve the deal. This adds $1 per share to our stand-alone base-case fair value estimate based on our $84 fair value estimate for Dominion. If regulators reject the deal, our Scana fair value estimate would range from $32 per share in our bear case to $68 per share in our bull case. Scana's value will depend primarily on how much money regulators allow it to charge customers for its abandoned new nuclear project.
If regulators maintain the recently enacted 15% temporary rate cut, we would probably cut our fair value estimate to $40 per share. Our bull case assumes regulators approve full nuclear project rate recovery per the state's 2007 Baseload Review Act.
SCANA is a holding company. Through its regulated subsidiaries, the company is engaged in the generation, transmission, distribution and sale of electricity in South Carolina and in the purchase, transmission and sale of natural gas in North Carolina and South Carolina. Through its non-regulated subsidiary, the company markets natural gas to retail customers in Georgia and to wholesale customers in the southeast. In addition, the company's subsidiary, SCANA Services, Inc. provides primarily administrative and management services to the company's other subsidiaries.
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