Morningstar | Market Still Nervous About Scana's Risk, but Reward Remains Greater
We are reaffirming our $56 fair value estimate for Scana after a state judge indicated he might rule South Carolina's 2007 Base Load Review Act, or BLRA, unconstitutional. Scana's stock closed down 11% on Oct. 22 after rallying 19% during the last month. We are reaffirming our narrow moat and stable moat trend ratings for Scana.We still consider Scana a favorable risk-reward opportunity. The market continues to value Scana near our $32 stand-alone worst-case scenario and assign a low probability to Dominion's all-stock bid, worth an equivalent $49 per share for Scana as of Oct. 22. The judge's request to lawyers for proposed rulings on the BLRA came late last week, and Scana stock traded in line with peers until late in the trading day.
The key indicator for investors to watch is South Carolina regulators' ruling on the Dominion deal and Scana's request to recover its $5 billion investment in the abandoned V.C. Summer nuclear project. Regulatory hearings are set to begin Nov. 1, with a ruling by Dec. 21. No legal ruling will take effect until after regulators issue their decision. If regulators reject the Dominion deal, we expect all regulatory or legal rulings will be appealed to the state Supreme Court.
Our Scana fair value estimate incorporates a 75% likelihood that regulators will approve Dominion's all-stock bid. Our fair value estimate for Dominion is $84 per share. We estimate the market is pricing in less than a 50% chance that the merger will close. Dominion has said it will withdraw its bid if the courts rule the BLRA unconstitutional; however, we don't think Dominion will withdraw until regulators have made their ruling.
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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