Morningstar | Scana and Dominion: Making Final Arguments for Their Deal
We are reaffirming our $56 fair value estimate for Scana and our $84 fair value estimate for Dominion Energy after the companies and other parties filed their proposed orders with South Carolina regulators on Dec. 10. We are reaffirming our narrow moat and stable moat trend ratings for Scana and our wide moat and stable moat trend ratings for Dominion.Although all parties support Dominion's all-stock acquisition of Scana, regulators must resolve several new nuclear project ratemaking issues that are tied to Dominion's offer. We expect regulators might issue a ruling as soon as their business meeting on Dec. 14. State legislation requires a decision by Dec. 21.
Our fair value estimates continue to include a 75% probability that regulators approve the acquisition and Dominion's proposed ratemaking terms. Deal approval would lead us to raise our Scana fair value estimate by $1 per share based on the 0.669 share exchange ratio. The market remains apprehensive, pricing in an 8% discount to the implied acquisition value and what we estimate is a 73% probability of approval as of Dec. 11.
Dominion's third and latest offer has won support from key stakeholders, giving us confidence that regulators are more likely than not to approve the deal without material changes to the deal's economics.
All parties support the acquisition but differ on two ratemaking matters that Dominion has said could sink the transaction. First, Dominion and Scana seek a 9.9% allowed return on equity on the nuclear project investment while others have proposed a 9.1% allowed ROE. Second, Dominion differs with other parties on tax treatment for the nuclear project losses. We expect these issues will dominate the discussion on Dec. 14 and justify Scana's uncertainty discount.
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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