Morningstar | Start of Regulatory Hearings Gives Us Confidence in Scana-Dominion Merger Approval
We are reaffirming our $56 fair value estimate for Scana and our $84 fair value estimate for Dominion Energy after the first week of South Carolina regulatory hearings that will determine the fate of Dominion's proposed acquisition. We are reaffirming our moat and moat trend ratings for both companies. We consider Scana a favorable risk-reward opportunity, with the stock trading at a 17% discount to the implied acquisition value and 27% discount to fair value as of Nov. 7.Testimony during the first week leads us to reaffirm our 75% probability that regulators will approve Dominion's acquisition offer. The acquisition terms, which incorporate Scana writing off about half of its $5 billion investment, have no material impact on our Dominion fair value and adds $1 per share to our Scana fair value. Regulators must issue a decision by Dec. 21.
Dominion's new merger plan would raise rates slightly more than the rate proposal from the Office of Regulatory Staff, which is the primary consumer advocate. However, ORS acknowledged that Dominion's credit support, access to funding, synergies, and service quality would provide customer value. We think regulators will find these benefits offset slightly higher rates.
We also think regulators would rather approve the acquisition than rule on prudent costs, which likely would initiate a lengthy legal challenge based on the state's 2007 Base Load Review Act. Dominion and the ORS both agree to recover prudent costs only up to March 2015, when other witnesses allege Scana began concealing cost overruns and schedule delays.
We also gained more confidence in our $32 per share worst-case Scana fair value estimate. Bankruptcy appears highly unlikely based on the proposed nondeal rate plans. We expect Scana will argue in the coming days that the Dominion deal is the best way to avoid bankruptcy, but we expect regulators will set rates to avoid bankruptcy even if they reject the acquisition.
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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