Morningstar | Tricks or Treats for Dominion and Scana Shareholders? Tense Regulatory Hearings Kickoff
We are reaffirming our $56 fair value estimate for Scana and our $84 per share fair value estimate for Dominion Energy after the first day of regulatory hearings that will determine the fate of Dominion's proposed acquisition and Scana's new nuclear project customer rates. State legislation requires the South Carolina Public Service Commission to issue its decision by Dec. 21. We are reaffirming our narrow moat and stable moat trend ratings for Scana and wide moat and stable moat trend for Dominion.We continue to assume a 75% probability that regulators approve the acquisition, including about $2 billion of rate concessions. The acquisition has no material impact on our Dominion fair value estimate and adds $1 per share to our Scana fair value.
Dominion made several moves this week that appear to have won more public support for its acquisition but won't have a material impact on our fair value estimate if regulators approve them. These include an alternative rate plan that removes Dominion's initial proposed $1.3 billion customer refund but lowers rates by about twice as much as its initial proposal. It also includes an offer to assume management of Scana's partner in the new nuclear project, Santee Cooper.
We still consider Scana a favorable risk-reward opportunity even after the stock rebounded 10% on Oct. 30 following Dominion's revised offer and support from Speaker of the South Carolina House of Representatives Jay Lucas, who supported temporary rate cuts this summer. The merger terms imply a $47 per share market value for Scana and 18% upside based on market close prices Nov. 1. We estimate the market is pricing in about a 40% chance that the merger will close.
If regulators reject the acquisition, we believe ultimately the state Supreme Court will have to rule on the constitutionality of the state's Baseload Review Act, which could delay resolution well into next year.
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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