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SCANA financial fate in balance as regulators weigh Dominion offer

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SCANA financial fate in balance as regulators weigh Dominion offer

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The saga surrounding the abandoned V.C. Summer nuclear reactors in Fairfield County, S.C., and the fate of project co-owner SCANA could soon come to an end. The Public Service Commission of South Carolina is expected to rule Dec. 14 on whether to approve Dominion Energy's offer to acquire SCANA, along with its pitches for rate relief.
Source: Associated Press

The financial fate of troubled South Carolina utility SCANA Corp. could soon be decided by state regulators.

More than 16 months after SCANA utility South Carolina Electric & Gas Co., or SCE&G, and government-owned utility Santee Cooper decided to pull the plug on the V.C. Summer nuclear plant expansion, South Carolina ratepayers and Wall Street investors will soon know how much of a rate cut and haircut to expect.

The Public Service Commission of South Carolina on Dec. 14 is expected to decide whether to approve Richmond, Va.-headquartered Dominion Energy Inc.'s longstanding offer to acquire SCANA, along with its pitches for rate relief, while also deciding whether to adopt a bigger rate cut preferred by the state's utility watchdog and "reparations" sought by environmental groups.

"Dominion has done a great job pulling a lot of levers behind the scenes to get support for this deal," CreditSights analyst Andrew DeVries said Dec. 11. "However, the final decision rests with the PSC and there appears to be some disagreement here over the size of the rate cut with [Dominion] holding firm around a 15% cut either through a bill credit or actual partial refund while the PSC staff is looking for 22%."

Dominion in a Dec. 7 proposed order filed with the PSC said the rate base of $713 million proposed by the South Carolina Office of Regulatory Staff, or ORS, "would defeat the merger."

While this could be detrimental to SCANA and its investors, Guggenheim Securities LLC analyst Shahriar Pourreza noted that the deal also is "very material for Dominion."

"This could be 3[%] to 4% accretive to Dominion under a hyper-conservative scenario," Pourreza said in a Dec. 5 interview.

The merger will "open up infrastructure opportunities for Dominion, including gas infrastructure from the distribution level to the Atlantic Coast Pipeline and some of the long-haul pipelines going through South Carolina," the Guggenheim analyst said.

It also offers important opportunities for the state itself.

"South Carolina has major generation needs because they essentially just took out a big baseload potential, which was the nuclear plant, and they've gone through a wave of coal retirements," Pourreza said. "So, while Dominion will benefit from incremental gas spending opportunities, I think the state is going to benefit as well because they need the generation. They need the source of natural gas."

Pourreza said the market reaction would be "very negative" if the PSC rejected Dominion's pitches for SCANA.

"I think the reaction to Dominion's stock price would be negative and that's partly because with the forward sales and the financing sort of complete, I think SCANA is a piece of Dominion's growth trajectory," Pourreza said.

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'The best alternative'

After months of remaining steadfast in its original pitch, Dominion Energy has twice upped its offer for SCANA amid contentious regulatory proceedings.

"Each of these plans involves Dominion contributing approximately $2 billion of its shareholders' resources to directly benefit SCE&G's customers through refunds and bill reductions over time, along with up to another $2.5 billion in balance sheet write-offs for the benefit of customers," Dominion and SCE&G wrote in their proposed order.

Dominion has told investors it is "confident in closing the merger" if regulators adopt any of its proposals.

"In the end of the day, the Dominion [offers] ... are by far and away, not even close, the best alternative for SCANA and the state of South Carolina. We are very confident the policymakers will come to that conclusion," Dominion Energy Chairman, President and CEO Thomas Farrell II said on a Nov. 1 earnings call.

Wall Street also views the terms of the proposals favorably.

"Dominion stuck by their word that they won't provide additional concessions that would impact the economics of this deal," Pourreza said.

Although it has reached settlement agreements with certain stakeholders, Dominion has not yet announced a stipulation with the ORS.

The regulatory staff recommends the PSC eliminate $445 million in revised rates collected by SCE&G for the unfinished nuclear reactors and supports an approximately $193.3 million net reduction in electric rates in 2019. The ORS also recommends the PSC disallow nuclear construction costs incurred by SCE&G after March 12, 2015, based on SCE&G's failure to disclose problems with the nuclear expansion outlined in an independent assessment.

The project audit played a key role in South Carolina lawmakers' decision in late June to approve a nearly 15% rate reduction for SCE&G in a move Dominion scolded as a "high-stakes game where [lawmakers] are gambling with the money of customers and taxpayers." Still, the company left its offer on the table.

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Wall Street optimistic

Even initially skeptical Wall Street analysts are now optimistic that the deal with close.

Several firms upgraded SCANA's stock and price targets following the announcement of a $2 billion settlement agreement to resolve a ratepayer lawsuit over cost recovery for the V.C. Summer project. The utility had implemented nine rate hikes and collected about $2 billion under a controversial state law tied to financing its 55% share of the project. Santee Cooper, known legally as South Carolina Public Service Authority, owns 45% of the scrapped reactors.

The SCANA settlement has the backing of South Carolina Attorney General Alan Wilson.

"That took a lot of the risks out of this whole process," Pourreza said. "I think our viewpoint is given this global settlement ... I think it is going to be extremely challenging for the commission to come out against this deal and the settlement that [the companies have] out there. That's partly because you've got a lot of stakeholders on board now."

South Carolina House Speaker Jay Lucas has voiced his support for the merger under conditions that include lowering nuclear cost recovery and protecting ratepayers from lawsuits or investigations into the more than $9 billion financial collapse of V.C. Summer.

"Our bearish investment thesis on [SCANA] since the announcement of the Dominion merger was predicated on our belief that as announced the terms of the deal were insufficient to get approval," The Williams Capital Group analyst Christopher Ellinghaus wrote in a research report. "However, it appears state political objectives have changed."

Regulators also have little in the way of alternatives to resolve the ongoing saga.

"If they come out, reject the merger and reject the rate settlement that's out there ... Dominion walks. They pull their ripcord," Pourreza said. "And SCANA is going to be left as an entity that has very little earnings growth, that will have a major hit to its financial metrics. It will likely have to raise equity in order to right-size its balance sheet, in order to maintain investment grade ratings. And it will likely have to raise equity at a very big premium, at a very big discount, because ... they suspended a major part of their dividend."

But not everyone on Wall Street believes SCANA and SCE&G's financial fate will be sealed by a PSC order.

"From a bondholder viewpoint, we are highly confident [SCE&G] stays investment grade as either a stand-alone company or via an acquisition by Dominion or another large utility holding company such as [NextEra Energy Inc.]," DeVries said.

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(SC PSC dockets 2017-370-E, 2017-305-E and 2017-207-E)