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CreditSights upgrades SCE&G bonds to 'conviction buy'

CreditSights on July 3 upgraded South Carolina Electric & Gas Co. bonds to "conviction buy" following the enactment of a new South Carolina law that orders a nearly 15% rate reduction for the utility.

The CreditSights analysts said that even under a "worst-case scenario" that assumes the SCANA Corp. subsidiary's rates are permanently cut, it appears the utility would have manageable credit metrics of 66% debt-to-capitalization and 22% cash flow-to-debt.

"The rate cut bill, H.B. 4375, was better than expected for investors as the bill was missing earlier language which called for a $2 billion credit to customers for rates already collected and is a temporary experimental rate cut," analysts wrote. "Our worst-case scenario assumes the [Public Service Commission of South Carolina] would make it a long-term rate cut."

Lawmakers in the South Carolina General Assembly on June 27 overwhelmingly approved a nearly 15% rate reduction for SCE&G to gut all but about 3.2% of the rates the utility charges electric customers for the abandoned V.C. Summer nuclear expansion. SCE&G is challenging the rate reduction in federal court and slashed its second-quarter cash dividend by 80% on June 28 to help offset the financial impact.

The "experimental rate," enacted July 2 by the PSC, is retroactive to April 1 and will be in effect until the PSC rules in December on Dominion Energy Inc.'s proposed acquisition of SCANA and related rate relief. The decision essentially eliminates six revised rate orders approved by the PSC. These orders approved approximately $367.4 million in V.C. Summer cost recovery dating back to 2011.

CreditSights analysts said they also are "comforted" by reports that Dominion Chairman, President and CEO Thomas Farrell II told South Carolina Gov. Henry McMaster that his company would not walk away from the deal. The analysts said they believe that "most of the negative headlines are now behind SCANA."

SCANA stock closed up more than 4% at $40.36 on July 3.