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Analyst skeptical Dominion/SCANA deal closes but companies willing to wait

A recent jump in SCANA Corp.'s stock price, along with efforts that signal cooperation with regulators and lawmakers probing the company's planned merger with Dominion Energy Inc., has not quelled skepticism on Wall Street.

SCANA's stock spiked more than 10% on Feb. 22 to close at $39.93 as the company reported its fourth-quarter 2017 earnings. The jolt appears to be tied to the company's announcement that it will pay a first-quarter dividend of 61.25 cents per share April 1.

The dividend announcement comes as the troubled South Carolina company reported a pretax impairment of $908 million tied to the scrapped V.C. Summer nuclear expansion and a loss of $30 million, or 21 cents per share, resulting from federal tax reform.

"While we did find some reasons for a slightly improved potential for earnings in SCANA's 2017 earnings results and the year-end balance sheet was modestly better than we expected, we still have significant doubts about the dividend subsequent to the first quarter," The Williams Capital Group analyst Christopher Ellinghaus wrote in a Feb. 23 report. "We do not expect yesterday's rationale for the rally in the stock to remain durable longer-term."

The analyst is also skeptical that SCANA's merger with Dominion will close. Richmond, Va.-headquartered Dominion announced Jan. 3 that it agreed to acquire SCANA in a $7.9 billion stock-for-stock deal pitched as a lifeline to the company and its customers following the financial collapse of the more than $9 billion V.C. Summer nuclear project.

SCANA subsidiary South Carolina Electric & Gas Co. and Dominion on Feb. 20 voluntarily withdrew their petition for the Public Service Commission of South Carolina to reconsider their request for an expedited hearing of the planned merger. The move comes as the South Carolina Senate voted 35-0 on Feb. 15 to approve amended legislation that could push to December regulatory action on the deal. S.B. 954 prevents the PSC from holding a hearing before Nov. 1, with an order issued no later than Dec. 21.

Dominion Energy Chairman, President and CEO Thomas Farrell II recently indicated to state lawmakers that pushing a ruling into late this year will not likely terminate the deal.

The Williams Capital Group, however, believes that the "first domino" threatening the agreement already fell when the South Carolina House of Representatives voted 119-1 on Jan. 31 to temporarily prevent SCE&G from collecting $37 million per month in revised rates tied to V.C. Summer. The firm contends the remainder of the dominoes could fall long before the PSC rules on the prudence of the nuclear abandonment or the merger itself.

"We expect the stock to continue to weaken as the Senate and Governor act on [H.B. 4375] and the aftershocks that follow," Ellinghaus wrote. "In our view, the handwriting is very much on the wall where the legislature is headed, with the full support and encouragement of the governor. The legislature will enact an 'effective' retroactive repeal of the Base Load Review Act (BLRA) and encourage the [PSC] to support its interim 'experimental' [new nuclear construction] rate reduction."

The Williams Capital Group's "domino effect" also includes the belief that Dominion will abandon the merger while SCANA and SCE&G will be forced to write-down about $4.7 billion of nuclear construction assets and take another hit to credit ratings. In addition, the firm believes that SCANA and SCE&G could file for Chapter 11 bankruptcy protection depending on the outcome of negotiations with creditors.

SCANA also could issue $1 billion to $3 billion of equity and accept a "white knight acquisition offer" that provides fresh capital.

The Williams Capital Group's scenario indicates the PSC will approve the South Carolina Office of Regulatory Staff's petition to reduce SCE&G rates by $445 million annually with SCANA and its subsidiary challenging legislation and rate orders "for an indeterminate but lengthy period with an uncertain outcome."