SCANA Corporation (NYSE: SCG) is a utility providing electricity and natural gas to customers in North Carolina, South Carolina, and Georgia. SCG's primary subsidiary is SCE&G, a public utility operating company. SCG also has 8 other wholly owned subsidiaries. SCE&G represents $2.8 billion of SCG's total $4.6 billion in 2010. Furthermore, SCE&G provided $604 million of the total $768 million in operating income in 2010. SCE&G is currently developing a nuclear plant in Fairfield County, SC. SCE&G is a vertically integrated regulated utility. GENCO is a subsidiary that generates power for exclusive sale to SCE&G. South Carolina Fuel Company (Fuelco) provides financing for SCE&G nuclear and fossil fuel plants.
SCG's other major regulated subsidiary is PSNC Energy, a regulated utility, providing gas service to a variety of customers in North Carolina. SCG also provides gas pipeline transportation services through Carolina Gas Transmission Corp. (CGT), which is federally regulated and transport gas through Georgia and South Carolina.
SCANA Energy Marketing, Inc. (SEMI) markets and retails natural gas throughout the Southeastern United States. SCANA Energy, a division of SEMI, provides natural gas to approximately 460,000 customers in Georgia's deregulated natural gas markets.
SCG also owns a 500-mile fiber optic telecommunications network and Ethernet network, and data center facilities in South Carolina that operates through SCANA Communications, Inc. SCG also has two other minor subsidiaries SCANA Services Inc. and ServiceCare, Inc.
SCE&G, PSNC Energy, CGT, Fuelco, and GENCO are all regulated businesses and comprise the bulk of SCG's revenues and assets. The following table shows the revenue across all of SCG's reporting segments.
|Segment||2010 Revenue ($ millions)||2009 Revenue ($ millions)|
|Retail gas marketing||553||522|
Source: SCG 2010 10-K
SCG has a market capitalization of $5.1 billion and an enterprise value of $10.4 billion, suggesting significant leverage. SCG has a strong track record of paying dividends.
SCG's estimated forward dividend yield is 5.0% based upon a closing price of $39.39 and the author's projected annual dividend of $1.96. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.
|Type||Ex-Dividend Date||Quarterly Dividend ($ per share)||Change on prior year|
Created from data from Yahoo!Finance
Dividend Discount Model Suggests an Undervaluation
The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. SCG has a beta of .52 and with the risk free rate at a very low 2.2% this gives the discount rate to be a 5.6%. As noted above, the forward dividend is approximately $1.96. Applying a long term growth rate of 1.5% gives an estimated price of $47.39 for SCG. This is approximately a 20% premium to the current price of $39.39. However, as with any dividend discount model, the result is highly sensitive to growth rate and equity hurdle rate assumptions.
|Sensitivity||Equity Hurdle Rate|
Source: Author calculations
The sensitivities suggest that a slightly lower growth rate would result in a fair valuation. A long term growth rate of .7% would provide a fair valuation. SCG represents an interesting utility opportunity with a relatively high portion of its business driven by regulated activities.
Sources: Information from Yahoo!Finance, SCG SEC Filings, and SCG's website
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.