SCANA Offers A Short-Term Reward If You Are Brave And Lucky
Summary
- SCANA's ultimate fate is still unclear 2 months after Dominion Energy's merger bid.
- Excluding the impairment charge for the abandoned nuclear construction project, the company is financially healthy.
- With its excellent dividend and possibility of its share rising in value, it offers short-term rewards for investors in 2018.
Two months after Dominion Energy (D) made an all-stock offer for SCANA (NYSE:SCG), the picture for SCANA and South Carolina’s state-owned Santee Cooper is no clearer, but there is at least a short-term opportunity for SCANA investors willing to take some risk and trust in luck.
South Carolina’s legislature looks no closer to deciding whether to approve or disapprove the SCANA merger with Dominion Energy. More likely, there will be no major political decisions until after the November governor’s election. Prior to that the rhetoric will fly but with a danger of alienating voters – either voters in favor of the current offer and those who believe it is inadequate – the safest route for politicians in the state is no action.
SCANA’s Board of Directors declared a regular quarterly dividend of 61 ¼ cents per share on the Company’s common stock for the quarter ending March 31, 2018. The dividend is payable April 1, 2018 to shareholders of record at the close of business on March 12, 2018.
The payment of dividends will be evaluated quarterly by SCANA’s Board of Directors and the dividend for the first quarter of 2018 is consistent with the quarterly dividend rate for 2017 and permitted by the terms of the merger agreement with Dominion Energy.
Assuming that no definitive action will happen before the state elections in November, SCANA will most likely continue to pay its current dividend through the remainder of 2018.
At the closing price of $39.65 as of March 2, that translates into a 6.18% yield, which is not a bad payment for investors while they wait to see what transpires in the state legislature.
Meanwhile, Dominion Energy’s offer of 0.669 share for each 1.0 share of SCANA remains on the table. That represents a 22% premium to Dominion Energy’s March 2 closing stock price of $72.50.
Of course, there is always the risk that the stock will lose more value than the offsetting dividend, but as the price hovers around its book value (estimated at $36.74 per share), that risk diminishes. And, of course, there is an upside possibility that the stock will show some rebound.
Since January 1, the SCANA’s stock price has dropped as low as $35.60 from its closing high of $47.65 on January 3, the day that Dominion announced its merger deal.
Source: Seeking Alpha
Two factors will influence the stock price: the market’s overall view of utilities (related to interest rates) and changes in SCANA’s own situation.
Market Risk
Utility stocks have been punished as the stock market expects higher interest rates. Utilities are usually seen as in competition with bonds, so that as bond yields rise, they become a more attractive alternative to utility dividends. In addition, utilities are heavy users of capital, meaning that increasing costs of capital weighs on the companies’ operations.
At the same time, while there is general consensus that the Federal Reserve will make as many as 4 interest rate hikes this year, it could be argued that these rate hikes are mostly already baked into bond rates.
The 10-year Treasury is currently at 2.87%. While it could move up to 3%, many traders are doubtful if it will move much beyond this key level.
Source: FRED, as of March 4, 2018
If rates do not move up much from this level, then utility stock prices might see a nice bounce up.
SCANA Risk
The second risk is that the situation at SCANA deteriorates and drives the stock price further downward.
Financial Risk
In 2017, SCANA did not have a bad year financially with the exception of the impairment charge for the nuclear construction abandonment.
For the year ending December 31, 2017, SCANA reported a loss of $119 million, or 83 cents per share, compared to earnings of $595 million, or $4.16 per share, for the same period of 2016. The decrease in earnings is primarily attributable to an impairment loss of $1.118 billion ($690 million, net of taxes), or $4.83 per share, associated with the VC Summer nuclear construction project.
Source: SCANA 4th Quarter 2017 Earnings Presentation
Earnings were also lower due to milder weather in 2017 and a loss arising from the re-measurement of deferred income taxes which was recorded upon the enactment of the Tax Cuts and Jobs Act of 2017 (tax reform).
Operating expenses did grow slightly faster than revenue. Total operating revenue rose from $4,227 million in 2016 to $4,407 million in 2017, an increase of 4.3%. Total operating expenses rose at a slightly faster pace from $3,074 million to $3,213 million (excluding the impairment charge), an increase of 4.5%.
Operating income before impairment increased from $1,153 million in 2016 to $1,194 million in 2017, a rise of 3.5%.
The company will easily be able to maintain its dividend for 2018.
Source: SCANA 4th Quarter 2017 Earnings Presentation
Legal Risks
Beyond the state legislature, SCANA is facing a number of lawsuits and investigations.
On March 2, State Circuit Judge John Hayes III refused to dismiss five lawsuits filed against SCANA and state-owned Santee Cooper, so those lawsuits may now proceed.
Judge Hayes wrote: “Plaintiff’s Complaint properly states causes of action in the original jurisdiction of the Circuit Court, which the PSC [S.C. Public Service Commission] is incapable of hearing,” the court wrote. “The relief sought by Plaintiff is not available through the PSC, or any other administrative channel. And Plaintiff’s claims are separate and distinct from those matters currently pending before the PSC,” as reported by WCBD-TV.
In addition to these private lawsuits, in its latest 10-k filing, the company reported that “The Company has also been served with subpoenas issued by the United States Attorney’s Office for the District of South Carolina and the staff of the SEC's Division of Enforcement seeking documents relating to the Nuclear Project. In addition, the state's Office of Attorney General, the Speaker of the House of Representatives, and the Chair and Vice-Chair of the South Carolina House Utility Ratepayer Protection Committee have requested that SLED conduct a criminal investigation into the handling of the Nuclear Project by SCANA and SCE&G. The Company and Consolidated SCE&G intend to fully cooperate with any such investigations.”
It is unlikely any of these lawsuits and investigations will be resolved before the end of 2018, so the threat of these cases having a significant impact on the company before 2019 is minimal.
Conclusion
It is impossible to know at this point whether holding SCANA stock will be valuable in the long term. If Dominion Energy’s bid is successful, SCANA shareholders might see a nice reward.
On the other hand, SCANA continues to threaten bankruptcy if the state legislature requires the company to give ratepayers a full refund and refuses to allow SCANA to continue to collect part of the costs of the abandoned V.C. Summer nuclear construction project.
For 2018, though, investors willing to bet that these issues will not be resolved before the November elections may see a nice short-term return on their investment through a combination of an attractive dividend at these levels and the possibility of some short-term upward bounces in the stock price.
You may not want to become too attached to the company, but if you are willing to take some moderate risk, it could be an attractive play in 2018 at these levels.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (22)
2014. I just wanted income and Morningstar and all the others rated SCG a buy and good for growth in a conservative utility company. Now I am stuck with losses
although for the time being at least I have income.
This is a disgusting saga and extremely frustrating. I’m
holding the stock, collecting dividends. I also own D.
Is there an option strategy that makes SCANA a possible investment strategy other than ‘trust luck’? If bankruptcy means the potential for near complete loss, the upside needs to be big, isn’t there a hedge that guarantees less loss and moderately lower returns as you bet on the upside? If the cost of the hedge is to great in relation to the perceived upside, what does that mean?
