SCANA's outlook: Stability and recovery, or sentence to 'Desolation Row?'

SCANA Corp.'s decision to abandon V.C. Summer Units 2 and 3, two 1,117-MW nuclear facilities, and the resultant regulatory fallout caused the company's stock to decline by about 46% in 2017. SCANA initially believed that the provisions of South Carolina's Baseload Review Act, or BLRA, which governs various aspects of the nuclear units' construction and ratemaking, including abandonment, would provide a large degree of financial protection for the company, but this has not been, and likely will not be, the case.

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The South Carolina Office of Regulatory Staff and Governor Henry McMaster have called for SCANA utility subsidiary South Carolina Electric & Gas, or SCE&G, to cease collecting $445 million that is currently in rates, and legislation has been introduced to that effect. Passage of this legislation would severely impact SCANA's financial health and possibly could engender a bankruptcy filing.

Dominion Energy Inc. has proposed to acquire SCANA. Among ratepayer benefits the companies proposed in their Jan. 19 filing with the Public Service Commission of South Carolina are a $1.3 billion cash payment within 90 days of completion of the merger to all customers, equivalent to $1,000 for the average residential electric customer, and an immediate reduction in customer bills of at least 5%, which would include the effects of the newly enacted tax reform legislation.

As part of the merger approval filing, Dominion/SCE&G requested a PSC finding that approximately $3.3 billion of invested capital for V.C. Summer units 2 and 3 is prudent and would be included in a regulatory asset. The regulatory asset would be amortized over 20 years without offset or disallowance, except for deferred taxes, and recovered through retail rates, with the rate of return on the unamortized balance reflecting an ROE of 10.25%.

Given the political opposition to SCE&G's current V.C. Summer-related rate recovery and to the rate aspects of Dominion's acquisition offer, it appears likely that Dominion will be required to offer more rate concessions to obtain the required approval for the transaction. While Dominion has indicated that significant changes to the merger application would result in the company's termination of the transaction, we anticipate that the company would be open to modest additional ratepayer concessions. However, we do not believe that the merger would be consummated until late 2018.

The V.C. Summer abandonment has cast considerable uncertainty over SCANA's finances, and clarity on earnings growth and other issues likely will not emerge until the regulatory and legal challenges and the outcome of Dominion's acquisition proposal have been resolved. While SCANA's operating earnings have increased steadily over the last few years, the consensus estimate is for a significant decline in 2018.

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