Scalper1 News
Summary SCANA Corp operates in electric and gas utilities in North Carolina, South Carolina and Georgia. SCANA Corp is a dividend contender having raised dividends for 15 consecutive years and has a Chowder Rule of 5.8. SCANA Corp’s new facility construction in S.Carolina is seeing higher costs and delays resulting in a credit rating downgrade from both Moody’s and Fitch. SCANA Corp (NYSE: SCG ) is an electric and gas utility company operating in North Carolina, South Carolina and Georgia. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The major subsidiaries include: South Carolina Electric & Gas – provides electricity and natural gas throughout South Carolina. A regulated public utility and principal subsidiary of SCANA Corporation, SCE&G generates, transmits, distributes and sells electricity to over half a million customers in 24 counties and provides natural gas to customers in 36 counties. PSNC Energy – provides natural gas services in North Carolina. A regulated public utility, PSNC Energy purchases, sells and transports natural gas to more than 508,000 residential, commercial and industrial customers. SCANA Energy – markets natural gas services in Georgia. A leading natural gas marketer, SCANA Energy serves about 460,000 residential, commercial and industrial customers statewide. Other subsidiaries include: SCANA Energy Marketing Inc (markets natural gas and provides energy-related services), SCANA Services Inc (provides administration, management, and other services to SCANA subsidiaries), South Carolina Generating Company Inc (supplies electricity for SCE&G), and South Carolina Fuel Company Inc (fuel supplier for SCE&G). (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) Corporate Profile (from Yahoo Finance) SCANA Corporation, through its subsidiaries, engages in the generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The company also purchases, sells, and transports natural gas; offers energy-related services; and owns and operates a fiber optic telecommunications network, ethernet network, and data center facilities in South Carolina. In addition, it offers tower site construction, management, and rental services, as well as sells towers in South Carolina, North Carolina, and Tennessee. As of December 31, 2014, the company supplied electricity to approximately 688,000 customers; and provided natural gas to approximately 859,000 residential, commercial, and industrial customers in North Carolina and South Carolina, as well as markets natural gas to approximately 459,000 customers in Georgia. It serves municipalities, electric cooperatives, other investor-owned utilities, registered marketers, and federal and state electric agencies, as well as chemical, educational service, paper product, food product, lumber and wood product, health service, textile manufacturing, rubber and miscellaneous plastic product, and fabricated metal product industries. The company was founded in 1924 and is based in Cayce, South Carolina. A Closer Look SCANA Corp operates both in electric and gas utility sectors. This has been identified in the industry as the path to growth going forward. Other competitors who operated solely in the electric-only business, have started purchasing assets in the gas-utility business in order to diversify and achieve growth. We have seen this lately with the moves from Southern Company (NYSE: SO ) acquiring AGL Resources Inc (NYSE: GAS ); and Duke Energy (NYSE: DUK ) acquiring Piedmont Natural Gas (NYSE: PNY ). The moves are motivated by the fact that electric-only utilities are seeing declining revenues over the years due to a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. In addition, power generating companies are moving to secure natural gas infrastructure as the industry moves to accommodate the US government mandate targeting power plants to cut carbon emissions by 32% (by 2030) on the 2005 levels. Most of the CEOs in the utility industry have accepted the terms and do not intend to fight against the mandate. SCANA has an advantage here as the company is ahead of competition in securing the electric and natural gas infrastructure. In addition, a major part of the company’s power generation comes from zero-emitting sources: hydro and nuclear. The company also has an advantage by operating in North and South Carolina, which is seeing population growth as residents move to these states where cost of living is lower. (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) SCANA intends to grow earnings in a target range of 3%-6% (95% of which comes from regulated operations) and analysts expect a growth rate of 4.45% over the next five-year period. Credit Rating Downgrades Two rating agencies, Moody’s and Fitch, downgraded SCANA Corp earlier this year. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook ( downgraded in Sep 2015 ). Fitch gives the company a “BBB-” with a “Stable” outlook ( downgraded in May 2015 ). The rating downgrade was mainly due to the delay and cost of the construction of new nuclear reactors in Jenkinsville, South Carolina. The costs are expected to rise to $11B from the initial $9.8B price tag and completion of Unit 2 reactor will be pushed out three years to 2019. SCANA has announced that the delay and related cost increases are due to design and fabrication issues associated with the production of submodules used. Moody’s issued the following statement with the ratings downgrade: “The negative outlooks reflect the projected deterioration in the financial profile across SCANA and its subsidiaries over the next few years” said Ryan Wobbrock, Assistant Vice President. “Although the supportive regulatory environment in South Carolina helps assure the recovery of new nuclear build expenses at SCE&G, we see leverage ratios rising across the family” added Wobbrock. The negative outlooks for SCANA and SCE&G incorporate the 2 September South Carolina Public Service Commission (SCPSC) vote of approval for a revised cost and construction schedule on the Summer new nuclear project. Moody’s views the SCPSC support as a material credit positive because it allows SCE&G to recover increased costs over a protracted time period. Through LTM 2Q15, SCANA and SCE&G produced cash flow to debt metrics of around 14% and 18%, respectively. However, over the next twelve to eighteen months, we expect each company to produce cash flow to debt below 15%, as capex for the nuclear spend reaches its highest levels (i.e., as of the 2Q15 Base Load Review Act (BLRA) filing, new nuclear gross construction capex is projected to be around $776 million for the 2015 period, $1,077 million for 2016, and $1,003 million for 2017), accompanied by an increasing debt load. We see the annual BLRA revenue increases, which recover Construction Work in Progress costs, as insufficient to improve the current negative trend of financial performance through 2019. Dividend Stock Analysis: Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen steadiness over the years. However, revenue has continued to face some pressure over the years although the earnings have seen steady rise since 2011. The debt load is stable over the course of time although high at $6.3B (vs. equity of $5.4B) resulting in a debt/equity of 1.16. The company’s balance sheets show a current ratio of 0.90. Credit ratings: S&P gives it a “BBB+” credit with a “Stable” outlook. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook (downgraded in Sep 2015). Fitch gives the company a “BBB-” with a “Stable” outlook (downgraded in May 2015). SCANA’s yield to maturity is as shown below: (click to enlarge) (Source: Morningstar) Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. SCANA is a Dividend Contender having raised dividends consecutively for 15 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 3.3%, 2.6%, 2.2%, and 3.8% respectively. Coupled with a current dividend yield of 3.61%, SCANA has a Chowder Rule number of 5.8. The current payout ratio is 41%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have steadily increased over the years. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value has trended upwards at a good pace over the years. Valuation To determine the valuation, I use the Graham Number, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for SCANA with a book value per share of $37.92 and TTM EPS of $5.27 is $67.05. SCANA’s average yield over the past five years was 4.39% and over the past 10 years was 4.44%. Based on the current annual payout of $2.18, that gives us a fair value of $49.66 and $49.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 1.42 and average 10-year P/S is 1.21. Revenue estimates for next year stand at $34.41 per share, giving a fair value of $48.86 and $41.63 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 4.45% per year over the next five years. If we take a more conservative number at 4%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $92.86. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of SCANA. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that SCANA is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be 3.88%, confirming that the valuation is high. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industry-wide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. Coupled with the new regulations from the US government to reduce carbon emissions, electric utilities have started focusing a shift away from dirty fuels such as coal. SCANA has operations concentrating on the nuclear field and already owns a lot of the natural gas infrastructure. However, the capex costs from the construction of new nuclear facilities in South Carolina are ballooning and has resulted in ratings downgrade from both Moody’s and Fitch; and chances of an upgrade anytime soon are low. Earnings are expected to grow at 4.45% over the next five years and dividend growth will lag a bit, although the company has some leeway to grow those dividends making the investment lucrative. The company appears slightly overvalued based on the valuation metrics used above. If we give equal weight to all metrics used above, we get a fair value of $57.95. An added risk for investors is the rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer in a rising rate environment and investors should stay weary. Full Disclosure: None. My full list of holdings is available here . Scalper1 News
Scalper1 News