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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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A Rare High-Profile Utility Takeover

Powerlines

Dominion Energy, Virginia’s largest utility, announced a takeover of holding company SCANA. SCANA's principal operating subsidiary, South Carolina Electric & Gas, is the main privately owned electric and gas company in South Carolina, and it also owns as a gas utility in North Carolina, and a gas retailer in Georgia.

SCANA has been in the news lately and not in a good way. This past July it and partner Santee Cooper cancelled construction of the two nuclear reactors planned for the V.C. Summer power station in Jenkinsville, SC.

Large, privately owned electric utilities seldom become available for purchase. Like a water damaged painting by an old Italian master, prospective buyers know their purchase comes warts and all so to speak.

This proposed transaction is rather complicated and is designed to appease a number of diverse audiences. For Dominion Resources this is an all equity transaction. Dominion will however incur the additional debt formerly held by SCANA. The total transaction value is about $14.6 billion. Dominion's Board of Director's has agreed to exchange each SCANA share for two-thirds of a Dominion Resources common share or approximately $55.32.

Related: Is An Oil Price Correction Overdue?

Before the deal's announcement a share of SCANA common stock sold at around $37.50. The deal price is below SCANA’s highs but close to where the stock price was right before the nuclear project cratered. So, SCANA's shareholders appear to do ok in this proposed transaction. And corporate bond holders who invested in SCANA's ill-fated project will still receive payment of principal and interest. Hence, no expected complaints from them either.

But what about utility customers in South Carolina? They've been for paying for this project even though it is not likely to ever produce electricity. The new owners have promised electricity customers a $1.3 billion cash refund (within ninety days of transaction closing). Consumers have paid close to $1.6 billion so far in nuclear construction and related costs over the previous nine years (by our calculations). A refund along the lines promised seems just.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

Dominion's management also promised to reduce electricity prices for South Carolina customers by an additional 5 percent price decrease or $575 million. This amount is what customers save by not paying for an equity investment return on the cancelled nuclear project plus the not inconsiderable income tax savings generated by new tax law.

All in all, this seems like a deal any regulated utility would strike with its state PUC-after a financially staggering nuclear power plant cancellation. Share the tax savings with consumers and forego the return on investment related to the cancelled nuclear project. A merger regardless of the generosity of terms is not required for any of this. But for SCANA's shareholders Dominion's takeover bid beats most of the alternatives.

Electricity customers in South Carolina remain obligated for debts incurred by SCANA for its ill-fated nuclear project. The passage of the 2006 Base Load Review Act (BLRA) by the South Carolina General Assembly is a political embarrassment. This law permits cost recovery for new power plants while they are being built, not like in the old days when state regulators would only permit customers to be charged for new investments after they were competed and had entered commercial service.

Right now the real wild card in the Dominion-SCANA transaction is the South Carolina legislature. Despite the 2006 BLRA, many legislators are reported to be upset with the idea of any recovery for cancelled nuclear plant investment. They may address this legislation when the legislature reconvenes on January 9. Dominion's Chairman, Tom Farrrell, stated plainly on a conference call that any meaningful alteration of the BLA would be a deal breaker.

The investment bankers, some politicians and other merger advocates will attempt to assuage public concern with "small" numbers related to canceling nuclear plant costs: "only" $20 per month for 20 years.

We can't know precisely how many customers SCANA will have over time or whether large industrial load will migrate to neighboring wholesalers. But for current customers, we calculate that these cancelled nuclear plant debt costs could equate to $170 million per year for a total of $3.4 billion over 20 years. Despite the potential change in ownership this is an additional expense South Carolina's electricity customers will bear for the former management's nuclear misadventures.

Well, maybe there is some good news. Related: The World’s Most Expensive Oil

Instead of a $25 billion nuclear facility, Dominion has agreed to, at its own shareholders expense, finance a 540 MW gas fired power plant dedicated entirely to serving SCANA's customers. Estimated cost, $180 million. If this occurred on a football field instead of a corporate boardroom, we would expect a referee's whistle and penalties for taunting or unsportsmanlike conduct.

In all fairness to SCANA's previous management, load growth forecasts for the region circa 2005, when the nuclear go ahead decision was contemplated, appeared far more robust than those for 2018 and beyond.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

With the benefit of hindsight, it appears SCANA never really have needed an expensive nuclear facility to meet its customer's future power needs in the first place. Thus from a policy and investment perspective the cancellation decision does not appear to be a bad one.

In the end, SCANA's shareholders should make out reasonably well assuming this transaction receives its various regulatory, FTC and shareholder approvals. SCANA's former bondholders will now look for their ultimate credit support to Dominion Resources. They incur no capital loss or impairments.

Customers in the Carolinas get something of a break. They may only have to pay for part of a nuclear construction debacle. And despite what they pay, this cancelled-plant investment, like a dead winter battery, will never produce electricity.

By Leonard Hyman and William Tilles for Oilprice.com

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