SCANA Initiated at Neutral

We are initiating coverage on SCANA Corp. (SCG - Analyst Report) with a Neutral recommendation and a target price of $36. Our rating stems from the early-stage nature of the company’s nuclear generation project and potential dilution risk coming from its plan to move equity from debt.

However, potential for positive earnings momentum with modest growth is expected to continue through the utility’s regulated and historically stable electric and gas operations. The company’s nuclear expansion project is a potential catalyst for long-term earnings growth.

In the second quarter, SCANA reported earnings of 45 cents per share, beating the Zacks Consensus Estimate of 43 cents. The favorable comparison was driven by lower operating costs and customer growth.

During the first half of 2009, SCANA’s two principal subsidiaries, South Carolina Electric & Gas Co. (SCE&G) and Public Service Co. of North Carolina, saw natural gas customer growth of 1.3% and 1.6%, respectively. SCE&G’s electric customer growth was 1.2%.

However, we remain concerned about the effect of unpredictable weather, nuclear power generation risks, a debt-heavy balance sheet and negative credit ratings on the company’s future growth prospects.