We maintained our recommendation on energy holding company, SCANA Corp. (SCG - Free Report) at Neutral on Nov 4, 2013. The company posted strong third-quarter results driven by improved electric margins from customer growth and rate increases. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Columbia, S.C.-based SCANA’s operations include generation, transmission, distribution, and sale of electricity to retail and wholesale customers within the state. The company also purchases, sells and transports natural gas to retail customers; provides energy-related risk management services; and acquires, owns and provides financing for nuclear fuel, fossil fuel and emission allowances.
SCANA’s nuclear expansion project is a catalyst for future earnings growth. Given SCANA’s financing plan, construction budget and schedule, we expect it to fund its nuclear expansion project. Management expects 2013 earnings in the range of $3.25–$3.45 per share, with an internal target of $3.35 per share. It expects to achieve the target based on industrial expansion and continued customer growth. As the company's capex grows with new nuclear projects and investments are recognized in the rate base, the regulated earnings power is expected to improve.
SCANA is well positioned in a positive regulatory environment, has a low risk business with outstanding customer growth and operational efficiency. These in turn are favorable for stable cash flow generation and growth. Another positive for shareholders is SCANA’s utility business mix. The majority of the company’s total earnings come from the regulated electricity and natural gas utilities business.
We are concerned about SCANA’s heavy debt level and the overall business risk associated with the nuclear generation construction project. The last nuclear generation construction cycle severely affected the stocks of numerous electric utilities. This fact generates a legitimate level of investor anxiety.
SCANA’s capital program primarily has two nuclear plants, which will cost $6 billion through 2018. Risks allied with financing the projects will be aggravated in 2013 as the company’s capital spending levels rise. Execution risks latent in such large projects and regulatory uncertainties also remain. Further, the delay in commissioning its first reactor by a year, to 2017, is likely to increase its capital expenses.
Other Stocks to Consider
While we prefer to remain on the sidelines for SCANA, there are other stocks in the sector that appear rewarding. Among these, SM Energy Company (SM - Free Report) , Exterran Holdings, Inc. and TransAtlantic Petroleum Ltd. carry a Zacks Rank #1 (Strong Buy) and are expected to outperform the broader market over the next few months.