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SCANA's Business Model Promises Growth, High Debt a Drag

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On Jun 2, 2016, we issued an updated research report on SCANA Corporation . The company is engaged in the generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina.

SCANA’s nuclear expansion project is a catalyst to future earnings growth. Given SCANA’s financing plan, construction budget and schedule, we believe that it will be able to fund its nuclear expansion project. Management projects 2016 earnings in the range of $3.90–$4.10 per share and expects to achieve the target on industrial expansion and continued customer growth. As the company's capex escalates with new nuclear projects and its investments are recognized in the rate base, its regulated earnings power is expected to improve.

The company’s principal subsidiary, SCE&G, also received the consent of the Nuclear Regulatory Commission to build nuclear reactors. Notably, this is the second approval by the agency to build additional units in the U.S. within a period of two months, after a gap of 30 years. The new units are a strategic fit in the rapidly growing state of South Carolina and a driver of earnings growth at SCE&G. The construction costs for the two units are estimated at about $3.5–$4 billion over a period of five years. The company’s significant planned investments will aid in the growth of the regulated base rate.

SCANA is well positioned in a positive regulatory environment. The company 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 SCANA’s shareholders is its utility business mix. The majority of the company’s total earnings comes from its regulated electricity and natural gas utilities business.

However, SCANA’s high debt level and the overall business risk associated with the nuclear generation construction project is a major concern. The last nuclear generation construction cycle severely affected the stocks of numerous electric utilities. This fact results in a legitimate level of investor anxiety.

Moreover, SCANA’s capital program primarily includes two nuclear plants, which will cost it $6 billion through 2018. Risks allied with financing the projects will be aggravated during the peak construction period of 2016–2017 as the company’s capital spending levels will rise.  Execution risks latent in such large projects and regulatory uncertainties are other concerns. Further, the delay in commissioning SCANA’s first reactor by a year, to 2017, is likely to increase its capital expenses.

Key Picks in the Sector

SCANA carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are CVR Refining, LP , TC PipeLines, LP (TCP - Free Report) and Braskem S.A. (BAK - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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