We are maintaining a Neutral rating on SCANA Corporation (SCG - Free Report) , based on its growth momentum and various upcoming projects, partially offset by risks related to the heavy debt level.
Columbia, South Carolina-based SCANA’s operations include generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina. 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.
In the third quarter, the company presented better-than-expected results with earnings per share of 81 cents, beating the Zacks Consensus Estimate of 77 cents. The quarterly results were 2.5% higher than the year-ago profit level, driven by improved electric margins on base rate hikes and lower operations and maintenance expenses, partially offset by higher interest expense and share dilution.
Going forward, management expects to attain earnings growth based on industrial expansion and continued customer growth. As the company's capital expenditure escalates with the new nuclear projects and the investments are recognized into the rate base, the regulated earnings power is expected to improve.
SCANA is also on track to build two nuclear plants that are expected to become operational in 2016 and 2019. The new units are a strategic fit in the rapidly growing state of South Carolina and for the overall growth of the company.
However, we remain concerned about SCANA’s sensitivity to changes in coal, gas, oil and other commodity prices, including their availability. Commodity price volatility always poses a risk to utility earnings potential. Rising commodity energy costs can affect the elasticity of profit margins and retail customer demand.
The company also remains vulnerable to unplanned construction delays or unexpected cost inflation. Construction costs and delays could adversely impact the timing of rate base growth, earnings, cash flow and quality of the balance sheet.
Moreover, SCANA also faces regulatory risks due to weakness in possible rates from regular filings needed in order to procure timely recovery of investments. Economic risk arises from the company’s exposure to demand in the Southeast, which is not moderated by rate design.
The company also faces tough competition from Duke Energy Corporation (DUK - Free Report) and Progress Energy Inc. . Hence, we foresee limited upside potential for the stock and expect it to perform on par with the broader industry.