A price cut of $3.7 billion. A discount of almost 35 percent.
Bargains this big don’t come around often, especially in the reliably stable business of selling electricity.
But that's the opportunity available to potential buyers of South Carolina's largest company, SCANA Corp., which has been repeatedly hammered on Wall Street since walking away from two nuclear reactors north of Columbia. On paper, the company's value has crashed from the soaring highs it reached last year, plunging to a sharp discount that has showed little indication of rebounding anytime soon.
It's a stark reality fueled by a minefield of political, legal and regulatory troubles for the company. And it's happening in a sector that's slowly consolidating as major utilities snap up smaller power providers, which now number in the dozens after decades of buyouts.
It also highlights the potential for the V.C. Summer Nuclear Station project to reshape the business of delivering electricity to more than 700,000 South Carolina customers, a prospect that's taken shape in the two months since the reactors in Fairfield County were abandoned after repeated delays and cost overruns.
Still, if SCANA looks ripe for a takeover on paper, analysts say they expect the Cayce-based owner of South Carolina Electric & Gas to stand on its own — at least for now.
That's because they expect would-be buyers will be spooked by the legal and regulatory uncertainties swirling around the company, just like the investors who have led a sustained selloff this year. SCANA shares have lost more than a third of their value since peaking last Christmas while the rest of the industry has trotted upward.
"No one is going to walk into this quagmire," said Travis Miller, director of utilities research at Morningstar Research Services in Chicago. But, he added, "Once it's it's resolved, SCANA goes back to being a high-quality, mid-size utility. Certainly, then, it could be an acquisition target."
The kind of volatility buffeting SCANA's stock doesn’t happen much in the typically slow-moving world of regulated utilities, where business is almost always predictable. Companies are protected by legal monopolies and profits guaranteed by state regulators, and they sell a product customers need even in bad economic times.
For SCANA, however, uncertainty is a newfound reality. It faces a raft of lawsuits, a pair of criminal investigations and a regulatory process that could force it to eat the cost of trying to expand V.C. Summer. Not far from its headquarters in the suburbs of Columbia, the Legislature appears eager to foist change on the state's energy sector.
The uncertainly ramped up last month when the state Public Service Commission, which oversees SCE&G, said it would hold hearings on a request to stop the power company from charging customers for the failed nuclear project. The reactors cost some $9 billion before SCANA and its partner, state-owned Santee Cooper, walked away from the deal.
The same day, the state Attorney General's office opened the door for legislators to repeal the 2007 law that enabled the reactors in the first place, effectively saying they could limit how much SCE&G charges customers for the project. About 18 percent of ratepayers’ electric bills go toward the project — a total of about $37 million a month.
The mere suggestion of that possibility triggered the second-biggest selloff in SCANA's history on the stock market. As the company now faces a pair of state and federal investigations and a General Assembly hungry for change, it's raised big-picture questions about what the company is really worth.
"There is little visibility into the true earnings power of the business," Morgan Stanley analyst Stephen Byrd wrote in a research note last week, adding that regulators seem more likely to pursue a punishing path. "We see a clearer path to the bear case than the bull case."
Byrd thinks SCANA is likely to be stuck with part of the bill for the unfinished nuclear reactors, a possibility that he thinks will ding its stock a few more dollars a share. In the company's worst-case scenario, he says, close to another fifth of its value could be wiped out.
Even before the bloodletting on Wall Street, SCANA's stock price made it relatively affordable compared to utilities that have sold in recent years.
At its current price of about $49 a share, SCANA is trading at less than half the going rate for utility acquisitions last year. The steep fall this year also makes room for the handsome premiums big utilities have paid to nab their targets.
They've been willing to pay up because they want to spread into new states to spread out the risk of bad weather or unfavorable regulation. Thanks to improved energy efficiency, Americans' electricity use isn't growing, so there aren't many other options to expand revenue, according to attorneys William Lamb and Michael Didriksen, who have advised on utility buyouts.
That's led to a steady stream of buyout deals in the industry — about four a year, according to Lamb and Didriksen's analysis.
South Carolina doesn't have to look far for evidence of the sector's consolidation: Two of its biggest players are right next door.
To the north, Charlotte-based Duke Energy is one of the largest power companies on the planet. Duke has lines that run from Florida to Indiana, including the Pee Dee and the Upstate. It bought Progress Energy in 2012, a blockbuster deal that made it South Carolina's largest utility. To the west is Atlanta-based Southern, with subsidiaries that power most of Alabama and Georgia, plus parts of Florida and Mississippi.
Both of those companies are reportedly negotiating yet another deal with implications for South Carolina's energy future: They're two of the four companies Gov. Henry McMaster is said to be talking to as he seeks to unload Santee Cooper to the private sector. Virginia-based Dominion Energy is also said to be in play, along with a fourth that hasn't been identified. It's not yet clear whether a deal will take shape.
Still, utility buyers don't always come from next door. Take the Florida power company bought by a Canadian holding company, for example, or the Washington, D.C., utility acquired by a Chicago energy giant — deals that closed last year.
Fending off buyers
Industry analysts say it’s unlikely that a buyer would step forward until the storm clouds parked above SCANA's headquarters begin to clear, but the company has announced plans that could help prop up its share price over the next few years.
Days after it scuttled its reactors, the company announced plans to buy back stock valued at more than $1 billion over the next four years, a move that could boost its shares' value and ward off prospective buyers.
Whether those plans will go forward isn't yet clear — finance chief Jimmy Addison said in August the company would hold off "until we get some clarity on the whole situation" — but SCANA says the share buyback is intended to balance how much of its financing comes from selling stock compared to taking on debt.
The company declined to answer questions about whether it would take measures to fend off prospective buyers, saying it doesn't talk about the possibility of mergers and acquisitions.
"Our focus right now is continuing to do what is in the best interest of our customers by following through on our prudent plans to end construction at V.C. Summer," spokeswoman Rhonda O'Banion said in an email.
For the time being, analysts say they won't need the help anyway. Their contention is that while SCANA is trading at a steep discount, its stock could still be overvalued if regulators and lawmakers decide to pull the rug out from under the company and force it to bear the cost of the unfinished reactors.
Regulators and the Legislature aren't likely to decide SCANA's fate for months, bringing a long spell of uncertainty to an industry that rarely faces it. Electric utilities occupy one of the sleepiest corners of Wall Street, far from flashier sectors like technology or finance, and they have a reputation as a safe haven for investors in bad times.
But investors see little refuge in SCANA now. Instead, they're puzzling through what the company is really worth — and whether its big discount on Wall Street is big enough.
"The uncertainty would also extend to anybody who'd be interested," says Paul Patterson, a New York-based utility analyst. "What would they be buying?"
The answer could be murky for some time.