Just three days into 2018, Dominion Energy (NYSE:D) announced its intention to acquire regional energy company SCANA Corp. (NYSE:SCG) in an all-stock merger. Well, it was more of a bailout, but one that's much needed for utility customers, regulators, and shareholders to avoid a worse fate.
As an example of the unusualness and complexity of the situation, shares of SCANA have fallen since the merger was announced, but it's essentially the only available option. The good news is that Dominion Energy offered a relatively sweet deal that should ultimately allow the merger to gain regulatory approval. The bad news is that the larger energy company is taking on a significant amount of risk.
Considering that the merger is expected to close before the end of 2018, here's what investors need to know about the Dominion Energy and SCANA Corp. merger.
In July 2017 SCANA notified the Nuclear Regulatory Commission that it had stopped construction on two new nuclear reactors at the VC Summer Power Station in South Carolina. The decision followed years of cost overruns and delays -- a common occurrence for new nuclear projects -- and resulted in even more scrutiny from state and federal regulators.
That's because laws in the state allow utilities to pass on rate increases to customers for yet-to-be-finished and even abandoned generation projects, which meant customers were grossly overcharged for years on their utility bills for what ultimately became a corporation's failed investment. Because the project was so expensive customers would be paying for the abandoned project for years or decades to come. Making matters worse, SCANA's partner on the project was a state-owned utility. Thus, not many stakeholders were happy with how things devolved to that point.
Shareholders couldn't have been very happy, either. The regional energy company's share price cratered from over $71 to under $40 in the few months following the news. Luckily, investors -- and everyone else involved -- is on the cusp of a bailout.
Not wanting a potential opportunity to go to waste, Dominion Energy swooped in to acquire SCANA. The deep pocketed integrated energy company was one of the few that could even make an offer. That's especially true given what it figures to cost. Dominion Energy proposed the following:
- A total acquisition price of $14.6 billion, which includes $7.9 billion in a stock-for-stock exchange and $6.7 billion in debt.
- Cash payments of $1,000 to each customer of SCANA's electric utility within 90 days of closing. The olive branch will help to make up for capital costs from the abandoned nuclear project that were passed on to customers and aim to make regulators more easily approve the merger.
- The write-off of $1.7 billion of nuclear capital costs that will never be collected from utility customers.
- Investments to complete a $180 million natural gas-fired power plant to help offset lost generation from the abandoned nuclear project, once again at no cost to utility customers.
Despite swallowing relatively large costs to rectify SCANA's past decisions, Dominion Energy thinks the merger could increase annual EPS growth to 8% or higher through 2020.
How soon could the merger close?
Both SCANA and Dominion Energy expect the merger to close by the end of 2018. The regional utility's shareholders need to approve the deal (which shouldn't be a problem, all things considered), as does the U.S. Federal Trade Commission (FTC), the U.S. Department of Justice, the Nuclear Regulatory Commission, and the Federal Energy Regulatory Commission.
Dominion Energy's offer is also contingent on the state of South Carolina "approving the nuclear solution" for the abandoned VC Summer units, which may be the only real sense of uncertainty for shareholders to consider.
That said, the merger is almost guaranteed to go through in some form. Why? SCANA is virtually out of options. Since failure would create a messy affair for innocent customers, and likely require state and federal regulators to step in to somehow avert disaster, it'd be much simpler to approve a merger with a deep-pocketed peer that can (hopefully) eventually right the ship.
Should you buy SCANA Corp. stock?
If you buy SCANA Corp. stock today and assume the merger is approved, then you're really buying shares of Dominion Energy, because the merger is taking place in a stock-for-stock transaction. There's a compelling argument that investors are staring down an intriguing value opportunity.
That's because all stock merger will provide 0.669 shares of Dominion Energy for each share of SCANA Corp. In other words, if you multiply the price per share of Dominion Energy by that multiple, and the result is higher than the price of a single share of SCANA Corp., then you'd receive a premium if the merger closed tomorrow.
Right now one share of SCANA Corp. trades for about $39, while 0.669 shares of Dominion Energy has a value of over $48 -- a premium of 23%. Of course, the premium would only be captured if shares of Dominion Energy don't depreciate in value between now and the closing of the merger and that negotiations with the state of South Carolina don't result in material changes to the acquisition price.
Long story short, there are a lot of moving parts involved in the proposed acquisition of SCANA. However, considering that the merger with Dominion Energy is the best case scenario for all parties involved, this could be something for opportunistic investors to monitor throughout 2018. Just know there's a high degree of risk involved, especially relative to the stable trading ranges utilities stocks are used to.