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19 April, 2018

Katie Bays in Bloomberg Markets: Fate of $8 Billion Utility Takeover Hinges on South Carolina Governor

Dominion Energy Inc.’s $7.9 billion takeover of a troubled utility in South Carolina may be over before it’s even begun.

Dominion hasn’t even gained regulatory approval to buy Scana Corp., and state legislators are already threatening to throw a wrench in its plans. The state senate passed a bill late Wednesday that would cut the money Scana can recoup for a massive nuclear project that failed. If signed into law, it could be a “material” change that offers Dominion a reason to walk away with no strings attached. Ultimately, the fate of this takeover rests in the hands of South Carolina’s governor.

“The deal as it stands will terminate” if Governor Henry McMaster signs a rate cut into law, said Katie Bays, an analyst for Height Securities LLC. “If the deal does advance, it will be on new terms.”

The unraveling deal goes to show how the failed V.C. Summer nuclear project continues to haunt Scana after costs ballooned to more than $20 billion. While the company’s shares have slumped more than 40 percent since pulling the plug in July, dealing with the aftermath has made the company a tough acquisition target even with an eager buyer.

To be sure, Dominion could come back with different terms instead of calling off the deal altogether. And another buyer may step forward, even with the potential legislative overhang.

Dominion said by email that the adoption of the legislation passed Wednesday “would be a material event that could eliminate” the benefits of the Scana acquisition. That echoes comments from January, when the company said any change in the law that has a significant affect on the economics of the deal would create a “path for Dominion Energy to walk away.”

It’s not certain that the legislation will become law. The state senate voted Wednesday to temporarily cut Scana’s rates by 13 percent, so customers won’t get stuck paying for the Summer project. McMaster has said he would veto a bill with a cut of less than 18 percent. The house approved in January an 18 percent reduction. Meanwhile, state regulators have scheduled a November 1 hearing on the proposed purchase.

“The governor has repeatedly said that he isn’t going to sign anything short of a complete 18 percent rate cut,” Brian Symmes, his press secretary, said by email Thursday. “That’s what the people of South Carolina deserve and that’s what they should get.”

‘High Hurdles’

Enactment faces “high hurdles,” Guggenheim Securities analysts led by Shahriar Pourreza wrote in a Thursday research note. “We could end up in a situation where the bill is ultimately voted down.”

And if the bill is enacted, Scana “would consider its options at that time, including challenging the law in court,” spokesman Eric Boomhower said by email.

Dominion’s takeover of Scana faced an uphill battle to begin with. Since canceling the Summer project, Scana has found itself at the center of a federal investigation, a state probe and hearings over the costs.

The company’s chief executive officer retired after lawmakers called for his resignation and consumers are facing a multi-billion-dollar bill for a project that may never deliver a single watt of electricity. The 18 percent proposed rate cut would protect customers from covering those expenses, while the 13 percent proposal would leave them responsible for some of the costs.

“There’s a strong desire by legislators in both the house and senate to encourage Dominion and Scana to negotiate a new offer that may or may not have a different share price but would offer more value for ratepayers,” Bays said.

Source: Bloomberg