SCANA: Formula for Superior Returns

11/27/2013 7:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Capital spending, plus regulatory support, equals rising earnings, dividends, and share prices: That's the formula for superior total returns in utility stocks, says Roger Conrad, editor of Utility Forecaster.

And it's what SCANA Corp. (SCG) is locked-in to deliver, at least to the end of the decade. The company's biggest project is constructing two 1,117-mega-watt nuclear reactors using Toshiba-Westinghouse's AP 1000 model.

Constructed on the Summer site in South Carolina, the plant will boost nuclear to 31% of SCANA's total generation, up from 19% now. And it will restore reserve margins that are expected to otherwise go negative by late decade.

Delays in securing federal permits and equipment early on in the process have pushed back startup of the first reactor to late 2017, and the second to early 2018—from an initial estimate of March 2017.

That's still well within the 18-month window set in the law that guarantees recovery of costs as incurred.

The company has also avoided cost overruns so far and the project still enjoys regulatory support, demonstrated by the rate increase granted in mid-September.

Both are huge differences from the last construction cycle, when SCANA and other builders had to wait until startup to request rate hikes to cover costs.

When the company first announced new nukes in 2007, it reduced dividend growth by half to conserve capital. Last year, it began to ramp it up again, a sure sign of growing confidence in Summer cost recovery.

Accelerating customer growth, solid results at the Georgia retail marketing unit (5% of earnings), and capital expenditure (CAPEX) recovery spurred solid third quarter results, prompting management to reaffirm projected annual growth of 3 to 6% for the next five years.

And with just $36 million in debt maturities through October 2018, faster dividend growth appears assured.

Ironically, investors' fear of high capital spending levels and nuclear construction in particular, has pushed SCANA shares to a discount to other utilities. That's an opportunity that won't last forever. The stock is a new addition to our conservative income portfolio.

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