SCANA's (SCG) Expansion Plans Impress: Should You Buy?

On Sep 15, 2016, we issued an updated research report on South Carolina-based SCANA Corporation (NYSE:SCG) .

SCANA’s nuclear expansion project is a catalyst for future earnings growth. Given SCANA’s financing plan, construction budget and schedule, we believe that the company is well positioned to fund its nuclear expansion project. Management expects its 2016 earnings in the range of $3.90–$4.10 per share. It expects to achieve the target through industrial expansion and continued customer growth. Although the company's capex is likely to escalate with the new nuclear projects and the investments would be recognized in the rate base, its regulated earnings power is expected to improve.

SCANA has a low risk business with outstanding customer growth and operational efficiency, which should prove to be beneficial in a positive regulatory environment. These factors are also favorable for stable cash flow generation and growth. Another positive for shareholders is SCANA’s utility business mix. The majority of the company’s total earnings come from the regulated electricity and natural gas utilities business.

The company’s service areas enjoy legislative and regulatory support. SCANA is a stable, relatively strong and regulated integrated electric utility and its operations are backed by favorable regional demographics and electric utility rate. Considerable upside potential exists for the company as the service industry bounces back from the recession faster than others.

However, we are concerned about SCANA’s heavy debt level and the overall business risk associated with the nuclear generation construction project. The last nuclear generation construction cycle severely affected the stocks of numerous electric utilities. This is naturally a cause for investor anxiety.

Moreover, the company’s energy businesses are sensitive 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 energy costs can affect the elasticity of profit margins and retail customer demand.

SCANA also faces regulatory risks due to weakness in possible rates from regular filings needed in order to procure timely recovery of investment. Economic risks arise from the company’s exposure to demand in the Southeast, which is not moderated by rate design.

Zacks Rank and Stocks to Consider

Scana currently carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Matador Resources Company (NYSE:MTDR) , NGL Energy Partners LP (NYSE:NGL) and Enviva Partners L.P. (NYSE:EVA) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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