(Bloomberg) -- Before agreeing to buy South Carolina utility Scana Corp., perhaps Thomas Farrell, the head of Dominion Energy Inc., read the state's motto: While I breathe, I hope.
He now has to hope that South Carolina's lawmakers and regulators don't throw a wrench in his plans to take over the troubled utility for $7.9 billion.
Since pulling the plug on a massive nuclear project in South Carolina five months ago, Scana has found itself at the center of a federal investigation, a state probe and hearings on how the costs of the power plant ballooned to over $20 billion. The company's chief executive officer retired after lawmakers called for his resignation. Consumers face a multibillion-dollar bill for a project that may never deliver a single watt of electricity. And South Carolina's governor wants to sell Scana's partner in the project, state-run Santee Cooper.
Dominion is wading into a political quagmire. And it's already looking to appease state regulators by offering $1,000 payments to the average residential customer and promising 5 percent rate cuts. Even then, the company concedes that the deal is by no means a foregone conclusion.
Farrell told analysts on Wednesday that the terms of the merger allow the company to walk away if “adverse” conditions are imposed.
“Dominion will have to pull out all the stops to demonstrate that their offer is the best deal for customers,” said Katie Bays, an analyst at Height Securities LLC.
South Carolina House Speaker Jay Lucas was quick to weigh in, describing Dominion's bid for the owner of South Carolina Electric and Gas utility as an “interesting starting point” but saying more could be done to protect ratepayers. He said the House would continue to press for “safeguards so that SCE&G consumers no longer feel the burden of the VC Summer collapse.”
‘Much Reduced'
South Carolina's lawmakers need to preserve Scana's right to bill customers for some costs of the unfinished nuclear project, but that burden would be “much reduced” under Dominion's offer, Farrell told reporters. The acquisition would include a more than $1.7 billion write-off of existing capital and regulatory assets associated with the two unfinished reactors at the V.C. Summer plant, allowing the elimination of all related customer costs over 20 years.
South Carolina Senate Majority Leader Shane Massey said he isn't sold on the proposal. “I don't know how you can ask customers to pay for a nuclear plant that they will never get a benefit from,” he said in a phone interview Wednesday. “That's a tough sell for me.”
Farrell declined to say how much Dominion could be responsible for paying as a break-up fee should the merger fall through, noting only that it's a “traditional” amount representing a percentage of the total deal cost.
The state's Public Service Commission, which will rule on the proposed takeover, declined to comment.
Dominion slumped 3.9 percent, the steepest drop in 11 months, after announcing the deal on Wednesday. Scana, which before Wednesday had lost 47 percent of its value in the past year, rallied 23 percent.
“We expect Dominion shares to have a negative initial reaction due to regulatory concerns around the complex and contentious issues surrounding Scana's abandoned plant,'' wrote Paul Ridzon, a utility analyst for KeyBanc Capital Markets, in a note Wednesday. “Recent utility M&A have seen regulators demand more than the initial offer.''
Moody's Investors Service changed Dominion's rating outlook to negative from stable.
Probing Project
South Carolina Governor Henry McMaster, who's been sharply critical of both Scana and Santee Cooper over the canceled project, called the deal a step “in the right direction,” saying ratepayers will get back most of the money they paid for the reactors. But he also reiterated his wish to see Santee Cooper sold.
Scana could end up attracting rival bids, especially if a buyer is able to address McMaster's desire for Santee Cooper, Wells Fargo analyst Sarah Akers said in a note.
“The execution risk is still very high,” said Shahriar Pourreza, a New York-based analyst for Guggenheim Securities LLC. “You're basically coming into a jurisdiction and giving a very good reprieve to one set of ratepayers. I'd feel much more comfortable if someone comes in for Santee Cooper now.”
To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net, Mark Chediak in San Francisco at mchediak@bloomberg.net.
To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Stephen Cunningham
©2018 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
