Mizuho: Scana Corp. Has Strong Legal Case Against South Carolina Rate Cut

Energy company SCANA Corporation SCG announced a deal in January to be acquired by Dominion Energy Inc D, structured in the form of an all-stock transaction.

It is against this backdrop an analyst at Mizuho Securities said Scana shares look attractive and offer roughly 26-percent total upside in the firm's base-case scenario. 

The Analyst

Analyst Paul Fremont upgraded SCANA Corp. from Hold to Buy and maintained a $46 price target.

The Thesis

Scana represents a good value proposition given the likelihood of significant upside to the extent the company is successful in a court challenge to the rate cut announced by the South Carolina legislature, Fremont said in a Friday note. (See the analyst's track record here.) 

The state had announced a 15-percent mandated rate reduction.

A strong likelihood exists of a stay being issued in the case, the analyst said. 

"The standalone earnings of Scana will be higher if they are successful in obtaining a temporary stay in the Circuit Court," Fremont said. 

Scana has a viable legal argument in the form of unconstitutional taking for the overturning of the rate-cut legislation, the analyst said. 

Mizuho adjusted its earnings estimates to reflect the 15-percent annual reduction effective April 1, 2018. This would result in earnings per share of $2.69 in 2020.

"A favorable court ruling in their challenge of HB 4375 would likely put pressure on the South Carolina Commission to leave intact prior BLRA authorized rate increases," Fremont said. 

If Dominion walks away from its purchase of Scana, Fremont said other potential buyers would make an offer on the company. 

The Price Action

SCANA shares are flat year-to-date.

The stock was trading up 1.47 percent to $39.04 at the time of publication Friday. 

Related Links:

FERC Ruling Casts Doubts On Dominion's Dropdown Ambitions, BofA Says In Downgrade

Some Traders Betting The Energy Rally Is On Borrowed Time