SCANA Corporation (SCG) reported weaker-than-expected third-quarter 2010 earnings of 79 cents per share, below the Zacks Consensus Estimate of 85 cents and the year-ago earnings of 84 cents.
The decline was largely due to resolution of a state income tax issue. However, higher property taxes, interest, and operating and maintenance expenses also hurt the results. The decline was partially offset by higher electric margins owing to electric base rate increases under the Base Load Review Act (BLRA) and the retail electric rate case.
Total revenue increased more than 18% to $1.08 billion from the year-earlier figure but missed the Zacks Consensus Estimate of $1.13 billion.
In the last month, the South Carolina Public Service Commission approved the company’s annual rate revision. A 2.3% hike will be effective for bills rendered on or after October 30 of this year.
Segment Performance
South Carolina Electric & Gas Company: Earnings from the segment, which is also SCANA’s principal subsidiary, decreased to 87 cents per share from 89 cents in third quarter 2009. The decrease was due to state tax issues, higher interest, operating and maintenance expenses as well as property taxes. Both natural gas and electric customers increased 1% year over year.
PSNC Energy: The segment reported a loss of 4 cents per share, unchanged from the year-earlier quarter. Customer base increased 1.6% year over year.
SCANA Energy: The segment reported a loss of 2 cents per share, flat with the comparable quarter last year. Customer base increased 1% year over year.
Financials
At the end of the quarter, the company’s long-term debt balance was $4.5 billion, representing a debt-to-capitalization ratio of 55.5%.
Guidance
SCANA reaffirmed its full-year 2010 earnings guidance in the range of $2.90–$3.05 per share, excluding non-recurring items, and continues to target an average annual earnings growth rate of 4% to 6% over the next 3–5 years.
Our Recommendation
We believe SCANA is a relatively strong and regulated integrated electric utility, supported by favorable regional demographics and electric utility rate. The company continues to target an average annual earnings growth rate of 4% to 6% over the next 3 to 5 years. Given the BLRA rate recovery as well as some normal utility growth, we believe that this is an achievable target.
However, its heavy debt level and the overall business risk associated with the nuclear generation construction project keep us on sidelines. Hence, we retain our Neutral recommendation with the Zacks #3 Rank (‘Hold’) for SCANA.
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