Zacks_Analysts' Blog : SCANA Lucky by a Penny - Analyst Blog

SCANA Corporation (SCG) reported fourth-quarter 2010 earnings of 74 cents per share, just beating the Zacks Consensus Estimate of 73 cents and well above the year-ago earnings of 62 cents.

Better-than-expected results were mainly attributable to improved electric margins that the hike in the electric base rate under the Base Load Review Act (BLRA) and the retail electric rate case led to. The improvement was, however, dampened, by higher operations and maintenance expenses, higher depreciation expense and share dilution.

The company reported its full-year 2010 earnings of $2.98 a share, well within its guided range of $2.90–$3.05 and above the prior year earnings of $2.85. However, the full-year figure fell short of the Zacks Consensus Estimate of $3.00.

Total revenue increased nearly 5% to $1.15 billion in the fourth quarter from the year-earlier level of $1.09 billion. Full-year revenue came in at $4.6 billion, compared with $4.24 billion in the year-earlier period.

Segment Performance

South Carolina Electric & Gas Company: Earnings from the segment, which is also SCANA's principal subsidiary, increased to 52 cents per share from 39 cents in fourth quarter 2009. At the end of 2010, both natural gas and electric customers inched up 1.3% and 0.9%, respectively, on an annualized basis.

PSNC Energy: The segment’s earnings were 17 cent per share in the quarter, flat year over year. In 2010, the customer base increased 1.9% year over year.

SCANA Energy: The segment reported earnings of 7 cents per share, flat year over year. The customer base increased 2% year over year in the year 2010.

Financials

At the end of the quarter, the company's long-term debt balance was $4.49 billion, representing a debt-to-capitalization ratio of 54.8% versus 55.5% in the previous quarter.

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, the company’s heavy debt level keeps us on the sidelines. The company also faces tough competition from Dominion Resources Inc. (D), Duke Energy Corporation (DUK) and Progress Energy Inc. (PGN).

Hence, we retain our long-term “Neutral” recommendation for SCANA. The company holds a Zacks #2 Rank, which is equivalent to a short-term ‘Buy’ rating for the company.