Dominion Energy to Buy SCANA Following Nuclear Project Fiasco

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--In the end, the nuclear skeptics were right: Building a nuclear power plant is a bet-the-company proposition. That warning materialized on Wednesday, when Dominion Energy Incorporated (NYSE:D) (Richmond, Virginia) and SCANA Corporation (NYSE:SCG) (Cayce, South Carolina) agreed to merge in an all-stock deal valued at $14.6 billion, including the assumption of debt. SCANA's stock price had fallen about 40% since July 31, when it announced it was terminating construction of two new nuclear units at the Virgil C. Summer Nuclear Power Station in South Carolina. SCANA and its partner in the project, Santee Cooper (Moncks Corner, South Carolina), walked away from the project after spending about $9 billion to build those units over a decade.

In announcing the transaction, Thomas F. Farrell, II, chief executive officer of Dominion Energy, said: "We believe this merger will provide significant benefits to SCE&G's customers, SCANA's shareholders and the communities SCANA serves. It would lock in significant and immediate savings for [South Carolina Electric & Gas'] customers - including what we believe is the largest utility customer cash refund in history - and guarantee a rapidly declining impact from the V.C. Summer project. There also are potential benefits to natural gas customers in South Carolina, North Carolina and Georgia and to their communities. And, this agreement protects employees and treats fairly SCANA shareholders, many of whom are working families and retirees in SCANA's communities. The combined resources of our two companies make all this possible."

SCANA's stock traded at about $64 per share prior to the company's July 31 announcement. The stock was trading at about $38 per share prior to the merger announcement. The decision to abandon the V.C. Summer unit additions and the months of ensuing controversy knocked about $3.7 billion off SCANA's market capitalization, making it much more affordable to Dominion. The January 3 transaction announcement pushed SCANA's stock up nearly $10 per share, to about $48, still well under its pre-cancellation range.

The transaction must be approved by numerous state and federal agencies. A transaction could be completed this year, assuming all necessary regulatory approvals are received, the companies said.

SCANA and its electric utility unit, South Carolina Electric & Gas Company (SCE&G) (Cayce, South Carolina), have been widely criticized by South Carolina regulators, lawmakers, the governor, shareholders and customers following its cancellation decision. As a nod to the white-hot controversy surrounding that decision, Dominion's offer included:

• A $1.3 billion cash payment within 90 days upon completion of the merger to all customers, worth about $1,000 for the average residential electric customer. Payments would vary based on the amount of electricity used in the 12 months prior to the merger closing.
• An estimated additional 5% electric price reduction, equal to more than $7 a month for a typical SCE&G residential customer, resulting from a $575 million refund of amounts previously collected from customers, and savings of lower federal corporate taxes under recently enacted federal tax reform.
• A write-off exceeding $1.7 billion of existing V.C. Summer 2 and 3 capital and regulatory assets, which would never be collected from customers. This allows for the elimination of all related customer costs over 20 years, instead of over the previously proposed 50-60 years.

The transaction announcement caps a wild five months for SCANA and its partner in the Summer nuclear additions, Santee Cooper. SCANA was the 55% owner of the two units, while Santee Cooper, a public power utility, owned 45%. For more on the cancellation and its aftermath, see August 1, 2017, article - Utilities Abandon Construction of Summer Nuclear Plant in South Carolina and September 5, 2017, article - Summer Nuclear Units' Cancellation Followed by Two Other Terminations.

Two top SCANA executives, Chief Executive Officer Kevin Marsh and Chief Operating Officer Steven Byrne, left the company on December 31. Days before that, Santee Cooper board chairman Leighton Lord resigned, ending a three-week fight with Governor Henry McMaster over the utility's response to the nuclear project. Months earlier, Santee Cooper's chief executive, Lonnie Carter, announced his resignation after 35 years with the company.

Once the Summer unit additions were cancelled, South Carolina's elected officials, regulators and electric customers began asking hard questions of SCANA and Santee Cooper officials about the billions of dollars that had been collected to build new generating capacity that was now never going to come online. The average residential customer reportedly has been paying the SCANA unit about $27 per month for Summer units 2 and 3. Dominion's merger with SCANA may address some of those concerns, but the transaction is not expected to have a bearing on the questions swirling around Santee Cooper.

In a statement Wednesday, South Carolina Governor Henry McMaster praised the deal's refunds for SCE&G customers. But he said Santee Cooper also must be sold. "The only way to resolve this travesty is to sell Santee Cooper," he said. "There is more work to be done, but today, we are headed in the right direction."

Both SCG&E and Santee Cooper also find themselves enmeshed in a wide range of federal and state investigations, lawsuits and state regulatory proceedings stemming from the cancellation of the two Summer units. The U.S. Securities and Exchange Commission (SEC) (Washington, D.C.) is investigating whether SCANA misled investors about the costs and in-service dates of the two units. The U.S. Attorney's Office in South Carolina also is nosing around. The state legislature and the governor are exploring options to sell publicly owned Santee Cooper. In separate lawsuits, petitioners are trying to force SCANA to suspend quarterly dividends and require the utility to return about $1.8 billion to customers. SCANA had said it may face bankruptcy if forced to return the money to customers.

While SCANA has blamed the Chapter 11 bankruptcy filing by engineering, procurement & construction (EPC) firm Westinghouse for most of the cost overruns and construction delays at the Summer project, reports prepared long before Westinghouse's March 29, 2017, bankruptcy filing showed there were serious problems with the project.

In an early 2016 report recently released by the state's governor, EPC firm Bechtel (San Francisco, California) provided the owners with a confidential report that claimed some portions of the units could not be built as designed. An earlier report by another respected EPC firm, Fluor Corporation (NYSE:FLR) (Irving, Texas), also identified numerous construction and scheduling problems at the project. In recent weeks, the state's newspapers have uncovered allegations that Westinghouse and other contractors used unlicensed workers to craft blueprints and conduct complex engineering calculations, which could be crimes.

SCE&G was slated to get about 1,200 megawatts (MW) of generating capacity from Summer units 2 and 3. Following the cancellation of that project, the utility said it would spend about $180 million to buy an existing 540-MW natural gas combined cycle (NGCC) plant from Columbia Energy LLC (Gaston, South Carolina). The company's stockholders, not SCG&E's customers, will pay to purchase that power plant. SCE&G also said it plans to build about 100 MW of new solar generation. Those plans were announced last November. Wednesday's merger announcement confirmed the purchase of the gas-fired power plant would go forward.

For its part, Santee Cooper has no plans to add new generating capacity to replace the foregone generation from the cancelled nuclear units. "We project we can get to the mid-2030s without new generation," Mollie Gore, a spokesperson for Santee Cooper, said in an interview. "Over the last six years, some of our electric cooperative customers have been shifting a portion of their load, about 1,000 MW in total, to another provider. Also, electric load growth in rural parts of our state has not returned to the level it was prior to the Great Recession."

Over a decade ago, when Santee Cooper originally committed to Summer units 2 and 3, Gore told Industrial Info, "We thought we were going to need that capacity, and we wanted to have an emission-free source of electricity." The loss of 1,000 MW of electric load effectively counter-balanced the amount of generation Santee Cooper was scheduled to receive from the two now-cancelled nuclear units.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.