Natural gas and electric company SCANA Corporation (SCG) reported first quarter 2011 earnings of $1.00 per share, beating the Zacks Consensus Estimate by just a penny. The marginally better results were driven by improved electric margins on base rate hikes.
However, compared to the first quarter of 2010, SCANA’s earnings per share fell 2.0% (from $1.02 to $1.00) due to warmer temperatures in Georgia and a natural-gas rate cut that took effect in November.
Operating revenue, at $1,281.0 million, was shy of both the Zacks Consensus Estimate and the year-ago sales of $1,428.0 million.
Segment Performance
South Carolina Electric & Gas Company (SCE&G): Earnings from the segment, which is also SCANA's principal subsidiary, increased to 55 cents per share from 51 cents in the first quarter 2010.
This can be attributed to improved margins on the back of base rate increases that more than made up for higher expenses and share dilution. As of March 31, 2011, natural gas and electric customers of SCE&G inched up 0.9% and 0.6%, respectively, on an annualized basis.
PSNC Energy: The segment’s earnings were 25 cents per share in the quarter, flat year over year, as the rise in residential usage from customer growth was offset by higher interest expense and share dilution. At the end of the quarter, PSNC Energy’s customer base increased 1.4% year over year.
SCANA Energy – Georgia: The segment, which houses SCANA’s retail natural gas marketing business in Georgia, reported earnings of 17 cents per share, down from the year-ago level of 24 cents. The decrease was mainly on account of lower throughput due to more normal weather conditions. At March 31, 2011, SCANA Energy’s customer base was down 1.1% year-over-year.
Balance Sheet
At quarter-end, SCANA had $4,576 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 54.6%.
Guidance
SCANA expects full-year 2011 earnings to be in the range of approximately $2.95–$3.10 per share.
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 3% to 5% over the next 3 to 5 years. Given the Base Load Review Act (BLRA) rate recovery as well as some normal utility growth, we believe that this is an achievable target.
However, we remain concerned by SCANA’s heavy debt levels. 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 #3 Rank, which is equivalent to a short-term Hold rating.
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