Natural gas and electric company SCANA Corporation (SCG) has reported second quarter 2011 earnings of 43 cents per share, missing the Zacks Consensus Estimate of 49 cents.
The quarterly results were in line with the year-ago profit level and driven by improved electric margins on base rate hikes and lower operations and maintenance expenses, partially offset by the higher depreciation, higher interest expense and share dilution.
Operating revenue of $1,000.0 million improved 6.5% from the year-ago level of $939 million and strode past the Zacks Consensus Estimate of $908 million.
Segment Performance
South Carolina Electric & Gas Company (SCE&G): Earnings from the segment, which is also SCANA's principal subsidiary, declined to 48 cents per share from 50 cents in second quarter 2010. The underperformance was mainly due to weather-related hindrances, lower gas margin, hikes in interest and depreciation expense, and share dilution.
As of June 30, 2011, natural gas and electric customers of SCE&G inched up 1.0% and 0.6%, respectively, on an annualized basis.
PSNC Energy: The segment registered a loss of 1 cent per share in the quarter, flat year over year. At the end of the quarter, PSNC Energy’s customer base increased 1.6% year over year.
SCANA Energy – Georgia: The segment, which houses SCANA’s retail natural gas marketing business in Georgia, reported a loss of 2 cents per share, compared with the loss of 5 cents experienced a year ago. The uptick can be attributed to increased margins due to cooler weather early in the quarter compared to the prior-year quarter and lower operating expenses. At June 30, 2011, SCANA Energy’s customer base reached approximately 460,000.
Balance Sheet
At quarter end, SCANA had $4,665 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 55.1%.
Guidance
Earlier, SCANA had provided its full-year 2011 earnings guidance 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. Again, the company remains committed to nuclear construction, cost control, and providing safe, reliable energy for the balance of the year.
However, we remain concerned by SCANA’s heavy debt levels. The company also faces tough competition from 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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