2011-10-28 / Business

If SCANA should merge...

By John Temple Ligon

Cayce-based SCANA, parent company of Midlands utility SCE& G, is always somewhere in the merger and acquisition rumor grape vine since it sits between two utility behemoths, Charlottebased Duke to the north and Atlanta-based Southern to the west. Duke, in fact, will be soon to the east, too, once it finishes its merger with Raleigh-based Progress Energy to form America’s largest utility. For now, Southern claims to be the country’s largest utility in market capitalization value.

Market capitalization value is the price of a common share of stock multiplied by the total number of shares outstanding. In Southern’s case, it’s $37.06 billion; Duke, $ 26.91; Progress, $15.19 billion; and SCANA, $5.43 billion. Upon merging with Progress, probably completed late this December, Duke will claim the combined market capitalization with Progress, bringing the total to $42.10 billion, well above Southern’s $37.06 billion.

In a merger, though, the price of the deal has to cover all values besides the market capitalization. The price of the deal can be called the enterprise value, which is a sum of claims of all the security- holders, debtholders, preferred ( as opposed to common) shareholders, minority shareholders, common equity holders, and others. The enterprise value of a company is the price a buyer can be expected to pay.

Some flexibility kicks in when the market capitalization is priced with a premium in a merger. Typically, the common shareholders are offered something like a 20 percent premium to agree to the deal, but in the case of Duke’s offer to the common shareholders at Progress, Duke’s price includedonlyabouta4percent premium. And on August 23, the shareholders agreed.

Shareholders at Progress Energy (a 102-year-old company formerly known as Carolina Power & Light) were offered 2.6125 shares of Duke Energy for each of their shares, making the deal worth $ 45.46 per Progress share based on the value of a Duke share at the time of the announcement of Duke’s intention to merge with Progress, January 10. The stock deal was worth about $13.3 billion, which was good for a 4.1 percent premium for the Progress shareholders. Duke also assumed $ 12.2 billion of Progress Energy’s debt. The total price for Duke to merge with Progress has been referred to as a rounded up $26 billion deal.

Duke’s bid gives the Progress shareholders about 37 percent of the new company, and it gives Duke shareholders the other 63 percent.

At the completion of the merger, Duke Energy will have about 7.1 million electric power customers in North and South Carolina, Florida, Indiana, Kentucky, and Ohio, which will be America’s largest regulated customer base.

Southern Co., currently with no announced merger plans, serves approximately 4.4 million retail customers with almost 42,000 megawatts of electric power. Duke and Progress together will deliver 57,400 megawatts of electric power. SCANA delivers almost 6,000 megawatts of electric power to its 660,000 customers.

Duke several years ago spun off its natural gas business in a Houston headquarters, even though it still has about 500,000 natural gas customers in Ohio and Kentucky. Southern Co. is out of the natural gas business. SCANA, though, is still very much in the natural gas business with 482,000 residential, commercial, and industrial customers in North Carolina; 313,500 customers in South Carolina; and another 460,000 in Georgia. Point being, Duke is interested in a pure electric power play should Duke look to SCANA for growth. The same is likely the case with Southern. Should SCANA be merged with either Duke or Southern, a continuing SCANA as a natural gas operator can be expected.

So, if SCANA senses feelers coming from Charlotte or Atlanta, what is the price? First the enterprise value of the electric power side of SCANA will have to be computed, separating the natural gas operation with its own headquarters, and the shareholders must vote approval.

The SCANA employees and the citizens of the Midlands share one main concern, employee relocation and downsizing. The Duke/Progress deal is trimming about 2,000 employees from the payroll.

Another main concern is the concentration of wholesale electric power sales coming from one huge company across the Carolinas. Existing wholesale customers will lose current competition for their business. That’s under debate in North Carolina and South Carolina as a problem with the Duke/ Progress merger.

The town of Rock Hill, for instance, is a bulk wholesale purchaser of electric power. And where Rock Hill sits just south of Charlotte, it’s likely today to seek competitive bids for its business from Duke, Progress, and SCANA. If Duke follows the Progress merger with a SCANA deal, the town of Rock Hill loses any advantage it might have had with three-supplier competition.

And another main concern: regulated return on common equity. In early August, Duke Energy Carolinas proposed to the S. C. Public Service Commission raising rates in South Carolina by 15 percent on average. Parallel with the 15 percent rate hike is Duke’s expectation to raise its return on equity to 11.5 percent. In South Carolina, Duke is allowed a return on equity of 11 percent, but Duke actually engineers a 10.7 percent return, which is what the company gets in North Carolina.

Putting the regulated return on common equity above 11 percent sets up the shareholders’ annual dividend yield as a little above 5 percent. According to Wharton business professor Jeremy Siegel in his book The Future for Investors, as covered by The Motley Fool , a 1970 share purchase of either Piedmont Natural Gas or SCANA, then SCE&G, would result today in a 1,300 percent share price increase. If the shareholder reinvested the dividends as more shares of the same stock over the same 40 years, total returns jump to 17,000 percent.

As always, with the government regulated return on common equity, the shareholders will come out well ahead. The customers, though, need to be the main concern.

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