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SCANA-Dominion Vote: A Primer

Everything you need to know about next week’s high-stakes corporate merger tally …

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There are seven hurdles which must be cleared in order for a proposed deal between Virginia-based Dominion Energy and Cayce, South Carolina-based SCANA to move forward.

So far, three of those hurdles have been cleared … with the fourth scheduled for a critical vote early next week.

Hanging in the balance?  Billions of dollars  … including $1.6 billion in rebates to Palmetto State ratepayers screwed over by #NukeGate, state government’s spectacularly failed intervention in the nuclear power industry.

For those of you who have been living under a rock for the past year, SCANA and its state-owned partner – Santee Cooper – blew $10 billion on a pair of next generation, pressurized water reactors at the V.C. Summer nuclear generating station in Jenkinsville, S.C.  These two reactors were supposed to be operational in 2016 and 2017, respectively.

That didn’t happen …

Last summer, Santee Cooper pulled the plug on the project … and over the last twelve months the public has learned the true depths of this costly boondoggle (which was funded in large part on the backs of ratepayers thanks to special interest legislation approved by members of the “Republican-controlled” S.C. General Assembly).

#NukeGate is the focus of several high-stakes lawsuits … and even higher stakes criminal investigations.

Heads are going to roll, people.

Meanwhile, lawmakers are now trying to undo the billions of dollars worth of damage they have done to the state … but as usual they appear to be doing more harm than good.

More on that momentarily … for now let’s focus on the proposed merger.

What hurdles have been cleared?  Which ones remain?  And what are the particulars of next week’s big vote?

The first hurdle was federal (one of three federal regulatory hurdles in this process).  Dominion’s proposed offer for SCANA – which would give beleaguered South Carolina ratepayers an average of $1,500 in immediate relief – had to get what is known as Hart-Scott-Rodino approval from the U.S. Federal Trade Commission (FTC) and the antitrust division of the U.S. Department of Justice (DOJ).

Hart-Scott-Rodino refers to a 1976 antitrust law that requires companies to submit merger plans to these government agencies – which must then issue a determination that the proposed deal would not adversely impact commerce.  This determination was reached by the FTC (below) in February, allowing the merger to move forward.

(Click to view)

(Via: Flickr)

Second, the merger needed approval from the Georgia Public Service Commission (GPSC) – which it received on March 21.

Third, Dominion’s bid for SCANA required the authorization of the Federal Energy Regulatory Commission (FERC) – which it received on July 13 when the agency determined the deal to be “consistent with the public interest” and therefore “authorized.”

Which leads us to hurdle number four – the approval of the shareholders of SCANA.

Next Tuesday (July 31) – on the one year anniversary of the #NukeGate detonation that plunged the Palmetto State into its current economic and litigious abyss – SCANA shareholders will gather at the Columbia Conference Center (169 Laurelhurst Avenue, Columbia, SC 29210) at 9:00 a.m. EDT to determine whether to accept Dominion’s offer.

The vote is restricted to individuals and entities which owned SCANA stock on May 31, 2018 – which covers an estimated 142,916,917 shares.

Two-thirds of those shares must approve the merger.  Not “two-thirds present and voting,” but two-thirds total. (i.e. 95,277,945 shares). In other words, shareholders who abstain are voting “no” (with the notable exception of shares associated with SCANA’s employee savings plan, which will be voted in proportion with the outcome of the vote).

The deal for them is simple: A “yes” vote means they agree to accept two-thirds of a share of stock in Dominion Energy for each share of SCANA stock they own.  A “no” vote means they do not accept the deal.

As of this writing, SCANA is trading at around $40.25 per share while Dominion is trading at $71.65 per share.  Two-thirds of a share of Dominion stock would be equal to $47.77 – meaning SCANA shareholders would stand to make $7.51 per share.

Again, as of this writing …

It’s important to remember the deal isn’t based on today’s stock prices.  If approved, it would be based on the value of the companies’ stock at the time the deal is closed.

SCANA will announce the results of Tuesday’s election – perhaps the same day.  The quick turnaround time makes sense because the vast majority of shares will have already been voted by the time the meeting is called to order on Tuesday morning.

(Click to view)

(Via: Dominion Energy)

So … will the vote pass?

Several state lawmakers (and politicos close to the #NukeGate drama) have reached out to us expressing concern over the outcome of the election.  They believe it will be far closer than expected – and have gone to great lengths to convince us that the deal is precariously close to being rejected.

Are they correct?  Who knows …

It’s no secret plenty of SCANA shareholders are livid with the company’s management, and this shareholder meeting represents one of their first opportunities to confront them – and vent their rage.  Are they angry enough to vote against their own financial self-interest, though?

Good question …

Also, it is worth noting that most of the action related to this deal revolves around large, institutional shareholders (mutual funds, pension funds, insurers, etc.). These shares are voted in bulk on the basis of advice received from investment firms.

Rage doesn’t apply, it’s all about numbers.  And the largest of these firms – International Shareholder Services (ISS) – has looked at the numbers and advised in favor of the merger.

Accordingly, we think the deal passes … although we believe a few pitchforks will probably be hurled in the process.

Assuming SCANA shareholders vote to accept the Dominion offer, three additional steps remain.  The deal must be approved by the North Carolina Utilities Commission (NCUC), the U.S. Nuclear Regulatory Commission (NRC) and last but not least the South Carolina Public Service Commission (SCPSC).

That final hurdle could prove quite difficult, too, considering the ostensibly independent SCPSC has become little more than an arm of the all-powerful state legislature – which appears to be going out of its way to sink this deal.

As we previously reported, in late June legislators refused to even consider a recent $300 million “sweetener” offered by SCANA to ratepayers – money that would have been added to the $1.3 billion in relief Dominion is providing.  This $300 million would have been taken directly out of the pockets of its shareholders.

Even more interesting?  Lawmakers blamed SCANA for negotiating “in secret” despite the fact they solicited the “sweetener” offer from the company in the first place.

“We needed their number,” one legislative aide familiar with the solicitation process told us.  “There was no other way to get a straight answer from them.”

In other words they needed to know how much money they could take … 

Pay attention, businesses … this is how it works in the Palmetto State.

Lawmakers took the money, too.  The final legislative compromise provided $270 million in short-term “relief” to ratepayers – which is identical to the initial amount put forward by SCANA (lawmakers are also counting an estimated $30 million or so in rate relief for government agencies).

In other words they provided ratepayers with relief that was already on the table … all to undo a pooch screw of their own making.

Let’s not forget (ever) that it was the legislature that put ratepayers on the hook for more than $2 billion of the costs associated with the abandoned nuclear project.  We’re referring, of course, to the notorious Base Load Review Act (BLRA) – legislation advanced by liberal state lawmakers and allowed to become law in 2007 by former governor Mark Sanford.

(Click to view)

(Via: High Flyer)

Which reminds us …

Even if SCANA shareholders approve this deal (and even if the three remaining regulatory hurdles are cleared) Dominion has made it abundantly clear it intends to exercise its right to void the agreement if the status quo holds at the S.C. State House (i.e. if lawmakers’ temporary solution becomes permanent).

That would mean no rebates for ratepayers, a possible SCANA bankruptcy and an exceedingly uncertain energy future for the Palmetto State – especially given the imminent collapse of Santee Cooper.

Of course much of this drama will be resolved in court … where lawmakers appear to have bet big on an uncertain hand.

Our view?  We honestly see the merit in both perspectives.  We understand lawmakers’ desire to get the maximum amount of relief for ratepayers, which is why we encouraged them months ago to stop pussyfooting around the issue and enact an immediate and complete repeal of the BLRA.

They didn’t do that …

In lieu of such a bold stroke, we have consistently argued in favor of “a reasonable settlement that maximizes ratepayer relief, within the confines of what the courts will accept and the markets will bear.”

Lawmakers don’t appear to have done that, either …

Bottom line?  A year after this debacle first detonated on the Palmetto political landscape, #NukeGate remains undecided … leaving the state in limbo.

Next week’s vote will bring some further clarity on the matter, but we are a long way from the end of the road.  In fact the legal and criminal components of the story are just beginning to heat up, meaning the really seismic headlines are yet to come.

As we are wont to say, “developing …”

***

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