Nothing could be finer Than to be in Carolina In the morning. -- Gus Kahn This is a scary time for investors in utility stocks. The Philadelphia Utility Index is off nearly 10% from its October highs after slipping 0.6% to 397.75 on Thursday. With expectations for higher interest rates, many on the Street presume the group will continue heading lower. But for investors who want exposure to utilities, Scana ( SCG) is an unloved defensive play that may be ripe for a takeover.
The Consensus Story
Wall Street is not enamored with Scana, an energy provider to customers in North and South Carolina as well as parts of Georgia. The electricity and natural gas provider's projected 4% to 6% earnings growth is not the stuff of lofty multiples. Scana operates in a heavily regulated industry, and that puts a cap on earnings; in addition, the company is, of course, sensitive to interest rates, which have risen sharply of late (in case you hadn't heard).
The Real Story
Scana operates in a geographic location that is seeing an influx of new customers. The Carolinas have experienced tremendous growth in population -- in part due to northerners looking for a less expensive and warmer place to live, while Floridians search for a cheaper home (or refuge) that is relatively safe from hurricanes. According to Robert Hinckley of Rochdale Securities, customer growth in Scana's South Carolina electricity markets averaged 2.6% over the past five years, a full percentage point above the national average. Natural gas customer growth averaged 2.5%, almost double the national average. CarolinaLiving.com estimates that nearly half a million families will relocate to the Carolinas in 2006. While more customers mean more demand, utilities are challenged to keep demand high in the face of rising energy prices. Scana's rates are among the lowest in the nation because of inexpensive production methods. Nearly all of its generation comes from coal, nuclear and hydroelectric plants. Paul Justice of Morningstar notes that the lower cost of energy to the end user means lower levels of customer defaults and keeps the company in good standing with politicians.