SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3375
South Carolina Electric & Gas Company
(Exact name of registrant as specified in its charter)
South Carolina 57-0248695
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1426 Main Street, Columbia, South Carolina 29201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 748-3000
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes . No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
As of March 31, 1998, there were issued and outstanding
40,296,147 shares of the registrant's common stock, $4.50 par
value, all of which were held, beneficially and of record, by SCANA
Corporation.
1
SOUTH CAROLINA ELECTRIC & GAS COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997.................................... 3
Consolidated Statements of Income and Retained Earnings
for the Periods Ended March 31, 1998 and 1997............ 5
Consolidated Statements of Cash Flows for the Periods
Ended March 31, 1998 and 1997............................ 6
Notes to Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
Signatures............................................................ 17
Exhibit Index......................................................... 18
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
1998 1997
(Millions of Dollars)
ASSETS
Utility Plant:
Electric............................................. $4,020 $4,020
Gas.................................................. 353 353
Other................................................ 84 84
Total.............................................. 4,457 4,457
Less accumulated depreciation and amortization....... 1,443 1,421
Total.............................................. 3,014 3,036
Construction work in progress........................ 269 221
Nuclear fuel, net of accumulated amortization........ 49 53
Utility Plant, Net............................... 3,332 3,310
Nonutility Property and Investments, net of
accumulated depreciation............................. 17 17
Current Assets:
Cash and temporary cash investments.................. 20 6
Receivables - customer and other..................... 166 165
Inventories (at average cost):
Fuel............................................... 29 23
Materials and supplies............................. 47 48
Prepayments.......................................... 13 10
Deferred income taxes................................ 21 21
Total Current Assets............................. 296 273
Deferred Debits:
Emission allowances.................................. 31 31
Environmental........................................ 29 32
Nuclear plant decommissioning fund................... 51 49
Pension asset, net................................... 83 82
Other................................................ 267 260
Total Deferred Debits............................ 461 454
Total................................. $4,106 $4,054
See notes to consolidated financial statements.
3
SOUTH CAROLINA ELECTRIC & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
1998 1997
(Millions of Dollars)
CAPITALIZATION AND LIABILITIES
Stockholders' Investment:
Common Equity......................................... $1,468 $1,447
Preferred Stock (not subject to purchase or sinking
funds).............................................. 106 106
Total Stockholders' Investment.................... 1,574 1,553
Preferred Stock, net (subject to purchase or
sinking funds)........................................ 12 12
Company - Obligated Mandatorily Redeemable Preferred
Securities of the Company's Subsidiary Trust, SCE&G
Trust I holding solely $50 million, principal amount
of 7.55% of Junior Subordinated Debentures of the
Company, due 2027..................................... 50 50
Long-term debt, net..................................... 1,260 1,262
Total Capitalization............................ 2,896 2,877
Current Liabilities:
Short-term borrowings................................. 57 13
Current portion of long-term debt..................... 48 48
Accounts payable...................................... 50 53
Accounts payable - affiliated companies............... 27 32
Customer deposits..................................... 17 16
Taxes accrued......................................... 30 45
Interest accrued...................................... 25 22
Dividends declared.................................... 39 58
Other................................................. 8 7
Total Current Liabilities....................... 301 294
Deferred Credits:
Deferred income taxes................................. 559 539
Deferred investment tax credits....................... 89 89
Reserve for nuclear plant decommissioning............. 51 49
Postretirement benefits............................... 64 61
Other................................................. 146 145
Total Deferred Credits.......................... 909 883
Total ................................. $4,106 $4,054
See notes to consolidated financial statements.
4
SOUTH CAROLINA ELECTRIC & GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Periods Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31,
1998 1997
(Millions of Dollars)
OPERATING REVENUES:
Electric................................................ $270 $253
Gas..................................................... 88 84
Transit................................................. - -
Total Operating Revenues........................... 358 337
OPERATING EXPENSES:
Fuel used in electric generation........................ 43 38
Purchased power (including
affiliated purchases)................................. 26 24
Gas purchased from affiliate
for resale............................................ 49 48
Other operation......................................... 56 52
Maintenance............................................. 18 15
Depreciation and amortization........................... 26 35
Income taxes............................................ 33 28
Other taxes............................................. 24 24
Total Operating Expenses........................... 275 264
OPERATING INCOME.......................................... 83 73
OTHER INCOME:
Allowance for equity funds used
during construction................................... 2 2
Total Other Income................................. 2 2
INCOME BEFORE INTEREST CHARGES............................ 85 75
INTEREST CHARGES (CREDITS):
Interest expense........................................ 24 24
Other interest expense.................................. 2 2
Allowance for borrowed funds
used during construction.............................. (2) (1)
Total Interest Charges, net........................ 24 25
INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS
ON MANDATORILY REDEEMABLE PREFERRED
SECURITIES 61 50
PREFERRED DIVIDEND REQUIREMENT OF COMPANY
- OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 1 -
NET INCOME................................................ 60 50
Preferred Stock Cash Dividends
(at stated rates)....................................... (2) (1)
Earnings Available for Common Stock....................... 58 49
Retained Earnings at Beginning
of Period............................................... 438 415
Common Stock Cash Dividends
Declared................................................ (37) (34)
Retained Earnings at End of Period........................ $459 $430
See notes to consolidated financial statements.
5
SOUTH CAROLINA ELECTRIC & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31,
1998 1997
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 60 $ 50
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization...................... 26 35
Amortization of nuclear fuel....................... 41 6
Deferred income taxes, net......................... 20 17
Pension asset...................................... (1) (4)
Postretirement benefits............................ 3 3
Allowance for funds used during construction....... (4) (3)
Over collections, fuel adjustment clause........... 16 17
Changes in certain current assets and liabilities:
(Increase) decrease in receivables............... 1 13
(Increase) decrease in inventories............... (5) (2)
Increase (decrease) in accounts payable.......... (9) (28)
Increase (decrease) in taxes accrued............. (15) (27)
Other, net......................................... (21) 4
Net Cash Provided From Operating Activities............ 112 81
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility property additions and construction
expenditures, net of AFC........................... (82) (40)
Nonutility property and investments.................. - (4)
Net Cash Used For Investing Activities................. (82) (44)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds:
Equity contributions from parent................... - 12
Repayments:
Preferred stock.................................... - (2)
Dividend payments:
Common stock....................................... (56) (35)
Preferred stock.................................... (2) (1)
Short-term borrowings, net........................... 44 9
Fuel and emission allowance financings, net.......... (2) 3
Net Cash Used For Financing Activities................. (16) (14)
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS..................................... 14 23
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1....... 6 5
CASH AND TEMPORARY CASH INVESTMENTS AT MARCH 31........ $ 20 $ 28
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for - Interest (includes capitalized
interest of $2 and $1 for 1998
and 1997, respectively)............. $ 21 $ 22
- Income taxes......................... (20) (4)
See notes to consolidated financial statements.
6
SOUTH CAROLINA ELECTRIC & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
The following notes should be read in conjunction with the
Notes to Consolidated Financial Statements appearing in South
Carolina Electric & Gas Company's (the Company) Annual Report on
Form 10-K for the year ended December 31, 1997. These are interim
financial statements and, because of temperature variations between
seasons of the year, the amounts reported in the Consolidated
Statements of Income are not necessarily indicative of amounts
expected for the year. In the opinion of management, the
information furnished herein reflects all adjustments, all of a
normal recurring nature except as described in Note 2, which are
necessary for a fair statement of the results for the interim
periods reported.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Basis of Accounting
The Company accounts for its regulated utility operations,
assets and liabilities in accordance with the provisions of
Statement of Financial Accounting Standards No. 71 (SFAS 71).
The accounting standard requires cost-based rate-regulated
utilities to recognize in their financial statements revenues
and expenses in different time periods than do enterprises that
are not rate-regulated. As a result the Company has recorded,
as of March 31, 1998, approximately $236 million and $68
million of regulatory assets and liabilities, respectively,
including amounts recorded for deferred income tax assets and
liabilities of approximately $118 million and $52 million,
respectively. The electric and gas regulatory assets of
approximately $80 million and $35 million, respectively
(excluding deferred income tax assets) are being recovered
through rates, and the Public Service Commission of South
Carolina (PSC) has approved accelerated recovery of
approximately $37 million of these assets. In the future, as
a result of deregulation or other changes in the regulatory
environment, the Company may no longer meet the criteria for
continued application of SFAS 71 and could be required to write
off its regulatory assets and liabilities. Such an event could
have a material adverse effect on the Company's results of
operations in the period the write-off is recorded, but it is
not expected that cash flows or financial position would be
materially affected.
B. Reclassifications
Certain amounts from prior periods have been reclassified to
conform with the 1998 presentation.
2. RATE MATTERS
On January 9, 1996 the PSC issued an order granting the Company
an increase in retail electric rates of 7.34%, which was
designed to produce additional revenues, based on a test year,
of approximately $67.5 million annually. The increase was
implemented in two phases. The first phase, an increase in
revenues of approximately $59.5 million annually, or 6.47%,
commenced in January 1996. The second phase, an increase in
revenues of approximately $8.0 million annually, or .87%, was
implemented in January 1997. The PSC authorized a return on
common equity of 12.0%. The PSC also approved establishment of
a Storm Damage Reserve Account capped at $50 million to be
collected through rates over a ten-year period. Additionally,
the PSC approved accelerated recovery of a significant portion
of the Company's electric regulatory assets (excluding deferred
income tax assets) and the remaining transition obligation for
postretirement benefits other than pensions, changing the
amortization periods to allow recovery by the end of the
year 2000. The Company's request to shift, for ratemaking
purposes, approximately
7
$257 million of depreciation reserves from transmission and
distribution assets to nuclear production assets was also
approved. The Consumer Advocate and two other intervenors
appealed certain issues in the order to the South Carolina
Circuit Court, which affirmed the PSC's decisions, and,
subsequently, to the South Carolina Supreme Court. In March
1998, the Company, the PSC and the Consumer Advocate and one of
the other intervenors reached an agreement that provided for
the reversal of the shift in depreciation reserves and the
dismissal of the appeal of all other issues. The PSC also
authorized the Company to adjust depreciation rates that had
been approved in the 1996 rate order for its electric
transmission, distribution and nuclear production properties to
eliminate the effect of the depreciation reserve shift and to
retroactively apply such depreciation rates to February 1996.
As a result, a one-time reduction in depreciation expense of
$5.5 million after taxes was recorded in March 1998. The
agreement does not affect retail electric rates. The remaining
intervenor continues to contest establishment of the Storm
Damage Reserve Account and the authorized return on common
equity. The Supreme Court heard the case in April 1998 and is
expected to issue a ruling by July 1998. While the outcome of
this proceeding is uncertain, the Company does not believe that
any significant adverse change in the rate order is likely.
The Federal Energy Regulatory Commission (FERC) had previously
rejected the transfer of depreciation reserves for rates
subject to its jurisdiction.
3. RETAINED EARNINGS:
The Restated Articles of Incorporation of the Company and the
Indenture underlying its First and Refunding Mortgage Bonds
contain provisions that under certain circumstances, could
limit the payment of cash dividends on its common stock. In
addition, with respect to hydroelectric projects, the Federal
Power Act requires the appropriation of a portion of certain
earnings therefrom. At March 31, 1998 approximately $21.8
million of retained earnings were restricted by this
requirement as to payment of cash dividends on common stock.
4. CONTINGENCIES:
With respect to commitments at March 31, 1998, reference is
made to Note 10 of Notes to Consolidated Financial Statements
appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. Contingencies at March 31, 1998
are as follows:
A. Nuclear Insurance
The Price-Anderson Indemnification Act, which deals with public
liability for a nuclear incident, currently establishes the
liability limit for third-party claims associated with any
nuclear incident at $8.9 billion. Each reactor licensee is
currently liable for up to $79.3 million per reactor owned for
each nuclear incident occurring at any reactor in the United
States, provided that not more than $10 million of the
liability per reactor would be assessed per year. The
Company's maximum assessment, based on its two-thirds
ownership of the V. C. Summer Nuclear Station (Summer
Station), would be approximately $52.9 million per incident,
but not more than $6.7 million per year.
The Company currently maintains policies (for itself and on
behalf of the PSA) with Nuclear Electric Insurance Limited
(NEIL) and American Nuclear Insurers (ANI) providing combined
property and decontamination insurance coverage of $2.0
billion for any losses at Summer Station. The Company pays
annual premiums and, in addition, could be assessed a
retroactive premium assessment not to exceed five times its
annual premium in the event of property damage loss to any
nuclear generating facility covered under the NEIL program.
Based on the current annual premium, this retroactive
premium assessment would not exceed $5.1 million.
8
To the extent that insurable claims for property damage,
decontamination, repair and replacement and other costs and
expenses arising from a nuclear incident at Summer Station
exceed the policy limits of insurance, or to the extent such
insurance becomes unavailable in the future, and to the extent
that the Company's rates would not recover the cost of any
purchased replacement power, the Company will retain the risk
of loss as a self-insurer. The Company has no reason to
anticipate a serious nuclear incident at Summer Station. If
such an incident were to occur, it could have a material
adverse impact on the Company's results of operations, cash
flows and financial position.
B. Environmental
The Company has an environmental assessment program to identify and
assess current and former operations sites that could require
environmental cleanup. As site assessments are initiated an
estimate is made of the amount of expenditures, if any, necessary
to investigate and clean up each site. These estimates are refined
as additional information becomes available; therefore, actual
expenditures could differ significantly from the original
estimates. Amounts estimated and accrued to date for site
assessment and cleanup relate primarily to regulated operations;
such amounts are deferred (approximately $29 million) and are
being amortized and recovered through rates over a five-year period
for electric operations and an eight-year period for gas
operations. The deferral includes the costs estimated to be
associated with the matters discussed below.
In September 1992, the Environmental Protection Agency (EPA)
notified the Company, the City of Charleston and the
Charleston Housing Authority of their potential liability for
the investigation and cleanup of the Calhoun Park area site
in Charleston, South Carolina. This site encompasses
approximately 30 acres and includes properties which were the
locations for industrial operations, including a wood
preserving (creosote) plant, one of the Company's
decommissioned manufactured gas plants, properties owned by
the National Park Service and the City of Charleston and
private properties. The site has not been placed on the
National Priorities List, but may be added before cleanup
is initiated. The Potentially Responsible Parties (PRPs)
have agreed with the EPA to participate in an innovative
approach to site investigation and cleanup called "Superfund
Accelerated Cleanup Model," allowing the pre-cleanup site
investigation process to be compressed significantly. The
PRPs have negotiated an administrative order by consent for
the conduct of a Remedial Investigation/Feasibility Study and
a corresponding Scope of Work. Field work began in November
1993 and the EPA conditionally approved a Remedial
Investigation Report in March 1997. Although the Company is
continuing to investigate cost-effective clean-up
methodologies, further work is pending EPA approval of the
final draft of the Remedial Investigation Report.
In October 1996 the City of Charleston and the Company
settled all environmental claims the City may have had
against the Company involving the Calhoun Park area for a
payment of $26 million over four years (1996-1999) by the
Company to the City. The Company is recovering the amount
of the settlement, which does not encompass site assessment
and cleanup costs, through rates in the same manner as other
amounts accrued for site assessments and cleanup as discussed
above. As part of the environmental settlement, the Company
has agreed to construct an 1,100 space parking garage on the
Calhoun Park site and to transfer the facility to the City
in exchange for a 20-year municipal bond backed by revenues
from the parking garage and a mortgage on the parking garage.
Construction is expected to begin in 1998. The total amount
of the bond is not to exceed $16.9 million, the maximum
expected project cost.
The Company owns three other decommissioned manufactured gas
plant sites which contain residues of by-product chemicals.
The Company is investigating the sites to monitor the nature
and extent of the residual contamination.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SOUTH CAROLINA ELECTRIC & GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Statements included in this discussion and analysis (or
elsewhere in this quarterly report) which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor
provided by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Readers are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks
and uncertainties, and that actual results could differ materially
from those indicated by such forward-looking statements. Important
factors that could cause actual results to differ materially from
those indicated by such forward-looking statements include, but are
not limited to, the following: (1) that the information is of a
preliminary nature and may be subject to further and/or continuing
review and adjustment, (2) changes in the utility regulatory
environment, (3) changes in the economy in areas served by the
Company, (4) the impact of competition from other energy
suppliers, (5) the management of the Company's operations (6)
growth opportunities for the Company's regulated and diversified
subsidiaries, (7) the results of financing efforts, (8) changes in
the Company's accounting policies, (9) weather conditions in areas
served by the Company, (10) performance of the telecommunications
companies in which the Company has made significant
investments, (11) inflation, (12) changes in environmental
regulations and (13) the other risks and uncertainties described
from time to time in the Company's periodic reports filed with the
Securities and Exchange Commission. The Company disclaims any
obligation to update any forward-looking statements.
Competition
The electric utility industry has begun a major transition
that could lead to expanded market competition and less regulation.
Deregulation of electric wholesale and retail markets is creating
opportunities to compete for new and existing customers and
markets. As a result, profit margins and asset values of some
utilities could be adversely affected. Legislative initiatives at
the Federal and state levels are being considered and, if enacted,
could mandate market deregulation. The pace of deregulation, the
future prices of electricity, and the regulatory actions which may
be taken by the PSC and FERC in response to the changing
environment cannot be predicted. However, the FERC, in issuing
Order 888 in April 1996, accelerated competition among electric
utilities by providing for open access to wholesale transmission
service. Order 888 requires utilities under FERC jurisdiction that
own, control or operate transmission lines to file
nondiscriminatory open access tariffs that offer to others the same
transmission service they provide themselves. The FERC has also
permitted utilities to seek recovery of wholesale stranded costs
from departing customers by direct assignment. Approximately two
percent of the Company's electric revenue is under FERC
jurisdiction for the purpose of setting rates for wholesale
service. Legislation is pending in South Carolina that would
deregulate the state's retail electric market and enable customers
to choose their supplier of electricity. The Company is not able
to predict whether the legislation will be enacted and, if it is,
the conditions it will impose on utilities that currently operate
in the state and future market participants.
10
The Company is aggressively pursuing actions to position
itself strategically for the transformed environment. To enhance
its flexibility and responsiveness to change, the Company operates
Strategic Business Units. Maintaining a competitive cost structure
is of paramount importance in the utility's strategic plan. The
Company has undertaken a variety of initiatives, including
reductions in operation and maintenance costs and in staffing
levels and the accelerated recovery of the Company's electric
regulatory assets. The Company has also established open access
transmission tariffs and is selling bulk power to wholesale
customers at market-based rates. Significant new customer and
management information systems will be implemented in 1998.
Marketing of services to commercial and industrial customers has
been increased significantly. The Company has obtained long term
power supply contracts with a significant portion of its industrial
customers. The Company believes that these actions as well as
numerous others that have been and will be taken demonstrate its
ability and commitment to succeed in the new operating environment
to come.
Regulated public utilities are allowed to record as assets
some costs that would be expensed by other enterprises. If
deregulation or other changes in the regulatory environment occur,
the Company may no longer be eligible to apply this accounting
treatment and may be required to eliminate such regulatory assets
from its balance sheet. Although the potential effects of
deregulation cannot be determined at present, discontinuation of
the accounting treatment could have a material adverse effect on
the Company's results of operations if a write-off is required to
be recorded. It is expected that cash flows and the financial
position of the Company would not be materially affected by the
discontinuation of the accounting treatment. The Company reported
approximately $236 million and $68 million of regulatory assets
and liabilities, respectively, including amounts recorded for
deferred income tax assets and liabilities of approximately $118
million and $52 million, respectively, on its balance sheet at
March 31, 1998.
The Company's generation assets would be exposed to
considerable financial risks in a deregulated electric market. If
market prices for electric generation do not produce adequate
revenue streams and the enabling legislation or regulatory actions
do not provide for recovery of the resulting stranded costs, the
Company could be required to write down its investment in these
assets. The Company cannot predict whether any write-downs will be
necessary and, if they are, the extent to which they would
adversely affect the Company's results of operations in the period
in which they are recorded. As of March 31, 1998, the Company's
net investment in fossil\hydroelectric generation and nuclear
generation assets was $985.5 million and $647.7 million,
respectively.
Material Changes in Capital Resources and Liquidity
Since December 31, 1997
Liquidity and Capital Resources
The cash requirements of the Company arise primarily from its
operational needs and its construction program. The ability of the
Company to replace existing plant investment, as well as to expand
to meet future demand for electricity and gas, will depend upon its
ability to attract the necessary financial capital on reasonable
terms. The Company recovers the costs of providing services
through rates charged to customers. Rates for regulated services
are generally based on historical costs. As customer growth and
inflation occur and the Company continues its ongoing construction
program, it is necessary to seek increases in rates. As a result,
the Company's future financial position and results of operations
will be affected by its ability to obtain adequate and timely rate
and other regulatory relief.
11
On January 9, 1996 the PSC issued an order granting the
Company an increase in retail electric rates of 7.34%, which was
designed to produce additional revenues, based on a test year, of
approximately $67.5 million annually. The increase was
implemented in two phases. The first phase, an increase in
revenues of approximately $59.5 million annually or 6.47%,
commenced in January 1996. The second phase, an increase in
revenues of approximately $8.0 million annually, or .87%, was
implemented in January 1997. The PSC authorized a return on
common equity of 12.0%. The PSC also approved establishment of a
Storm Damage Reserve Account capped at $50 million to be collected
through rates over a ten-year period. Additionally, the PSC
approved accelerated recovery of a significant portion of the
Company's electric regulatory assets (excluding deferred income tax
assets) and the remaining transition obligation for postretirement
benefits other than pensions, changing the amortization periods to
allow recovery by the end of the year 2000. The Company's request
to shift, for ratemaking purposes, approximately $257 million of
depreciation reserves from transmission and distribution assets to
nuclear production assets was also approved. The Consumer Advocate
and two other intervenors appealed certain issues in the order to
the South Carolina Circuit Court, which affirmed the PSC's
decisions, and, subsequently, to the South Carolina Supreme Court.
In March 1998, the Company, the PSC and the Consumer Advocate and
one of the other intervenors reached an agreement that provided for
the reversal of the shift in depreciation reserves and the
dismissal of the appeal of all other issues. The PSC also
authorized the Company to adjust depreciation rates that had been
approved in the 1996 rate order for its electric transmission,
distribution and nuclear production properties to eliminate the
effect of the depreciation reserve shift and to retroactively apply
such depreciation rates to February 1996. As a result, a one-time
reduction in depreciation expense of $5.5 million after taxes was
recorded in March 1998. The agreement does not affect retail
electric rates. See "Results of Operations - Earnings and
Dividends." The remaining intervenor continues to contest
establishment of the Storm Damage Reserve Account and the
authorized return on common equity. The Supreme Court heard the
case in April 1998 and is expected to issue a ruling by July 1998.
While the outcome of this proceeding is uncertain, the Company does
not believe that any significant adverse change in the rate order
is likely. The FERC had previously rejected the transfer of
depreciation reserves for rates subject to its jurisdiction.
The following table summarizes how the Company generated funds
for its utility property additions and construction expenditures
during the three months ended March 31, 1998 and 1997:
Three Months Ended
March 31,
1998 1997
(Millions of Dollars)
Net cash provided from operating activities $112 $ 81
Net cash used for financing activities (16) (14)
Cash and temporary cash investments available
at the beginning of the period 6 5
Net cash available for utility property
additions and construction expenditures $102 $ 72
Funds used for utility property additions
and construction expenditures, net of
noncash allowance for funds used during
construction $ 82 $ 40
12
On August 7, 1996 the City of Charleston executed 30-year
electric and gas franchise agreements with the Company. In
consideration for the electric franchise agreement, the Company is
paying the City $25 million over seven years (1996-2002) and has
donated to the City the existing transit assets in Charleston. The
$25 million is included in electric plant-in-service. In
settlement of environmental claims the City may have had against
the Company involving the Calhoun Park area, where the Company and
its predecessor companies operated a manufactured gas plant until
the 1960's, the Company is paying the City $26 million over a four-
year period (1996-1999). As part of the environmental settlement,
the Company has agreed to construct an 1,100 space parking garage
on the Calhoun Park site and to transfer the facility to the City
in exchange for a 20-year municipal bond backed by revenues from
the parking garage and a mortgage on the parking garage. The total
amount of the bond is not to exceed $16.9 million, the maximum
expected project cost.
SCANA Corporation, the Company's parent, and Westvaco
Corporation have formed a limited liability company, Cogen South
LLC, to build and operate a $170 million cogeneration facility at
Westvaco's Kraft Division Paper Mill in North Charleston, South
Carolina. The facility will provide industrial process steam for
the Westvaco paper mill and shaft horsepower to enable the Company
to generate up to 99 megawatts of electricity. Construction
financing is being provided to Cogen South LLC by banks. In
addition to the cogeneration LLC, Westvaco has entered into a 20-
year contract with the Company for all its electricity requirements
at the North Charleston mill at the Company's standard industrial
rate. Construction of the plant began in September 1996 and it is
expected to be operational in the fall of 1998.
The Company anticipates that the remainder of its 1998 cash
requirements will be met through internally generated funds, the
sales of additional equity securities, additional equity
contributions from SCANA and the incurrence of additional short-
term and long-term indebtedness. The timing and amount of such
financings will depend upon market conditions and other factors.
The Company expects that it has or can obtain adequate resources of
financings to meet its projected cash requirements for the next
twelve months and for the foreseeable future. The ratio of
earnings to fixed charges for the twelve months ended March 31,
1998 was 4.05.
The year 2000 issue could have a material impact on the
operations of the Company if required modifications and conversions
are not made to ensure that all system software and equipment with
embedded processors are date code compliant. The Company has
formed a steering committee to direct the resolution of this major
issue. The steering committee, which reports to the senior
officers of the Company and to the board of directors, is chaired
by the chief financial officer of the Company and is comprised of
officers representing all operational areas. Reporting to the
committee are a group of full time project managers who are
responsible for addressing year 2000 issues and coordinating the
required assessment and remediation efforts.
The Company has completed an initial inventory of impacted
information systems applications, operating software, hardware and
embedded processors. A risk prioritization of these systems was
completed to determine the Company's critical systems. The Company
has begun the assessment process to determine which systems have
year 2000 compliance issues. All required remediation efforts on
critical systems are expected to be completed by mid-1999. The
cost of the project is not expected to have a material impact on
the results of operations, financial position or cash flows of the
Company.
In particular, with regard to the evaluation and remediation
of the year 2000 issue at the Company's Summer Station, the Company
is closely cooperating with other utility companies, including
utilities in the southeast, that own nuclear power plants. The
utilities are sharing technical nuclear plant operating and
monitoring systems information to ensure the prompt and effective
resolution of the year 2000 issue.
The Company is communicating with all of its significant
suppliers to determine the extent to which the Company is
vulnerable to those suppliers' failure to remediate their own year
2000 issue. The extent to which significant customers have
resolved the year 2000 issue, and the resulting impact on the
demand for the Company's products, is not determinable. There can
be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted. A failure to
convert by another company, or a conversion that is incompatible
with the Company's systems, could have a material adverse effect on
the results of operations, financial position or cash flows of the
Company.
13
SOUTH CAROLINA ELECTRIC & GAS COMPANY
Results of Operations
For the Three Months ended March 31, 1998
As Compared to the Corresponding Periods in 1997
Earnings and Dividends
Net income for the three months ended March 31, 1998 increased
approximately $9.5 million when compared to the corresponding
period in 1997. Higher electric and gas margins more than offset
the impact of higher operating costs. Net income for the current
period includes a one-time, after-tax adjustment to depreciation
expense of approximately $5.5 million related to a change in
depreciation rates retroactive to February 1996. This change in
rates is a result of a reversal of a $257 million shift of
depreciation reserves from electric transmission and distribution
assets to nuclear production assets, previously approved in a PSC
rate order in January 1996. See "Liquidity and Capital Resources."
Allowance for funds used during construction (AFC) is a
utility accounting practice whereby a portion of the cost of both
equity and borrowed funds used to finance construction (which is
shown on the balance sheet as construction work in progress) is
capitalized. Both the equity and the debt portions of AFC are
noncash items of nonoperating income which have the effect of
increasing reported net income. AFC represented approximately 4%
of income before income taxes for the three months ended March 31,
1998 and 1997, respectively.
On February 17, 1998 the Company's Board of Directors
authorized the payment of a dividend on common stock of
approximately $36.9 million for the quarter ended March 31,
1998. The dividend was paid on April 1, 1998 to SCANA.
On April 23, 1998 the Company's Board of Directors authorized
the payment of a dividend on common stock of approximately $37.7
million for the quarter ended June 30, 1998. The dividend is
payable on July 1, 1998 to SCANA.
Sales Margins
The change in the electric sales margin for the three months
ended March 31, 1998, when compared to the corresponding periods in
1997, was as follows:
Three Months
Change % Change
(Millions)
Electric operating revenues $16.7 6.6
Less: Fuel used in electric generation 4.9 12.8
Purchased power 1.6 6.6
Margin $10.2 5.4
The electric sales margin increased for the three months ended
March 31, 1998 when compared to the corresponding period in 1997
primarily as a result of colder weather and customer growth.
14
The change in the gas sales margin for the three months ended
March 31, 1998, when compared to the corresponding period in 1997,
was as follows:
Three Months
Change % Change
(Millions)
Gas operating revenues $3.8 4.5
Less: Gas purchased for resale 1.2 4.5
Margin $2.6 7.0
The gas sales margin increased for the three months ended
March 31, 1998, when compared to the corresponding period in 1997
primarily as a result of colder weather, increased negotiated
contract markups and increased interruptible sales attributable to
fewer curtailments.
Other Operating Expenses
Changes in other operating expenses, including taxes, for the
three months ended March 31, 1998 when compared to the
corresponding period in 1997, are presented in the following table:
Three Months
Change % Change
(Millions)
Other operation and maintenance $ 7.3 10.9
Depreciation and amortization (8.7) (24.8)
Income taxes 5.2 18.6
Total $ 3.8 2.4
Other operation and maintenance expenses for the three months
ended March 31, 1998 increased from 1997 levels primarily as a
result of increases in maintenance costs at electric generating
plants and other operating costs. The decrease in depreciation and
amortization expenses for the period reflects the non-recurring
adjustment to depreciation expense discussed under "Earnings and
Dividends." The changes in income tax expense reflect the changes
in operating income.
15
Item 3. Quantitative and Qualitative Disclosure About Market
Risk
With regard to the market risk information disclosed in
the Company's Annual Report on Form 10-K at December 31,
1997 there have been no material changes in market risk
exposure related to interest rate risk.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings see Note 2 "Rate
Matters," appearing in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, and Note 3
"Contingencies" of Notes to Consolidated Financial
Statements appearing in this Quarterly Report on Form 10-Q.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibits filed with this Quarterly Report on Form 10-Q
are listed in the following Exhibit Index. Certain of
such exhibits which have heretofore been filed with the
Securities and Exchange Commission and which are
designated by reference to their exhibit numbers in
prior filings are hereby incorporated herein by
reference and made a part hereof.
B. Reports on Form 8-K
None
16
SOUTH CAROLINA ELECTRIC & GAS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTH CAROLINA ELECTRIC & GAS COMPANY
(Registrant)
May 14, 1998 By: s/Jimmy E. Addison
Jimmy E. Addison
Vice President and Controller
(Chief accounting officer)
17
SOUTH CAROLINA ELECTRIC & GAS COMPANY Sequentially
EXHIBIT INDEX Numbered
Number Pages
2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
Not Applicable
3. Articles of Incorporation and By-Laws
A. Restated Articles of Incorporation of the
Company as adopted on December 15, 1993
(Exhibit 3-A to Form 10-Q for the quarter
ended June 30, 1994, File No. 1-3375)...................... #
B. Articles of Amendment, dated June 7, 1994,
filed June 9, 1994 (Exhibit 3-B to Form 10-Q
for the quarter ended June 30, 1994, File
No. 1-3375)
C. Articles of Amendment, dated November 9, 1994
(Exhibit 3-C to Form 10-K for the year ended
December 31, 1994, File No. 1-3375)........................ #
D. Articles of Amendment, dated December 9, 1994
(Exhibit 3-D to Form 10-K for the year ended
December 31, 1994, File No. 1-3375)........................ #
E. Articles of Correction, dated January 17, 1995
(Exhibit 3-E to Form 10-K for the year ended
December 31, 1994, File No. 1-3375)........................ #
F. Articles of Amendment, dated January 13, 1995
(Exhibit 3-F to Form 10-K for the year ended
December 31, 1994, File No. 1-3375)........................ #
G. Articles of Amendment, dated March 31, 1995
(Exhibit 3-G to Form 10-Q for the quarter
ended March 31, 1995, File No. 1-3375)..................... #
H. Articles of Correction - Amendment to Statement
filed March 31, 1995, dated December 13, 1995
(Exhibit 3-H to Form 10-K for the year ended
December 31, 1995, File No. 1-3375)........................ #
I. Articles of Amendment dated December 13, 1995
(Exhibit 3-I to Form 10-K for the year ended
December 31, 1995, File No. 1-3375)........................ #
J. Copy of By-Laws of the Company as revised and
amended on December 17, 1997 (Filed as Exhibit
4-J to Form 10-K for the year ended
December 31, 1997, File No. 1-3375)........................ #
K. Articles of Amendment dated February 18, 1997
(Exhibit 3-L to Registration Statement No. 333-
24919)...................................................... #
L. Articles of Amendment dated February 21, 1997
(Exhibit 3-L to Form 10-Q for the quarter ended
March 31, 1997)............................................. #
M. Articles of Amendment dated April 22, 1997
(Exhibit 3-M to Form 10-Q for the quarter ended
June 30, 1997).............................................. #
N. Articles of Amendment dated April 9, 1998 (Filed herewith).. 22
# Incorporated herein by reference as indicated.
18
SOUTH CAROLINA ELECTRIC & GAS COMPANY Sequentially
EXHIBIT INDEX Numbered
Number Pages
4. Instruments Defining the Rights of Security
Holders, Including Indentures
A. Indenture dated as of January 1, 1945, from the
South Carolina Power Company (the "Power Company")
to Central Hanover Bank and Trust Company, as
Trustee, as supplemented by three Supplemental
Indentures dated respectively as of May 1, 1946,
May 1, 1947 and July 1, 1949 (Exhibit 2-B to
Registration No. 2-26459).................................. #
B. Fourth Supplemental Indenture dated as of April 1,
1950, to Indenture referred to in Exhibit 4A,
pursuant to which the Company assumed said
Indenture (Exhibit 2-C to Registration No. 2-26459)........ #
C. Fifth through Fifty-second Supplemental Indentures
to Indenture referred to in Exhibit 4A dated as
of the dates indicated below and filed as
exhibits to the Registration Statements and
1934 Act reports whose file numbers are set
forth below................................................ #
4. (Continued)
December 1, 1950 Exhibit 2-D to Registration No. 2-26459
July 1, 1951 Exhibit 2-E to Registration No. 2-26459
June 1, 1953 Exhibit 2-F to Registration No. 2-26459
June 1, 1955 Exhibit 2-G to Registration No. 2-26459
November 1, 1957 Exhibit 2-H to Registration No. 2-26459
September 1, 1958 Exhibit 2-I to Registration No. 2-26459
September 1, 1960 Exhibit 2-J to Registration No. 2-26459
June 1, 1961 Exhibit 2-K to Registration No. 2-26459
December 1, 1965 Exhibit 2-L to Registration No. 2-26459
June 1, 1966 Exhibit 2-M to Registration No. 2-26459
June 1, 1967 Exhibit 2-N to Registration No. 2-29693
September 1, 1968 Exhibit 4-O to Registration No. 2-31569
June 1, 1969 Exhibit 4-C to Registration No. 33-38580
December 1, 1969 Exhibit 4-Q to Registration No. 2-35388
June 1, 1970 Exhibit 4-R to Registration No. 2-37363
March 1, 1971 Exhibit 2-B-17 to Registration No. 2-40324
January 1, 1972 Exhibit 4-C to Registration No. 33-38580
July 1, 1974 Exhibit 2-A-19 to Registration No. 2-51291
May 1, 1975 Exhibit 4-C to Registration No. 33-38580
July 1, 1975 Exhibit 2-B-21 to Registration No. 2-53908
February 1, 1976 Exhibit 2-B-22 to Registration No. 2-55304
December 1, 1976 Exhibit 2-B-23 to Registration No. 2-57936
March 1, 1977 Exhibit 2-B-24 to Registration No. 2-58662
May 1, 1977 Exhibit 4-C to Registration No. 33-38580
February 1, 1978 Exhibit 4-C to Registration No. 33-38580
June 1, 1978 Exhibit 2-A-3 to Registration No. 2-61653
April 1, 1979 Exhibit 4-C to Registration No. 33-38580
June 1, 1979 Exhibit 4-C to Registration No. 33-38580
April 1, 1980 Exhibit 4-C to Registration No. 33-38580
June 1, 1980 Exhibit 4-C to Registration No. 33-38580
December 1, 1980 Exhibit 4-C to Registration No. 33-38580
April 1, 1981 Exhibit 4-D to Registration No. 33-49421
June 1, 1981 Exhibit 4-D to Registration No. 2-73321
March 1, 1982 Exhibit 4-D to Registration No. 33-49421
April 15, 1982 Exhibit 4-D to Registration No. 33-49421
# Incorporated herein by reference as indicated.
19
SOUTH CAROLINA ELECTRIC & GAS COMPANY
Exhibit Index (Continued)
Number
May 1, 1982 Exhibit 4-D to Registration No. 33-49421
December 1, 1984 Exhibit 4-D to Registration No. 33-49421
December 1, 1985 Exhibit 4-D to Registration No. 33-49421
June 1, 1986 Exhibit 4-D to Registration No. 33-49421
February 1, 1987 Exhibit 4-D to Registration No. 33-49421
September 1, 1987 Exhibit 4-D to Registration No. 33-49421
January 1, 1989 Exhibit 4-D to Registration No. 33-49421
January 1, 1991 Exhibit 4-D to Registration No. 33-49421
February 1, 1991 Exhibit 4-D to Registration No. 33-49421
July 15, 1991 Exhibit 4-D to Registration No. 33-49421
August 15, 1991 Exhibit 4-D to Registration No. 33-49421
April 1, 1993 Exhibit 4-E to Registration No. 33-49421
July 1, 1993 Exhibit 4-D to Registration No. 33-57955
D. Indenture dated as of April 1, 1993 from South Carolina
Electric & Gas Company to NationsBank of Georgia, National
Association (Filed as Exhibit 4-F to Registration
Statement No. 33-49421)...................................... #
E. First Supplemental Indenture to Indenture referred to
in Exhibit 4-D dated as of June 1, 1993 (Filed as
Exhibit 4-G to Registration Statement No. 33-49421).......... #
F. Second Supplemental Indenture to Indenture referred to
in Exhibit 4-D dated as of June 15, 1993 (Filed as
Exhibit 4-G to Registration Statement No. 33-57955).......... #
G. Trust Agreement for SCE&G Trust I (Filed as
Exhibit 4-G to Form 10-K for the year ended
December 31, 1997)........................................... #
H. Certificate of Trust for SCE&G Trust I (Filed as
Exhibit 4-H to Form 10-K for the year ended
December 31, 1997)........................................... #
I. Junior Subordinated Indenture for SCE&G Trust I
(Filed as Exhibit 4-I to Form 10-K for the year
ended December 31, 1997)..................................... #
J. Guarantee Agreement for SCE&G Trust I
(Filed as Exhibit 4-J to Form 10-K for the year
ended December 31, 1997)..................................... #
K. Amended & Restated Trust Agreement for SCE&G
Trust I (Filed as Exhibit 4-K to Form 10-K for the
year ended December 31, 1997)................................ #
10. Material Contracts
Not Applicable
11. Statement Re Computation of Per Share Earnings
Not Applicable
15. Letter Re Unaudited Interim Financial Information
Not Applicable
18. Letter Re Change in Accounting Principles
Not Applicable
# Incorporated herein by reference as indicated.
20
SOUTH CAROLINA ELECTRIC & GAS COMPANY
Exhibit Index (Continued)
Number
19. Report Furnished to Security Holders
Not Applicable
22. Published Report Regarding Matters Submitted to
Vote of Security Holders
Not Applicable
23. Consents of Experts and Counsel
Not Applicable
24. Power of Attorney
Not Applicable
27. Financial Data Schedule (Filed herewith)
99. Additional Exhibits
Not Applicable
21