-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6iZUtAG4L73cEfjcdKpBpTVWm4mxO5td/7YlukjqMbK5rQWnnSxrNVO730msE59 pa/YcMGOydKdMF51BBphFQ== 0000754737-99-000013.txt : 19990816 0000754737-99-000013.hdr.sgml : 19990816 ACCESSION NUMBER: 0000754737-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANA CORP CENTRAL INDEX KEY: 0000754737 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 570784499 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08809 FILM NUMBER: 99689279 BUSINESS ADDRESS: STREET 1: 1426 MAIN ST STREET 2: P O BOX 764 CITY: COLUMBIA STATE: SC ZIP: 29201 BUSINESS PHONE: 8032179000 MAIL ADDRESS: STREET 1: MAIL CODE 051 CITY: COLUMBIA STATE: SC ZIP: 29218 10-Q 1 2ND QUARTER 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-8809 SCANA Corporation 57-0784499 (A South Carolina Corporation) 1426 Main Street Columbia, South Carolina 29201 (803) 217-9000 1-3375 South Carolina Electric & Gas Company 57-0248695 (A South Carolina Corporation) 1426 Main Street Columbia, South Carolina 29201 (803) 217-9000 Indicate by check mark whether the registrants: (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Description of Shares Outstanding Registrant Common Stock at July 31, 1999 SCANA Corporation Without Par Value 103,572,623 South Carolina Electric Par Value $4.50 Per Share 40,296,1471 & Gas Company 1Held, beneficially and of record, by SCANA Corporation. This combined Form 10-Q is separately filed by SCANA Corporation and South Carolina Electric & Gas Company. Information contained herein relating to SCANA Corporation or any of its direct or indirect subsidiaries, other than South Carolina Electric & Gas Company and its consolidated operations, is provided solely by SCANA Corporation and shall be deemed not included in the Form 10-Q of South Carolina Electric & Gas Company. ================================================================================ INDEX Page PART 1. FINANCIAL INFORMATION SCANA Corporation Financial Section......................................... 3 Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4 Consolidated Statements of Income and Retained Earnings for the Periods Ended June 30, 1999 and 1998......................................... 6 Consolidated Statements of Cash Flows for the Periods Ended June 30, 1999 and 1998........................................................ 7 Notes to Consolidated Financial Statements............................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................13 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........21 South Carolina Electric & Gas Company Financial Section......................22 Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ................................................23 Consolidated Statements of Income and Retained Earnings for the Periods Ended June 30, 1999 and 1998..............................25 Consolidated Statements of Cash Flows for the Periods Ended June 30, 1999 and 1998........................................... 26 Notes to Consolidated Financial Statements.........................27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................30 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........35 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................36 Item 4. Submission of Matters to a Vote of Security-Holders.................36 Item 6. Exhibits and Reports on Form 8-K....................................36 Signatures...................................................................37 Exhibit Index................................................................39 SCANA CORPORATION FINANCIAL SECTION PART I. FINANCIAL INFORMATION Item 1. Financial Statements. SCANA CORPORATION CONSOLIDATED BALANCE SHEETS As of June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 31, - -------------------------------------------------------------------------------- ------------------- 1999 1998 - -------------------------------------------------------------------------------- ------------------- Assets (Millions of Dollars) Utility Plant: Electric $4,446 $4,406 Gas 606 604 Other 178 175 - -------------------------------------------------------------------------------- ------------------- Total 5,230 5,185 Less accumulated depreciation and amortization 1,805 1,728 - -------------------------------------------------------------------------------- ------------------- Total 3,425 3,457 Construction work in progress 323 251 Nuclear fuel, net of accumulated amortization 53 56 Acquisition adjustment-gas, net of accumulated amortization 23 23 - -------------------------------------------------------------------------------- ------------------- Utility Plant, Net 3,824 3,787 - -------------------------------------------------------------------------------- ------------------- Nonutility Property and Investments, net of accumulated depreciation 645 493 - -------------------------------------------------------------------------------- ------------------- Current Assets: Cash and temporary cash investments 70 62 Receivables 240 276 Inventories (at average cost): Fuel 55 63 Materials and supplies 64 56 Prepayments 36 22 Deferred income taxes 21 22 - -------------------------------------------------------------------------------- ------------------- Total Current Assets 486 501 - -------------------------------------------------------------------------------- ------------------- Deferred Debits: Emission allowances 31 31 Environmental 25 22 Nuclear plant decommissioning fund 60 56 Pension asset, net 128 115 Other regulatory assets 184 216 Other 96 60 - -------------------------------------------------------------------------------- ------------------- Total Deferred Debits 524 500 - -------------------------------------------------------------------------------- ------------------- Total $5,479 $5,281 ================================================================================ =================== SCANA CORPORATION CONSOLIDATED BALANCE SHEETS As of June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 31, - ------------------------------------------------------------------------------------ ------------- 1999 1998 - ----------------------------------------------------------------------------- -------------------- Capitalization and Liabilities (Millions of Dollars) Stockholders' Investment: Common Equity $1,808 $1,746 Preferred stock (not subject to purchase or sinking funds) 106 106 - -------------------------------------------------------------------------------- ----------------- Total Stockholders' Investment 1,914 1,852 Preferred Stock, Net (subject to purchase or sinking funds) 11 11 SCE&G-Obligated Mandatorily Redeemable Preferred Securities of SCE&G's Subsidiary Trust, SCE&G Trust I, holding solely $50 million principal amount of the 7.55% Junior Subordinated Debentures of SCE&G, due 2027 50 50 Long-Term Debt, net 1,785 1,623 - -------------------------------------------------------------------------------- ----------------- Total Capitalization 3,760 3,536 - -------------------------------------------------------------------------------- ----------------- Current Liabilities: Short-term borrowings 105 195 Current portion of long-term debt 205 107 Accounts payable 144 219 Customer deposits 18 18 Taxes accrued 42 72 Interest accrued 29 28 Dividends declared 42 42 Other 12 13 - -------------------------------------------------------------------------------- ----------------- Total Current Liabilities 597 694 - -------------------------------------------------------------------------------- ----------------- Deferred Credits: Deferred income taxes 697 628 Deferred investment tax credits 106 108 Postretirement benefits 93 87 Reserve for nuclear plant decommissioning 60 56 Other regulatory liabilities 75 71 Other 91 101 - -------------------------------------------------------------------------------- ----------------- Total Deferred Credits 1,122 1,051 - -------------------------------------------------------------------------------- ----------------- Total $5,479 $5,281 ================================================================================ ================= See Notes to Consolidated Financial Statements. SCANA CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Periods Ended June 30, 1999 and 1998 (Unaudited) Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------------------------- -------------- -------------- -------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------- -------------- -------------- -------------- (Millions of Dollars, Except Per Share Amounts) Operating Revenues: Electric $ 293 $ 299 $ 559 $ 569 Gas 82 88 212 224 Transit - - 1 1 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Total Operating Revenues 375 387 772 794 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Fuel used in electric generation 72 68 133 128 Purchased power 11 12 14 13 Gas purchased for resale 56 61 137 145 Other operation 62 60 120 120 Maintenance 21 22 39 41 Depreciation and amortization 42 39 84 68 Income taxes 20 26 48 63 Other taxes 26 25 53 51 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Total Operating Expenses 310 313 628 629 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Operating Income 65 74 144 165 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Other Income: Allowance for equity funds used during construction 2 2 3 4 Other income (loss), net of income taxes (5) (1) (11) 2 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Total Other Income (Loss) (3) 1 (8) 6 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Income Before Interest Charges And Preferred Stock Dividends 62 75 136 171 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Interest Charges (Credits): Interest expense on long-term debt 32 30 63 59 Other interest expense 4 2 8 4 Allowance for borrowed funds used during construction (1) (2) (2) (4) - -------------------------------------------------------------------------------- -------------- -------------- -------------- Total Interest Charges, Net 35 30 69 59 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Income Before Preferred Dividend Requirements on Mandatorily Redeemable Preferred Securities 27 45 67 112 Preferred Dividend Requirement of SCE&G - Obligated Mandatorily Redeemable Preferred Securities 1 1 2 2 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Income Before Preferred Stock Cash Dividends of Subsidiary 26 44 65 110 Preferred Stock Cash Dividends of Subsidiary (At Stated Rates) 2 2 4 4 - -------------------------------------------------------------------------------- -------------- -------------- -------------- Net Income 24 42 61 106 Retained Earnings at Beginning of Period 675 640 678 617 Common Stock Cash Dividends Declared (40) (41) (80) (82) ================================================================================ ============== ============== ============== Retained Earnings at End of Period $ 659 $ 641 $ 659 $ 641 ================================================================================ ============== ============== ============== Net Income $ 24 $ 42 $ 61 $ 106 Weighted Average Number of Common Shares Outstanding (Millions) 103.6 106.4 103.6 106.8 Earnings Per Weighted Average Share of Common Stock (Basic and $ .23 $ .40 $ .59 $1.00 Diluted) Cash Dividends Declared Per Share of Common Stock $ .385 $.385 $ .77 $ .77 ================================================================================ ============== ============== ============== See Notes to Consolidated Financial Statements. SCANA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended June 30, 1999 and 1998 (Unaudited) Six Months Ended June 30, - ----------------------------------------------------------------------------------- ------------- 1999 1998 - ----------------------------------------------------------------------------------- ------------- (Millions of Dollars) Cash Flows From Operating Activities: Net income $ 61 $ 106 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 88 72 Amortization of nuclear fuel 8 10 Deferred income taxes, net 20 21 Pension asset (13) (4) Other regulatory assets 32 - Other regulatory liabilities 4 8 Post-retirement benefits 6 7 Allowance for funds used during construction (5) (8) Over (under) collections, fuel adjustment clauses - 9 Changes in certain current assets and liabilities: (Increase) decrease in receivables 36 (36) (Increase) decrease in prepayments (14) (10) Increase (decrease) in accounts payable (75) 21 Increase (decrease) in taxes accrued (30) (17) Other, net (52) (17) - ---------------------------------------------------------------------- ------------ ------------- Net Cash Provided From Operating Activities 66 162 - ---------------------------------------------------------------------- ------------ ------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC (118) (108) Increase in other property and investments (38) (82) Sale of subsidiary assets 12 - - ---------------------------------------------------------------------- ------------ ------------- Net Cash Used For Investing Activities (144) (190) - ---------------------------------------------------------------------- ------------ ------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 99 - Issuance of notes and loans 150 60 Repayments: Notes and loans - (60) Other long-term debt (3) - Repurchase of common stock - (61) Dividend payments: Common stock (80) (81) Preferred stock of subsidiary (4) (4) Short-term borrowings, net (90) 160 Fuel and emission allowance financings, net 14 (7) - ---------------------------------------------------------------------- ------------ ------------- Net Cash Provided From Financing Activities 86 7 - ---------------------------------------------------------------------- ------------ ------------- 8 (21) Net Increase (Decrease) In Cash And Temporary Cash Investments Cash And Temporary Cash Investments At January 1 62 60 - ---------------------------------------------------------------------- ------------ ------------- Cash And Temporary Cash Investments At June 30 $ 70 $ 39 ====================================================================== ============ ============= Supplemental Cash Flow Information: Cash paid for - Interest (includes capitalized interest of $2 for 1999 and $4 for 1998) $ 69 $ 62 - Income taxes 13 30 Noncash investing activities - Unrealized gain on securities available for sale (net of tax) 80 34 See Notes to Consolidated Financial Statements.
SCANA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) The following notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in SCANA Corporation's (the Company) Annual Report on Form 10-K for the year ended December 31, 1998. These are interim financial statements, and 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 June 30, 1999, approximately $209 million and $75 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $130 million and $56 million, respectively. The electric and gas regulatory assets (excluding deferred income tax assets) of approximately $46 million and $30 million, respectively, are being recovered through rates, and the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $10 million of the electric regulatory 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 that a write-off would be required, but it is not expected that cash flows or financial position would be materially affected. B. Comprehensive Income Comprehensive income includes net income and all other changes in equity except those resulting from investments by and distributions to stockholders. Comprehensive income of the Company totaled $86 million and $141 million for the three and six months ended June 30, 1999, respectively, and $45 million and $140 million for the same periods in 1998. For each period, comprehensive income included net income and unrealized gains/losses on securities available for sale. C. Reclassifications Certain amounts from prior periods have been reclassified to conform with the 1999 presentation. 2. RATE MATTERS On December 11, 1998, the PSC issued an order requiring South Carolina Electric & Gas Company (SCE&G), a wholly owned subsidiary of the Company, to reduce retail electric rates on a prospective basis. The PSC acted in response to SCE&G reporting that it earned a 13.04 percent return on common equity for its retail electric operations for the twelve months ended September 30, 1998. This return on common equity exceeded SCE&G's authorized return of 12.0 percent by 1.04 percent, or $22.7 million, primarily as a result of record heat experienced during the summer. The order required prospective rate reductions on a per kilowatt-hour basis, based on actual retail sales for the twelve months ended September 30, 1998. This action will reduce future reported return on common equity to the PSC-authorized level if SCE&G experiences the same weather effect and other business results as that of the twelve months ended September 30, 1998. On December 21, 1998, SCE&G filed a motion for reconsideration with the PSC. On January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G's return on equity of 12.0 percent. The rate reductions were placed into effect with the first billing cycle of January 1999. 3. RETAINED EARNINGS: The Restated Articles of Incorporation of the Company do not limit the dividends that may be payable on its common stock. However, the Restated Articles of Incorporation of SCE&G 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, the Federal Power Act requires the appropriation of a portion of certain earnings from hydroelectric projects. At June 30, 1999 approximately $27.4 million of retained earnings were restricted by this requirement as to payment of cash dividends on SCE&G's common stock. 4. INVESTMENTS IN EQUITY SECURITIES: At June 30, 1999, SCANA Communications, Inc. (SCI), a wholly owned subsidiary of the Company, held the following investments in ITC Holding Company, Inc. (ITC) and its affiliates: o Powertel, Inc. (Powertel) is a publicly traded company that owns and operates personal communications services (PCS) systems in several major Southeastern markets. SCI owned approximately 4.8 million common shares of Powertel. SCI's investment in Powertel's common shares of approximately $70.4 million had a market value of $143.5 million at June 30, 1999, resulting in a pre-tax unrealized holding gain of $73.1 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." In addition, SCI owned the following non-voting convertible preferred shares, at the approximate cost noted: 100,000 shares series B ($75.1 million); 50,000 shares series D ($22.5 million); and, 50,000 shares series E 6.5% ($75.0 million). Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Preferred series E shares are convertible in June 2003 at a conversion price of $22.01 per common share or approximately 3.4 million common shares. The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $290.3 million at June 30, 1999, resulting in an unrecorded pre-tax holding gain of $117.8 million. ITC^ DeltaCom, Inc. (ITCD) is a fiber optic telecommunications provider. SCI owned approximately 4.1 million common shares of ITCD. SCI's investment in ITCD's common shares of approximately $16.2 million had a market value of $113.6 million at June 30, 1999, resulting in a pre-tax unrealized holding gain of $97.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." In addition, SCI owned 1,480,771 shares of series A preferred stock of ITCD at a cost of approximately $11.3 million. Series A preferred shares are convertible in March 2002 into ITCD common shares on a two for one basis. The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $82.9 million at June 30, 1999, resulting in an unrecorded pre-tax holding gain of $71.7 million. o Knology Holdings, Inc. (Knology) is a broad-band service provider of cable, television, telephone and internet services. SCI owned 71,050 units of Knology. Each unit consists of one 11.875% Senior Discount Note due 2007 and one warrant entitling the holder to purchase .003734 shares of preferred stock of Knology. The cost of this investment was approximately $40 million. SCI also owned an additional 753 warrants which entitles it to purchase 753 shares of preferred stock at $1,500 per share. o ITC has an ownership interest in several Southeastern communications companies. SCI owned approximately 3.1 million common shares, 645,153 series A convertible preferred shares, and 133,664 series B convertible preferred shares of ITC. These investments cost approximately $7.1 million, $8.9 million, and $5.0 million, respectively. Series A and series B preferred shares are convertible in March 2002 into ITC common shares at a conversion price of $13.45 and $43.56, respectively, on a four for one basis. The market value of these investments is not readily determinable. On July 9, 1999, ITCD completed its acquisition of AvData Systems, Inc. (AvData). Prior to the merger, the Company held 1,577,384 common shares in AvData at a cost of approximately $1.7 million. The Company received 49,995 common shares of ITCD as a result of the merger. In addition, SCI purchased an additional 1.0 million common shares of ITCD at $25 per share on August 6, 1999. 5. CONTINGENCIES: With respect to commitments at June 30, 1999, 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, 1998. Contingencies at June 30, 1999 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 $9.7 billion. Each reactor licensee is currently liable for up to $88.1 million per reactor owned for each nuclear incident occurring at any reactor in the United States, provided that not more than $10.0 million of the liability per reactor would be assessed per year. SCE&G's maximum assessment, based on its two-thirds ownership of V. C. Summer Nuclear Station (Summer Station), would be approximately $58.7 million per incident, but not more than $6.7 million per year. SCE&G currently maintains policies (for itself and on behalf of Santee Cooper) 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. SCE&G pays annual premiums and, in addition, could be assessed a retroactive premium 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 $6.1 million. 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 SCE&G's rates would not recover the cost of any purchased replacement power, SCE&G will retain the risk of loss as a self-insurer. SCE&G 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, estimates are made of the expenditures, if any, deemed 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 assessments and cleanup relate primarily to regulated operations. Such amounts are deferred and amortized with recovery provided through rates. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. The Company has recovered all amounts previously deferred for its electric operations. The Company expects to recover all deferred amounts related to its gas operations by December 2002. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $24.1 million at June 30, 1999. The deferral includes the estimated costs associated with the following matters. o In September 1992, the Environmental Protection Agency (EPA) notified SCE&G, 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 locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G'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 in the future. The Potentially Responsible Parties (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 approved a Remedial Investigation Report in February 1997 and a Feasibility Study Report in June 1998. In July 1998, the EPA approved SCE&G's Removal Action Work Plan for soil excavation. SCE&G completed Phase One of the Removal Action in 1998 at a cost of approximately $1.5 million. Phase Two will include excavation and installation of several permanent barriers to mitigate coal tar seepage. Phase Two began in November 1998, and is expected to cost approximately $3 million. On September 30, 1998 a Record of Decision was issued which sets forth EPA's view of the extent of each PRP's responsibility for site contamination and the level to which the site must be remediated. On January 13, 1999 the EPA issued a Unilateral Administrative Order which directed SCE&G to implement a Remedial Design and Remedial Action that would accomplish the objectives identified by the Record of Decision. SCE&G and the EPA are continuing to negotiate the remedial plan. In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996-1999) by SCE&G to the City. SCE&G 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, SCE&G 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. The parking garage is currently under construction and is scheduled for completion in the spring of the year 2000. o SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. For the site located in Sumter, South Carolina, effective September 15, 1998, SCE&G entered into a Remedial Action Plan Contract with the South Carolina Department of Health and Environmental Control (DHEC) pursuant to which it agreed to undertake a full site investigation and remediation under the oversight of DHEC. Site investigation and characterization are proceeding according to schedule. Upon selection and successful implementation of a site remedy, DHEC will give SCE&G a Certificate of Completion and a covenant not to sue. SCE&G is continuing to investigate the other two sites, and is monitoring the nature and extent of residual contamination. 6. SEGMENT OF BUSINESS INFORMATION: The Company's reportable segments are listed in the following table. The Consolidated Financial Statements report operating revenues, comprised of reportable segments, except Energy Marketing, and the non-reportable transit operations segment. Energy Marketing's revenues and revenues from other non-reportable segments are included in Other Income. The Company uses operating income to measure profitability for its Electric Operations and Gas Distribution segments. Therefore, net income is not allocated to these segments. The Company uses net income to measure profitability for its Energy Marketing segment, which includes the Company's unregulated gas sales in Georgia. Affiliate revenue is derived from transactions between reportable segments as well as transactions between separate legal entities that are combined into the same reportable segment. Assets for the period did not change significantly. Disclosure and Reconciliation of Reportable Segments - -------------------------------------------------------------------------------- Three Months Ended Three Months Ended June 30, 1999 June 30, 1998 - -------------------------------------------------------------------------------- Net Operating Net Operating Income Income Income Income (Millions of Dollars) Electric Operations n/a $ 64 n/a $69 Gas Distribution n/a - n/a 1 Gas Transmission $ 2 3 $ 3 4 Energy Marketing (11) n/a (2) n/a - ------------------------------------------------- ----------------------------- Total Reportable Segments (9) 67 1 74 Elimination of Affiliates - (1) - (1) Non-reportable Segments (3) (1) (2) (1) Unallocated 36 - 43 2 - ---------------------------------------------- ---------------- ------------- Consolidated Totals $24 $65 $42 $74 ============================================== ================ ============= External Affiliate External Affiliate Revenue Revenue Revenue Revenue (Millions of Dollars) Electric Operations $293 $ 79 $299 $74 Gas Distribution 44 1 44 2 Gas Transmission 38 29 44 29 Energy Marketing 48 - 56 - - -------------------------------------------------------------------------------- Total Reportable Segments $423 $109 $443 $105 ================================================================================ - -------------------------------------------------------- ---------------------- Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 - -------------------------------------------------------- ----------------------- Net Operating Net Operating Income Income Income Income (Millions of Dollars) Electric Operations n/a $127 n/a $141 Gas Distribution n/a 14 n/a 17 Gas Transmission $ 5 7 $ 8 10 Energy Marketing (25) n/a (3) n/a - ---------------------------------------------------------------- -------------- Total Reportable Segments (20) 148 5 168 Elimination of Affiliates - (2) - (2) Non-reportable Segments (2) (2) (1) (2) Unallocated 83 - 102 1 - ---------------------------------------------------------------- -------------- Consolidated Totals $61 $144 $106 $165 ================================================================ ============== External Affiliate External Affiliate Revenue Revenue Revenue Revenue (Millions of Dollars) Electric Operations $559 $148 $569 $141 Gas Distribution 130 1 132 2 Gas Transmission 82 78 92 78 Energy Marketing 189 - 148 - - --------------------------------------------------------------------------- Total Reportable Segments $960 $227 $941 $221 =========================================================================== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SCANA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in SCANA Corporation's (the Company) Annual Report on Form 10-K for the year ended December 31, 1998. 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, including the pace of deregulation of retail natural gas and electricity markets in the United States, (3) changes in the economy, (4) the impact of competition from other energy suppliers, (5) the management of the Company's operations, (6) variations in prices of natural gas and fuels used for electric generation, (7) growth opportunities for the Company's regulated and non-regulated subsidiaries, (8) the results of financing efforts, (9) changes in the Company's accounting policies, (10) weather conditions in areas served by the Company's utility subsidiaries, (11) performance of the telecommunications companies in which the Company has made significant investments, (12) inflation, (13) exposure to environmental issues and liabilities, (14) changes in environmental regulation, (15) unsuccessful correction of any material Year 2000 problem or, alternatively, unsuccessful implementation of a contingency plan by the Company and any critical third party suppliers, and (16) 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. MATERIAL CHANGES IN CAPITAL RESOURCES AND LIQUIDITY SINCE DECEMBER 31, 1998 COMPETITION North Carolina Acquisition On February 17, 1999, the Company and Public Service Company of North Carolina, Inc. (PSNC) announced a definitive agreement whereby the Company will acquire PSNC in a transaction valued at approximately $900 million, including the assumption of debt. The transaction will be accounted for as a purchase. It is anticipated that PSNC will be operated as a wholly-owned subsidiary of the Company. The shareholders of both companies approved the transaction on July 1, 1999. On July 30, 1999, SCANA filed an application with the Securities and Exchange Commission (SEC) to become a registered public utility holding company. The transaction still requires the approval of the SEC and several regulatory agencies. It is anticipated that the approval process will be completed by the end of 1999. Georgia Retail Gas Market SCANA Energy Marketing (Energy Marketing), a wholly-owned subsidiary of the Company, continues to exceed projections for acquiring customers in Georgia's natural gas market. At June 30, 1999, Energy Marketing had approximately 287,000 customers compared to approximately 72,000 at December 31, 1998. Energy Marketing's success has resulted in startup costs and expenses being significantly higher than expected. For the six months ended June 30, 1999, Energy Marketing incurred losses (net of taxes) of approximately $22.7 million, including startup costs which were expensed as incurred. A substantial portion of those costs came from a $50 per customer promotional sign-up offer, which expired April 15, 1999. In March 1999, the Georgia legislature approved a bill that resulted in Georgia's natural gas market being declared competitive. As a result, customers who have not chosen a new gas supplier by August 11, 1999 will be randomly assigned to a new supplier based on market share. At the current rate of expansion, Energy Marketing could have approximately 435,000 customers after the random assignment process is completed. The level of future revenues and expenditures, including startup costs, is dependent on several factors that cannot be reasonably predicted. These factors include how rapidly Energy Marketing gains additional customers and market share, the intensity of competition as it continues to develop, the margin Energy Marketing is able to achieve on gas sales and its ability to find industrial interruptible customers to purchase available capacity. Energy Marketing anticipates incurring additional losses through the remainder of 1999 and plans to be breakeven for the year 2000. Proposed Interstate Natural Gas Pipeline On April 14, 1999, South Carolina Pipeline Corporation, a wholly-owned subsidiary of the Company, announced plans to develop an interstate natural gas pipeline to ensure adequate supplies to growing gas markets in South Carolina and North Carolina. Details of the proposal are being finalized. Construction of the project will require approval by the Federal Energy Regulatory Commission and other federal and state agencies. LIQUIDITY AND CAPITAL RESOURCES On December 11, 1998, the Public Service Commission of South Carolina (PSC) issued an order requiring South Carolina Electric & Gas Company (SCE&G), a wholly owned subsidiary of the Company, to reduce retail electric rates on a prospective basis. The PSC acted in response to SCE&G reporting that it earned a 13.04 percent return on common equity for its retail electric operations for the twelve months ended September 30, 1998. This return on common equity exceeded SCE&G's authorized return of 12.0 percent by 1.04 percent, or $22.7 million, primarily as a result of record-breaking heat experienced during the summer. The order required prospective rate reductions on a per kilowatt-hour basis, based on actual retail sales for the twelve months ended September 30, 1998. This action will reduce future reported return on common equity to the PSC-authorized level if SCE&G experiences the same weather effect and other business results as that of the twelve months ended September 30, 1998. On December 21, 1998, SCE&G filed a motion for reconsideration with the PSC. On January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G's return on equity of 12.0 percent. The rate reductions were placed into effect with the first billing cycle of January 1999. The following table summarizes how the Company generated funds for property additions and construction expenditures during the six months ended June 30, 1999 and 1998: - ----------------------------------------------------------------------------- Six Months Ended June 30, 1999 1998 - ---------------------------------------------------------- ------------------ (Millions of Dollars) Net cash provided from operating activities $ 66 $ 162 Net cash provided from financing activities 86 7 Cash provided from sale of subsidiary assets 12 - Cash and temporary cash investments available at the beginning of the period 62 60 ================================================================================ Net cash available for property additions and construction expenditures $226 $229 ================================================================================ Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $118 $ 108 ================================================================================ Funds used for nonutility property additions $ 38 $ 82 ================================================================================ On March 9, 1999, SCE&G issued $100 million of First Mortgage Bonds having an annual interest rate of 6 1/8% and maturing on March 1, 2009. These funds were used to reduce short-term debt. On June 29, 1999, the Company issued $150 million one-year floating rate medium-term notes maturing on July 14, 2000. The interest rate is reset monthly and is based on the one-month LIBOR plus 35 basis points. These funds were used to reduce short-term bank debt. The Company anticipates that the remainder of its 1999 cash requirements will be met through internally generated funds, and the incurrence of additional short-term and long-term indebtedness. The Company anticipates incurring short-term and long-term debt to fund the cash consideration to be paid to shareholders related to the Company's acquisition of PSNC. 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 sources of financing 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 June 30, 1999 was 3.01. Investments in Equity Securities At June 30, 1999, SCANA Communications, Inc. (SCI), a wholly owned subsidiary of the Company, held the following investments in ITC Holding Company, Inc. (ITC) and its affiliates: o Powertel, Inc. (Powertel) is a publicly traded company that owns and operates personal communications services (PCS) systems in several major Southeastern markets. SCI owned approximately 4.8 million common shares of Powertel. SCI's investment in Powertel's common shares of approximately $70.4 million had a market value of $143.5 million at June 30, 1999, resulting in a pre-tax unrealized holding gain of $73.1 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." In addition, SCI owned the following non-voting convertible preferred shares, at the approximate cost noted: 100,000 shares series B ($75.1 million); 50,000 shares series D ($22.5 million); and, 50,000 shares series E 6.5% ($75.0 million). Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Preferred series E shares are convertible in June 2003 at a conversion price of $22.01 per common share or approximately 3.4 million common shares. The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $290.3 million at June 30, 1999, resulting in an unrecorded pre-tax holding gain of $117.8 million. o ITC^ DeltaCom, Inc. (ITCD) is a fiber optic telecommunications provider. SCI owned approximately 4.1 million common shares of ITCD. SCI's investment in ITCD's common shares of approximately $16.2 million had a market value of $113.6 million at June 30, 1999, resulting in a pre-tax unrealized holding gain of $97.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." In addition, SCI owned 1,480,771 shares of series A preferred stock of ITCD at a cost of approximately $11.3 million. Series A preferred shares are convertible in March 2002 into ITCD common shares on a two for one basis. The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $82.9 million at June 30, 1999, resulting in an unrecorded pre-tax holding gain of $71.7 million. o Knology Holdings, Inc. (Knology) is a broad-band service provider of cable, television, telephone and internet services. SCI owned 71,050 units of Knology. Each unit consists of one 11.875% Senior Discount Note due 2007 and one warrant entitling the holder to purchase .003734 shares of preferred stock of Knology. The cost of this investment was approximately $40 million. SCI also owned an additional 753 warrants which entitles it to purchase 753 shares of preferred stock at $1,500 per share. o ITC has an ownership interest in several Southeastern communications companies. SCI owned approximately 3.1 million common shares, 645,153 series A convertible preferred shares, and 133,664 series B convertible preferred shares of ITC. These investments cost approximately $7.1 million, $8.9 million, and $5.0 million, respectively. Series A and series B preferred shares are convertible in March 2002 into ITC common shares at a conversion price of $13.45 and $43.56, respectively, on a four for one basis. The market value of these investments is not readily determinable. On July 9, 1999, ITCD completed its acquisition of AvData Systems, Inc. (AvData). Prior to the merger, the Company held 1,577,384 common shares in AvData at a cost of approximately $1.7 million. The Company received49,995 common shares of ITCD as a result of the merger. In addition, SCI purchased 1.0 million common shares of ITCD at $25 per share on August 6, 1999. Year 2000 Issue The Year 2000 is an issue because many computers, embedded systems and software were originally programmed using two digits rather than four digits to identify the applicable year. This may prevent them from accurately processing information with dates beyond 1999. Because the Year 2000 issue could have a material impact on the operations of the Company if not addressed, the Company's goal is to be Year 2000 ready. This means that before the year 2000, critical systems, equipment, applications and business relationships will have been evaluated and should be suitable to continue into and beyond the year 2000 and that applicable contingency plans are in place. In 1993, the Company began the first of several projects to replace many of its business application systems to provide increased functionality and to improve access to business information. Accordingly, the Company has implemented new general ledger, purchasing, materials inventory, accounts payable, and customer information systems. These new systems, which comprise a significant portion of the Company's applications software, were designed to be Year 2000 compliant and have been tested to confirm their Year 2000 readiness. In 1997, the Company established a Corporate Year 2000 Project Office (Project Office) to direct Year 2000 efforts throughout the Company. A Steering Committee was formed to direct the efforts of the Project Office. The Steering Committee reports to the senior officers of the Company and to the board of directors. It is chaired by the chief financial officer of SCANA and is comprised of officers representing all operational areas. The Project Office is staffed by nine full time project managers and extensive support personnel. The Project Office is responsible for addressing Year 2000 issues and coordinating the required assessment and remediation efforts. The Company's Year 2000 efforts encompass three projects, all reporting to the Steering Committee. The Information Technology Project covers all mainframe and client server application software, infrastructure hardware, system software, desktop computers and network equipment. The Embedded Systems Project covers all microprocessors, instruments and control devices, monitoring equipment on power lines and in substations, security and control devices, telephone systems and certain types of meters. The Procedures and External Interfaces Project covers Year 2000 procedures, documentation and communications with key suppliers, vendors, customers, financial institutions and governmental agencies. The Company's Year 2000 project approach involves the following: (1) inventorying all Year 2000 internal and external items and entities and updating the Year 2000 Inventory Database; (2) performing risk analysis and corporate prioritization of all inventory entries; (3) performing detailed assessments of all inventory entries to determine Year 2000 readiness and establishing a remediation action plan where necessary; (4) remediating all inventory entries assessed as non-compliant, including repairing, replacing or developing acceptable work-arounds; (5) testing through date simulation and comprehensive test data; (6) implementation of all converted systems and equipment into production operations; and (7) contingency planning. Detailed project plans exist for each of the Year 2000 projects. These project plans, work schedules and resource requirements are reviewed weekly by the project managers and monthly by the Steering Committee. The Year 2000 projects are appropriately staffed and are on schedule. The Company's critical systems and business relationships have been addressed and the remaining project work this year will focus on addressing the lower priority systems and change management. SCE&G's V. C. Summer Nuclear Station reported to the Nuclear Regulatory Commission (NRC) at the end of June 1999 that the plant is Year 2000 ready. Also at the end of June, SCANA reported to the North American Electric Reliability Council (NERC), that the Company's primary systems necessary for the generation and transmission of electricity are Year 2000 ready with two exceptions. The first exception is associated with Canadys Station Unit 1 coal-fired generating plant. The Westinghouse Distributed Products Family (WDPF) upgrades and Year 2000 readiness tests at two of the three Canadys Station Units have been completed. The same WDPF upgrade and Year 2000 readiness test for Unit 1 is scheduled for the fall outage in November 1999. Canadys Station Unit 1 generates 125 MW and represents less than 3% of SCANA's generating capacity. The second exception is associated with SCE&G's new Spectrum Energy Management System (EMS). The conversion of the existing EMS system to the Spectrum System is in process and expected to be completed in August 1999. Management believes the Spectrum System will be Year 2000 ready when implemented. SCANA has contingency plans in place, which include manual procedures that provide a reliable alternative to the functions expected to be handled by the Spectrum System. The Information Technology Project Team has completed the assessment and code remediation for all application software. These applications have been tested in an isolated Year 2000 testing environment. The Year 2000 testing environment will be maintained through the end of the year to test any changes to these systems or any newly implemented applications. Independent vendor code verifications were successfully completed for selected systems that had been through the Company's remediation process. During the second quarter of 1999 a comprehensive Year 2000 test was successfully performed on the Company's network equipment. All of the Company's desktop workstations are in the process of either being replaced or upgraded to a standard configuration and software release level. All completed assessment and remediation documentation related to mission critical applications and technical infrastructure items has been reviewed and approved by the Information Technology Audit Review Committee. The Information Technology Project was approximately 85% complete through June 1999. The Embedded Systems Project Team, which included approximately 20 engineers with prior experience with microprocessors was formed in 1998, and detailed assessment, remediation and testing procedures were developed. This team worked closely with each of SCANA's business units to complete the assessments of critical systems and equipment and any required remediation based on the corporate prioritization process. All completed assessment and remediation documentation related to mission critical systems or equipment involving microprocessors has been reviewed and approved by the Embedded Systems Audit Review Committee. Independent vendor verifications for selected embedded system assessments were completed during the first quarter of 1999 and confirmed the Company's previous conclusions. The Embedded Systems Project was approximately 90% complete through June 1999. The Procedures and External Interfaces Project Team has developed written documentation and procedures for Year 2000 compliance definition, document control, inventory, prioritization, assessment, remediation, change control, business continuity planning, and vendor, customer and supplier communications. This team has communicated with all significant vendors and suppliers and assessed their Year 2000 readiness status in an attempt to determine the extent to which the Company may be vulnerable to their failure to remediate their own Year 2000 issues. The Company has developed communications materials explaining its year 2000 efforts and is continuing communications with customers and external groups, including the South Carolina and Georgia Public Service Commissions. The Procedures and External Interfaces Project was approximately 75% complete through June 1999. The Company's revised projected total cost of its Year 2000 efforts as of June 1999 and the anticipated timing and breakdown of those expenditures is as follows: ------------------- -------------- ------------------ ---------------- Internal Out of Pocket Total ------------------- -------------- ------------------ ---------------- (Millions of Dollars) Project To Date $ 3 $ 10 $13 Remainder of 1999 1 3 4 ----- ------- ----- Total $ 4 $13 $17 ------------------- -------------- ------------------ ---------------- The cost of the project is based on management's best estimates, which are based on assumptions regarding future events. These future events include continued availability of key resources, third parties' Year 2000 readiness and other factors. The cost of the project is not expected to have a material impact on the results of operations or on the financial position or cash flows of SCANA or SCE&G. The costs of implementing the new business application systems referred to earlier are not included in these cost estimates. A failure to correct a material Year 2000 problem by the Company or by a critical third party supplier could result in an interruption in, or a failure of the Company's ability to provide energy services. At this time, the Company believes its most reasonably likely worst case scenario is that Year 2000 failures could lead to temporary generating capacity reductions on the Company's electrical grid, temporary intermittent interruptions in communications and temporary intermittent interruptions in gas supply from interstate suppliers or producers. A Year 2000 problem of this nature could result in temporary interruptions in electric or gas service to customers. The Company has no historical experience with interruptions caused by this scenario. However, these temporary interruptions in service, if any, might be similar to weather-related outages that the Company encounters from time to time in its business today. Although the Company does not believe that this scenario will occur, the Company is enhancing existing contingency plans to ensure preparedness and to mitigate the long term effect of such a scenario. Since the expected impact of this scenario on the Company's operations, cash flow and financial position cannot be determined, there is no assurance that it would not be material. In 1998 the Company established eight business continuity planning task groups to develop Year 2000 business continuity plans. Contingency plans to cover the Company's Corporate Operations, Customer Service Operations, Electric Generation, Transmission and Distribution Operations, Gas Delivery Operations, Telecommunications and Emergency Preparedness, Information Technology and Procurement have been developed and approved by the Company's senior management. Detailed contingency plans that were already in place to cover weather-related outages, computer failures and generation outages were used and/or referenced as the basis for the Year 2000 business continuity plans. These plans include mitigation strategies and emergency response action plans to address potential Year 2000 scenarios, critical system failures and reliance on critical suppliers. NERC is coordinating the Year 2000 efforts of the electric utility industry in the United States and contingency planning within the regional electric reliability councils. Coordination in SCE&G's region is through the Southeastern Electric Reliability Council (SERC). SCE&G's contingency planning efforts are in compliance with the SERC and NERC contingency planning guidelines which required final contingency plans to be complete by y June 30, 1999. On April 9, 1999, the Company participated in the first of two NERC required contingency planning drills that are intended to test backup communications systems and the Company's ability to operate the electric grid with manually read data instead of computerized systems. The Company's gas transmission and distribution operations areas also participated in the drill. The drills were very successful and no major problems with the Company's backup procedures were found. The Company will also participate in a similar NERC required drill on September 8 and 9, 1999, which will serve as a full dress rehearsal for December 31, 1999. In addition to NERC and SERC, SCE&G is working with the Electric Power Research Institute (EPRI) to address the issue of overall grid reliability and protection. To ensure that all Year 2000 issues at its Summer Station nuclear plant are addressed, SCE&G is closely cooperating with other utility companies that own nuclear power plants. SCE&G and other utilities participating in workshops sponsored by NERC and EPRI continue to share Year 2000 project information to ensure the prompt and effective resolution of the Year 2000 issue. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE CORRESPONDING PERIODS IN 1998 Earnings and Dividends Net income for the three and six months ended June 30, 1999 decreased approximately $18.4 million and $45.5 million, respectively, when compared to the corresponding periods in 1998. These decreases were primarily due to milder weather, the impact of a rate reduction, and losses from the Company's entry into the Georgia retail gas market. In addition, net income for the six months ended June 30, 1998 includes a one-time, after-tax reduction to depreciation expense of approximately $5.5 million related to a change in depreciation rates retroactive to February 1996. This change in depreciation rates resulted from the 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. 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 5% of income before income taxes for the six months ended June 30, 1999 and 1998. The Company's Board of Directors declared the following quarterly dividends on common stock: - --------------------- ------------------ ------------------ ----------------- Declaration Dividend Record Payment Date Per Share Date Date - --------------------- ------------------ ------------------ ----------------- February 7, 1999 38 1/2 cents March 9, 1999 April 1, 1999 April 22, 1999 38 1/2 cents June 9, 1999 July 1, 1999 - --------------------- ------------------ ------------------ ----------------- On February 17, 1999, the Board of Directors adopted a new common stock dividend policy to bring the Company's dividend payout ratio more in line with that of growth-oriented utilities. In accordance with the new policy, the board declared a dividend of $0.385 cents per share which was paid on July 1, 1999. The board anticipates reducing the dividend to $0.275 per share, effective with the dividend to be paid on October 1, 1999, if any. This action would make the Company's indicated annual dividend rate on common stock $1.10 per share. Electric Operations Changes in the electric operations sales margins (including transactions with affiliates) for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - --------------------------------- ---------------------------- ----------------- Three Months Six Months (Millions of Dollars) Change % Change Change % Change - --------------------------------- ---------- ------------ ---------------------- Electric operating revenue $ (6.5) (2.2%) $ (9.6) (1.7%) Less: Fuel used in generation 3.8 5.6% 5.6 4.4 % Purchased power (1.1) (9.2%) 1.0 7.2 % - --------------------------------- ---------- ------------ ---------------------- Margin $ (9.2) (4.2%) $ (16.2) (3.8%) ================================= ========== ============ ====================== Electric operations sales margins decreased for the three and six months ended June 30, 1999 when compared to the corresponding periods in 1998 primarily as a result of milder weather in the first and second quarters of 1999 and implementation in January 1999 of a $22.7 million annual rate reduction ordered by the PSC. See LIQUIDITY AND CAPITAL RESOURCES. Gas Distribution Changes in the gas distribution sales margins for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------- ----------------- Three Months Six Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas distribution operating revenue $ 0.8 1.9% $ (1.5) (1.2%) Less: Gas purchased for resale (0.2) (0.8%) (0.4) (0.6%) - -------------------------------------------------------------------------------- Margin $ 1.0 7.4% $(1.1) (2.1%) ================================================================================ Gas distribution sales margins for the three and six months ended June 30, 1999 did not change significantly from 1998 levels. Gas Transmission Changes in the gas transmission sales margins (including transactions with affiliates) for the three and six months ended June 30, 1999, when compared to the corresponding periods in1998, were as follows: - ----------------------------------------------------------- -------------------- Three Months Six Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas transmission operating revenue (8.0) (10.6%) (12.5) ( 7.2%) Less: Gas purchased for resale (6.9) (10.8%) (9.4) ( 6.4%) - -------------------------------------------------------------------------------- Margin (1.1) (9.3%) (3.1) (11.9%) ================================================================================ Gas transmission sales margins for the three and six months ended June 30, 1999 decreased from 1998 levels primarily as a result of increased competitiveness of alternate fuels. Energy Marketing Changes in the energy marketing sales margins for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------- ----------------------- Three Months Six Months (Millions of Dollars) Change % Change Change % Change - ----------------------------------------------------------------------------- Gas and electric sales revenue $(93.8) (60.9%) $(36.9) (15.0%) Less: Gas and electricity purchased for resale (93.4) (60.5%) (37.8) (15.3%) - -------------------------------------------------------------------------------- Margin $ (0.4) (88.1%) $ 0.9 693.4% ============================================================================== Energy marketing sales margins for the three and six months ended June 30, 1999 did not change significantly from 1998 levels. Decreases in revenue and gas and electricity purchased for resale resulted primarily from phasing out the trading activity of Energy Marketing's Houston office in April 1999, which more than offset increases from the Georgia retail natural gas market. Other Operating Expenses Change in other operating expenses, including taxes, for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - ---------------------------------------------------------- --------------------- Three Months Six Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Other operation and maintenance $ 1.4 1.7% $ (1.5) (1.0%) Depreciation and amortization 3.4 8.7% 15.3 22.4% Income taxes (5.5) (21.2%) (14.0) (22.4%) Other taxes (0.1) (0.6%) 1.0 2.0% - -------------------------------------------------------------------------------- Total $ (0.8) (0.5%) $ 0.8 0.2% ================================================================================ Other operation and maintenance expenses for the three and six months ended June 30, 1999 did not change significantly from 1998 levels. The increase in depreciation and amortization expenses for the three and six months ended June 30, 1999 is due primarily to the completion of the new customer information system in January 1999. In addition, increased depreciation expenses for the six months ended June 30, 1999 reflects the non-recurring adjustment to depreciation expense in 1998 discussed under "Earnings and Dividends." The change in income taxes primarily reflects the change in operating income. The changes in other taxes for the periods were not significant. Other Income Other income, net of income taxes, for the three and six months ended June 30, 1999 decreased approximately $3.9 million and $12.6 million, respectively, when compared to the corresponding periods of 1998. This decrease was primarily attributable to losses from energy marketing activities as a result of startup costs in new markets. Interest Expense Interest expense, excluding the debt component of AFC, for the three and six months ended June 30, 1999 increased approximately $2.7 million and $4.8 million, respectively, when compared to the corresponding periods in 1998. The increase was primarily due to the issuance of medium term notes in the third quarter of 1998 and , the issuance of First Mortgage Bonds in the first quarter of 1999 and increased borrowings of short-term debt. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by the Company described below are held for purposes other than trading. Interest rate risk - The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. June 30, 1999 Expected Maturity Date ------------------------- ------------------------------- --------------- (Millions of Dollars) There- Fair Liabilities 1999 2000 2001 2002 2003 After Total Value ------------------ ------------------------------------------------------ Long-Term Debt Fixed Rate ($) 106.5 363.5 27.5 27.5 284.4 1,265.8 2,075.3 2,119.1 Average Interest Rate 6.86 5.77 6.87 6.87 6.29 7.35 6.89
While a decrease in interest rates would increase the fair value of debt, it is unlikely that events which would result in a realized loss will occur. On March 9, SCE&G issued $100 million of First Mortgage Bonds having an annual interest rate of 6 1/8 % and maturing on March 1, 2009. On June 29, 1999 the Company issued $150 million one-year floating rate medium term notes maturing on July 14, 2000. In addition, the Company has invested in a telecommunications company approximately $40 million for 11.875% senior discount notes due 2007. The fair value of these notes approximates their carrying value. An increase in market interest rates would result in a decrease in fair value of these notes and a corresponding adjustment, net of tax, to other comprehensive income. Equity price risk - Investments in telecommunications companies' marketable equity securities are carried at their market value of $510.5 million. A ten percent decline in market value would result in a $51.1 million reduction in fair value and a corresponding adjustment, net of tax effect, to the related equity account for unrealized gains/losses, a component of other comprehensive income. SOUTH CAROLINA ELECTRIC & GAS COMPANY FINANCIAL SECTION Item 1. Financial Statements SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED BALANCE SHEETS As of June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 31, - ---------------------------------------------------------------------------- -------------------- 1999 1998 - ---------------------------------------------------------------------------- -------------------- Assets (Millions of Dollars) Utility Plant: Electric $4,173 $4,133 Gas 367 366 Other 178 175 - ---------------------------------------------------------------------------- -------------------- Total 4,718 4,674 Less accumulated depreciation and amortization 1,588 1,517 - ---------------------------------------------------------------------------- -------------------- Total 3,130 3,157 Construction work in progress 287 219 Nuclear fuel, net of accumulated amortization 54 56 - ---------------------------------------------------------------------------- -------------------- Utility Plant, Net 3,471 3,432 - ---------------------------------------------------------------------------- -------------------- Nonutility Property and Investments, net of accumulated depreciation 18 16 - ---------------------------------------------------------------------------- -------------------- Current Assets: Cash and temporary cash investments 24 36 Receivables 165 178 Inventories (at average cost): Fuel 33 32 Materials and supplies 46 47 Prepayments 19 8 Deferred income taxes 21 21 - ------------------------------------------------------------------------------------------------ Total Current Assets 308 322 - ------------------------------------------------------------------------------------------------ Deferred Debits: Emission allowances 31 31 Environmental 25 22 Nuclear plant decommissioning fund 60 56 Pension asset, net 128 115 Other regulatory assets 176 186 Other 78 66 - ---------------------------------------------------------------------------- -------------------- Total Deferred Debits 498 476 - ---------------------------------------------------------------------------- -------------------- Total $4,295 $4,246 ============================================================================ ====================
SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED BALANCE SHEETS As of June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 31, - --------------------------------------------------------------------------------------- -------------------- 1999 1998 - ------------------------------------------------------------------------------------ ------------------- Capitalization And Liabilities (Millions of Dollars) Stockholders' Investment: Common equity $1,508 $1,499 Preferred stock (not subject to purchase or sinking funds) 106 106 - ------------------------------------------------------------------------------------ ------------------- Total Stockholders' Investment 1,614 1,605 Preferred Stock, net (subject to purchase or sinking funds) 11 11 SCE&G-Obligated Mandatorily Redeemable Preferred Securities of SCE&G's Subsidiary Trust, SCE&G Trust I, holding solely $50 million principal amount of the 7.55% Junior Subordinated Debentures of SCE&G, due 2027 50 50 Long-Term Debt, net 1,218 1,206 - ------------------------------------------------------------------------------------ ------------------- Total Capitalization 2,893 2,872 - ------------------------------------------------------------------------------------ ------------------- Current Liabilities: Short-term borrowings 95 125 Current portion of long-term debt 128 29 Accounts payable 66 97 Accounts payable - affiliated companies 21 23 Customer deposits 17 17 Taxes accrued 58 75 Interest accrued 22 21 Dividends declared 38 38 Other 8 10 - ------------------------------------------------------------------------------------ ------------------- Total Current Liabilities 453 435 - ------------------------------------------------------------------------------------ ------------------- Deferred Credits: Deferred income taxes 564 549 Deferred investment tax credits 98 100 Postretirement benefits 93 87 Reserve for nuclear plant decommissioning 60 56 Regulatory liabilities 69 65 Other 65 82 - ------------------------------------------------------------------------------------ ------------------- Total Deferred Credits 949 939 - ------------------------------------------------------------------------------------ ------------------- Total $4,295 $4,246 ==================================================================================== =================== See Notes to Consolidated Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Periods Ended June 30, 1999 and 1998 (Unaudited) Three Months Ended Six Months Ended June 30, June 30, - ----------------------------------------------------------------------------- ------------ ----------- ------------ 1999 1998 1999 1998 - ----------------------------------------------------------------------------- ------------ ----------- ------------ (Million of Dollars, Except Per Share Amounts) Operating Revenues: Electric $293 $299 $559 $569 Gas 45 44 130 132 Transit - - 1 1 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Total Operating Revenues 338 343 690 702 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Operating Expenses: Fuel used in electric generation 54 54 99 96 Purchased power (including affiliated purchases) 37 35 66 61 Gas purchased from affiliate for resale 29 29 78 79 Other operation 58 55 111 111 Maintenance 20 21 36 39 Depreciation and amortization 38 35 77 61 Income taxes 19 24 45 58 Other taxes 23 23 47 47 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Total Operating Expenses 278 276 559 552 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Operating Income 60 67 131 150 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Other Income: Allowance for equity funds used during construction 1 2 2 3 Other income 2 - 4 - - ----------------------------------------------------------------------------- ------------ ----------- ------------ Total Other Income 3 2 6 3 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Income Before Interest Charges 63 69 137 153 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Interest Charges (Credits): Interest expense on long-term debt 24 24 47 47 Other interest expense 2 2 5 3 Allowance for borrowed funds used during construction (1) (2) (2) (3) - ----------------------------------------------------------------------------- ------------ ----------- ------------ Total Interest Charges, Net 25 24 50 47 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Income Before Preferred Dividend Requirements On Mandatorily Redeemable Preferred Securities 38 45 87 106 Preferred Dividend Requirement of SCE&G - Obligated Redeemable Preferred Securities 1 1 2 2 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Net Income 37 44 85 104 Preferred Stock Cash Dividends (At stated rates) 2 2 4 4 - ----------------------------------------------------------------------------- ------------ ----------- ------------ Earnings Available for Common Stock 35 42 81 100 Retained Earnings at Beginning of Period 501 459 491 438 Common Stock Cash Dividends Declared (36) (37) (72) (74) ============================================================================= ============ =========== ============ Retained Earnings at End of Period $500 $464 $500 $464 ============================================================================= ============ =========== ============ See Notes to Consolidated Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended June 30, 1999 and 1998 (Unaudited) Six Months Ended June 30, - ------------------------------------------------------------------------------- ------------- 1999 1998 - ------------------------------------------------------------------------------- ------------- (Millions of Dollars) Cash Flows From Operating Activities: Net income $ 85 $ 104 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 77 61 Amortization of nuclear fuel 7 10 Deferred income taxes, net 15 17 Pension asset (13) (4) Post retirement benefits 6 7 Other regulatory assets 10 - Regulatory liabilities 4 8 Allowance for funds used during construction (4) (6) Over (under) collections, fuel adjustment clauses - 9 Changes in certain current assets and liabilities: (Increase) decrease in receivables 13 (8) (Increase) decrease in inventories - (7) (Increase) decrease in prepayments (11) (7) Increase (decrease) in accounts payable (33) (13) Increase (decrease) in taxes accrued (17) 3 Other, net (40) (25) - ------------------------------------------------------------------------------- ------------- Net Cash Provided From Operating Activities 99 149 - ------------------------------------------------------------------------------- ------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC 116) (98) - ------------------------------------------------------------------------------- ------------- Net Cash Used For Investing Activities 116) (98) - ------------------------------------------------------------------------------- ------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 99 - Repayments: Other long-term debt (3) - Dividend payments: Common stock (72) (93) Preferred stock (4) (4) Short-term borrowings, net (30) 53 Fuel and emission allowance financings, net 15 (7) - ------------------------------------------------------------------------------ ------------- Net Cash Provided From (Used For) Financing Activities 5 (51) - ------------------------------------------------------------------------------- ------------- Net Decrease In Cash And Temporary Cash Investments (12) - Cash And Temporary Cash Investments At January 1 36 6 =============================================================================== ============= Cash And Temporary Cash Investments At June 30 $ 24 $ 6 =============================================================================== ============= Supplemental Cash Flow Information: Cash paid for - Interest (includes capitalized interest of $2 for 1999 and $3 for 1998) $ 50 $ 50 - Income taxes 18 9 See Notes to Consolidated Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (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, 1998. These are interim financial statements, and 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 June 30, 1999, approximately $201 million and $69 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $51 million, respectively. The electric and gas regulatory assets (excluding deferred income tax assets) of approximately $46 million and $30 million, respectively, are being recovered through rates, and the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $10 million of the electric regulatory 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 that a write-off would be required, 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 1999 presentation. 2. RATE MATTERS On December 11, 1998, the PSC issued an order requiring the Company to reduce retail electric rates on a prospective basis. The PSC acted in response to the Company reporting that it earned a 13.04 percent return on common equity for its retail electric operations for the twelve months ended September 30, 1998. This return on common equity exceeded the Company's authorized return of 12 percent by 1.04 percent, or $22.7 million, primarily as a result of record heat experienced during the summer. The order required prospective rate reductions on a per kilowatt-hour basis, based on actual retail sales for the twelve months ended September 30, 1998. This action will reduce future reported return on common equity to the PSC-authorized level if the Company experiences the same weather effect and other business results as that of the twelve months ended September 30, 1998. On December 21, 1998, the Company filed a motion for reconsideration with the PSC. On January 12, 1999, the PSC denied the Company's motion for reconsideration and reaffirmed the Company's return on equity of 12 percent. The rate reductions were placed into effect with the first billing cycle of January 1999. 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, the Federal Power Act requires the appropriation of a portion of certain earnings from hydroelectric projects. At June 30, 1999, approximately $27.4 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 June 30, 1999, 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, 1998. Contingencies at June 30, 1999 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 $9.7 billion. Each reactor licensee is currently liable for up to $88.1 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 $58.7 million per incident, but not more than $6.7 million per year. The Company currently maintains policies (for itself and on behalf of Santee Cooper) 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 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 $6.1 million. 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, estimates are made of the expenditures, if any, deemed 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 assessments and cleanup relate primarily to regulated operations. Such amounts are deferred and amortized with recovery provided through rates. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. The Company has recovered all amounts previously deferred for its electric operations. The Company expects to recover all deferred amounts related to its gas operations by December 2002. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $24.1 million at June 30, 1999. The deferral includes the estimated costs associated with the following matters. o In September 1992, the 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 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 in the future. The Potentially Responsible Parties (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 approved a Remedial Investigation Report in February 1997 and a Feasibility Study Report in June 1998. In July 1998, the EPA approved the Company's Removal Action Work Plan for soil excavation. The Company completed Phase One of the Removal Action in 1998 at a cost of approximately $1.5 million. Phase Two will include excavation and installation of several permanent barriers to mitigate coal tar seepage. Phase Two began in November 1998, and is expected to cost approximately $3 million. On September 30, 1998 a Record of Decision was issued which sets forth EPA's view of the extent of each PRP's responsibility for site contamination and the level to which the site must be remediated. On January 13, 1999 the EPA issued a Unilateral Administrative Order which directed the Company to implement a Remedial Design and Remedial Action that would accomplish the objectives identified by the Record of Decision. The Company and the EPA are continuing to negotiate the remedial plan. 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. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost. The parking garage is currently under construction and is scheduled for completion in the spring of the year 2000. o The Company owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. For the site located in Sumter, South Carolina, effective September 15, 1998, the Company entered into a Remedial Action Plan Contract with the South Carolina Department of Health and Environmental Control (DHEC) pursuant to which it agreed to undertake a full site investigation and remediation under the oversight of DHEC. Site investigation and characterization are proceeding according to schedule. Upon selection and successful implementation of a site remedy, DHEC will give the Company a Certificate of Completion and a covenant not to sue. The Company is continuing to investigate the other two sites, and is monitoring the nature and extent of residual contamination. 5. SEGMENT OF BUSINESS INFORMATION The Company's reportable segments are listed in the following table. The Company uses operating income to measure profitability for its Electric Operations and Gas Distribution segments. Therefore, net income is not allocated to these segments. Affiliate revenue is derived from transactions between reportable segments as well as transactions between separate legal entities that are combined into the same reportable segment. Assets for the period did not change significantly. Disclosure and Reconciliation of Reportable Segments Three Months Ended Three Months Ended (Millions of Dollars) June 30, 1999 June 30, 1998 - ------------------------------------------------------------------------------------------- Operating External Affiliate Operating External Affiliate Income Revenue Revenue Income Revenue Revenue Electric Operations $62 $293 $52 $66 $299 $50 Gas Distribution - 45 - 1 44 - - ------------------------------------------------------------------------------------------- Total Reportable Segments 62 338 52 67 $343 $50 ==== === ==== === Elimination of Affiliates (1) (1) Non-reportable Segments (1) 1 - ------------------------------------------------------------------------------------------- Consolidated Totals $60 $67 === === Six Months Ended Six Months Ended (Millions of Dollars) June 30, 1999 June 30, 1998 - ------------------------------------------------------------------------------------------- Operating External Affiliate Operating External Affiliate Income Revenue Revenue Income Revenue Revenue Electric Operations $121 $559 $96 $136 $569 $93 Gas Distribution 14 130 - 17 132 - - ------------------------------------------------------------------------------------------- Total Reportable Segments 135 $689 $96 153 $701 $93 ==== === ==== === Elimination of Affiliates (2) (2) Non-reportable Segments (2) (1) - ------------------------------------------------------------------------------------------- Consolidated Totals $131 $150 ==== ====
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 The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in South Carolina Electric & Gas Company's (SCE&G) Annual Report on Form 10-K for the year ended December 31, 1998. 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, including the pace of deregulation of retail natural gas and electricity markets in the United States, (3) changes in the economy, (4) the impact of competition from other energy suppliers, (5) the management of SCE&G's operations, (6) variations in prices of natural gas and fuels used for electric generation, (7) growth opportunities, (8) the results of financing efforts, (9) changes in SCE&G's accounting policies, (10) weather conditions in areas served by SCE&G, (11) inflation, (12) exposure to environmental issues and liabilities, (13) changes in environmental regulation, (14) unsuccessful correction of any material Year 2000 problem or, alternatively, unsuccessful implementation of a contingency plan by SCE&G and any critical third party suppliers and (15) the other risks and uncertainties described from time to time in SCE&G's periodic reports filed with the Securities and Exchange Commission . SCE&G disclaims any obligation to update any forward-looking statements. MATERIAL CHANGES IN CAPITAL RESOURCES AND LIQUIDITY SINCE DECEMBER 31, 1998 LIQUIDITY AND CAPITAL RESOURCES On December 11, 1998, the South Carolina Public Service Commission (PSC) issued an order requiring SCE&G to reduce retail electric rates on a prospective basis. The PSC acted in response to SCE&G reporting that it earned a 13.04% return on common equity for its retail electric operations for the twelve months ended September 30, 1998. This return on common equity exceeded SCE&G's authorized return of 12.0% by 1.04%, or $22.7 million, primarily as a result of record-breaking heat experienced during the summer. The order required prospective rate reductions on a per kilowatt-hour basis, based on actual retail sales for the twelve months ended September 30, 1998. This action will reduce future reported return on common equity to the PSC-authorized level if SCE&G experiences the same weather effect and other business results as that of the twelve months ended September 30, 1998. On December 21, 1998, SCE&G filed a motion for reconsideration with the PSC. On January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G's return on equity of 12.0%. The rate reductions were placed into effect with the first billing cycle of January 1999. The following table summarizes how SCE&G generated funds for its utility property additions and construction expenditures during the six months ended June 30, 1999 and 1998: - -------------------------------------------------------------------------------- Six Months Ended June 30, 1999 1998 - ---------------------------------------------------------------- --------------- (Millions of Dollars) Net cash provided from operating activities $99 $149 Net cash provided from (used for) financing activities 5 (51) Cash and temporary cash investments available at the beginning of the period 36 6 - ------------------------------------------------------------------------------ Net cash available for utility property additions and construction expenditures $140 $104 ============================================================================== Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $116 $ 98 ============================================================================== On March 9, 1999, SCE&G issued $100 million of First Mortgage Bonds having an annual interest rate of 6 1/8% and maturing on March 1, 2009. These funds were used to reduce short-term debt. SCE&G anticipates that the remainder of its 1999 cash requirements will be met through internally generated funds 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. SCE&G expects that it has or can obtain adequate sources of financing 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 June 30, 1999 was 4.07. Year 2000 Issue The Year 2000 is an issue because many computers, embedded systems and software were originally programmed using two digits rather than four digits to identify the applicable year. This may prevent them from accurately processing information with dates beyond 1999. Because the Year 2000 issue could have a material impact on the operations of SCE&G if not addressed, SCE&G's goal is to be Year 2000 ready. This means that before the year 2000, critical systems, equipment, applications and business relationships will have been evaluated and should be suitable to continue into and beyond the year 2000 and that applicable contingency plans are in place. In 1993, SCE&G began the first of several projects to replace many of its business application systems to provide increased functionality and to improve access to business information. Accordingly, SCE&G has implemented new general ledger, purchasing, materials inventory, accounts payable, and customer information systems. These new systems, which comprise a significant portion of SCE&G's application software, were designed to be Year 2000 compliant and have been tested to confirm their Year 2000 readiness. In 1997, SCANA Corporation (SCANA), SCE&G's parent company, established a Corporate Year 2000 Project Office (Project Office) to direct Year 2000 efforts for itself and each of its subsidiaries, including SCE&G. A Steering Committee was formed to direct the efforts of the Project Office. The Steering Committee reports to the senior officers of SCANA and to its board of directors. It is chaired by SCANA's chief financial officer and is comprised of officers representing all operational areas. The Project Office is staffed by nine full time project managers and extensive support personnel. The Project Office is responsible for addressing Year 2000 issues and coordinating the required assessment and remediation efforts. SCANA's Year 2000 efforts encompass three projects, all reporting to the Steering Committee. The Information Technology Project covers all mainframe and client server application software, infrastructure hardware, system software, desktop computers and network equipment. The Embedded Systems Project covers all microprocessors, instruments and control devices, monitoring equipment on power lines and in substations, security and control devices, telephone systems and certain types of meters. The Procedures and External Interfaces Project covers Year 2000 procedures, documentation and communications with key suppliers, vendors, customers, financial institutions and governmental agencies. SCANA's Year 2000 project approach involves the following: (1) inventorying all Year 2000 internal and external items and entities and updating the Year 2000 Inventory Database; (2) performing risk analysis and corporate prioritization of all inventory entries; (3) performing detailed assessments of all inventory entries to determine Year 2000 readiness and establishing a remediation action plan where necessary; (4) remediating all inventory entries assessed as non-compliant, including repairing, replacing or developing acceptable work-arounds; (5) testing through date simulation and comprehensive test data; (6) implementation of all converted systems and equipment into production operations; and (7) contingency planning. Detailed project plans exist for each of the Year 2000 projects. These project plans, work schedules and resource requirements are reviewed weekly by the project managers and monthly by the Steering Committee. The Year 2000 projects are appropriately staffed and are on schedule. SCE&G's critical systems and business relationships have been addressed and the remaining project work this year will focus on addressing the lower priority systems and change management. SCE&G's V. C. Summer Nuclear Station reported to the Nuclear Regulatory Commission (NRC) at the end of June 1999 that the plant is Year 2000 ready. Also at the end of June, SCE&G reported to the North American Electric Reliability Council (NERC), that the company's primary systems necessary for the generation and transmission of electricity are Year 2000 ready with two exceptions. The first exception is associated with SCE&G's Canadys Station Unit 1 coal-fired generating plant. The Westinghouse Distributed Products Family (WDPF) upgrades and Year 2000 readiness tests at two of the three Canadys Station Units have been completed. The same WDPF upgrade and Year 2000 readiness test for Unit 1 is scheduled for the fall outage in November 1999. Canadys Station Unit 1 generates 125 MW and represents less than 3% of SCE&G's generating capacity. The second exception is associated with SCE&G's new Spectrum Energy Management System (EMS). The conversion of the existing EMS system to the Spectrum System is in process and expected to be completed in August 1999. Management believes the Spectrum System will be Year 2000 ready when implemented. SCE&G has contingency plans in place, which include manual procedures that provide a reliable alternative to the functions expected to be handled by the Spectrum System. The Information Technology Project Team has completed the assessment and code remediation for all application software. These applications have been tested in an isolated Year 2000 testing environment. The Year 2000 testing environment will be maintained through the end of the year to test any changes to these systems or any newly implemented applications. Independent vendor code verifications were successfully completed for selected systems that had been through the Company's remediation process. During the second quarter of 1999 a comprehensive Year 2000 test was successfully performed on the Company's network equipment. All of SCE&G's desktop workstations are in the process of either being replaced or upgraded to a standard configuration and software release level. All completed assessment and remediation documentation related to mission critical applications and technical infrastructure items has been reviewed and approved by the Information Technology Audit Review Committee. The Information Technology Project was approximately 85% complete through June 1999. The Embedded Systems Project Team, which included approximately 20 engineers with prior experience with microprocessors, was formed in 1998, and detailed assessment, remediation and testing procedures were developed. This team worked closely with each of SCE&G's business units to complete the assessments of critical systems and equipment and any required remediation based on the corporate prioritization process. . All completed assessment and remediation documentation related to mission critical systems or equipment involving microprocessors has been reviewed and approved by the Embedded Systems Audit Review Committee. Independent vendor verifications for selected embedded system assessments were completed during the first quarter of 1999 and confirmed SCE&G's previous conclusions. The Embedded Systems Project was approximately 90% complete through June 1999. The Procedures and External Interfaces Project Team has developed written documentation and procedures for Year 2000 compliance definition, document control, inventory, prioritization, assessment, remediation, change control, business continuity planning, and vendor, customer and supplier communications. This team has communicated with all significant vendors and suppliers and assessed their Year 2000 readiness status in an attempt to determine the extent to which SCE&G may be vulnerable to their failure to remediate their own Year 2000 issues. SCE&G has developed communications materials explaining its year 2000 efforts and is continuing communications with customers and external groups, including the South Carolina and Georgia Public Service Commissions. The Procedures and External Interfaces Project was approximately 75% complete through June 1999. SCE&G's revised projected total cost of its Year 2000 efforts as of June 1999 and the anticipated timing and breakdown of those expenditures is a follows: - ------------------------------------------------------------------------ Internal Out of Pocket Total - ------------------------------------------------------------------------ Project To Date $ 3 $ 9 $ 12 Remainder of 1999 1 3 4 --- ----- ----- Total $ 4 $ 12 $16 - ------------------------------------------------------------------------ The cost of the project is based on management's best estimates, which are based on assumptions regarding future events. These future events include continued availability of key resources, third parties' Year 2000 readiness and other factors. The cost of the project is not expected to have a material impact on the results of operations or on the financial position or cash flows of SCE&G. The costs of implementing the new business application systems referred to earlier are not included in these cost estimates. A failure to correct a material Year 2000 problem by SCE&G or by a critical third party supplier could result in an interruption in, or a failure of SCE&G's ability to provide energy services. At this time, SCE&G believes its most reasonably likely worst case scenario is that Year 2000 failures could lead to temporary generating capacity reductions on SCE&G's electrical grid, temporary intermittent interruptions in communications and temporary intermittent interruptions in gas supply from interstate suppliers or producers. A Year 2000 problem of this nature could result in temporary interruptions in electric or gas service to customers. SCE&G has no historical experience with interruptions caused by this scenario. However, these temporary interruptions in service, if any, might be similar to weather-related outages that SCE&G encounters from time to time in its business today. Although SCE&G does not believe that this scenario will occur, SCE&G is enhancing existing contingency plans to ensure preparedness and to mitigate the long term effect of such a scenario. Since the expected impact of this scenario on SCE&G's operations, cash flow and financial position cannot be determined, there is no assurance that it would not be material. In 1998, SCE&G established eight business continuity planning task groups to develop Year 2000 business continuity plans. Contingency plans to cover SCE&G's Corporate Operations, Customer Service Operations, Electric Generation, Transmission and Distribution Operations, Gas Delivery Operations, Telecommunications and Emergency Preparedness, Information Technology and Procurement have been developed and approved by senior management. Detailed contingency plans that were already in place to cover weather-related outages, computer failures and generation outages were used and/or referenced as the basis for the Year 2000 business continuity plans. These plans include mitigation strategies and emergency response action plans to address potential Year 2000 scenarios, critical system failures, and reliance on critical suppliers. NERC is coordinating the Year 2000 efforts of the electric utility industry in the United States and contingency planning within the regional electric reliability councils. Coordination in SCE&G's region is through the Southeastern Electric Reliability Council (SERC). SCE&G's contingency planning efforts are in compliance with the SERC and NERC contingency planning guidelines, which required final contingency plans to be complete by June 30, 1999. On April 9, 1999, SCE&G participated in the first of two NERC required contingency planning drills that are intended to test backup communications systems and SCE&G's ability to operate the electric grid with manually read data instead of computerized systems. SCE&G's gas transmission and distribution operations areas also participated in the drill. The drills were very successful and no major problems with SCE&G's backup procedures were found. SCE&G will also participate in a similar NERC required drill on September 8 and 9, 1999, which will serve as a full dress rehearsal for December 31, 1999. In addition to NERC and SERC, SCE&G is working with the Electric Power Research Institute (EPRI) to address the issue of overall grid reliability and protection. To ensure that all Year 2000 issues at its Summer Station nuclear plant are addressed, SCE&G is closely cooperating with other utility companies that own nuclear power plants. SCE&G and other utilities participating in workshops sponsored by NERC and EPRI continue to share Year 2000 project information to ensure the prompt and effective resolution of the Year 2000 issue. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE CORRESPONDING PERIODS IN 1998 Earnings and Dividends Net income for the three and six months ended June 30, 1999 decreased approximately $7.3 million and $19.3 million, respectively, when compared to the corresponding periods in 1998. The decreases were primarily due to lower electric margins and the impact of a rate reduction. In addition, net income for the six months ended June 30, 1998 include a one-time, after-tax reduction to depreciation expense of approximately $5.5 million related to a change in depreciation rates retroactive to February 1996. This change in depreciation rates resulted from the 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. 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 3% and 4% of income before income taxes for the six months ended June 30, 1999 and 1998, respectively. SCE&G's Board of Directors authorized payment of dividends on common stock held by SCANA, as follows: - ---------------------- ----------------- ----------------- ----------------- Declaration Dividend Quarter Payment Date Amount Ended Date - ---------------------- ----------------- ----------------- ----------------- February 17, 1999 $35.8 million March 31, 1999 April 1, 1999 April 22, 1999 $35.8 million June 30, 1999 July 1, 1999 - ---------------------- ----------------- ----------------- ----------------- Electric Operations Changes in the electric operations sales margins (including transactions with affiliates) for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - --------------------------------------------------------- ---------------------- Three Month Ended Six Months Ended (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Electric operating revenue $(6.5) (2.2%) $ (9.6) (1.7%) Less: Fuel used in generation 0.8 1.4% 2.5 2.5% Purchased power 2.0 5.9% 4.5 7.3% - -------------------------------------------------------------------------------- Margin $(9.3) (4.4%) $(16.6) (4.0%) ================================================================================ Electric operations sales margins decreased for the three and six months ended June 30, 1999 when compared to the corresponding periods in 1998 primarily as a result of milder weather in the first and second quarters of 1999 and implementation in January 1999 of a $22.7 million annual rate reduction ordered by the South Carolina Public Service Commission. See LIQUIDITY AND CAPITAL RESOURCES. Gas Distribution Changes in the gas distribution sales margins for the three and six months ended June 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas operating revenue $0.8 1.9% $(1.5) (1.2%) Less: Gas purchased for resale (0.2) (0.8%) (0.4) (0.6%) - -------------------------------------------------------------------------------- Margin $1.0 7.4 % $(1.1) (2.1%) ================================================================================ Gas distribution sales margins for the three and six months ended June 30, 1999 did not change significantly from 1998 levels. Other Operating Expenses Changes in other operating expenses, including taxes, for the three and six months ended June 30, 1999 when compared to the corresponding periods in 1998, were as follows: - ------------------------------------------------------------ ------------------- Three Months Ended Six Months Ended (Millions of Dollars) Change % Change Change % Change - ------------------------------------------------------------------------------- Other operation and maintenance $ 1.1 1.5% $ (2.6) (1.8%) Depreciation and amortization 3.4 9.6% 15.3 25.0% Income taxes (5.2) (21.7%) (12.6) (21.9%) Other taxes (0.3) (1.3%) 0.9 1.9% - ------------------------------------------------------------------------------- Total $(1.0) (0.7%) $ 1.0 0.3% =============================================================================== Other operation and maintenance expenses for the six months ended June 30, 1999 decreased from 1998 levels primarily as a result of decreased maintenance costs for electric generation and distribution facilities. The increase in depreciation and amortization expenses for the three and six months ended June 30, 1999 is due primarily to the completion of the new customer information system in January 1999. In addition, increased depreciation expense for the six months ended June 30, 1999 reflects the non-recurring adjustment to depreciation expense discussed under "Earnings and Dividends." The change in income tax expense primarily reflects the change in operating income. The changes in other taxes for the periods were not significant. Other Income Other income, net of income taxes, for the three and six months ended June 30, 1999 increased approximately $2.5 million and $3.3 million, respectively, and is due to earnings from pension assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by SCE&G described below are held for purposes other than trading. Interest rate risk - The table below provides information about SCE&G's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. June 30, 1999 Expected Maturity Date ----------------------------------------------- ------ -- (Millions of Dollars) There- Fair Liabilities 1999 2000 2001 2002 2003 After Total Value --------------------------------------------------------- Long-Term Debt Fixed Rate ($) 29.1 188.6 22.6 22.6 124.5 1,043.4 1,437.1 1,456.4 Average Interest Rate 6.56 5.89 6.72 6.72 7.56 7.55 7.28 While a decrease in interest rates would increase the fair value of debt, it is unlikely that events which would result in a realized loss will occur. On March 9, SCE&G issued $100 million of First Mortgage Bonds having an annual interest rate of 6 1/8 % and maturing on March 1, 2009. PART II. OTHER INFORMATION Item 1. Legal Proceedings SCANA Corporation: 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, 1998, and Note 5 "Contingencies" of Notes to Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q. South Carolina Electric & Gas Company: For information regarding legal proceeding see Note 2 "Rate Matters, " appearing in South Carolina Electric & Gas Company's Annual Report on Form 10-K for the year ended December 31, 1998, and Note 4 "Contingencies" of Notes to Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q. Item 4. Submission of Matters to a Vote of Security-Holders (not applicable for South Carolina Electric & Gas Company) The Annual Meeting of Shareholders of SCANA Common Stock (No Par Value) was held on April 22, 1999. The following matters were voted upon at the meeting. 1 and 2. To elect five (5) directors for the terms specified in the Proxy Statement. Number of Voting Number of Shares Total Shares Voting Voting to Shares Nominee For Withhold Authority Voted Harold C. Stowe 89,675,431 4,098,269 93,773,700 Bill L. Amick 89,808,095 3,965,605 93,773,700 Hugh M. Chapman 90,171,267 3,602,433 93,773,700 Lawrence M. Gressette, Jr. 90,160,132 3,613,568 93,773,700 D. Maybank Hagood 89,801,547 3,972,153 93,773,700 3. To approve the appointment of Deloitte & Touche LLP as independent accountants for SCANA. Number of Shares For 92,658,803 Against 720,446 Abstain 394,451 ----------- Total 93,773,700 Percent of FOR votes of those shares actually voting for this proposal: 98.81% A Special Meeting of the shareholders of SCANA Common Stock (No Par Value) was held on July 1, 1999. The following matters were voted upon at the meeting. 1. To approve the agreement and plan of merger dated as of February 16, 1999, as amended and restated as of May 10, 1999, by and among SCANA, Public Service Company of North Carolina, Incorporated, New Sub I, Inc. and New Sub II, Inc., with respect to the merger of New Sub I with and into SCANA. Number of Shares For 79,499,380 Against 10,742,705 Abstain 733,122 Broker non-voted 6,261,154 --------- Total 97,236,361 Percent of FOR votes for this proposal of total outstanding shares: 76.7% 2. To approve the issuance of shares of SCANA common stock with respect to the merger of PSNC with and into New Sub II, Inc. or SCE&G. Number of Shares For 79,074,175 Against 11,127,506 Abstain 773,526 Broker non-voted 6,261,154 --------- Total 97,236,361 Percent of FOR votes for this proposal of total outstanding shares: 76.3% Item 6. Exhibits and Reports on Form 8-K SCANA Corporation and South Carolina Electric & Gas Company: 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 during the second quarter 1999 were as follows: None SCANA CORPORATION 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. SCANA CORPORATION (Registrant) August 13, 1999 By: s/K. B. Marsh K. B. Marsh, Senior Vice President -Finance, Chief Financial Officer and Controller (Principal financial and accounting officer) 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) August 13, 1999 By: s/Jimmy E. Addison Jimmy E. Addison Vice President and Controller (Principal accounting officer) EXHIBIT INDEX Applicable to Form 10-Q of Exhibit No. SCANA SCE&G Description - ---------------------- ------------------------------------------------------ 2.01 X X Agreement and Plan of Merger, dated as of February 16, 1999 as amended and restated as of May 10, 1999, by and among Public Service Company of North Carolina, Incorporated, SCANA Corporation , New Sub I, Inc. and New Sub II, Inc. (Filed as Exhibit 2.1 to SCANA Form S-4 on May 11, 1999) 3.01 X Restated Articles of Incorporation of SCANA as adopted on April 26, 1989 (Filed as Exhibit 3-A to Registration Statement No. 33-49145) 3.02 X Restated Articles of Incorporation of SCE&G, as adopted on December 15, 1993 (Filed as Exhibit 3-A to Form 10-Q for the quarter ended June 30, 1994, File No. 1-3375) 3.03 X Articles of Amendment of SCANA, dated April 27, 1995 (Filed as Exhibit 4-B to Registration Statement No. 33-62421) 3.04 X Articles of Amendment of SCE&G, dated June 7, 1994 filed June 9, 1994 (Filed as Exhibit 3-B to Form 10-Q for the quarter ended June 30, 1994, File No. 1-3375) 3.05 X Articles of Amendment of SCE&G, dated November 9, 1994 (Filed as Exhibit 3-C to Form 10-K for the year ended December 31, 1994, File No. 1-3375) 3.06 X Articles of Amendment of SCE&G, dated December 9, 1994 (Filed as Exhibit 3-D to Form 10-K for the year ended December 31, 1994, File No. 1-3375) 3.07 X Articles of Correction of SCE&G, dated January 17, 1995 (Filed as Exhibit 3-E to From 10-K for the year ended December 31, 1994, File No. 1-3375) 3.08 X Articles of Amendment of SCE&G, dated January 13, 1995 and filed January 17, 1995 (Filed as Exhibit 3-F to Form 10-K for the year ended December 31, 1994, File No. 1-3375) 3.09 X Articles of Amendment of SCE&G, dated March 31, 1995 (Filed as Exhibit 3-G to Form 10-Q for the quarter ended March 31, 1995, File No.1-3375) 3.10 X Articles of Correction of SCE&G - Amendment to Statement filed March 31, 1995, dated December 12, 1995 (Filed as Exhibit 3-H to Form 10-K for the year ended December 31, 1995, Filed No. 1-3375) 3.11 X Articles of Amendment of SCE&G, dated December 13, 1995 (Filed as Exhibit 3-I to Form 10-K for the year ended December 31,1995, File No. 1-3375) 3.12 X Articles of Amendment of SCE&G, dated February 18, 1997 (Filed as Exhibit 3-L to Registration Statement No. 333-24919) 3.13 X Articles of Amendment of SCE&G, dated February 21, 1997 (Filed as Exhibit 3-L to Form 10-Q for the quarter ended March 31, 1997) 3.14 X Articles of Amendment of SCE&G, dated April 22, 1997 (Filed as Exhibit 3-M to Form 10-Q for the quarter ended June 30, 1997) 3.15 X Articles of Amendment of SCE&G, dated April 9, 1998 (Filed as Exhibit 3.15 to SCE&G Form 10-Q for the quarter ended March 31, 1999) 3.16 X By-Laws of SCANA as revised and amended on December 17, 1997 (Filed as Exhibit 3-C to SCANA Form 10-K for the year ended December 31, 1997) Applicable to Form 10-Q of Exhibit No. SCANA SCE&G Description 3.17 X By-Laws of SCE&G as amended and adopted on December 17, 1997 (Filed as Exhibit 3-J to Form 10-K for the year ended December 31, 1997) 4.01 X Articles of Exchange of South Carolina Electric and Gas Company and SCANA Corporation (Filed as Exhibit 4-A to Post-Effective Amendment No. 1 to Registration Statement No. 2-90438) 4.02 X Indenture dated as of November 1, 1989 to The Bank of New York, Trustee (Filed as Exhibit 4-A to Registration Statement No. 33-32107) 4.03 X X 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 (Filed as Exhibit 2-B to Registration Statement No. 2-26459) 4.04 X X Fourth Supplemental Indenture dated as of April 1, 1950, to Indenture referred to in Exhibit 4.03, pursuant to which SCE&G assumed said Indenture (Filed as Exhibit 2-C to Registration Statement No. 2-26459) 4.05 X X Fifth through Fifty-second Supplemental Indentur referred to in Exhibit 4.03 dated as of the dates indicated below and filed as exhibits to the Registration Statements whose file numbers are set forth below: 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-O 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 2-B 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 Applicable to Form 10-Q of Exhibit No. SCANA SCE&G Description 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 2-A-3 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 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 4.06 X X Fifty-Third Supplemental Indenture, dated May 1, 1999, to Indenture (Filed as Exhibit 4.06 to SCE&G Form 10-Q for the quarter ended March 31, 1999) 4.07 X X Indenture dated as of April 1, 1993 from South Carolina Electric & Gas Company to NationsBank of Georgia, National Association (Filed as Exhibit 4.07 to Registration Statement No. 33-49421) 4.08 X X First Supplemental Indenture to Indenture referred to in Exhibit 4.07 dated as of June 1, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-49421) 4.09 X X Second Supplemental Indenture to Indenture referred to in Exhibit 4.07 dated as of June 15, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-57955) 4.10 X X Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-G to SCE&G Form 10-K for the year ended December 31, 1997) 4.11 X X Certificate of Trust for SCE&G Trust I (Filed as Exhibit 4-H to SCE&G Form 10-K for the year ended December 31, 1997) 4.12 X X Junior Subordinated Indenture for SCE&G Trust I (Filed as Exhibit 4-I to SCE&G Form 10-K for the year ended December 31, 1997) 4.13 X X Guarantee Agreement for SCE&G Trust I (Filed as Exhibit 4-J to SCE&G Form 10-K for the year ended December 31, 1997) Applicable to Form 10-Q of Exhibit No. SCANA SCE&G Description 4.14 X X Amended and Restated Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-K to SCE&G Form 10-K for the year ended December 31, 1997) 10.01 X SCANA Voluntary Deferral Plan as amended through October 21, 1997 (Filed as Exhibit 10.01 to SCANA Form 10-K for the year ended December 31, 1998) 10.02 X X Supplemental Executive Retirement Plan (Filed as Exhibit 10-A to SCE&G Form 10-K for the year ended December 31, 1997) 10.03 X SCANA Supplementary Voluntary Deferral Plan as amended and restated through October 21, 1997 (Filed as Exhibit 10-B to SCANA Form 10-K for the year ended December 31, 1997) 10.04 X SCANA Key Executive Severance Benefits Plan as amended and restated effective as of October 21, 1997 (Filed as Exhibit 10-C to SCANA Form 10-K for the year ended December 31, 1997) 10.05 X SCANA Supplementary Key Executive Severance Benefits Plan as amended and restated effective October 21, 1997 (Filed as Exhibit 10.06 to SCANA Form 10-K for the year ended December 31, 1998) 10.06 X SCANA Performance Share Plan as amended and restated effective January 1, 1998 (Filed as Exhibit 10.07 to SCANA Form 10-K for the year ended December 31, 1998) 10.07 X SCANA Key Employee Retention Plan as amended and restated effective as of October 21, 1997 (Filed as Exhibit 10-E to SCANA Form 10-K for the year ended December 31, 1997) 10.08 X Description of SCANA Whole Life Option (Filed as Exhibit 10-F to SCANA Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809) 10.9 X Description of SCANA Corporation Annual Incentive Plan (Filed as Exhibit 10-G to SCANA Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809) 27.01 X Financial Data Schedule (Filed herewith) 27.02 X Financial Data Schedule (Filed herewith) EX-27 2 SCANA FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1998 JUN-30-1999 PER-BOOK 3,824 645 486 524 0 5,479 1,052 (8) 659 1,808 61 106 1,785 105 0 0 205 0 0 0 287 5,479 772 48 580 628 144 (8) 136 69 65 4 61 80 0 66 0.59 0.59
EX-27 3 SCE&G FDS
UT THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1998 JUN-30-1999 PER-BOOK 3,471 18 308 498 0 4,295 181 827 500 1,508 61 106 1,218 95 0 0 128 0 0 0 1,179 4,295 690 45 514 559 131 6 137 50 85 4 81 72 0 99 0 0
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