-----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, AklC0MR16W70GxCyn76E1UAA6m4utQoWioxE62pY/qBq0bsxyVBYOMcetyl6Vh85 3d0NxTrTKbvvFb7SnmGIGA== 0000091882-99-000026.txt : 19991117 0000091882-99-000026.hdr.sgml : 19991117 ACCESSION NUMBER: 0000091882-99-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH CAROLINA ELECTRIC & GAS CO CENTRAL INDEX KEY: 0000091882 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 570248695 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03375 FILM NUMBER: 99754116 BUSINESS ADDRESS: STREET 1: 1426 MAIN ST CITY: COLUMBIA STATE: SC ZIP: 29201 BUSINESS PHONE: 8032179000 MAIL ADDRESS: STREET 1: 1426 MAIN ST CITY: COLUMBIA STATE: SC ZIP: 29201 10-Q 1 COMBINED FORM 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 September 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 October 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 September 30, 1999 and December 31, 1998.... 4 Consolidated Statements of Income and Retained Earnings for the Periods Ended September 30, 1999 and 1998............................................ 6 Consolidated Statements of Cash Flows for the Periods Ended September 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.............................................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk............22 South Carolina Electric & Gas Company Financial Section.......................23 Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998....24 Consolidated Statements of Income and Retained Earnings for the Periods Ended September 30, 1999 and 1998....................................26 Consolidated Statements of Cash Flows for the Periods Ended September 30, 1999 and 1998............................................................27 Notes to Consolidated Financial Statements....................................28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................32 Item 3. Quantitative and Qualitative Disclosures About Market Risk............39 PART II. OTHER INFORMATION Item 1. Legal Proceedings.....................................................40 Item 4. Submission of Matters to a Vote of Security-Holders...................40 Item 6. Exhibits and Reports on Form 8-K......................................40 Signatures....................................................................41 Exhibit Index.................................................................43 SCANA CORPORATION FINANCIAL SECTION PART I. FINANCIAL INFORMATION Item 1. Financial Statements. SCANA CORPORATION CONSOLIDATED BALANCE SHEETS As of September 30, 1999 and December 31, 1998 (Unaudited) September 30, December 31, - ------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------ Assets (Millions of Dollars) Utility Plant: Electric $4,470 $4,406 Gas 614 604 Other 180 175 - ------------------------------------------------------------------------ Total 5,264 5,185 Less accumulated depreciation and amortization 1,835 1,728 - ------------------------------------------------------------------------ Total 3,429 3,457 Construction work in progress 328 251 Nuclear fuel, net of accumulated amortization 48 56 Acquisition adjustment-gas, net of accumulated amortization 23 23 - ------------------------------------------------------------------------ Utility Plant, Net 3,828 3,787 - ------------------------------------------------------------------------ Nonutility Property and Investments, net of accumulated depreciation 796 493 - ------------------------------------------------------------------------ Current Assets: Cash and temporary cash investments 57 62 Receivables 280 276 Inventories (at average cost): Fuel 55 63 Materials and supplies 75 56 Prepayments 29 22 Deferred income taxes 20 22 - ------------------------------------------------------------------------- Total Current Assets 516 501 - ------------------------------------------------------------------------- Deferred Debits: Emission allowances 31 31 Environmental 25 22 Nuclear plant decommissioning fund 62 56 Pension asset, net 136 115 Other regulatory assets 185 216 Other 106 60 - ------------------------------------------------------------------------ Total Deferred Debits 545 500 - ------------------------------------------------------------------------ Total $5,685 $5,281 ======================================================================== SCANA CORPORATION CONSOLIDATED BALANCE SHEETS As of September 30, 1999 and December 31, 1998 (Unaudited) September 30, December 31, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Capitalization and Liabilities (Millions of Dollars) Stockholders' Investment: Common Equity $1,922 $1,746 Preferred stock (not subject to purchase or sinking funds) 106 106 - -------------------------------------------------------------------------------- Total Stockholders' Investment 2,028 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 1,610 1,623 - -------------------------------------------------------------------------------- Total Capitalization 3,699 3,536 - -------------------------------------------------------------------------------- Current Liabilities: Short-term borrowings 162 195 Current portion of long-term debt 327 107 Accounts payable 142 219 Customer deposits 18 18 Taxes accrued 92 72 Interest accrued 37 28 Dividends declared 31 42 Other 15 13 - -------------------------------------------------------------------------------- Total Current Liabilities 824 694 - -------------------------------------------------------------------------------- Deferred Credits: Deferred income taxes 733 628 Deferred investment tax credits 105 108 Postretirement benefits 95 87 Reserve for nuclear plant decommissioning 62 56 Other regulatory liabilities 75 71 Other 92 101 - -------------------------------------------------------------------------------- Total Deferred Credits 1,162 1,051 - -------------------------------------------------------------------------------- Total $5,685 $5,281 ================================================================================ See Notes to Consolidated Financial Statements.
SCANA CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Periods Ended September 30, 1999 and 1998 (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, - ------------------------------------------------------------ --------------- ------------- -------------- 1999 1998 1999 1998 - ------------------------------------------------------------ --------------- ------------- -------------- (Millions of Dollars, Except Per Share Amounts) Operating Revenues: Electric 393 $ 393 $ 953 $ 962 Gas 87 81 299 305 Transit - - 1 1 - ------------------------------------------------------------ --------------- ------------- -------------- Total Operating Revenues 480 474 1,253 1,268 - ------------------------------------------------------------ --------------- ------------- -------------- Operating Expenses: Fuel used in electric generation 87 84 221 212 Purchased power 14 9 29 22 Gas purchased for resale 64 54 200 199 Other operation 66 66 186 186 Maintenance 25 21 64 62 Depreciation and amortization 42 39 126 107 Income taxes 47 55 96 117 Other taxes 26 26 79 78 - ------------------------------------------------------------ --------------- ------------- -------------- Total Operating Expenses 371 354 1,001 983 - ------------------------------------------------------------ --------------- ------------- -------------- Operating Income 109 120 252 285 - ------------------------------------------------------------ --------------- ------------- -------------- Other Income: Allowance for equity funds used during construction - 2 3 6 Other income (loss), net of income taxes (3) (1) (14) 1 - ------------------------------------------------------------ --------------- ------------- -------------- Total Other Income (Loss) (3) 1 (11) 7 - ------------------------------------------------------------ --------------- ------------- -------------- Income Before Interest Charges And Preferred Stock Dividends 106 121 241 292 - ------------------------------------------------------------ --------------- ------------- -------------- Interest Charges (Credits): Interest expense on long-term debt 34 31 97 89 Other interest expense 3 3 11 8 Allowance for borrowed funds used during construction (1) (2) (3) (5) - ------------------------------------------------------------ --------------- ------------- -------------- Total Interest Charges, Net 36 32 105 92 - ------------------------------------------------------------ --------------- ------------- -------------- Income Before Preferred Dividend Requirements on Mandatorily Redeemable Preferred Securities 70 89 136 200 Preferred Dividend Requirement of SCE&G - Obligated Mandatorily Redeemable Preferred Securities 1 1 3 3 - ------------------------------------------------------------ --------------- ------------- -------------- Income Before Preferred Stock Cash Dividends of Subsidiary 69 88 133 197 Preferred Stock Cash Dividends of Subsidiary (At Stated Rates) 2 2 5 5 - ------------------------------------------------------------ --------------- ------------- -------------- Net Income 67 86 128 192 Retained Earnings at Beginning of Period 659 641 678 617 Common Stock Cash Dividends Declared (28) (40) (108) (122) ============================================================ =============== ============= ============== Retained Earnings at End of Period $ 698 $ 687 $ 698 $ 687 ============================================================ =============== ============= ============== Net Income $ 67 $ 86 $ 128 $ 192 Weighted Average Number of Common Shares Outstanding (Millions) 103.6 104.2 103.6 105.9 Earnings Per Weighted Average Share of Common Stock (Basic and Diluted) $ .65 $ .82 $ 1.23 $ 1.81 Cash Dividends Declared Per Share of Common Stock $ .275 $ .385 $ 1.045 $ 1.155 ========================================================== =============== ============= ============== See Notes to Consolidated Financial Statements.
SCANA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended September 30, 1999 and 1998 (Unaudited) Nine Months Ended September 30, - ------------------------------------------------------------------ ------------- 1999 1998 - ------------------------------------------------------------------ ------------- (Millions of Dollars) Cash Flows From Operating Activities: Net income $128 $192 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 133 113 Amortization of nuclear fuel 13 15 Deferred income taxes, net 10 17 Pension asset (21) (18) Other regulatory assets 31 7 Other regulatory liabilities 4 5 Post-retirement benefits 8 22 Allowance for funds used during construction (6) (12) Over (under) collections, fuel adjustment clause (8) (1) Deferred taxes - unrealized gain on investments (97) (11) Changes in certain current assets and liabilities (Increase) decrease in receivables (4) (35) (Increase) decrease in inventories (11) 4 (Increase) decrease in prepayments (7) (6) Increase (decrease) in accounts payable (77) 13 Increase (decrease) in taxes accrued 20 28 Other, net 54 4 - ------------------------------------------------------------------ ------------- Net Cash Provided From Operating Activities 170 337 - ------------------------------------------------------------------ ------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC (167) (161) Increase in other property and investments (73) (87) Sale of subsidiary assets 17 - - ------------------------------------------------------------------ ------------- Net Cash Used For Investing Activities (223) (248) - ------------------------------------------------------------------ ------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 99 - Issuance of notes and loans 150 135 Repayments: First and Refunding Mortgage Bonds - (20) Notes and loans (44) (80) Other long-term debt (9) (5) Preferred stock - (1) Repurchase of common stock - (110) Dividend payments: Common stock (120) (122) Preferred stock of subsidiary (6) (6) Short-term borrowings, net (33) 122 Fuel and emission allowance financings, net 11 (10) - ------------------------------------------------------------------ ------------- Net Cash Provided From Financing Activities 48 (97) - ------------------------------------------------------------------ ------------- Net Increase (Decrease) In Cash And Temporary Cash Investments (5) (8) Cash And Temporary Cash Investments At January 1 62 60 - ------------------------------------------------------------------ ------------- Cash And Temporary Cash Investments At September 30 $ 57 $ 52 ================================================================== ============= Supplemental Cash Flow Information: Cash paid for - Interest (includes capitalized interest of $3 for 1999 and $5 for 1998) $ 97 $ 87 - Income taxes 37 59 Noncash investing activities - Unrealized gain on securities available for sale (net of tax) 157 19 See Notes to Consolidated Financial Statements. SCANA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 September 30, 1999, approximately $210 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 $45 million and $33 million, respectively, are being recovered through rates, and the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $9 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 $143 million and $284 million for the three and nine months ended September 30, 1999, respectively, and $70 million and $210 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 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 January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G'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 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 September 30, 1999, approximately $28.5 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 September 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 4.9 million common shares of Powertel. SCI's investment in Powertel's common shares of approximately $71.6 million had a market value of $267.5 million at September 30, 1999, resulting in a pre-tax unrealized holding gain of $195.9 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 $535 million at September 30, 1999, resulting in an unrecorded pre-tax holding gain of $362.5 million. o ITC^ DeltaCom, Inc. (ITCD) is a fiber optic telecommunications provider. SCI owned approximately 5.1 million common shares of ITCD. SCI's investment in ITCD's common shares of approximately $41.2 million had a market value of $139.0 million at September 30, 1999, resulting in a pre-tax unrealized holding gain of $97.8 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 $81.4 million at September 30, 1999, resulting in an unrecorded pre-tax holding gain of $70.2 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. Preferred series A shares are convertible in March 2002 at a conversion price of $13.45 per common share or approximately 2.6 million common shares. Preferred series B shares are convertible in March 2002 at a conversion price of $43.56 per common share or approximately 500,000 million common shares. 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 valued at approximately $1.5 million as a result of the merger. The Company's investment in ITCD had a market value of $1.4 million at September 30, 1999, resulting in a pre-tax unrealized holding loss of $0.1 million. 5. CONTINGENCIES: With respect to commitments at September 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 September 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. 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 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 $24.3 million at September 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 includes 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. Additionally, SCE&G is continuing to support overall site development activities by managing potentially contaminated soils removed from construction activities nearby. 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 Plan to 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 build 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 September 30, 1999 September 30, 1998 - -------------------------------------------------------- ---------------------- Net Operating Net Operating Income Income Income Income (Millions of Dollars) Electric Operations n/a $109 n/a $121 Gas Distribution n/a (2) n/a (1) Gas Transmission $ 3 4 $ 5 6 Energy Marketing (14) n/a (3) n/a - -------------------------------------------------------------------------------- Total Reportable Segments (11) 111 2 126 Elimination of Affiliates - (1) - (1) Non-reportable Segments 2 (1) (3) (1) Unallocated 76 - 87 (4) - -------------------------------------------------------------------------------- Consolidated Totals $67 $109 $86 $120 ================================================================================ External Affiliate External Affiliate Revenue Revenue Revenue Revenue (Millions of Dollars) Electric Operations $393 $ 90 $393 $ 87 Gas Distribution 34 4 35 2 Gas Transmission 53 28 46 28 Energy Marketing 79 - 176 - - -------------------------------------------------------------------------------- Total Reportable Segments $559 $122 $650 $117 ================================================================================ - ------------------------------------------------------------------------------ Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 - ------------------------------------------------------------------------------ Net Operating Net Operating Income Income Income Income (Millions of Dollars) Electric Operations n/a $235 n/a $263 Gas Distribution n/a 12 n/a 16 Gas Transmission $ 8 11 $ 13 15 Energy Marketing (40) n/a (7) n/a - ------------------------------------------------------------------------- Total Reportable Segments (32) 258 6 294 Elimination of Affiliates - (3) - (4) Non-reportable Segments - (3) (3) (3) Unallocated 160 - 189 (2) - ----------------------------------------------------------------------------- Consolidated Totals $128 $252 $192 $285 ============================================================================= External Affiliate External Affiliate Revenue Revenue Revenue Revenue (Millions of Dollars) Electric Operations $ 953 $237 $ 962 $228 Gas Distribution 163 4 164 5 Gas Transmission 136 107 141 106 Energy Marketing 289 - 422 - - ---------------------------------------------------------------------------- Total Reportable Segments $1,541 $348 $1,689 $339 ============================================================================ 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 the Company's service areas , (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 Department of Justice and the Federal Trade Commission have approved the transaction. The North Carolina Utilities Commission held a hearing on whether to approve the merger in late September. Their decision is expected in November. SEC approval is expected by the end of 1999. Georgia Retail Gas Market SCANA Energy Marketing (Energy Marketing), a wholly-owned subsidiary of the Company, exceeded projections for acquiring customers in Georgia's natural gas market. At September 30, 1999, Energy Marketing had approximately 421,000 customers compared to approximately 72,000 at December 31, 1998. As a result, expenses have been significantly higher than expected. For the nine months ended September 30, 1999, Energy Marketing incurred losses (net of taxes) of approximately $36.1 million. Startup costs were expensed as incurred. A significant portion of those costs came from a $50 per customer promotional sign-up offer, which expired April 15, 1999. Other significant costs are being incurred to establish local offices, call centers, and billing and collection functions. The level of future revenues and expenditures is dependent on several factors that cannot be reasonably predicted. These factors include Energy Marketing's ability to retain 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 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 January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G's return on equity of 12 percent. The rate reductions were placed into effect with the first billing cycle of January 1999. On September 14, 1999, the PSC approved an accelerated capital recovery plan for SCE&G's Cope Generating Station. The plan will be implemented beginning January 1, 2000 for a three-year period. The PSC approved an accelerated capital recovery methodology wherein SCE&G will increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates. The amount of the accelerated depreciation will be determined by SCE&G based on the level of revenues and operating expenses, not to exceed $36 million annually without the approval of the PSC. Any unused portion of the $36 million in any given year could be carried forward for possible use in the succeeding year. The accelerated capital recovery plan will be accomplished through existing customer rates. On September 21, 1999, SCE&G announced it will build a $180 million gas turbine generator project in Aiken County, South Carolina. The combined-cycle turbines will burn natural gas to produce 300 megawatts of new electric generation and then use the exhaust heat to replace coal-fired steam that powers two existing 75 megawatt turbines at the Urquhart Generating Station. The turbines are scheduled to be completed by June 2002. On October 15, 1999, the Federal Energy Regulatory Commission (FERC) notified SCE&G of its agreement with SCE&G's plan to reinforce Lake Murray Dam in order to maintain the lake in case of an extreme earthquake. SCE&G and FERC have been discussing possible remediation efforts for the dam over the past several years as part of SCE&G's ongoing hydroelectric operating license with FERC. Cost of the remediation project and a schedule for construction will be determined following the expected completion of engineering and environmental efforts in the first quarter of 2000. FERC is requiring that engineering and construction on the dam be completed by the end of 2002. The following table summarizes how the Company generated funds for property additions and construction expenditures during the nine months ended September 30, 1999 and 1998: - ------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 1998 - -------------------------------------------------------------------------------- (Millions of Dollars) Net cash provided from operating activities $170 $337 Net cash provided from (used for) financing activities 48 (97) Cash provided from sale of subsidiary assets 17 - Cash and temporary cash investments available at the beginning of the period 62 60 =============================================================================== Net cash available for property additions and construction $297 $300 expenditures =============================================================================== Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $167 $161 =============================================================================== Funds used for nonutility property additions $ 73 $ 87 =============================================================================== 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. The proceeds from the sale of these bonds 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 on the notes is reset monthly and is based on the one-month LIBOR plus 35 basis points. The proceeds from these notes were used to reduce short-term bank debt. On September 28, 1999, the Company entered into a definitive agreement to sell its retail propane assets for $86 million plus working capital (approximately $9 million). Net proceeds from the sale will be used primarily to reduce indebtedness. The sale was completed on November 10, 1999. 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 debt. The Company anticipates incurring short-term and long-term debt to satisfy the Company's obligation to purchase shares of common stock of SCANA and PSNC in connection with 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 September 30, 1999 was 2.80. Investments in Equity Securities At September 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 4.9 million common shares of Powertel. SCI's investment in Powertel's common shares of approximately $71.6 million had a market value of $267.5 million at September 30, 1999, resulting in a pre-tax unrealized holding gain of $195.9 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 $535 million at September 30, 1999, resulting in an unrecorded pre-tax holding gain of $362.5 million. o ITC^ DeltaCom, Inc. (ITCD) is a fiber optic telecommunications provider. SCI owned approximately 5.1 million common shares of ITCD. SCI's investment in ITCD's common shares of approximately $41.2 million had a market value of $139.0 million at September 30, 1999, resulting in a pre-tax unrealized holding gain of $97.8 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 $81.4 million at September 30, 1999, resulting in an unrecorded pre-tax holding gain of $70.2 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. Preferred series A shares are convertible in March 2002 at a conversion price of $13.45 per common share or approximately 2.6 million common shares. Preferred series B shares are convertible in March 2002 at a conversion price of $43.56 per common share or approximately 0.5 million common shares. 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 1,577,394 common shares in AvData at a cost of approximately $1.7 million. The Company received 49,995 common shares of ITCD valued at approximately $1.5 million as a result of the merger. The Company's investment in ITCD had a market value of $1.4 million at September 30, 1999, resulting in a pre-tax unrealized holding loss of $0.1 million. 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 has completed efforts to ensure Year 2000 readiness. This means that critical systems, equipment, applications and business relationships 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 involved 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 were developed for each of the Year 2000 projects. These project plans, work schedules and resource requirements were reviewed weekly by the project managers and monthly by the Steering Committee. The project plan tasks required to address the Company's mission critical systems for electric, gas and other business operations and address the Company's business relationships were successfully completed. The remaining Year 2000 project work this year is primarily focused on change management, executing mitigation strategies to minimize potential Year 2000 risks and refining contingency plans. SCE&G's V. C. Summer Nuclear Station reported to the Nuclear Regulatory Commission (NRC) at the end of June 1999 that the plant was 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 were Year 2000 ready with two exceptions. The first exception was associated with SCE&G's Canadys Station Unit 1 coal-fired generating plant. At the end of June, the Westinghouse Distributed Products Family (WDPF) upgrades and Year 2000 readiness tests at two of the three Canadys Station Units had been completed, however, the same WDPF upgrade and Year 2000 readiness test for Unit 1 had not been completed. Canadys Station Unit 1 generates 125 MW and represents less than 3% of SCE&G's generating capacity. The second exception was associated with SCE&G's new Spectrum Energy Management System (EMS). At the end of June, the Year 2000 assessment and testing for the Spectrum System had been completed, however, the new system was not yet on-line. In November 1999, SCE&G reported to NERC that these two exceptions had been addressed. 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 have been 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 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 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 Company's revised projected total cost of its Year 2000 efforts as of September 1999 and the anticipated timing and breakdown of those expenditures is as follows: ------------------------ -------------- ------------------ ---------------- Internal Out of Pocket Total ------------------------ -------------- ------------------ ---------------- (Millions of Dollars) Project To Date $ 3.5 $12.0 $15.5 Remainder of 1999 0.5 0.5 1.0 ------- --------- ------- Total $ 4.0 $12.5 $16.5 ------------------------ -------------- ------------------ ---------------- 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 were 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 June 30, 1999. On September 8 and 9, 1999, the Company participated in the last of two NERC required contingency planning drills that were 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 drills. The September drill also served as a full dress rehearsal for December 31, 1999. The Company employees who participated in the September drill are the same employees who will be on duty for December 31, 1999. During the drill, Company employees monitored company systems for potential problems related to the date September 9, 1999. The drills were successful and no problems were encountered as a result of the September 9, 1999 date. 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. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE CORRESPONDING PERIODS IN 1998 Earnings and Dividends Net income for the three and nine months ended September 30, 1999 decreased approximately $18.6 million and $64.1 million, respectively, when compared to the corresponding periods in 1998. These decreases were primarily due to losses from the Company's entry into the Georgia retail gas market, the impact of a rate reduction at SCE&G, and milder weather. These decreases offset a one-time gain of approximately $5.2 million from the July 1999 sale of 28 towers owned by SCANA Communications, Inc. In addition, net income for the nine months ended September 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 3% and 4% of income before income taxes for the nine months ended September 30, 1999 and 1998, respectively. The Company's Board of Directors declared the following quarterly dividends on common stock: - ------------------------------ --------------- ------------------------------- Declaration Dividend Record Payment Date Per Share Date Date - --------------------- --------------- ---------------------------------------- February 17, 1999 38 1/2 cents March 9, 1999 April 1, 1999 April 22, 1999 38 1/2 cents June 9, 1999 July 1, 1999 August 18, 1999 27 1/2 cents September 10, 1999 October 1, 1999 October 19, 1999 27 1/2 cents December 10, 1999 January 1, 2000 - ---------------------- --------------- --------------------------------------- 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. The board's action makes 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 nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - ---------------------------------- ------------------------------------------- Three Months Nine Months (Millions of Dollars) Change % Change Change % Change - ---------------------------------- ----------- ------------------------------- Electric operating revenue - - (9.6) (1.0%) Less: Fuel used in generation 2.9 3.4% 8.6 4.0% Purchased power 5.6 64.5% 6.6 29.9% - ---------------------------------- ----------- ------------------------------ Margin (8.5) (2.8%) (24.8) (3.4%) ================================== =========== ============================== Electric operations sales margins decreased for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, primarily as a result of milder weather in each of the three quarters to date in 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 nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Nine Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas distribution operating revenue 0.4 1.1% (1.1) (0.7%) Less: Gas purchased for resale 1.3 5.3% 0.9 0.9% - -------------------------------------------------------------------------------- Margin (0.9) (7.7%)) (2.0) (3.1%) ================================================================================ Gas distribution sales margins for the three and nine months ended September 30, 1999 decreased from 1998 levels primarily as a result of milder weather. Gas Transmission Changes in the gas transmission sales margins (including transactions with affiliates) for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Nine Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas transmission operating revenue 7.7 10.4% (4.9) (2.0%) Less: Gas purchased for resale 9.8 16.7% 0.4 0.2% - -------------------------------------------------------------------------------- Margin (2.1) (14.8%) (5.3) (13.0%) ================================================================================ Gas transmission sales margins for the three and nine months ended September 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, operating and other expenses, and net losses for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - ------------------------------------------------------------------------------- Three Months Nine Months (Millions of Dollars) Change % Change Change % Change - ------------------------------------------------------------------------------- Gas and electric sales revenue (97.1) (0.6%) (133.9) (0.3%) Less: Gas and electricity purchased for resale (91.9) (0.5%) (129.6) (0.3%) - ------------------------------------------------------------------------------- Margin (5.2) (5.8%) (4.3) (4.2%) Less: Operating and other expenses 5.8 * 28.8 * - ------------------------------------------------------------------------------- Net losses (11.0) * (33.1) * =============================================================================== * Greater than 100% Energy marketing sales margins for the three and nine months ended September 30, 1999 decreased primarily as a result of negative margins in the Georgia retail natural gas market. Operating and other expenses and net losses increased primarily as a result of expenses related to the entry into the Georgia market. See LIQUIDITY AND CAPITAL RESOURCES. Other Operating Expenses Changes in other operating expenses, including taxes, for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Nine Months (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Other operation and maintenance 4.5 5.2% 3.0 1.2% Depreciation and amortization 3.3 8.5% 18.6 17.4% Income taxes (7.7) (14.1%) (21.7) (18.5%) Other taxes (0.1) (0.2%) 1.0 1.3% - -------------------------------------------------------------------------------- Total - - 0.9 0.2% ================================================================================ Other operation and maintenance expenses for the three months ended September 30, 1999 increased from 1998 levels primarily as a result of increased maintenance costs for electric generation and distribution facilities. The increase in depreciation and amortization expenses for the three and nine months ended September 30, 1999 is due primarily to the completion of the new customer information system in January 1999. In addition, depreciation expense for the nine months ended September 30, 1998 reflects the non-recurring adjustment to depreciation expense discussed under "Earnings and Dividends." The changes in income taxes primarily reflect the changes in operating income. The changes in other tax expense for the periods were not significant. Other Income Other income, net of income taxes, for the three and nine months ended September 30, 1999 decreased approximately $2.0 million and $14.6 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 the entry into new markets, which more than offset the earnings on pension assets and also the gain from the sale of towers discussed under "Earnings and Dividends." Interest Expense Interest expense, excluding the debt component of AFC, for the three and nine months ended September 30, 1999 increased approximately $2.1 million and $11.4 million, respectively, when compared to the corresponding periods in 1998. The increase was primarily due to the issuance of medium term notes in the third quarter of 1998 and the issuance of First Mortgage Bonds in the first quarter of 1999 and increased borrowings of short-term debt. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by the Company described below are held for purposes other than trading. Interest rate risk - The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
September 30, 1999 Expected Maturity Date ------------------------------------------------- ------------------ (Millions of Dollars) There- Fair Liabilities 1999 2000 2001 2002 2003 After Total Value ------- ------------------------------------------------ ----------- Long-Term Debt Fixed Rate ($) 106.7 363.5 27.5 27.5 284.4 1,264.2 2,073.8 2,119.1 Average Interest Rate 6.86 5.77 6.86 6.86 6.29 7.36 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 $661.4 million. A ten percent decline in market value would result in a $66.1 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 September 30, 1999 and December 31, 1998 (Unaudited) September 30, December 31, - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- Assets (Millions of Dollars) Utility Plant: Electric $4,192 $4,133 Gas 375 366 Other 180 175 - ------------------------------------------------------------------------------- Total 4,747 4,674 Less accumulated depreciation and amortization 1,615 1,517 - ------------------------------------------------------------------------------- Total 3,132 3,157 Construction work in progress 295 219 Nuclear fuel, net of accumulated amortization 48 56 - ------------------------------------------------------------------------------- Utility Plant, Net 3,475 3,432 - ------------------------------------------------------------------------------- Nonutility Property and Investments, net of accumulated depreciation 19 16 - ------------------------------------------------------------------------------- Current Assets: Cash and temporary cash investments 38 36 Receivables 195 178 Inventories (at average cost): Fuel 26 32 Materials and supplies 48 47 Prepayments 13 8 Deferred income taxes 21 21 - ------------------------------------------------------------------------------- Total Current Assets 341 322 - ------------------------------------------------------------------------------- Deferred Debits: Emission allowances 31 31 Environmental 25 22 Nuclear plant decommissioning fund 62 56 Pension asset, net 136 115 Other regulatory assets 177 186 Other 82 66 - ------------------------------------------------------------------------------- Total Deferred Debits 513 476 - ------------------------------------------------------------------------------- Total $4,348 $4,246 =============================================================================== SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED BALANCE SHEETS As of September 30, 1999 and December 31, 1998 (Unaudited) September 30, December 31, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Capitalization And Liabilities (Millions of Dollars) Stockholders' Investment: Common equity $1,558 $1,499 Preferred stock (not subject to purchase or sinking funds) 106 106 - -------------------------------------------------------------------------------- Total Stockholders' Investment 1,664 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 1,214 1,206 - -------------------------------------------------------------------------------- Total Capitalization 2,939 2,872 - -------------------------------------------------------------------------------- Current Liabilities: Short-term borrowings 80 125 Current portion of long-term debt 123 29 Accounts payable 60 97 Accounts payable - affiliated companies 21 23 Customer deposits 16 17 Taxes accrued 103 75 Interest accrued 25 21 Dividends declared 27 38 Other 11 10 - -------------------------------------------------------------------------------- Total Current Liabilities 466 435 - -------------------------------------------------------------------------------- Deferred Credits: Deferred income taxes 554 549 Deferred investment tax credits 96 100 Reserve for nuclear plant decommissioning 62 56 Postretirement benefits 95 87 Regulatory liabilities 70 65 Other 66 82 - -------------------------------------------------------------------------------- Total Deferred Credits 943 939 - -------------------------------------------------------------------------------- Total $4,348 $4,246 ================================================================================ See Notes to Consolidated Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Periods Ended September 30, 1999 and 1998 (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------------------------------------- ------------ ----------- ------------ 1999 1998 1999 1998 - ----------------------------------------------------------------- ------------ ----------- ------------ (Million of Dollars, Except Per Share Amounts) Operating Revenues: Electric $393 $393 $ 953 $ 962 Gas 38 37 168 169 Transit - - 1 1 - ----------------------------------------------------------------- ------------ ----------- ------------ Total Operating Revenues 431 430 1,122 1,132 - ----------------------------------------------------------------- ------------ ----------- ------------ Operating Expenses: Fuel used in electric generation 69 68 168 164 Purchased power (including affiliated purchases) 41 33 107 95 Gas purchased from affiliate for resale 27 25 105 104 Other operation 62 61 173 173 Maintenance 23 20 60 58 Depreciation and amortization 39 35 115 96 Income taxes 45 52 90 110 Other taxes 24 24 72 71 - ----------------------------------------------------------------- ------------ ----------- ------------ Total Operating Expenses 330 318 890 871 - ----------------------------------------------------------------- ------------ ----------- ------------ Operating Income 101 112 232 261 - ----------------------------------------------------------------- ------------ ----------------------- Other Income: Allowance for equity funds used during construction - 2 2 5 Other income (loss) 2 (1) 6 (1) - ---------------------------------------------------------------- ------------ ----------- ------------ Total Other Income 2 1 8 4 - ----------------------------------------------------------------- ------------ ----------- ------------ Income Before Interest Charges 103 113 240 265 - ----------------------------------------------------------------- ------------ ----------- ------------ Interest Charges (Credits): Interest expense on long-term debt 24 24 72 72 Other interest expense 2 1 7 4 Allowance for borrowed funds used during construction (1) (1) (3) (5) - --------------------------------------------------------------- ------------ ----------- ------------ Total Interest Charges, Net 25 24 76 71 - ----------------------------------------------------------------- ------------ ----------- ------------ Income Before Preferred Dividend Requirements On Mandatorily Redeemable Preferred Securities 78 89 164 194 Preferred Dividend Requirement of SCE&G - Obligated Mandatorily Redeemable Preferred Securities 1 1 3 3 - ----------------------------------------------------------------- ------------ ----------- ------------ Net Income 77 88 161 191 Preferred Stock Cash Dividends (At stated rates) 2 2 5 5 - ----------------------------------------------------------------- ------------ ----------- ------------ Earnings Available for Common Stock 75 86 156 186 Retained Earnings at Beginning of Period 500 464 491 438 Common Stock Cash Dividends Declared (25) (57) (97) (131) ================================================================= ============ =========== ============ Retained Earnings at End of Period $550 $493 $550 $ 493 ================================================================= ============ =========== ============ See Notes to Consolidated Financial Statements.
SOUTH CAROLINA ELECTRIC & GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended September 30, 1999 and 1998 (Unaudited) Nine Months Ended September 30, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- (Millions of Dollars) Cash Flows From Operating Activities: Net income $161 $191 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 115 96 Amortization of nuclear fuel 13 15 Deferred income taxes, net 8 15 Pension asset (21) (18) Post retirement benefits 8 22 Other regulatory assets 9 (7) Regulatory liabilities 5 4 Allowance for funds used during construction (5) (10) Over (under) collections, fuel adjustment clause (8) (1) Changes in certain current assets and liabilities: (Increase) decrease in receivables (17) (25) (Increase) decrease in inventories 5 4 (Increase) decrease in prepayments (5) (2) Increase (decrease) in accounts payable (39) (22) Increase (decrease) in taxes accrued 28 45 Other, net (34) 6 - -------------------------------------------------------------------------------- Net Cash Provided From Operating Activities 223 313 - -------------------------------------------------------------------------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC (161) (147) Other property and investments (2) 1 - -------------------------------------------------------------------------------- Net Cash Used For Investing Activities (163) (146) - -------------------------------------------------------------------------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 99 - Repayments: Preferred stock - (1) First and refunding mortgage bonds - (20) Other long-term debt (9) (4) Dividend payments: Common stock (108) (130) Preferred stock (6) (6) Short-term borrowings, net (45) 20 Fuel and emission allowance financings, net 11 (10) - -------------------------------------------------------------------------------- Net Cash Provided From (Used For) Financing Activities (58) (151) - -------------------------------------------------------------------------------- Net Decrease In Cash And Temporary Cash Investments 2 16 Cash And Temporary Cash Investments At January 1 36 6 ================================================================================ Cash And Temporary Cash Investments At September 30 $ 38 $ 22 ================================================================================ Supplemental Cash Flow Information: Cash paid for - Interest (includes capitalized interest of $3 for 1999 and $5 for 1998) $ 73 $ 78 - Income taxes 47 41 See Notes to Consolidated Financial Statements. SOUTH CAROLINA ELECTRIC & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 September 30, 1999, approximately $202 million and $70 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 $45 million and $33 million, respectively, are being recovered through rates, and the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $9 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 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 September 30, 1999, approximately $28.5 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 September 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 September 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 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 $24.3 million at September 30, 1999. The deferral includes the estimated costs associated with the following matters. o In September 1992, the Environmental Protection Agency (EPA) notified the Company, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were 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 includes 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. Additionally, the Company is continuing to support overall site development activities by managing potentially contaminated soils removed from construction activities nearby. 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 Plan 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) September 30, 1999 September 30, 1998 - -------------------------------------------------------------------------------------------- Operating External Affiliate Operating External Affiliate Income Revenue Revenue Income Revenue Revenue Electric Operations $105 $393 $63 $118 $393 $63 Gas Distribution (2) 38 - (1) 37 - - --------------------------------------------------------------------------------------------- Total Reportable Segments 103 $431 $63 117 $430 $63 ==== === ==== === Elimination of Affiliates (1) (1) Non-reportable Segments (1) (4) - --------------------------------------------------------------------------------------------- Consolidated Totals $101 $112 ==== ====
Nine Months Ended Nine Months Ended (Millions of Dollars) September 30, 1999 September 30, 1998 - ----------------------------------------------------------------------------------------------- Operating External Affiliate Operating External Affiliate Income Revenue Revenue Income Revenue Revenue Electric Operations $226 $ 953 $159 $254 $ 962 $155 Gas Distribution 13 168 - 16 169 - - --------------------------------------------------------------------- ------------------------- Total Reportable Segments 239 $1,121 $159 270 $1,131 $155 ====== ==== ====== ==== Elimination of Affiliates (4) (3) Non-reportable Segments (3) (6) - --------------------------------------------------------------------- ------------------------- Consolidated Totals $232 $261 ==== ====
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 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 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 January 12, 1999, the PSC denied SCE&G's motion for reconsideration and reaffirmed SCE&G's return on equity of 12 percent. The rate reductions were placed into effect with the first billing cycle of January 1999. On September 14, 1999, the PSC approved an accelerated capital recovery plan for SCE&G's Cope Generating Station. The plan will be implemented beginning January 1, 2000 for a three-year period. The PSC approved an accelerated capital recovery methodology wherein SCE&G will increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates. The amount of the accelerated depreciation will be determined by SCE&G based on the level of revenues and operating expenses, not to exceed $36 million annually without the approval of the PSC. Any unused portion of the $36 million in any given year could be carried forward for possible use in the succeeding year. The accelerated capital recovery plan will be accomplished through existing customer rates. On September 21, 1999, SCE&G announced it will build a $180 million gas turbine generator project in Aiken County, South Carolina. The combined-cycle turbines will burn natural gas to produce 300 megawatts of new electric generation and then use the exhaust heat to replace coal-fired steam that powers two existing 75 megawatt turbines at the Urquhart Generating Station. The turbines are scheduled to be completed by June 2002. On October 15, 1999, the Federal Energy Regulatory Commission (FERC) notified SCE&G of its agreement with SCE&G's plan to reinforce Lake Murray Dam in order to maintain the lake in case of an extreme earthquake. SCE&G and FERC have been discussing possible remediation efforts for the dam over the past several years as part of SCE&G's ongoing hydroelectric operating license with FERC. Cost of the remediation project and a schedule for construction will be determined following the expected completion of engineering and environmental efforts in the first quarter of 2000. FERC is requiring that engineering and construction on the dam be completed by the end of 2002. The following table summarizes how SCE&G generated funds for its utility property additions and construction expenditures during the nine months ended September 30, 1999 and 1998: - -------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 1998 - ----------------------------------------------------------------- -------------- (Millions of Dollars) Net cash provided from operating activities $223 $313 Net cash used for financing activities (58) (151) Cash and temporary cash investments available at the beginning of the period 36 6 - -------------------------------------------------------------------------------- Net cash available for utility property additions and construction expenditures $201 $168 - -------------------------------------------------------------------------------- Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $161 $147 - -------------------------------------------------------------------------------- Funds used for (provided from) nonutility property additions and investments $ (2) $ 1 ================================================================================ 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 debt. 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 September 30, 1999 was 3.90. 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 has completed efforts to ensure Year 2000 readiness. This means that critical systems, equipment, applications and business relationships 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 involved 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 were developed for each of the Year 2000 projects. These project plans, work schedules and resource requirements were reviewed weekly by the project managers and monthly by the Steering Committee. The project plan tasks required to address SCE&G's mission critical systems for electric, gas and other business operations and address SCE&G's business relationships were successfully completed. The remaining Year 2000 project work this year is primarily focused on change management, executing mitigation strategies to minimize potential Year 2000 risks, and refining contingency plans. SCE&G's V. C. Summer Nuclear Station reported to the Nuclear Regulatory Commission (NRC) at the end of June 1999 that the plant was 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 were Year 2000 ready with two exceptions. The first exception was associated with SCE&G's Canadys Station Unit 1 coal-fired generating plant. At the end of June, the Westinghouse Distributed Products Family (WDPF) upgrades and Year 2000 readiness tests at two of the three Canadys Station Units had been completed, however, the same WDPF upgrade and Year 2000 readiness test for Unit 1 had not been completed. Canadys Station Unit 1 generates 125 MW and represents less than 3% of SCE&G's generating capacity. The second exception was associated with SCE&G's new Spectrum Energy Management System (EMS). At the end of June, the Year 2000 assessment and testing for the Spectrum System had been completed, however, the new system was not yet on-line. In November 1999, SCE&G reported to NERC that these two exceptions had been addressed. 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 have been 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 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 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. SCE&G's revised projected total cost of its Year 2000 efforts as of September 1999 and the anticipated timing and breakdown of those expenditures is a follows: ------------------------ -------------- ------------------ ---------------- Internal Out of Pocket Total ------------------------ -------------- ------------------ ---------------- (Millions of Dollars) Project To Date $ 3.5 $11.5 $15.0 Remainder of 1999 0.5 0.5 1.0 ------- --------- ------- Total $ 4.0 $12.0 $16.0 ------------------------ -------------- ------------------ ---------------- 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 were 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 September 8 and 9, 1999, SCE&G participated in the last of two NERC required contingency planning drills that were 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 distribution operations areas also participated in the drills. The September drill also served as a full dress rehearsal for December 31, 1999. The SCE&G employees who participated in the September drill are the same employees who will be on duty for December 31, 1999. During the drill, SCE&G employees monitored company systems for potential problems related to the date September 9, 1999. The drills were successful and no problems were encountered as a result of the September 9, 1999 date. 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. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE CORRESPONDING PERIODS IN 1998 Earnings and Dividends Net income for the three and nine months ended September 30, 1999 decreased approximately $11.0 million and $30.3 million, respectively, when compared to the corresponding periods in 1998. The decreases were primarily due to the impact of a rate reduction and milder weather. In addition, net income for the nine months ended September 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 2% and 3% of income before income taxes for the nine months ended September 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 August 18, 1999 $25.0 million September 30, 1999 October 1, 1999 October 19, 1999 $25.8 million December 31, 1999 January 1, 2000 - -------------------- ----------------- -------------------- -------------------- Electric Operations Changes in the electric operations sales margins (including transactions with affiliates) for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - ------------------------------------------------------------------------------- Three Month Ended Nine Months Ended (Millions of Dollars) Change % Change Change % Change - ------------------------------------------------------------------------------- Electric operating revenue - - (9.5) (1.0%) Less: Fuel used in generation 1.2 1.8% 3.7 2.2% Purchased power 7.7 23.0% 12.2 12.9% - ------------------------------------------------------------------------------- Margin (8.9) (3.0%) (25.4) (3.6%) =============================================================================== Electric operations sales margins decreased for the three and nine months ended September 30, 1999, when compared to the corresponding periods in 1998, primarily as a result of milder weather in each of the three quarters to date in 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 nine months ended September 30, 1999, when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Gas operating revenue 0.4 1.1% (1.1) (0.7%) Less: Gas purchased for resale 1.3 5.3% 0.9 0.9% - -------------------------------------------------------------------------------- Margin (0.9) (7.7%) (2.0) (3.1%) ================================================================================ Gas distribution sales margins for the three and nine months ended September 30, 1999 decreased from the corresponding periods in 1998 primarily as a result of milder weather. Other Operating Expenses Changes in other operating expenses, including taxes, for the three and nine months ended September 30, 1999 when compared to the corresponding periods in 1998, were as follows: - -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended (Millions of Dollars) Change % Change Change % Change - -------------------------------------------------------------------------------- Other operation and maintenance 4.2 5.2% 1.6 .07% Depreciation and amortization 3.4 9.7% 18.7 19.4% Income taxes (7.1) (13.6%) (19.7) (18.0%) Other taxes (0.1) (0.6%) 0.7 1.0% - -------------------------------------------------------------------------------- Total 0.4 0.2% 1.3 0.3% ================================================================================ Other operation and maintenance expenses for the three months ended September 30, 1999 increased from 1998 levels primarily as a result of increased maintenance costs for electric generation and distribution facilities. The increase in depreciation and amortization expenses for the three and nine months ended September 30, 1999 is due primarily to the completion of the new customer information system in January 1999. In addition, depreciation expense for the nine months ended September 30, 1998 reflects the non-recurring adjustment to depreciation expense discussed under "Earnings and Dividends." The changes in income taxes primarily reflect the changes 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 nine months ended September 30, 1999 increased approximately $2.7 million and $6.0 million, respectively, and is primarily due to earnings on pension assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by SCE&G described below are held for purposes other than trading. Interest rate risk - The table below provides information about SCE&G's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
September 30, 1999 Expected Maturity Date --------- --------------- ------------------------------------------------ (Millions of Dollars) There- Fair Liabilities 1999 2000 2001 2002 2003 After Total Value ------- --------- -------------------------------------------------------- Long-Term Debt Fixed Rate ($) 29.1 188.6 22.6 22.6 124.5 1,041.6 1,429.0 1,456.4 Average Interest Rate 6.56 5.89 6.72 6.72 7.56 7.56 7.29
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 2, 3, and 5 are not applicable Item 4. Submission of Matters to a Vote of Security-Holders (not applicable for South Carolina Electric & Gas Company) For information regarding submission of matters to a vote of security-holders, see Item 4 of Part II Other Information appearing in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 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 third 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) November 12, 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) November 12, 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 Registration Statement No. 333-78227) 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 3.01 to Registration Statement No. 333-86387) 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 3.02 to Registration Statement No. 333-86387) 3.05 X Articles of Amendment of SCE&G, dated November 9, 1994 (Filed as Exhibit 3.03 to Registration Statement No. 333-86387) 3.06 X Articles of Amendment of SCE&G, dated December 9, 1994 (Filed as Exhibit 3.04 to Registration Statement No. 333-86387) 3.07 X Articles of Correction of SCE&G, dated January 17, 1995 (Filed as Exhibit 3.05 to Registration Statement No. 333-86387) 3.08 X Articles of Amendment of SCE&G, dated January 13, 1995 and filed January 17, 1995 (Filed as Exhibit 3.06 to Registration Statement No. 333-86387) 3.09 X Articles of Amendment of SCE&G, dated March 30, 1995 (Filed as Exhibit 3.07 to Registration Statement No. 333-86387) 3.10 X Articles of Correction of SCE&G - Amendment to Statement filed March 31, 1995, dated December 13, 1995 (Filed as Exhibit 3.08 to Registration Statement No. 333-86387) 3.11 X Articles of Amendment of SCE&G, dated December 13, 1995 (Filed as Exhibit 3.09 to Registration Statement No. 333-86387) 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 3.11 to Registration Statement No. 333-86387) 3.14 X Articles of Amendment of SCE&G, dated April 22, 1997 (Filed as Exhibit 3.12 to Registration Statement No. 333-86387) 3.15 X Articles of Amendment of SCE&G, dated April 9, 1998 (Filed as Exhibit 3.13 to Registration Statement No. 333-86387) 3.16 X By-Laws of SCANA as revised and amended on December 17, 1997 (Filed as Exhibit 4.01(b) to Registration Statement No. 333-86803) 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 3.14 to Registration Statement No.333-86387) 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-third Supplemental Indenture 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 May 1, 1999 Exhibit 4.04 to Registration No. 333-86387 4.06 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-F to Registration Statement No. 33-49421) 4.07 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) 4.08 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) 4.09 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) 4.10 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) 4.11 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) 4.12 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 4.13 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 Exhibit10.01(a) to Registration Statement No. 333-86803) 10.02 X X Supplemental Executive Retirement Plan (Filed as Exhibit 10.01(b) to Registration Statement No. 333-86803) 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 10.01(c) to Registration Statement No. 333-86803) 10.05 X SCANA Supplementary Key Executive Severance Benefits Plan as amended and restated effective October 21, 1997 (Filed as Exhibit 10.01(d) to Registration Statement No. 333-86803) 10.06 X SCANA Performance Share Plan as amended and restated effective January 1, 1998 (Filed as Exhibit 10.01(e) to Registration Statement No. 333-86803) 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) 10.09 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 FINANCIAL DATA SCHEDULE 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 SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 SEP-30-1999 PER-BOOK 3,828 796 516 545 0 5,685 1,051 173 698 1,922 61 106 1,610 162 0 0 327 1 0 0 1,496 5,685 1,253 96 905 1,001 252 (11) 241 105 133 5 128 108 0 169 1.23 1.23
EX-27 3 SCE&G FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 SEP-30-1999 PER-BOOK 3,475 19 341 513 0 4,348 181 827 550 1,558 61 106 1,214 80 0 0 123 1 0 0 1,205 4,348 1,122 90 800 890 232 8 240 76 161 5 156 97 0 224 0 0
-----END PRIVACY-ENHANCED MESSAGE-----