-----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, NlAkK1dq+xJa25ASWBOIeZgR8M7eUuc7QoCWyOTMOSVd7/ls/v4WDOU1wd67sITP NMLA14v0L0+inQgv25FgxA== 0000754737-03-000180.txt : 20031107 0000754737-03-000180.hdr.sgml : 20031107 20031106173524 ACCESSION NUMBER: 0000754737-03-000180 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANA CORP CENTRAL INDEX KEY: 0000754737 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 570784499 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08809 FILM NUMBER: 03983197 BUSINESS ADDRESS: STREET 1: 1426 MAIN ST STREET 2: MAIL CODE - 051 CITY: COLUMBIA STATE: SC ZIP: 29201 BUSINESS PHONE: 8032179000 MAIL ADDRESS: STREET 1: 1426 MAIN STREET STREET 2: MAIL CODE - 051 CITY: COLUMBIA STATE: SC ZIP: 29218 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: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03375 FILM NUMBER: 03983199 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NORTH CAROLINA INC CENTRAL INDEX KEY: 0000081025 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 562128483 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11429 FILM NUMBER: 03983198 BUSINESS ADDRESS: STREET 1: 1426 MAIN STREET CITY: COLUMBIA STATE: SC ZIP: 29201 BUSINESS PHONE: 8032179188 MAIL ADDRESS: STREET 1: 1426 MAIN STREET CITY: COLUMBIA STATE: SC ZIP: 29201 10-Q 1 form10q.txt 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 quarterly period ended September 30, 2003 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 1-11429 Public Service Company of North Carolina, Incorporated 56-2128483 (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. SCANA Corporation Yes X No South Carolina Electric & Gas Company Yes X No Public Service Company of North Carolina, Incorporated Yes X No Indicate by check mark whether the registrant is an accelerated filer ( as defined in Exchange Act Rule 12b-2). SCANA Corporation Yes X No South Carolina Electric & Gas Company Yes No X Public Service Company of North Carolina, Incorporated Yes No X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Description of Shares Outstanding Registrant Common Stock at October 31, ---------- ------------ -------------- 2003 SCANA Corporation Without Par Value 110,748,408 South Carolina Electric & Gas Company $4.50 Par Value 40,296,147(a) Public Service Company of North Carolina, Incorporated Without Par Value 1,000(a) (a)Held beneficially and of record by SCANA Corporation. This combined Form 10-Q is separately filed by SCANA Corporation, South Carolina Electric & Gas Company and Public Service Company of North Carolina, Incorporated. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies. Public Service Company of North Carolina, Incorporated meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and therefore is filing this form with the reduced disclosure format allowed under General Instruction H(2). ============================================================================
INDEX Page PART I. FINANCIAL INFORMATION SCANA Corporation Financial Section.................................................................................... 3 Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 .................... 4 Condensed Consolidated Statements of Operations for the Periods Ended September 30, 2003 and 2002........ 6 Condensed Consolidated Statements of Cash Flows for the Periods Ended September 30, 2003 and 2002........ 7 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Periods Ended September 30, 2003 and 2002...................................................................... 8 Notes to Condensed Consolidated Financial Statements..................................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 32 Item 4. Controls and Procedures...................................................................................... 34 South Carolina Electric & Gas Company Financial Section................................................................ 35 Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 .................... 36 Condensed Consolidated Statements of Income for the Periods Ended September 30, 2003 and 2002............ 38 Condensed Consolidated Statements of Cash Flows for the Periods Ended September 30, 2003 and 2002........ 39 Notes to Condensed Consolidated Financial Statements..................................................... 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 47 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 53 Item 4. Controls and Procedures....................................................................................... 54 Public Service Company of North Carolina, Incorporated Financial Section............................................... 55 Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 .................... 56 Condensed Consolidated Statements of Operations for the Periods Ended September 30, 2003 and 2002........ 57 Condensed Consolidated Statements of Cash Flows for the Periods Ended September 30, 2003 and 2002........ 58 Notes to Condensed Consolidated Financial Statements..................................................... 59 Item 2. Management's Narrative Analysis of Results of Operations...................................................... 64 Item 4. Controls and Procedures....................................................................................... 66 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................................. 67 Item 6. Exhibits and Reports on Form 8-K.............................................................................. 69 Signatures............................................................................................................. 70 Exhibit Index.......................................................................................................... 71 Certifications Required by Rule 13a-14 ................................................................................ 76 Certifications Pursuant to 18 U.S.C. Section 1350...................................................................... 82
SCANA CORPORATION FINANCIAL SECTION
PART I. FINANCIAL INFORMATION Item 1. Financial Statements SCANA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - ------------------------------------------------------------------------------- ------------------ ------------------ September 30, December 31, Millions of dollars 2003 2002 - ------------------------------------------------------------------------------- ------------------ ------------------ Assets Utility Plant: Electric $5,416 $5,228 Gas 1,650 1,593 Other 181 184 - ------------------------------------------------------------------------------- ------------------ ------------------ Total 7,247 7,005 Accumulated depreciation and amortization (2,606) (2,476) - ------------------------------------------------------------------------------- ------------------ ------------------ Total 4,641 4,529 Construction work in progress 994 677 Nuclear fuel, net of accumulated amortization 41 38 Acquisition adjustments, net of accumulated amortization 230 230 - ------------------------------------------------------------------------------- ------------------ ------------------ Utility Plant, Net 5,906 5,474 - ------------------------------------------------------------------------------- ------------------ ------------------ Nonutility Property, Net of Accumulated Depreciation 93 95 Investments 222 231 - ------------------------------------------------------------------------------- ------------------ ------------------ - ------------------------------------------------------------------------------- ------------------ ------------------ Nonutility Property and Investments, Net 315 326 - ------------------------------------------------------------------------------- ------------------ ------------------ - ------------------------------------------------------------------------------- ------------------ ------------------ Current Assets: Cash and temporary investments 80 374 Receivables, net of allowance for uncollectible accounts of $15 and $17 358 478 Receivables - affiliated companies 15 8 Inventories (at average cost): Fuel 169 166 Materials and supplies 60 61 Emission allowances 7 10 Prepayments 36 40 Deferred income taxes, net 4 - - ------------------------------------------------------------------------------- ------------------ ------------------ Total Current Assets 729 1,137 - ------------------------------------------------------------------------------- ------------------ ------------------ Deferred Debits: Environmental 21 27 Nuclear plant decommissioning - 87 Assets held in trust, net-nuclear decommissioning 35 - Pension asset, net 269 265 Other regulatory assets 331 292 Other 182 138 - ------------------------------------------------------------------------------- ------------------ ------------------ Total Deferred Debits 838 809 - ------------------------------------------------------------------------------- ------------------ ------------------ Total $7,788 $7,746 =============================================================================== ================== ================== - ------------------------------------------------------------------------------------ ------------------- ----------------- September 30, December 31, Millions of dollars 2003 2002 - ------------------------------------------------------------------------------------ ------------------- ----------------- Capitalization and Liabilities Stockholders' Investment: Common equity $2,306 $2,177 Preferred stock (Not subject to purchase or sinking funds) 106 106 - ------------------------------------------------------------------------------------ ------------------- ----------------- Total Stockholders' Investment 2,412 2,283 Preferred Stock, net (Subject to purchase or sinking funds) 9 9 SCE&G-Obligated Mandatorily Redeemable Preferred Securities of SCE&G's Subsidiary Trust, SCE&G Trust I, holding solely $50 million principal amount of 7.55% Junior Subordinated Debentures of SCE&G - 50 Long-Term Debt, net 2,852 2,834 - ------------------------------------------------------------------------------------ ------------------- ----------------- Total Capitalization 5,273 5,176 - ------------------------------------------------------------------------------------ ------------------- ----------------- Current Liabilities: Short-term borrowings 242 209 Current portion of long-term debt 402 413 Accounts payable 201 354 Accounts payable - affiliated companies 14 8 Customer deposits 43 39 Taxes accrued 72 78 Interest accrued 52 52 Dividends declared 41 39 Deferred income taxes, net - 4 Other 51 77 - ------------------------------------------------------------------------------------ ------------------- ----------------- Total Current Liabilities 1,118 1,273 - ------------------------------------------------------------------------------------ ------------------- ----------------- Deferred Credits: Deferred income taxes, net 782 747 Deferred investment tax credits 119 118 Reserve for nuclear plant decommissioning - 87 Asset retirement obligation - nuclear plant 116 - Postretirement benefits 133 131 Regulatory liabilities 144 114 Other 103 100 - ------------------------------------------------------------------------------------ ------------------- ----------------- Total Deferred Credits 1,397 1,297 - ------------------------------------------------------------------------------------ ------------------- ----------------- Total $7,788 $7,746 ==================================================================================== =================== ================= See Notes to Condensed Consolidated Financial Statements. SCANA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - -------------------------------------------------------------------- --------------------------- --------------------------- Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars, except per share amounts 2003 2002 2003 2002 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Operating Revenues: Electric $429 $424 $1,121 $1,075 Gas - regulated 155 136 775 587 Gas - nonregulated 167 134 650 503 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Total Operating Revenues 751 694 2,546 2,165 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Operating Expenses: Fuel used in electric generation 97 105 258 271 Purchased power 13 7 39 29 Gas purchased for resale 262 215 1,127 828 Other operation and maintenance 135 126 420 383 Depreciation and amortization 60 55 180 163 Other taxes 34 32 104 95 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Total Operating Expenses 601 540 2,128 1,769 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Operating Income 150 154 418 396 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Other Income: Other income, including allowance for equity funds used during construction of $6, $6, $15 and $18 16 17 48 54 Gain on sale of investments and assets 3 - 60 31 Impairment of investments - - (7) (255) - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Total Other Income (Expense) 19 17 101 (170) - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Income Before Interest Charges, Income Taxes, Preferred Stock Dividends and Cumulative Effect of Accounting Change 169 171 519 226 Interest Charges, Net of Allowance for Borrowed Funds Used During Construction of $3, $3, $9 and $10 48 49 149 151 Dividend Requirement of SCE&G - Obligated Mandatorily Redeemable Preferred Securities - 1 2 3 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Income Before Income Taxes, Preferred Stock Dividends and Cumulative Effect of Accounting Change 121 121 368 72 Income Tax Expense 35 41 120 20 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Income Before Preferred Stock Dividends and Cumulative Effect of Accounting Change 86 80 248 52 Cash Dividends on Preferred Stock of Subsidiary (At stated rates) 2 2 6 6 - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Income Before Cumulative Effect of Accounting Change 84 78 242 46 Cumulative Effect of Accounting Change, net of taxes - - - (230) - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Net Income (Loss) $84 $78 $242 $(184) ==================================================================== =============== =========== ============ ============== ==================================================================== =============== =========== ============ ============== Basic and Diluted Earnings Per Share of Common Stock: Before Cumulative Effect of Accounting Change $.76 $.74 $2.18 $.44 Cumulative Effect of Accounting Change, net of taxes - - - (2.20) - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- - -------------------------------------------------------------------- --------------- ----------- ------------ -------------- Basic and Diluted Earnings (Loss) Per Share $.76 $.74 $2.18 $(1.76) ==================================================================== =============== =========== ============ ============== ==================================================================== =============== =========== ============ ============== Weighted Average Shares Outstanding (millions) 110.9 104.7 110.9 104.7 See Notes to Condensed Consolidated Financial Statements. SCANA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------------------- ---------------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 - --------------------------------------------------------------------------------------- ------------------ --------------- Cash Flows From Operating Activities: Net income (loss) $242 $(184) Adjustments to reconcile net income (loss) to net cash provided from operating activities: Cumulative effect of accounting change, net of taxes - 230 Depreciation and amortization 188 172 Amortization of nuclear fuel 18 14 Gain on sale of investments and assets (60) (31) Hedging activities (4) 45 Investment impairments 7 255 Allowance for funds used during construction (24) (28) Over (under) collection, fuel adjustment clauses 18 (39) Changes in certain assets and liabilities: (Increase) decrease in receivables, net 113 82 (Increase) decrease in inventories 1 (10) (Increase) decrease in prepayments 4 (1) (Increase) decrease in pension asset (4) (20) (Increase) decrease in other regulatory assets (20) - Increase (decrease) in deferred income taxes, net 27 (138) Increase (decrease) in regulatory liabilities 38 32 Increase (decrease) in postretirement benefits obligations 2 7 Increase (decrease) in accounts payable (147) (62) Increase (decrease) in taxes accrued (6) (18) Increase (decrease) in interest accrued - 9 Changes in other assets (5) 12 Changes in other liabilities 11 20 - --------------------------------------------------------------------------------------- ------------------ --------------- Net Cash Provided From Operating Activities 399 347 - --------------------------------------------------------------------------------------- ------------------ --------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC (558) (424) Proceeds from sale of investments and assets 69 335 Increase in nonutility property (6) (12) Investments in affiliates (11) (25) - --------------------------------------------------------------------------------------- ------------------ --------------- - --------------------------------------------------------------------------------------- ------------------ --------------- Net Cash Used For Investing Activities (506) (126) - --------------------------------------------------------------------------------------- ------------------ --------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 495 295 Issuance of Pollution Control Bonds 36 - Issuance of notes and loans - 497 Issuance of common stock upon exercise of stock options 4 - Repayments: Mortgage bonds (250) (104) Notes and loans (271) (907) Pollution Control Bonds (43) - Retirement of preferred stock - (1) SCE&G Trust I Preferred Securities (50) - Payment of deferred financing costs (22) - Dividends and distributions: Common stock (113) (100) Preferred stock (6) (6) Short-term borrowings, net 33 84 - --------------------------------------------------------------------------------------- ------------------ --------------- Net Cash Used For Financing Activities (187) (242) - --------------------------------------------------------------------------------------- ------------------ --------------- Net Decrease In Cash and Temporary Investments (294) (21) Cash and Temporary Investments, January 1 374 192 - --------------------------------------------------------------------------------------- ------------------ --------------- Cash and Temporary Investments, September 30 $80 $171 ======================================================================================= ================== =============== Supplemental Cash Flow Information: Cash paid for - Interest (net of capitalized interest of $9 and $10) $149 $142 - Income taxes 63 131 Noncash Investing and Financing Activities: Unrealized gain on securities available for sale, net of tax 1 17 See Notes to Condensed Consolidated Financial Statements. SCANA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - ----------------------------------------------------------------------- ----------------------- ----------------------- Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------- ----------- ---------- ------------ - ----------------------------------------------------------------------- ----------- ----------- ---------- ------------ Net Income (Loss) $84 $78 $242 $(184) Other Comprehensive Income (Loss), net of tax: Unrealized gains (losses) on securities available for sale 1 (12) 1 17 Unrealized gains (losses) on hedging activities (2) 1 (4) 28 - ----------------------------------------------------------------------- ----------- ----------- ---------- ------------ Total Comprehensive Income (Loss) (1) $83 $67 $239 $(139) ======================================================================= =========== =========== ========== ============ (1) Accumulated other comprehensive income (loss) of the Company totaled $(1.1) million and $1.0 million as of September 30, 2003 and December 31, 2002, respectively.
See Notes to Condensed Consolidated Financial Statements. SCANA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (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, 2002. These are interim financial statements, and due to the seasonality of the Company's business, the amounts reported in the Condensed Consolidated Statements of Operations 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, 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 (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires cost-based rate-regulated utilities to recognize in their financial statements certain 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, 2003, approximately $352 million and $144 million of regulatory assets (including environmental) and liabilities, respectively, as shown below. September 30, December 31, Millions of dollars 2003 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Accumulated deferred income taxes, net $95 $95 Under-collections - electric fuel and gas cost adjustment clauses, net 40 61 Deferred environmental remediation costs 21 27 Asset retirement obligation - nuclear decommissioning 43 - Deferred non-conventional fuel tax benefits, net (59) (40) Storm damage reserve (36) (32) Franchise agreements 62 65 Other 42 29 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total $208 $205 ================================================================================ Accumulated deferred income tax liabilities arising from utility operations that have not been included in customer rates are recorded as a regulatory asset. Accumulated deferred income tax assets arising from deferred investment tax credits are recorded as a regulatory liability. Under-collections - fuel adjustment clauses, net represent amounts under-collected from customers pursuant to the fuel adjustment clause (electric customers) or gas cost adjustment clause (gas customers) as approved by the Public Service Commission of South Carolina (SCPSC) or North Carolina Utilities Commission (NCUC) during annual hearings. Deferred environmental remediation costs represent costs associated with the assessment and clean-up of manufactured gas plant (MGP) sites currently or formerly owned by the Company. Costs incurred at sites owned by South Carolina Electric & Gas Company (SCE&G) are being recovered through rates. Such costs, totaling approximately $11.6 million, are expected to be fully recovered by the end of 2005. A portion of the costs incurred at sites owned by Public Service Company of North Carolina, Incorporated (PSNC Energy) is also being recovered through rates, and management believes the remaining costs of approximately $7.5 million will be recoverable. Amounts incurred and deferred to date that are not currently being recovered through gas rates at PSNC Energy are approximately $1.5 million. (See Note 3.) Asset retirement obligation - nuclear decommissioning represents the regulatory asset associated with the legal obligation of decommissioning and dismantling V. C. Summer Nuclear Station (Summer Station) as required in SFAS 143, "Accounting for Asset Retirement Obligations." (See Note 1B.) Deferred non-conventional fuel tax benefits represent the deferral of partnership losses and other expenses, offset by the accumulated deferred income tax credits associated with SCE&G's two partnerships involved in converting coal to alternate fuel. Under a plan approved by the SCPSC, any net tax credits generated from non-conventional fuel produced and consumed by SCE&G and ultimately passed through to SCE&G, net of partnership loses and other expenses, have been and will be deferred and will be applied to offset the capital costs of projects required to comply with legislative or regulatory actions. The storm damage reserve represents an SCPSC approved reserve account capped at $50 million to be collected through rates over a period of approximately ten years. The accumulated storm damage reserve can be applied to offset actual storm damage costs in excess of $2.5 million in a calendar year. Franchise agreements represent costs associated with the 30-year electric and gas franchise agreements with the cities of Charleston and Columbia, South Carolina. These amounts are not earning a return, but are being amortized through cost of service over 15 years. The SCPSC and the NCUC have reviewed and approved through specific orders most of the items shown as regulatory assets. Other items represent costs which are not yet approved for recovery by the SCPSC or the NCUC. In recording these costs as regulatory assets, management believes the costs will be allowable under existing rate-making concepts that are embodied in rate orders received by the Company. However, ultimate recovery is subject to SCPSC or NCUC approval. 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, liquidity or financial position in the period the write-off would be recorded. B. New Accounting Standards The Company adopted SFAS 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. In connection with this implementation, the Company performed a valuation analysis of its investment in South Carolina Pipeline Corporation (SCPC) using a discounted cash flow analysis and of PSNC Energy using an independent appraisal. The analysis of the investment in PSNC Energy indicated that the carrying amount of PSNC Energy's acquisition adjustment exceeded its fair value by approximately $230 million, or a $2.20 per share. The resulting impairment charge is reflected on the Condensed Consolidated Statement of Operations as the cumulative effect of an accounting change. SFAS 142 requires that an impairment evaluation be performed annually and at the same time each year. The Company performed its annual evaluation as of January 1, 2003 and no further impairment was indicated. The Company adopted SFAS 143 effective January 1, 2003. SFAS 143 applies to legal obligations associated with the retirement of tangible long-lived assets (ARO) and requires the Company to recognize, as a liability, the fair value of an ARO in the period in which it is incurred and to accrete the liability to its present value in future periods. As of December 31, 2002, prior to the adoption of SFAS 143, the Company carried deferred debits and deferred credits each totaling approximately $87 million related to the decommissioning and dismantling of Summer Station and the funding thereof. Effective January 1, 2003, in connection with the measurement of the ARO upon the adoption of SFAS 143, the amounts reflected within these regulatory assets and liabilities were recharacterized. The following table presents such recharacterized amounts related to the decommissioning obligation and the funding thereof as recorded in the condensed consolidated balance sheet as of September 30, 2003, and the pro forma amounts that would have been recorded as of December 31, 2002 and 2001 had SFAS 143 been adopted at the beginning of 2001. As of September 30, December 31, December 31, Millions of dollars 2003 2002 2001 - ------------------- Actual Proforma Proforma Assets: Within electric plant $40 $40 $40 Within accumulated depreciation (13) (13) (12) Assets held in trust (net) - nuclear decommissioning 35 39 35 Within other regulatory assets 54 45 42 ---------------- --------------- --------------- ---------------- --------------- --------------- Total $116 $111 $105 ================ =============== =============== ================ =============== =============== Liabilities: Asset retirement obligation - nuclear plant decommissioning $116 $111 $105 ================ =============== =============== Proforma net income (loss) and earnings (loss) per share for periods prior to the adoption of SFAS 143 would not differ from amounts actually recorded during these periods. The Company believes that there is legal uncertainty as to the existence of environmental obligations associated with certain transmission and distribution properties. The Company believes that any ARO related to this type of property would be insignificant and, due to the indeterminate life of the related assets, an ARO could not be reasonably estimated. The Company adopted SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective January 1, 2003. The provisions of SFAS 145, among other things, discontinue treatment of gains or losses from the early extinguishment of debt as extraordinary items unless such early extinguishment meets the criteria of Accounting Principles Board Opinion (APB) 30. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 145. The Company adopted SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective January 1, 2003. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 146. The Company adopted the disclosure provisions of SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," effective January 1, 2003. SFAS 148 requires prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 148. SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued in April 2003. SFAS 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 149. SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued in May 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 150. C. Equity Compensation Plan Under the SCANA Corporation Long-Term Equity Compensation Plan (the "Plan"), certain employees and non-employee directors may receive incentive and nonqualified stock options and other forms of equity compensation. The Company accounts for this equity-based compensation using the intrinsic value method under APB 25, "Accounting for Stock Issued to Employees" and related interpretations. In addition, the Company has adopted the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation" and, effective January 1, 2003, the disclosure provisions of SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." At September 30, 2003, options issued and outstanding under the Plan totaled approximately 1.5 million. All options were granted with exercise prices equal to the fair market value of the Company's stock on the respective grant dates; therefore, no compensation expense has been recognized in connection with such grants. If the Company had determined compensation expense for the issuance of options based on the fair value method described in SFAS 123, pro forma net income and earnings (loss) per share would have been as presented below:
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) - as reported (millions) $84 $78 $242 $(184) Net income (loss) - pro forma (millions) $83 $78 $240 $(184) Basic and diluted earnings (loss) per share - as reported $.76 $.74 $2.18 $(1.76) Basic and diluted earnings (loss) per share - pro forma $.75 $.74 $2.16 $(1.76)
D. Earnings (Loss) Per Share Earnings (loss) per share amounts have been computed in accordance with SFAS 128, "Earnings Per Share." Under SFAS 128, basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share are computed as net income divided by the weighted average number of shares of common stock outstanding during the period after giving effect to securities considered to be dilutive potential common stock. The Company uses the treasury stock method in determining total dilutive potential common stock. E. Affiliated Transactions SCE&G holds two equity-method investments in partnerships involved in converting coal to non-conventional fuel. SCE&G had recorded as receivables from affiliated companies for these investments approximately $15.4 million and $8.5 million at September 30, 2003 and December 31, 2002, respectively. SCE&G had recorded as payables to affiliated companies for these investments approximately $14.3 million and $8.0 million at September 30, 2003 and December 31, 2002, respectively. F. Reclassifications Certain amounts from prior periods have been reclassified to conform with the presentation adopted for 2003. 2. ACCOUNTING CHANGE As a result of the January 1, 2002 adoption of SFAS 142, the Company recorded a $230 million impairment charge related to the acquisition adjustment recorded in connection with its investment in PSNC Energy. This charge is reflected on the Condensed Consolidated Statements of Operations as the cumulative effect of an accounting change. See additional information at Note 1B. 3. RATE AND OTHER REGULATORY MATTERS South Carolina Electric & Gas Company (SCE&G) Electric In January 2003 the SCPSC issued an order granting SCE&G a composite increase in retail electric rates of approximately 5.8% which is designed to produce additional annual revenues of approximately $70.7 million based on a test year calculation. The SCPSC authorized a return on common equity of 12.45%. The new rates were effective for service rendered on and after February 1, 2003. As a part of the order, the SCPSC extended through 2005 its approval of the accelerated capital recovery plan for SCE&G's Cope Generating Station. Under the plan, based on the level of revenues and operating expenses, SCE&G may increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates, not to exceed $36 million annually, without additional approval of the SCPSC. Any unused portion of the $36 million in any given year may be carried forward for possible use in the following year. In January 2003, in conjunction with the approval of the above retail rate increase, the SCPSC approved SCE&G's request to reduce the fuel component to 1.678 cents per KWh. This reduction was effective for service rendered on and after February 1, 2003. In April 2003 the SCPSC issued an order approving SCE&G's request to maintain the fuel cost component of rates at 1.678 cents per KWh, effective May 1, 2003. The SCPSC also reaffirmed the prudence of SCE&G's purchasing practices and recognized the efficiency of SCE&G's electric generating plants; however, it deferred action on the recovery of certain purchased power costs pending the resolution of the appeal discussed below. In May 2002 the SCPSC issued an order approving SCE&G's request to increase the fuel component of rates charged to electric customers from 1.579 cents per KWh to 1.722 cents per KWh. The increase reflected higher fuel costs projected for the period May 2002 through April 2003. The increase also provided continued recovery for under-collected actual fuel costs through April 2001, including short-term purchased power costs necessitated by outages at two of SCE&G's base load generating plants in winter 2000-2001. The new rates were effective as of the first billing cycle in May 2002. The Consumer Advocate of South Carolina appealed to the South Carolina Circuit Court (Circuit Court) the portion of the SCPSC's order related to the recovery of certain purchased power costs. The appeal is still pending. Gas SCE&G's rates are established using a cost of gas component approved by the SCPSC which may be modified periodically to reflect changes in the price of natural gas purchased by SCE&G. SCE&G's cost of gas component in effect during the period January 1, 2002 through September 30, 2003 was as follows: Rate Per Therm Effective Date Rate Per Therm Effective Date $.728 January-February 2003 $.596 January-October 2002 $.928 March-September 2003 $.728 November-December 2002 On October 28, 2003, as part of the annual review of gas costs, the SCPSC approved SCE&G's request to decrease the cost of gas component from $.928 per therm to $.867 per therm effective with the first billing cycle in November 2003. The SCPSC allows SCE&G to recover through a billing surcharge to its gas customers the costs of environmental cleanup at the sites of former MGPs. The billing surcharge is subject to annual review and provides for the recovery of substantially all actual and projected site assessment and cleanup costs and environmental claims settlements for SCE&G's gas operations that had previously been recorded in deferred debits. In October 2003, as a result of the annual review, the SCPSC approved SCE&G's request to reduce the billing surcharge from 3.0 cents per therm to 2.2 cents per therm, which is intended to provide for the recovery, prior to the end of the year 2009, of the balance remaining at September 30, 2003 of $11.6 million. Public Service Company of North Carolina, Incorporated (PSNC Energy) PSNC Energy's rates are established using a benchmark cost of gas approved by the NCUC, which may be modified periodically to reflect changes in the market price of natural gas. PSNC Energy revises its tariffs with the NCUC as necessary to track these changes and accounts for any over- or under-collections of the delivered cost of gas in its deferred accounts for subsequent rate consideration. The NCUC reviews PSNC Energy's gas purchasing practices annually. PSNC Energy's benchmark cost of gas in effect during the period January 1, 2002 through September 30, 2003 was as follows: Rate Per Therm Effective Date Rate Per Therm Effective Date $.460 January-February 2003 $.300 January 2002 $.595 March 2003 $.215 February-June 2002 $.725 April-September 2003 $.350 July-October 2002 $.410 November-December 2002 On October 13, 2003 in connection with PSNC Energy's 2003 Annual Prudence Review the NCUC determined that PSNC Energy's gas costs, including all hedging transactions, were reasonable and prudently incurred during the 12-month review period ended March 31, 2003. The NCUC also authorized new rate decrements to refund overcollections of certain gas costs included in PSNC Energy's deferred accounts, effective November 1, 2003. A state expansion fund, established by the North Carolina General Assembly and funded by refunds from PSNC Energy's interstate pipeline transporters, provides financing for expansion into areas that otherwise would not be economically feasible to serve. In June 2000 the NCUC approved PSNC Energy's requests for disbursement of up to $28.4 million from PSNC Energy's expansion fund to extend natural gas service to Madison, Jackson and Swain Counties in western North Carolina. PSNC Energy estimates that the cost of this project will be approximately $31.4 million. The Madison County and Jackson County portions of the project were completed in 2002, and the Swain County portion is expected to be completed in the spring of 2004. Through September 30, 2003 approximately $24.4 million had been spent on this project. In December 1999 the NCUC issued an order approving SCANA's acquisition of PSNC Energy. As specified in the order, PSNC Energy agreed to a moratorium on general rate cases until August 2005. General rate relief can be obtained during this period to recover costs associated with material adverse governmental actions and force majeure events. South Carolina Pipeline Corporation (SCPC) SCPC's purchased gas adjustment for cost recovery and gas purchasing policies are reviewed annually by the SCPSC. In an order dated August 5, 2003 the SCPSC found that for the period April 2002 through December 2002 SCPC's gas purchasing policies and practices were prudent and SCPC properly adhered to the gas cost recovery provisions of its gas tariff. 4. LONG-TERM DEBT On January 13, 2003 the Company retired at maturity $60 million of 6.05% medium-term notes. On January 23, 2003 SCE&G issued $200 million First Mortgage Bonds having an annual interest rate of 5.80% and maturing on January 15, 2033. The proceeds from the sale of these bonds were used to reduce short-term debt and for general corporate purposes. On April 4, 2003 the Company redeemed $100 million of floating rate medium-term notes that were set to mature August 8, 2003. The notes were bearing interest at a rate of 2.215% when redeemed. On May 21, 2003 SCE&G issued $300 million First Mortgage Bonds having an annual interest rate of 5.30% and maturing on May 15, 2033. SCE&G used the net proceeds from the sale of these bonds and certain other SCE&G funds to redeem its $100 million principal amount of 7.625% First Mortgage Bonds due June 1, 2023, its $150 million principal amount of 7.50% First Mortgage Bonds due June 15, 2023 and its Junior Subordinated Debentures which effected the redemption of $50 million aggregate amount of 7.55% Trust Preferred Securities, Series A, issued by SCE&G Trust I. On July 1, 2003 the Company retired at maturity $20 million of 6.51% medium-term notes and, on July 8, 2003 the Company retired at maturity $75 million of 6.5% medium-term notes. On August 26, 2003 Berkeley County, South Carolina, issued its $35,850,000 Pollution Control Facilities Revenue Refunding Bonds, Series 2003. The proceeds of these bonds were loaned by the County to South Carolina Generating Company, Inc. (GENCO), and applied to defease GENCO's obligation with the respect to the County's $35,850,000 Pollution Control Facilities Revenue Refunding Bonds, Series 1984 (bearing interest at a rate of 6.50%). The 2003 refunding bonds have an annual interest rate of 4.875% and mature on October 1, 2014. 5. RETAINED EARNINGS The Company's Restated Articles of Incorporation do not limit the dividends that may be paid on its common stock. However, the Restated Articles of Incorporation of SCE&G contain provisions that, under certain circumstances, could limit the payment of cash dividends on its common stock. In addition, with respect to hydroelectric projects, the Federal Power Act requires the appropriation of a portion of certain earnings therefrom. At September 30, 2003 approximately $43.4 million of retained earnings were restricted by this requirement as to payment of cash dividends on SCE&G's common stock. 6. FINANCIAL INSTRUMENTS Investments Certain of the Company's subsidiaries hold investments in marketable securities, some of which are subject to SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," mark-to-market accounting and some of which are considered cost basis investments for which determination of fair value historically has been considered impracticable. Equity holdings subject to SFAS 115 are categorized as "available for sale" and are carried at quoted market prices, with any unrealized gains and losses credited or charged to other comprehensive income (loss) within common equity on the Company's balance sheet. Debt securities and preferred stock with significant debt characteristics are categorized as "held to maturity" and are carried at amortized cost. When indicated, and in accordance with its stated accounting policy, the Company performs periodic assessments of whether any decline in the value of these securities to amounts below the Company's cost basis is other than temporary. When other than temporary declines occur, write-downs are recorded through operations, and new (lower) cost bases are established.
Telecommunications Investments At September 30, 2003 SCANA Communications Holdings, Inc. (SCH), a wholly owned, indirect subsidiary of the Company, held investments in the equity and debt securities of the following companies in the amounts noted in the table below. Investee Securities Basis - ---------------------- ------------------------------------------------------------- ----------------------- (Millions of dollars) Magnolia Holding 6.2 million shares nonvoting common stock $2.1 ITC^DeltaCom 566.0 thousand shares of common stock 1.1 157.3 thousand shares series A 8% preferred stock, convertible in 2005 into 2.8 million shares of common 13.0 stock Warrants to purchase 506.9 thousand shares of common stock 1.1 Knology 7.2 million shares series A preferred stock, convertible into 7.5 million shares of common stock 14.0 18.1 million shares series C preferred stock, convertible into 18.1 million shares of common stock 33.9 21.7 million shares series E preferred stock, convertible into 21.7 million shares of common stock 40.6 12% senior unsecured notes due 2009, including accrued 48.0 interest
In May 2003 the Company's investment in ITC Holding Company, Inc. was sold and in September 2003 the working capital true-up for the sale was completed. The transaction resulted in the receipt of net after-tax cash proceeds of approximately $48 million and the receipt of an investment interest in a newly formed entity, Magnolia Holding Company LLC (Magnolia Holding). A book gain, net of tax, of approximately $39 million was realized upon this transaction. Magnolia Holding holds ownership interests in several Southeastern communications companies. ITC^DeltaCom, Inc. (ITC^DeltaCom) is a regional provider of telecommunications services. The common shares of ITC^DeltaCom owned by SCH have a market value of $3.1 million. The ITC^DeltaCom preferred shares owned by SCH are classified as held to maturity due to their debt features, and the market value is not readily determinable. Knology, Inc. (Knology) is a broadband service provider of cable television, telephone and internet services. In June 2003, based upon valuation information obtained in connection with the Magnolia Holding transaction, SCH recorded impairment losses associated with the Knology investment totaling $4.8 million, net of taxes. In August 2003, Magnolia Holding distributed its holdings in Knology preferred stock to Magnolia Holding's members. As a result, SCH's basis in Magnolia Holding was reduced by, and SCH's basis in Knology was increased by, approximately $6.2 million. Derivatives SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the Company to recognize all derivative instruments as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. SFAS 133 further provides that changes in the fair value of derivative instruments are either recognized in earnings or reported as a component of other comprehensive income (loss), depending upon the intended use of the derivative and the resulting designation. The fair value of the derivative instruments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. Policies and procedures and risk limits are established to control the level of market, credit, liquidity and operational and administrative risks assumed by the Company. The Company's Board of Directors has delegated to a Risk Management Committee the authority to set risk limits, establish policies and procedures for risk management and measurement, and oversee and review the risk management process and infrastructure. The Risk Management Committee, which is comprised of certain officers, including the Company's Risk Management Officer and senior officers of the Company, apprises the Board of Directors with regard to the management of risk and brings to the Board's attention any areas of concern. Written policies define the physical and financial transactions that are approved, as well as the authorization requirements and limits for transactions. Commodities The Company uses derivative instruments to hedge anticipated future purchases of natural gas, which create market risks of different types. Instruments designated as cash flow hedges are used to hedge risks associated with fixed price obligations in a volatile price market and risks associated with price differentials at different delivery locations. Instruments designated as fair value hedges are used to hedge operational storage assets. The basic types of financial instruments utilized are exchange-traded instruments, such as New York Mercantile Exchange futures contracts or options, and over-the-counter instruments such as swaps, which are typically offered by energy and financial institutions. The Company recognized gains (losses) of approximately $(0.4) million, net of tax, and $5.4 million, net of tax, as a result of qualifying cash flow hedges related to nonregulated operations during the three and nine months ended September 30, 2003. The Company recognized gains (losses) of approximately $0.1 million and $(21.9) million, net of tax, as a result of qualifying cash flow hedges related to nonregulated operations during the three and nine months ended September 30, 2002. These gains and losses were recorded in cost of gas. The Company estimates that most of the September 30, 2003 unrealized loss balance of $1.3 million, net of tax, will be reclassified from accumulated other comprehensive income (loss) to earnings in 2004 and 2005 as an increase to realized gas cost if market prices remain stable. As of September 30, 2003 all of the Company's cash flow hedges settle by their terms before the end of 2006. The Company recorded option premiums of $0.5 million and gains of $0.3 million, net of tax, as a result of qualifying fair value hedges during the three and nine months ended September 30, 2003, respectively. The premiums and gains were recorded in cost of gas. As of September 30, 2003 all of the Company's fair value hedges had settled. In January 2003 PSNC Energy filed a summary of its hedging program for natural gas purchases with the NCUC for informational purposes. The primary goal of the program is to reduce price volatility to firm customers. In an October 2003 order, the NCUC declared the program was reasonable. Transaction fees and any gains or losses are recorded in deferred accounts for subsequent rate consideration. As of September 30, 2003 PSNC Energy had deferred a net gain of approximately $0.6 million. SCPC's tariffs include a purchased gas adjustment (PGA) clause that provides for the recovery of actual gas costs incurred. The SCPSC has ruled that the results of SCPC's hedging activities are to be included in the PGA. As such, costs of related derivatives that SCPC utilizes to hedge its gas purchasing activities are recoverable through its weighted average cost of gas calculation. The offset to the change in fair value of these derivatives is recorded as a current asset or liability. Interest Rates The Company uses interest rate swap agreements to manage interest rate risk. These swap agreements provide for the Company to pay variable rate and receive fixed rate interest payments and are designated as fair value hedges of certain debt instruments. The Company may terminate a swap agreement and may replace it with a new swap also designated as a fair value hedge. Payments received upon termination of a swap are recorded as basis adjustments to long-term debt and are amortized as reductions to interest expense over the term of the underlying debt. The fair value of interest rate swaps is recorded within other deferred debits on the balance sheet. The resulting credits serve to reflect the hedged long-term debt at its fair value. Periodic receipts or payments related to the interest rate swaps are credited or charged to interest expense as incurred. At September 30, 2003 the estimated fair value of the Company's swaps totaled $12.1 million related to combined notional amounts of $337.4 million. In anticipation of the issuance of debt, the Company also uses interest rate lock or similar agreements to manage interest rate risks. Payments received or made upon termination of such agreements are recorded within other deferred debits on the balance sheet and are amortized to interest expense over the term of the underlying debt. In connection with the issuance of First Mortgage Bonds in May 2003, the Company paid approximately $11.9 million upon the termination of a treasury lock agreement. 7. COMMITMENTS AND CONTINGENCIES Reference is made to Note 12 of Notes to Consolidated Financial Statements appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Commitments and contingencies at September 30, 2003 include the following: A. Lake Murray Dam Reinforcement In October 1999 the United States Federal Energy Regulatory Commission (FERC) mandated that SCE&G reinforce its Lake Murray dam in order to comply with new federal safety standards and maintain the lake in case of an extreme earthquake. Construction for the project and related activities, which began in the third quarter of 2001 is expected to cost approximately $275 million and be completed in 2005. Costs incurred through September 30, 2003 totaled approximately $126 million. B. 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 $10.9 billion. Each reactor licensee is currently liable for up to $100.6 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 Summer Station, would be approximately $67.1 million per incident, but not more than $6.7 million per year. The Price-Anderson Indemnification Act was anticipated to renew in August 2002. However, Congress concluded their session in 2002 without approving this renewal. The Act is now expected to renew with only modest changes in 2003. The delayed renewal has no impact on SCE&G at present due to the "grandfathered" status of existing licensees under the expired Act until such time as it is renewed. SCE&G currently maintains policies (for itself and on behalf of the South Carolina Public Service Authority) with Nuclear Electric Insurance Limited. The policies, covering the nuclear facility for property damage, excess property damage and outage costs, permit assessments under certain conditions to cover insurer's losses. Based on the current annual premium, SCE&G's portion of the retrospective premium assessment would not exceed $15.8 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 would have a material adverse impact on the Company's results of operations, cash flows and financial position. C. Environmental The Company maintains an environmental assessment program to identify and evaluate current and former operations sites that could require environmental cleanup. As site assessments are initiated, estimates are made of the amount of 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 solely to regulated operations. South Carolina Electric & Gas Company At SCE&G, site assessment and cleanup costs are deferred and amortized with recovery provided through rates. Deferred amounts, net of amounts previously recovered through rates and insurance settlements, totaled $11.6 million at September 30, 2003. The deferral includes the estimated costs associated with the following matters. SCE&G owns a decommissioned MGP site in the Calhoun Park area of Charleston, South Carolina. The site is currently being remediated for benzene contamination in the intermediate aquifer on surrounding properties. SCE&G anticipates that the remaining remediation activities will be completed by the end of 2004, with certain monitoring and retreatment activities continuing until 2007. As of September 30, 2003, SCE&G has spent approximately $19.6 million to remediate the Calhoun Park site. Total remediation costs are estimated to be $21.9 million. SCE&G owns three other decommissioned MGP sites in South Carolina which contain residues of by-product chemicals. Two of these sites are currently being remediated under work plans approved by the South Carolina Department of Health and Environmental Control (DHEC). SCE&G is continuing to investigate the remaining site and is monitoring the nature and extent of residual contamination. In addition, in March 2003 SCE&G signed a consent agreement with DHEC related to a site formerly owned by SCE&G. The site contained residue material that was moved from an MGP site. The removal action for this site has been completed. SCE&G anticipates that major remediation activities for the three owned sites will be completed before 2006. As of September 30, 2003, SCE&G has spent approximately $3.9 million related to these three sites, and expects to spend an additional $5.2 million. Total remediation costs are estimated to be $9.1 million. Public Service Company of North Carolina, Incorporated PSNC Energy is responsible for environmental cleanup at five sites in North Carolina on which MGP residuals are present or suspected. PSNC Energy's actual remediation costs for these sites will depend on a number of factors, such as actual site conditions, third-party claims and recoveries from other potentially responsible parties. PSNC Energy has recorded a liability and associated regulatory asset of $7.5 million, which reflects the estimated remaining liability at September 30, 2003. Amounts incurred and deferred to date that are not currently being recovered through gas rates are approximately $1.5 million. Management believes that all MGP cleanup costs incurred will be recoverable through gas rates. D. Long-Term Natural Gas Contract In 2001 a subsidiary of the Company entered into, in the ordinary course of business, a 15-year take-and-pay contract with an unaffiliated natural gas supplier to purchase 190,000 DT of natural gas per day beginning in the spring of 2004. In December 2002, as a result of the failure of the supplier and its guarantor to meet contractual obligations related to credit support provisions, the subsidiary terminated the contract and the supplier initiated arbitration. A hearing under the binding arbitration provisions of the contract was postponed from September 2003 until at least January 2004 after the parties made progress towards a settlement. In initial pleadings for the hearing, the supplier demanded payment of at least $134 million in damages from the subsidiary; conversely, the subsidiary demanded payment of no less than $154 million in damages from the supplier. The Company is confident of the propriety of its actions and will vigorously pursue its position if the arbitration hearing is held. The Company further believes that the resolution of these claims will not have a material adverse impact on its results of operations, cash flows or financial condition. E. Parts Availability Agreement In June 2002 SCE&G entered into a parts availability agreement with a supplier whereby turbine and stator bar parts will be stored by SCE&G to be available when needed. The parts will remain the property of the supplier until such time as they are removed from storage by SCE&G and payment is made. SCE&G bears the risk of loss or repair for any part damaged while in storage and will pay an availability fee each quarter based on the daily available parts stored. In addition, SCE&G is obligated to purchase all remaining stored parts at the termination dates of the contract, June 2009 for the turbine parts and December 2006 for the stator bar parts. As such, SCE&G has recorded a liability in Other Long-Term Debt with an offsetting asset in Deferred Debits. At September 30, 2003 SCE&G had recorded $30.8 million for the turbine parts and $3.2 million for the stator bar parts. 8. 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 regulated operations. Therefore, net income is not allocated to the Electric Operations, Gas Distribution and Gas Transmission segments. The Company uses net income to measure profitability for its Retail Gas Marketing and Energy Marketing segments. Accumulated depreciation is not assignable to Electric Operations and Gas Distribution segments; therefore, it is reflected as an adjustment to arrive at the consolidated total assets. Gas Distribution is comprised of the local distribution operations of SCE&G and PSNC Energy which meet SFAS 131 criteria for aggregation.
Disclosure of Reportable Segments (Millions of dollars) - ---------------------------------- ------------- -------------- --------------- ----------------- Three Months Ended External Intersegment Operating Net September 30, 2003 Revenue Revenue Income (Loss) Income (Loss) - ---------------------------------- ------------- -------------- --------------- ----------------- Electric Operations $429 $1 $162 n/a Gas Distribution 114 - (16) n/a Gas Transmission 41 53 2 n/a Retail Gas Marketing 60 - n/a $- Energy Marketing 107 - n/a 1 Telecommunications Investments - - n/a 3 All Other - 65 - (2) Adjustments/Eliminations - (119) 2 82 - ---------------------------------- ------------- -------------- --------------- ----------------- - ---------------------------------- ------------- -------------- --------------- ----------------- Consolidated Total $751 $- $150 $84 ================================== ============= ============== =============== ================= - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Nine Months Ended External Intersegment Operating Net Segment September 30, 2003 Revenue Revenue Income Income (Loss) Assets - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Electric Operations $1,121 $4 $343 n/a $6,337 Gas Distribution 603 - 40 n/a 1,465 Gas Transmission 172 225 11 n/a 328 Retail Gas Marketing 320 - n/a $17 84 Energy Marketing 330 - n/a (1) 50 Telecommunications Investments - - n/a 36 218 All Other - 204 - (5) 238 Adjustments/Eliminations - (433) 24 195 (932) - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Consolidated Total $2,546 $- $418 $242 $7,788 ================================== ============= ============== =============== ================= =============== - ---------------------------------- ------------- -------------- --------------- ----------------- Three Months Ended External Intersegment Operating Net September 30, 2002 Revenue Revenue Income (Loss) Income (Loss) - ---------------------------------- ------------- -------------- --------------- ----------------- Electric Operations $424 $1 $166 n/a Gas Distribution 85 1 (12) n/a Gas Transmission 51 54 6 n/a Retail Gas Marketing 46 - n/a $(3) Energy Marketing 88 - n/a - Telecommunications Investments - - n/a (1) All Other - 74 - (1) Adjustments/Eliminations - (130) (6) 83 - ---------------------------------- ------------- -------------- --------------- ----------------- Consolidated Total $694 $- $154 $78 ================================== ============= ============== =============== ================= - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Nine Months Ended External Intersegment Operating Net Segment September 30, 2002 Revenue Revenue Income (Loss) Income (Loss) Assets - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Electric Operations $1,075 $4 $339 n/a $5,722 Gas Distribution 428 1 40 n/a 1,615 Gas Transmission 159 185 3 n/a 305 Retail Gas Marketing 265 - n/a $10 74 Energy Marketing 238 - n/a (2) 43 Telecommunications Investments - - - (154) 341 All Other - 207 - 2 349 Adjustments/Eliminations - (397) 14 (40) (870) - ---------------------------------- ------------- -------------- --------------- ----------------- --------------- Consolidated Total $2,165 $- $396 $(184) $7,579 ================================== ============= ============== =============== ================= ===============
9. SUBSEQUENT EVENT On November 6, 2003 SCE&G issued $250 million First Mortgage Bonds having an annual interest rate of 5.25% and maturing on November 1, 2018. SCE&G will use the net proceeds from the sale of these bonds for the payment at maturity of SCE&G's $100 million principal amount of 6.25% First Mortgage Bonds due December 15, 2003, for repayment of short-term debt primarily incurred as a result of SCE&G's construction program and for general corporate purposes. 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, 2002. 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 and nonutility regulatory environment, (3) changes in the economy, especially in areas served by the Company's subsidiaries, (4) the impact of competition from other energy suppliers, including competition from alternate fuels in industrial interruptible markets, (5) growth opportunities for the Company's regulated and diversified subsidiaries, (6) the results of financing efforts, (7) changes in the Company's accounting policies, (8) weather conditions, especially in areas served by the Company's subsidiaries, (9) performance of and marketability of the Company's investments in telecommunications companies, (10) performance of the Company's pension plan assets, (11) inflation, (12) changes in environmental regulations, (13) volatility in commodity natural gas markets and (14) the other risks and uncertainties described from time to time in the Company's periodic reports filed with the United States Securities and Exchange Commission. The Company disclaims any obligation to update any forward-looking statements. COMPETITION Electric Operations In South Carolina electric restructuring efforts remain stalled, and the state legislature adjourned for the year without considering electric restructuring legislation. At the federal level, energy legislation passed both houses of Congress in 2003, though significant differences exist between the House and Senate versions. Some of the more stringent provisions of this legislation, either currently included or expected to be debated in conference committee, would require that one percent of the electric energy sold by retail electric suppliers, beginning in 2005, escalating to ten percent by 2020, be generated from renewable energy resources. Renewable energy resources, as defined in the legislation, may exclude hydroelectric generation. Substantial penalties would be levied for failure to comply. Electric cooperatives and municipal utilities would be exempt from these requirements. In addition, largely in response to the August 2003 blackout in eight northern states and parts of Canada, the energy legislation being considered includes several provisions to develop and enforce reliability standards for high-voltage transmission systems and to expedite construction of transmission lines. The Company cannot predict whether such legislation will be enacted, and if it is, the conditions it would impose on utilities. In July 2002 the United States Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) on Standard Market Design (SMD) which proposed sweeping changes to the country's existing regulatory framework governing transmission, open access and energy markets and would attempt, in large measure, to standardize the national energy market. If implemented, the proposed rule could have a significant impact on South Carolina Electric and Gas Company's (SCE&G) access to or cost of power for its native load customers and on SCE&G's marketing of power outside its service territory. On April 28, 2003 FERC issued a "white paper" regarding SMD which describes how the final SMD rule being considered would differ from the NOPR. The Company is currently evaluating FERC's action to determine potential effects on SCE&G's operations. Additional directives from FERC are expected, and would likely be significantly influenced by the energy legislation discussed in the preceding paragraph. Gas Distribution Natural gas competes with electricity, propane and heating oil to serve the heating and, to a lesser extent, other household energy needs of residential and small commercial customers. This competition is generally based on price and convenience. Large commercial and industrial customers often have the ability to switch from natural gas to an alternate fuel, such as propane or fuel oil. Natural gas competes with these alternate fuels based on price. As a result, any significant disparity between supply and demand, either of natural gas or of alternate fuels, and due either to production or delivery disruptions or other factors, will affect price and impact the Company's ability to retain large commercial and industrial customers. Gas Transmission In September 2002 SCG Pipeline, Inc. (SCG) received approval from FERC to acquire an interest in an existing pipeline and to build a pipeline from Elba Island, Georgia to Jasper County, South Carolina. When operational, SCG will provide interstate transportation services for natural gas to markets in southeastern Georgia and South Carolina. SCG will transport natural gas from interconnections with Southern Natural at Port Wentworth, Georgia, and from an import terminal owned by Southern LNG at Elba Island, near Savannah, Georgia. The endpoint of SCG's pipeline is at the site of the natural gas-fired generating station that SCE&G is building in Jasper County, South Carolina. Construction of the pipeline, which began in March 2003, was completed in the third quarter of 2003 at a cost of approximately $32 million. In August 2003 SCPC began construction on phase one of the South System Loop pipeline project. This phase of the pipeline will stretch 38.3 miles from SCE&G's Jasper County generation facility to Yemassee in Hampton County, South Carolina, and will provide a new supply source to SCPC's current system. Completion of phase one of the pipeline is expected in the first quarter of 2004, at a cost of approximately $25 million. South Carolina Pipeline Corporation (SCPC) supplies natural gas to SCE&G for its resale to gas distribution customers and for certain electric generation needs. SCPC also sells natural gas to large commercial and industrial customers in South Carolina and faces the same competitive pressures as gas distribution for these classes of customers. Retail Gas Marketing SCANA Energy continues to maintain its position as the second largest natural gas marketer in Georgia with a market share of approximately 25 percent and total customers in excess of 380,000 (including those served under the program described below). SCANA Energy's competitors include affiliates of other large energy companies with substantial experience in Georgia's energy market as well as several electric membership cooperatives (EMCs). SCANA's ability to maintain its market share depends on the prices it charges customers relative to the prices charged by its competitors, its ability to continue to provide high levels of customer service and other factors. The Georgia Public Service Commission (GPSC) continues to implement provisions of the Natural Gas Consumer's Relief Act of 2002 (the Act). Among other things, the Act created a regulated provider selected through a bidding process to serve low-income and high credit risk customers. The Act also established new service quality standards and addressed assignment of interstate assets. In 2002 SCANA Energy was selected by the GPSC to serve as Georgia's regulated provider for a 2-year period. In this capacity, SCANA Energy serves low-income customers at a rate subsidized by Georgia's Universal Service Fund, and extends service to high credit risk customers who have been denied service by other marketers. At September 30, 2003 approximately 31,000 of SCANA Energy's total customers were being served under this program. In July 2003 the GPSC approved a joint stipulation between the GPSC staff, Atlanta Gas Light Company (AGL) and natural gas marketers (excluding SCANA Energy) dealing with interstate asset capacity and other operational issues. The joint stipulation reduces the frequency whereby AGL can recall capacity previously released to the various gas marketers and streamlines certain gas balancing processes. Though SCANA Energy believes the joint stipulation will improve operations for the gas marketers, SCANA Energy continues to advocate an alternate plan it proposed that would assign interstate asset capacity to those gas marketers choosing assignment and approved by the GPSC. The GPSC has indicated that it intends to file a request with FERC to obtain a declaratory order on whether FERC regulation would preempt or have jurisdiction over SCANA Energy's proposal. The GPSC has not yet filed the request with FERC. If FERC issues a declaratory order, the GPSC is expected to evaluate the order and determine what action, if any, the GPSC should take on SCANA Energy's proposal. SCANA Energy and SCANA's other natural gas distribution, transmission and marketing segments maintain gas inventory and also utilize forward contracts and financial instruments, including futures contracts and options, to manage their exposure to fluctuating commodity natural gas prices. As a part of this risk management process, at any given time, a portion of SCANA's projected natural gas needs has been purchased or otherwise placed under contract. Since SCANA Energy operates in a competitive market, it may be unable to sustain its current levels of customers and/or pricing, thereby reducing expected margins and profitability. LIQUIDITY AND CAPITAL RESOURCES The Company anticipates that its contractual cash obligations will be met through internally generated funds and the incurrence of additional short-term and long-term indebtedness. Sales of additional equity securities may also occur. The Company expects that it has or can obtain adequate sources of financing to meet its projected cash requirements for the foreseeable future. The Company's ratio of earnings to fixed charges for the 12 months ended September 30, 2003 was 1.87. Cash requirements for SCANA's regulated subsidiaries arise primarily from their operational needs funding their construction programs and payment of dividends to SCANA. The ability of the regulated subsidiaries to replace existing plant investment, as well as to expand to meet future demand for electricity or gas, will depend on their ability to attract the necessary financial capital on reasonable terms. Regulated subsidiaries recover the costs of providing services through rates charged to customers. Rates for regulated services are generally based on historical costs. As customer growth and inflation occur and these subsidiaries continue their ongoing construction programs, rate increases will be sought. The future financial position and results of operations of the regulated subsidiaries will be affected by their ability to obtain adequate and timely rate and other regulatory relief, if requested. In January 2003 the Public Service Commission of South Carolina (SCPSC) issued an order granting SCE&G a composite increase in retail electric rates of approximately 5.8% which is designed to produce additional annual revenues of approximately $70.7 million based on a test year calculation. The SCPSC authorized a return on common equity of 12.45%. The new rates were effective for service rendered on and after February 1, 2003. As a part of the order, the SCPSC extended through 2005 its approval of the accelerated capital recovery plan for SCE&G's Cope Generating Station. Under the plan, based on the level of revenues and operating expenses, SCE&G may increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates, not to exceed $36 million annually without the approval of the SCPSC. Any unused portion of the $36 million in any given year may be carried forward for possible use in the following year. The following table summarizes how the Company generated and used funds for property additions and construction expenditures during the nine months ended September 30, 2003 and 2002: - ---------------------------------------------------------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 - -------------------------------------------------------------- ------------- Net cash provided from operating activities $399 $347 Net cash used for financing activities (187) (242) Cash provided from sale of investments and assets 69 335 Funds used for investments (11) (25) Cash and temporary investments available at the beginning of the period 374 192 Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $(558) $(424) Funds used for nonutility property additions (6) (12) CAPITAL TRANSACTIONS On January 13, 2003 SCANA retired at maturity $60 million of 6.05% medium-term notes. On January 23, 2003 SCE&G issued $200 million of First Mortgage Bonds having an annual interest rate of 5.80% and maturing on January 15, 2033. The proceeds from the sale of these bonds were used to reduce short-term debt and for general corporate purposes. On April 4, 2003 SCANA redeemed $100 million of floating rate medium-term notes that were set to mature August 8, 2003. The notes were bearing interest at a rate of 2.215% when redeemed. On May 21, 2003 SCE&G issued $300 million First Mortgage Bonds having an annual interest rate of 5.30% and maturing on May 15, 2033. SCE&G used the net proceeds from the sale of these bonds and certain other SCE&G funds to redeem its $100 million principal amount of 7.625% First Mortgage Bonds due June 1, 2023, its $150 million principal amount of 7.50% First Mortgage Bonds due June 15, 2023 and its Junior Subordinated Debentures which effected the redemption of $50 million aggregate amount of 7.55% Trust Preferred Securities, Series A, issued by SCE&G Trust I. On July 1, 2003 SCANA retired at maturity $20 million of 6.51% medium-term notes, and on July 8, 2003 SCANA retired at maturity $75 million of 6.25% medium-term notes. On August 26, 2003 Berkeley County, South Carolina, issued its $35,850,000 Pollution Control Facilities Revenue Refunding Bonds, Series 2003. The proceeds of these bonds were loaned by the County to South Carolina Generating Company, Inc. (GENCO), and applied to defease GENCO's obligation with the respect to the County's $35,850,000 Pollution Control Facilities Revenue Refunding Bonds, Series 1984 (bearing interest at a rate of 6.50%). The 2003 refunding bonds have an annual interest rate of 4.875% and mature on October 1, 2014. On November 6, 2003 SCE&G issued $250 million First Mortgage Bonds having an annual interest rate of 5.25% and maturing on November 1, 2018. SCE&G will use the net proceeds from the sale of these bonds for the payment at maturity of SCE&G's $100 million principal amount of 6.25% First Mortgage Bonds due December 15, 2003, for repayment of short-term debt primarily incurred as a result of SCE&G's construction program and for general corporate purposes. CAPITAL PROJECTS In May 2002 SCE&G began construction of an 875 megawatt generation facility in Jasper County, South Carolina to supply electricity to its South Carolina customers. The facility will include three natural gas combustion-turbine generators and one steam-turbine generator. The $450 million facility is expected to begin commercial operation in mid-2004. SCG will transport natural gas to the facility. Costs incurred through September 30, 2003 totaled approximately $421 million. In October 1999 FERC mandated that SCE&G reinforce its Lake Murray dam in order to comply with new federal safety standards and maintain the lake in case of an extreme earthquake. Construction for the project and related activities, which began in the third quarter of 2001, is expected to cost approximately $275 million and be completed in 2005. Costs incurred through September 30, 2003 totaled approximately $126 million. In 2002 SCE&G entered into an agreement with the South Carolina Transportation Infrastructure Bank (the Bank) and the South Carolina Department of Transportation (SCDOT) that allows SCE&G to borrow funds from the Bank to construct a roadbed for SCDOT in connection with the above Lake Murray dam remediation project. The loan agreement provides for interest-free borrowings for costs incurred not to exceed $59 million, with such borrowings being repaid over ten years from the initial borrowing. At September 30, 2003 SCE&G had not yet borrowed under the agreement. In September 2002 SCG Pipeline, Inc. (SCG) received approval from FERC to acquire an interest in an existing pipeline and to build a pipeline from Elba Island, Georgia to Jasper County, South Carolina. When operational, SCG will provide interstate transportation services for natural gas to markets in southeastern Georgia and South Carolina. SCG will transport natural gas from interconnections with Southern Natural at Port Wentworth, Georgia, and from an import terminal owned by Southern LNG at Elba Island, near Savannah, Georgia. The endpoint of SCG's pipeline is at the site of the natural gas-fired generating station that SCE&G is building in Jasper County, South Carolina. Construction of the pipeline, which began in March 2003, was completed in the third quarter of 2003 at a cost of approximately $32 million. In August 2003 SCPC began construction on phase one of the South System Loop pipeline project. This phase of the pipeline will stretch 38.3 miles from SCE&G's Jasper County generation facility to Yemassee in Hampton County, South Carolina, and will provide a new supply source to SCPC's current system. Completion of phase one of the pipeline is expected in the first quarter of 2004, at a cost of approximately $25 million. ENVIRONMENTAL MATTERS For information on environmental matters see Note 7C of Notes to Condensed Consolidated Financial Statements. OTHER MATTERS Nuclear Station License Extension In August 2002 SCE&G filed an application with the Nuclear Regulatory Commission (NRC) for a 20-year license extension for its V. C. Summer Nuclear Station (Summer Station). If approved, the extension would allow the plant to operate through 2042. At September 30, 2003 SCE&G has capitalized in construction work in progress approximately $7 million related to the application process and expects to capitalize an additional $2 million. SCE&G expects the extension to be issued in mid-2004. Telecommunications Investments In May 2003 the Company's investment in ITC Holding Company, Inc. was sold and in September 2003 the working capital true-up for the sale was completed. The transaction resulted in the receipt of net after-tax cash proceeds of approximately $48 million and the receipt of an investment interest in a newly formed entity, Magnolia Holding Company LLC (Magnolia Holding). A book gain, net of tax, of approximately $39 million was realized upon this transaction. In August 2003, Magnolia Holding distributed its holdings in Knology preferred stock to Magnolia Holding's members. As a result, SCH's basis in Magnolia Holding was reduced by, and SCH's basis in Knology was increased by, approximately $6.2 million. Synthetic Fuel SCE&G holds two equity-method investments in partnerships involved in converting coal to non-conventional fuel, the use of which fuel qualifies for federal income tax credits. The aggregate investment in these partnerships as of September 30, 2003 is approximately $3 million, and through September 30, 2003, they have generated and passed through to SCE&G approximately $83 million in such tax credits. At September 30, 2003 SCE&G has recorded $59 million of deferred fuel tax benefits, which include partnership losses, net of tax. In addition, PrimeSouth, Inc, a non-regulated subsidiary of SCANA, operates a synthetic fuel facility for a third party and receives management fees, royalties and expense reimbursements related to these services. PrimeSouth does not benefit from any synfuel tax credits. Under a plan approved by the SCPSC, any tax credits generated and ultimately passed through to SCE&G from synfuel produced and consumed by SCE&G, net of partnership losses and other expenses, have been and will be deferred and will be applied to offset the capital costs of projects required to comply with legislative or regulatory actions. See Note 1A of Notes to Consolidated Financial Statements. On June 27, 2003 the Internal Revenue Service (IRS) announced that it is reviewing the scientific validity of certain test procedures and results that have been presented as evidence that solid coal-based synthetic fuels have undergone a significant chemical change. Pending completion of this review, the IRS suspended the issuance of Private Letter Rulings on the question of significant chemical change for requests that rely on the testing procedures and results being reviewed. Upon finishing this review, on October 29, 2003, the IRS issued Announcement 2003-70, finishing its review, and confirming that the test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner. SCE&G believes its test procedures will meet the standards contemplated in the Announcement. Although one of the partnerships in which SCE&G owns an interest is currently under audit by the IRS, there have been no issues raised with respect to the validity of synthetic fuel tax credits. While SCE&G is not able to determine what conclusion the IRS will reach in these matters, to the extent the IRS disallows synfuel tax credits generated by either of the two partnerships or the facility managed by PrimeSouth, the Company's and SCE&G's financial position, results of operations and cash flows would not be materially adversely affected. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THE CORRESPONDING PERIODS IN 2002 The following discussion of the results of operations of SCANA Corporation and its subsidiaries (the Company) includes a non-GAAP measure, GAAP-adjusted net earnings from operations per share, which excludes from net income (loss) (i) the cumulative effects of mandated changes in accounting principles and (ii) the effects of sales of certain assets and investments and impairment charges related to certain investments. Management believes that GAAP-adjusted net earnings from operations provides a meaningful representation of the Company's fundamental earnings power and improves comparability of period-over-period financial performance. Earnings Per Share GAAP-adjusted net earnings from operations per share of common stock for the third quarter and year to date periods ended September 30, 2003 and 2002 were as follows:
- -------------------------------------------------------------------- -------------------------- ------------------------- Third Quarter Year to Date 2003 2002 2003 2002 - -------------------------------------------------------------------- ------------- ------------ ------------ ------------ Earnings (loss) per share $.76 $.74 $2.18 $(1.76) Less: Realized gain from sale of telecommunications investments .02 - .35 .10 Investment impairments - - (.04) (1.59) Sale of assets - - - .09 Cumulative effect of accounting change, net of taxes - - - (2.20) - -------------------------------------------------------------------- ------------- ------------ ------------ ------------ GAAP-adjusted net earnings from operations per share $.74 $.74 $1.87 $1.84 ==================================================================== ============= ============ ============ ============
Third Quarter 2003 vs 2002 GAAP-adjusted net earnings from operations per share remained unchanged due to improved electric margins of $.05, improved gas margins of $.03, lower interest expense of $.01, reduced income tax expense due primarily to favorable income tax adjustments related to prior periods of $.04 and reduction of preferred dividend requirements of $.01. These factors were offset by higher operation and maintenance expenses of $.06, higher property taxes of $.02, higher depreciation and amortization expense of $.03 and the dilutive effect of the change in shares outstanding of $.03. Earnings per share for 2003 includes a gain of $.02 per share in connection with the working capital true-up for the previously announced sale of ITC Holding shares and the receipt of an investment interest in a newly formed entity (Magnolia Holding) in May 2003. Year to Date 2003 vs 2002 GAAP-adjusted net earnings from operations per share increased $.03 primarily due to higher electric margins of $.29, higher gas margins of $.21, lower interest expense of $.01, reduced income tax expense due primarily to favorable income tax adjustments related to prior periods of $.04 and reduction of preferred dividend requirements of $.01. These factors were partially offset by higher operations and maintenance expenses of $.22, higher depreciation and amortization expenses of $.10, higher property taxes of $.06, the dilutive effect of additional shares outstanding of $.13 and lower equity AFC of $.02. Earnings (loss) per share for 2003 includes a gain of $.35 per share in connection with the sale of ITC Holding shares and the receipt of an investment interest in a newly formed entity (Magnolia Holding) in May 2003. The Company also recorded an impairment charge of $.04 per share related to its Knology preferred stock investment in the second quarter. Earnings (loss) per share for 2002 includes a gain of $.10 per share in connection with the sale of Deutsche Telekom AG (DTAG) shares in March 2002. In March 2002 the Company also recorded an impairment write-down of $1.52 per share related to the other than temporary decline in market value of the Company's investment in DTAG and an additional $0.07 per share impairment in June 2002. The Company recorded a $.09 per share gain from the sale of a subsidiary's radio service network in April 2002. Also, as required by SFAS 142 the Company recorded an impairment charge of $2.20 per share, effective January 1, 2002, related to the acquisition adjustment associated with Public Service Company of North Carolina, Incorporated (PSNC Energy). The charge was recorded as the cumulative effect of an accounting change. Pension Income Pension income during the three and nine months ended September 30, 2003 was recorded on the Company's financial statements as follows:
- ---------------------------------------------------------------------------------------- ------------------ Third Quarter Year to Date Millions of dollars 2003 2002 2003 2002 - ------------------------------------------------------------------------------ --------- -------- --------- - ------------------------------------------------------------------------------ --------- -------- --------- Income Statement Impact: (Component of) reduction in employee benefit costs $0.5 $1.2 $(1.7) $8.1 Other income 2.2 4.4 6.0 8.3 Balance Sheet Impact: (Component of) reduction in capital expenditures 0.2 0.4 (0.4) 2.3 Component of (reduction in) amount due to Summer Station co-owner 0.1 0.1 (0.1) 0.7 - ------------------------------------------------------------------------------ --------- -------- --------- - ----------------------------------------------------------------------------- -------- --------- Total Pension Income $3.0 $6.1 $3.8 $19.4 ============================================================================= ========= ======== =========
For the last several years, the market value of the Company's retirement plan (pension) assets has exceeded the total actuarial present value of accumulated plan benefits. However, pension income in all periods of 2003 decreased significantly compared to corresponding periods in 2002 primarily as a result of a less favorable investment market. Allowance for Funds Used During Construction (AFC) 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. The Company includes an equity portion of AFC in nonoperating income and a debt portion of AFC in interest charges (credits) as noncash items, both of which have the effect of increasing reported net income. The decrease in AFC for the nine months ended September 30, 2003 is primarily the result of the completion of the Urquhart Station repowering project in June 2002. In addition, in January 2003 the SCPSC issued an order allowing SCE&G to include all Jasper County Generating project expenditures as of December 31, 2002 and other construction work in progress expenditures as of June 30, 2002 in electric rate base. At the time the expenditures were included in rate base, AFC was no longer calculated on those amounts. These decreases were partially offset by increased AFC from subsequent construction expenditures related to the Jasper County Generating Station project and the Lake Murray Dam project (see discussion at CAPITAL PROJECTS). Dividends Declared The Company's Board of Directors has declared the following dividends on common stock during 2003 : - ----------------- ------------------- ------------------- --------------------- Declaration Date Dividend Per Share Record Date Payment Date - ----------------- ------------------- ------------------- --------------------- February 20, 2003 $.345 March 10, 2003 April 1, 2003 May 1, 2003 $.345 June 10, 2003 July 1, 2003 July 31, 2003 $.345 September 10, 2003 October 1, 2003 - ----------------- ------------------- ------------------- --------------------- Electric Operations Electric Operations is comprised of the electric portion of SCE&G, South Carolina Generating Company, Inc. (GENCO) and South Carolina Fuel Company (Fuel Company). Changes in the electric operations sales margins were as follows:
------------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Operating revenues $429.0 $424.2 $4.8 1.1% $1,121.3 $1,075.3 $46.0 4.3% Less: Fuel used in generation 96.8 105.1 (8.3) (7.9%) 257.6 271.0 (13.4) (4.9%) Purchased power 12.8 7.3 5.5 75.3% 38.9 28.7 10.2 35.5% ------------------------------------------------------------------ --------------------------------- Margin $319.4 $311.8 $7.6 2.4% $824.8 $775.6 $49.2 6.3% =========================================================================================================================
Third Quarter 2003 vs 2002 Margin increased primarily due to the increase in retail electric base rates approved in January 2003 of $24.5 million partially offset by $18.5 million due to less favorable weather. Fuel used in generation decreased and purchased power increased due to planned plant outages. Year to Date 2003 vs 2002 Margin increased primarily due to the increase in retail electric base rates approved in January 2003 of $58.6 million and by $11.4 million due to customer growth and increased consumption. These increases were partially offset by $20.8 million due to the effects of less favorable weather. Fuel used in generation decreased and purchased power increased due to planned plant outages. Gas Distribution Gas Distribution is comprised of the local distribution operations of SCE&G and PSNC Energy. Changes in the gas distribution sales margins, including transactions with affiliates, were as follows:
- -------------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Operating revenues $113.7 $85.7 $28.0 32.7% $602.6 $429.1 $173.5 40.4% Less: Gas purchased for resale 81.0 53.9 27.1 50.3% 414.7 254.9 159.8 62.7% - ------------------------------------------------------------------- ---------------------------------- Margin $32.7 $31.8 $0.9 2.8% $187.9 $174.2 $13.7 7.9% ==========================================================================================================================
Third Quarter 2003 vs 2002 Margin increased primarily due to customer growth and increased consumption of $2.5 million, partially offset by a decrease in industrial usage of $1.5 million primarily due to an unfavorable competitive position of natural gas relative to alternate fuels. Year to Date 2003 vs 2002 Margin increased primarily due to customer growth at PSNC Energy of 2.7% and at SCE&G of 1.3% and increased recovery of environmental remediation expenses of $1.7 million (offset in operations and maintenance), partially offset by a decrease in industrial usage of $3.8 million primarily due to an unfavorable competitive position of natural gas relative to alternate fuels. Gas Transmission Gas Transmission is comprised of the operations of SCPC. Changes in the gas transmission sales margins, including transactions with affiliates, were as follows:
- -------------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Operating revenues $94.9 $105.3 $(10.4) (9.9%) $397.4 $344.3 $53.1 15.4% Less: Gas purchased for resale 84.2 92.2 (8.0) (8.7%) 362.6 319.1 43.5 13.6% - ------------------------------------------------------------------- ---------------------------------- ---------------------------------- Margin $10.7 $13.1 $(2.4) (18.3%) $34.8 $25.2 $9.6 38.1% ==========================================================================================================================
Third Quarter 2003 vs 2002 Margin decreased primarily due to an unfavorable competitive position of natural gas relative to alternate fuels and decreased demand for natural gas as a fuel for electric generation due to milder weather. Year to Date 2003 vs 2002 Margin increased primarily due to the favorable competitive position of natural gas relative to alternate fuels in the first quarter of $13.6 million, partially offset by the unfavorable competitive position of natural gas relative to alternate fuels in the second and third quarters of $4.0 million. Retail Gas Marketing Retail Gas Marketing is comprised of SCANA Energy. Changes in Retail Gas Marketing revenues and net income (loss) were as follows:
- -------------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - -------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Operating revenues $60.1 $46.4 $13.7 29.5% $320.3 $264.6 $55.7 21.1% Net income (loss) $0.1 $(3.5) 3.6 * $16.7 $9.9 $6.8 68.7% ========================================================================================================================== *Greater than 100%
Third Quarter 2003 vs 2002 Operating revenues increased primarily as a result of increased volumes and higher average retail prices. Net income increased primarily due to higher margins of $3.7 million and lower operating expenses of $0.5 million, partially offset by increased bad debt expense of $1.1 million. Year to Date 2003 vs 2002 Operating revenues increased primarily as a result of increased volumes and higher average retail prices. Net income increased primarily due to higher margins of $9.7 million, partially offset by increased bad debt expense of $1.8 million, increased interest expense of $0.6 million and higher operating expense of $0.8 million. Energy Marketing Energy Marketing is comprised of the Company's non-regulated marketing operations, excluding SCANA Energy. Changes in energy marketing operating revenues, including transactions with affiliates, and net income (loss) were as follows:
- ----------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- Operating revenues $106.8 $87.7 $19.1 21.8% $329.8 $238.2 $91.6 38.5% Net income (loss) $0.7 $(0.1) $0.8 * $(1.0) $(2.1) $1.1 53.6% ======================================================================================================================= *Greater than 100%
Third Quarter 2003 vs 2002 Operating revenues increased primarily as a result of the increase in commodity natural gas prices. Net income increased primarily due to lower bad debt expense of $5.3 million partially offset by higher operating expenses of $4.6 million. Year to Date 2003 vs 2002 Operating revenues increased primarily as a result of the increase in commodity natural gas prices. Net loss decreased primarily as a result of lower bad debt expense of $1.9 million and lower operating and interest expenses of $1.0 million, partially offset by lower margins of $1.9 million. Other Operating Expenses
Changes in other operating expenses were as follows: - ------------------------------------------------------------------------------------------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - ------------------------------------------------------------------------------------------------------------------------- Other operation and maintenance $134.8 $125.4 $9.4 7.5% $420.0 $383.3 $36.7 9.6% Depreciation and amortization 60.1 55.0 5.1 9.3% 180.3 163.4 16.9 10.3% Other taxes 34.9 31.6 3.3 10.4% 104.7 94.9 9.8 10.3% - ---------------------------------------------------------------------- -------------------------------- Total $229.8 $212.0 $17.8 8.4% $705.0 $641.6 $63.4 9.9% =========================================================================================================================
Third Quarter 2003 vs 2002 Other operation and maintenance expenses increased primarily due to reduced pension income of $0.7 million, increased labor and benefit costs of $4.5 million and increased bad debt expenses of $3.0 million. Depreciation and amortization increased due to normal net property changes. Other taxes increased primarily due to increased property taxes. Year to Date 2003 vs 2002 Other operation and maintenance expenses increased primarily due to reduced pension income of $9.8 million, increased labor and benefits costs of $13.2 million, increased amortization of environmental costs of $1.7 million, increased other operating expenses for electric generation and transmission of $1.0 million and increased bad debt expense of $5.4 million. Depreciation and amortization increased by $12.7 million due to normal net property changes and by $4.2 million due to the completion of the Urquhart Station repowering project in June 2002. Other taxes increased primarily due to increased property taxes. Other Income (Expense) Other income, including AFC, for the third quarter and year to date periods 2003 vs 2002, increased primarily due to changes related to the gain on sale of assets and investments and the impairment of investments as discussed at Earnings Per Share. Other income decreased due to a reduction in AFC due to completion of the Urquhart Station Repowering project in June 2002. In addition, in January 2003 the SCPSC issued an order allowing SCE&G to include all Jasper County Generating Station project expenditures as of December 31, 2002 and other construction work in progress expenditures as of June 30, 2002 in electric rate base. At the time the expenditures were included in rate base, AFC was no longer calculated on those amounts. These decreases were partially offset by increased AFC from subsequent Jasper County Generating Station project expenditures and the Lake Murray Dam Project. Interest Expense Third Quarter 2003 vs 2002 Interest expense decreased $3.0 million due to lower interest rates offset by $1.9 million due to increased debt and lower AFC. Year to Date 2003 vs 2002 Interest expense decreased $12.4 million due to lower interest rates offset by $11.7 million due to increased debt and lower AFC. Income Taxes Third Quarter 2003 vs 2002 Income taxes decreased primarily due to favorable income tax adjustments related to prior periods and reduced pre-tax income. Year to Date 2003 vs 2002 Income taxes increased primarily as a result of changes in Other Income (Expense) as discussed at Earnings Per Share, partially offset by reduced income tax expense due to favorable income tax adjustments related to prior periods. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by the Company described below are held for purposes other than trading. Interest rate risk - The table below provides information about long-term debt issued by the Company and other financial instruments that are sensitive to changes in interest rates. For debt obligations the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the figures shown reflect notional amounts and related maturities. Fair values for debt and swaps represent quoted market prices.
As of September 30, 2003 Expected Maturity Date - ------------------------ ---------------------- Millions of dollars There- Fair Liabilities 2003 2004 2005 2006 2007 After Total Value - --------------------------------------- -------- -------- --------- --------- --------- ---------- ---------- -------------- - --------------------------------------- -------- -------- --------- --------- --------- ---------- ---------- -------------- Long-Term Debt: Fixed Rate ($) 146.9 202.2 197.1 177.4 71.3 2,424.2 3,219.1 3,301.0 Average Fixed Interest Rate (%) 6.53 7.51 7.37 8.74 6.94 6.65 6.36 Variable Rate ($) 150.0 150.0 149.3 Average Variable Interest Rate (%) 1.74 1.74 Interest Rate Swaps: Pay Variable/Receive Fixed ($) 4.3 57.5 3.2 3.2 28.2 241.0 337.4 12.08 Average Pay Interest Rate (%) 7.06 5.86 4.33 4.33 4.33 2.81 3.54 Average Receive Interest Rate (%) 10.00 7.70 8.75 8.75 7.11 6.21 6.63
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. At September 30, 2003 the Company held investments in the 12% senior unsecured notes (due 2009) of a telecommunications company, the cost basis of which, including accrued interest, is approximately $48 million. As these notes are not actively traded, determination of their fair value is not practicable. In June 2002 SCE&G entered into a parts availability agreement with a supplier whereby turbine and stator bar parts will be stored by SCE&G to be available when needed. The parts will remain the property of the supplier until such time as they are removed from storage by SCE&G and payment is made. SCE&G bears the risk of loss or repair for any part damaged while in storage and will pay an availability fee each quarter based on the daily available parts stored. In addition, SCE&G is obligated to purchase all remaining stored parts at the termination dates of the contract, June 2009 for the turbine parts and December 2006 for the stator bar parts. As such, SCE&G has recorded a liability in Other Long-Term Debt with an offsetting asset in Deferred Debits. At September 30, 2003 SCE&G had recorded $30.8 million for the turbine parts and $3.2 million for the stator bar parts. Commodity price risk - The following table provides information about the Company's financial instruments that are sensitive to changes in natural gas prices. Weighted average settlement prices are per 10,000 mmbtu. Fair value represents quoted market prices.
Expected Maturity: Options Futures Contracts Purchased call Purchased put 2003 Long($) Short ($) (long) ($) (short) ($) Settlement Price (a) 4.98 4.96 Contract Amount 21.1 1.0 Strike Price (a) 5.56 5.40 Fair Value 19.9 0.8 Contract Amount 1.8 5.7 2004 Settlement Price (a) 5.06 5.13 Contract Amount 32.3 0.2 Strike Price (a) 5.13 5.50 Fair Value 31.4 0.2 Contract Amount 3.5 0.4 2005 Settlement Price (a) 4.71 - Contract Amount 3.4 - Strike Price (a) - - Fair Value 3.7 - Contract Amount - - 2006 Settlement Price (a) 4.84 - Contract Amount 0.5 - Strike Price (a) - - Fair Value 0.6 - Contract Amount - -
The Company uses derivative instruments to hedge forward purchases and sales of natural gas, which create market risks of different types. See Note 6 of Notes to Condensed Consolidated Financial Statements. The NYMEX futures information above includes those financial positions of Energy Marketing, SCPC and PSNC Energy. Certain derivatives that SCPC utilizes to hedge its gas purchasing activities are recoverable through its weighted average cost of gas calculation. SCPC's tariffs include a purchased gas adjustment (PGA) clause that provides for the recovery of actual gas costs incurred. The SCPSC has ruled that the results of SCPC's hedging activities are to be included in the PGA. The offset to the change in fair value of these derivatives is recorded as a current asset or liability. Beginning in January 2003, PSNC Energy initiated a hedging program for gas purchasing activities using NYMEX futures and options. PSNC Energy's tariffs include a provision for the recovery of actual gas costs incurred. PSNC Energy will include the offset to the change in fair value of derivatives acquired as part of its hedging program in deferred accounts for the over or under recovery of gas costs. In an October 2003 order, the North Carolina Utilities Commission (NCUC) declared the program was reasonable. The offset to the change in fair value of these derivatives is recorded as a regulatory asset or liability. Equity price risk - Investments in telecommunications companies' equity securities (excluding preferred stock with significant debt characteristics) are carried at market value or, if market value is not readily determinable, at cost. The carrying value of the Company's investments in such securities totaled $94.8 million at September 30, 2003. A temporary decline in value of ten percent would result in a $9.5 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 (Loss). An other than temporary decline in value of ten percent would result in a $9.5 million reduction in fair value and a corresponding adjustment to net income, net of tax effect. Item 4. Controls and Procedures As of September 30, 2003 an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that as of September 30, 2003 the Company's disclosure controls and procedures were effective. There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. SOUTH CAROLINA ELECTRIC & GAS COMPANY FINANCIAL SECTION
Item 1. Financial Statements SOUTH CAROLINA ELECTRIC & GAS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - ------------------------------------------------------------------------------ ------------------- ----------------------- September 30, December 31, Millions of dollars 2003 2002 - ------------------------------------------------------------------------------ ------------------- ----------------------- Assets Utility Plant: Electric $5,098 $4,934 Gas 453 439 Other 181 184 - ------------------------------------------------------------------------------ ------------------- ----------------------- Total 5,732 5,557 Accumulated depreciation and amortization (2,009) (1,912) - ------------------------------------------------------------------------------ ------------------- ----------------------- Total 3,723 3,645 Construction work in progress 877 604 Nuclear fuel, net of accumulated amortization 41 38 - ------------------------------------------------------------------------------ ------------------- ----------------------- Utility Plant, Net 4,641 4,287 - ------------------------------------------------------------------------------ ------------------- ----------------------- Nonutility Property and Investments, Net 25 25 - ------------------------------------------------------------------------------ ------------------- ----------------------- - ------------------------------------------------------------------------------ ------------------- ----------------------- Current Assets: Cash and temporary investments 25 56 Receivables, net 226 237 Receivables - affiliated companies 64 46 Inventories (at average cost): Fuel 27 48 Materials and supplies 52 53 Emission allowances 7 10 Prepayments 20 24 - ------------------------------------------------------------------------------ ------------------- ----------------------- Total Current Assets 421 474 - ------------------------------------------------------------------------------ ------------------- ----------------------- Deferred Debits: Environmental 12 18 Nuclear plant decommissioning - 87 Assets held in trust, net - nuclear decommissioning 35 - Pension asset, net 269 265 Due from affiliates - pension and postretirement benefits 20 18 Other regulatory assets 296 267 Other 146 103 - ------------------------------------------------------------------------------ ------------------- ----------------------- Total Deferred Debits 778 758 - ------------------------------------------------------------------------------ ------------------- ----------------------- Total $5,865 $5,544 ============================================================================== =================== ======================= - --------------------------------------------------------------------------------- ----------------- -------------------- September 30, December 31, Millions of dollars 2003 2002 - --------------------------------------------------------------------------------- ----------------- -------------------- Capitalization and Liabilities Stockholders' Investment: Common equity $2,028 $1,966 Preferred stock (Not subject to purchase or sinking funds) 106 106 - --------------------------------------------------------------------------------- ----------------- -------------------- Total Stockholders' Investment 2,134 2,072 Preferred Stock, net (Subject to purchase or sinking funds) 9 9 Company-Obligated Mandatorily Redeemable Preferred Securities of the Company's Subsidiary Trust, SCE&G Trust I, holding solely $50 million principal amount of 7.55% Junior Subordinated Debentures of SCE&G - 50 Long-Term Debt, net 1,706 1,534 - --------------------------------------------------------------------------------- ----------------- -------------------- Total Capitalization 3,849 3,665 - --------------------------------------------------------------------------------- ----------------- -------------------- Current Liabilities: Short-term borrowings 196 178 Current portion of long-term debt 238 144 Accounts payable 82 124 Accounts payable - affiliated companies 63 77 Customer deposits 24 22 Taxes accrued 100 93 Interest accrued 35 31 Dividends declared 39 42 Deferred income taxes, net 4 12 Other 23 37 - --------------------------------------------------------------------------------- ----------------- -------------------- Total Current Liabilities 804 760 - --------------------------------------------------------------------------------- ----------------- -------------------- Deferred Credits: Deferred income taxes, net 650 610 Deferred investment tax credits 111 108 Reserve for nuclear plant decommissioning - 87 Asset retirement obligation - nuclear plant 116 - Due to affiliates - pension and postretirement benefits 15 17 Postretirement benefits 133 131 Regulatory liabilities 133 109 Other 54 57 - --------------------------------------------------------------------------------- ----------------- -------------------- Total Deferred Credits 1,212 1,119 - --------------------------------------------------------------------------------- ----------------- -------------------- Total $5,865 $5,544 ================================================================================= ================= ==================== See Notes to Condensed Consolidated Financial Statements. SOUTH CAROLINA ELECTRIC & GAS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - ---------------------------------------------------------------- -------------------------- ------------------------- Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2003 2002 2003 2002 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Operating Revenues: Electric $430 $425 $1,125 $1,079 Gas 54 47 258 207 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Total Operating Revenues 484 472 1,383 1,286 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Operating Expenses: Fuel used in electric generation 78 86 218 217 Purchased power (including affiliated purchases) 42 36 107 111 Gas purchased for resale 44 36 194 148 Other operation and maintenance 93 89 296 269 Depreciation and amortization 47 43 142 126 Other taxes 30 27 90 81 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Total Operating Expenses 334 317 1,047 952 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Operating Income 150 155 336 334 Other Income, Including Allowance for Equity Funds Used During Construction of $5, $5, $13 and $16 9 9 24 28 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Income Before Interest Charges, Income Taxes and Preferred Stock Dividends 159 164 360 362 Interest Charges, Net of Allowance for Borrowed Funds Used During Construction of $3, $3, $7 and $10 30 30 97 87 Dividend Requirement of Company - Obligated Mandatorily Redeemable Preferred Securities - 1 2 3 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Income Before Income Taxes and Preferred Stock Dividends 129 133 261 272 Income Tax Expense 41 47 86 94 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Net Income 88 86 175 178 Preferred Stock Cash Dividends Declared (At stated rates) 2 2 6 6 - ---------------------------------------------------------------- ------------ ------------- ------------- ----------- Earnings Available for Common Stockholder $86 $84 $169 $172 ================================================================ ============ ============= ============= =========== See Notes to Condensed Consolidated Financial Statements. o 40 SOUTH CAROLINA ELECTRIC & GAS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - -------------------------------------------------------------------------------------------- ---------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 - -------------------------------------------------------------------------------------------- -------------- ------------- Cash Flows From Operating Activities: Net income $175 $178 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 141 127 Amortization of nuclear fuel 18 14 Allowance for funds used during construction (20) (26) Over (under) collections, fuel adjustment clauses 26 (14) Changes in certain assets and liabilities: (Increase) decrease in receivables, net (7) (27) (Increase) decrease in inventories 25 (7) (Increase) decrease in prepayments 4 (8) (Increase) decrease in pension asset (4) (20) (Increase) decrease in other regulatory assets (20) (1) Increase (decrease) in deferred income taxes, net 32 14 Increase (decrease) in regulatory liabilities 34 32 Increase (decrease) in postretirement benefits obligations 2 7 Increase (decrease) in accounts payable (56) (40) Increase (decrease) in taxes accrued 7 (11) Increase (decrease) in interest accrued 4 4 Changes in other assets 4 (15) Changes in other liabilities 8 3 - -------------------------------------------------------------------------------------------- ------------- -------------- Net Cash Provided From Operating Activities 373 210 - -------------------------------------------------------------------------------------------- ------------- -------------- Cash Flows From Investing Activities: Utility property additions and construction expenditures, net of AFC (451) (362) Proceeds from sales of assets - 1 Increase in nonutility property - (2) Increase in investments (11) (7) - -------------------------------------------------------------------------------------------- ------------- -------------- Net Cash Used For Investing Activities (462) (370) - -------------------------------------------------------------------------------------------- ------------- -------------- Cash Flows From Financing Activities: Proceeds: Issuance of First Mortgage Bonds 495 295 Capital contribution from parent 2 5 Repayments: Mortgage Bonds (250) (104) Pollution Control Bonds (6) - Other long-term debt (12) (3) SCE&G Trust 1 Preferred Securities (50) - Retirement of preferred stock - (1) Payment of deferred financing costs (21) - Dividends and distributions: Common stock (112) (113) Preferred stock (6) (6) Short-term borrowings, net 18 84 - -------------------------------------------------------------------------------------------- ------------- -------------- Net Cash Provided From Financing Activities 58 157 - -------------------------------------------------------------------------------------------- ------------- -------------- Net Decrease In Cash and Temporary Investments (31) (3) Cash and Temporary Investments, January 1 56 37 - -------------------------------------------------------------------------------------------- ------------- -------------- Cash and Temporary Investments, September 30 $25 $34 ============================================================================================ ============= ============== Supplemental Cash Flow Information: Cash paid for - Interest (net of capitalized interest of $7 and $10) $93 $82 - Income taxes 22 54
See Notes to Condensed Consolidated Financial Statements. SOUTH CAROLINA ELECTRIC & GAS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (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, 2002. These are interim financial statements, and due to the seasonality of the Company's business, the amounts reported in the Condensed 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, 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 (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires cost-based rate-regulated utilities to recognize in their financial statements certain 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, 2003, approximately $308 million and $133 million of regulatory assets (including environmental) and liabilities, respectively, as shown below. September 30, December 31, Millions of dollars 2003 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Accumulated deferred income taxes, net $86 $86 Under-collections - electric fuel and gas cost adjustment clauses, net 24 50 Deferred environmental remediation costs 12 18 Asset retirement obligation - nuclear decommissioning 43 - Deferred non-conventional fuel tax benefits, net (59) (40) Storm damage reserve (36) (32) Franchise agreements 62 65 Other 43 29 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total $175 $176 ================================================================================ Accumulated deferred income tax liabilities arising from utility operations that have not been included in customer rates are recorded as a regulatory asset. Accumulated deferred income tax assets arising from deferred investment tax credits are recorded as a regulatory liability. Under-collections - fuel adjustment clauses, net represent amounts under-collected from customers pursuant to the fuel adjustment clause (electric customers) or gas cost adjustment clause (gas customers) as approved by the Public Service Commission of South Carolina (SCPSC) during annual hearings. Deferred environmental remediation costs represent costs associated with the assessment and clean-up of manufactured gas plant (MGP) sites currently or formerly owned by the Company. Costs incurred at sites owned by the Company are being recovered through rates. Such costs, totaling approximately $11.6 million, are expected to be fully recovered by the end of 2005. Asset retirement obligation - nuclear decommissioning represents the regulatory asset associated with the legal obligation of decommissioning and dismantling V. C. Summer Nuclear Station (Summer Station) as required in SFAS 143, "Accounting for Asset Retirement Obligations." (See Note 1B). Deferred non-conventional fuel tax benefits represent the deferral of partnership losses and other expenses, offset by the accumulated deferred income tax credits associated with the Company's two partnerships involved in converting coal to alternate fuel. Under a plan approved by the SCPSC, any tax credits generated from non-conventional fuel produced and consumed by the Company and ultimately passed through to the Company, net of partnership losses and other expenses, have been and will be deferred and will be applied to offset the capital costs of projects required to comply with legislative or regulatory actions. The storm damage reserve represents an SCPSC approved reserve account capped at $50 million to be collected through rates over a period of approximately ten years. The accumulated storm damage reserve can be applied to offset actual storm damage costs in excess of $2.5 million in a calendar year. Franchise agreements represent costs associated with the 30-year electric and gas franchise agreements with the cities of Charleston and Columbia, South Carolina. These amounts are not earning a return, but are being amortized through cost of service over 15 years. The SCPSC has reviewed and approved through specific orders most of the items shown as regulatory assets. Other items represent costs which are not yet approved for recovery by the SCPSC. In recording these costs as regulatory assets, management believes the costs will be allowable under existing rate-making concepts that are embodied in rate orders received by the Company. However, ultimate recovery is subject to SCPSC approval. 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, liquidity or financial position in the period the write-off would be recorded. B. New Accounting Standards The Company adopted SFAS 143 effective January 1, 2003. SFAS 143 applies to legal obligations associated with the retirement of tangible long-lived assets (ARO) and requires the Company to recognize, as a liability, the fair value of an ARO in the period in which it is incurred and to accrete the liability to its present value in future periods. As of December 31, 2002, prior to the adoption of SFAS 143, the Company carried deferred debits and deferred credits each totaling approximately $87 million related to the decommissioning and dismantling of Summer Station and the funding thereof. Effective January 1, 2003, in connection with the measurement of the ARO upon the adoption of SFAS 143, the amounts reflected within these regulatory assets and liabilities were recharacterized. The following table presents such recharacterized amounts related to the decommissioning obligation and the funding thereof as recorded in the condensed consolidated balance sheet as of September 30, 2003, and the pro forma amounts that would have been recorded as of December 31, 2002 and 2001 had SFAS 143 been adopted at the beginning of 2001. As of September 30, December 31, December 31, Millions of dollars 2003 2002 2001 - ------------------- Actual Proforma Proforma Assets: Within electric plant $40 $40 $40 Within accumulated depreciation (13) (13) (12) Assets held in trust (net) - nuclear decommissioning 35 39 35 Within other regulatory assets 54 45 42 -------------- --------------- ------------- -------------- --------------- ------------- Total $116 $111 $105 ============== =============== ============= ============== =============== ============= Liabilities: Asset retirement obligation - nuclear plant decommissioning $116 $111 $105 ================ =============== =========== Proforma net income for periods prior to the adoption of SFAS 143 would not differ from amounts actually recorded during these periods. The Company believes that there is legal uncertainty as to the existence of environmental obligations associated with certain transmission and distribution properties. The Company believes that any ARO related to this type of property would be insignificant and, due to the indeterminate life of the related assets, an ARO could not be reasonably estimated. The Company adopted SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective January 1, 2003. The provisions of SFAS 145, among other things, discontinue treatment of gains or losses from the early extinguishment of debt as extraordinary items unless such early extinguishment meets the criteria of Accounting Principles Board Opinion (APB) 30. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 145. The Company adopted SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective January 1, 2003. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 146. SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued in May 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 150. C. Affiliated Transactions The Company has entered into agreements with certain affiliates to purchase gas for resale to its distribution customers and to purchase electric energy. The Company purchases all of its natural gas requirements from South Carolina Pipeline Corporation (SCPC). The Company had approximately $15.8 million and $29.6 million payable to SCPC for such gas purchases at September 30, 2003 and December 31, 2002, respectively. The Company purchases all of the electric generation of Williams Station, which is owned by South Carolina Generating Company (GENCO), under a unit power sales agreement. The Company had approximately $8.7 million and $9.0 million, payable to GENCO for unit power purchases at September 30, 2003 and December 31, 2002, respectively. Such unit power purchases, which are included in "Purchased power", amounted to approximately $28.9 million and $68.2 million for the three and nine months ended September 30, 2003, respectively. The Company holds two equity-method investments in partnerships involved in converting coal to non-conventional fuel. The Company had recorded as receivables from affiliated companies for these investments approximately $15.4 million and $8.5 million at September 30, 2003 and December 31, 2002, respectively. The Company had recorded as payables to affiliated companies for these investments approximately $14.3 million and $8.0 million at September 30, 2003 and December 31, 2002, respectively. D. Reclassifications Certain amounts from prior periods have been reclassified to conform with the presentation adopted for 2003. 2. RATE AND OTHER REGULATORY MATTERS Electric In January 2003 the SCPSC issued an order granting the Company a composite increase in retail electric rates of 5.8% which is designed to produce additional annual revenues of approximately $70.7 million based on a test year calculation. The SCPSC authorized a return on common equity of 12.45%. The new rates were effective for service rendered on and after February 1, 2003. As a part of the order, the SCPSC extended through 2005 its approval of the accelerated capital recovery plan for the Company's Cope Generating Station. Under the plan, based on the level of revenues and operating expenses, the Company may increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates, not to exceed $36 million annually, without additional approval of the SCPSC. Any unused portion of the $36 million in any given year may be carried forward for possible use in the following year. In January 2003, in conjunction with the approval of the above retail rate increase, the SCPSC approved the Company's request to reduce the fuel component to 1.678 cents per KWh. This reduction was effective for service rendered on and after February 1, 2003. In April 2003 the SCPSC issued an order approving the Company's request to maintain the fuel cost component of rates at 1.678 cents per KWh, effective May 1, 2003. The SCPSC also reaffirmed the prudence of the Company's purchasing practices and recognized the efficiency of the Company's electric generating plants; however, it deferred action on the recovery of certain purchased power costs pending the resolution of the appeal discussed below. In May 2002 the SCPSC issued an order approving the Company's request to increase the fuel component of rates charged to electric customers from 1.579 cents per KWh to 1.722 cents per KWh. The increase reflected higher fuel costs projected for the period May 2002 through April 2003. The increase also provided continued recovery for under-collected actual fuel costs through April 2001, including short-term purchased power costs necessitated by outages at two of the Company's base load generating plants in winter 2000-2001. The new rates were effective as of the first billing cycle in May 2002. The Consumer Advocate of South Carolina appealed to the South Carolina Circuit Court (Circuit Court) the portion of the SCPSC's order related to the recovery of certain purchased power costs. The appeal is still pending. Gas The Company's rates are established using a cost of gas component approved by the SCPSC which may be modified periodically to reflect changes in the price of natural gas purchased by the Company. The Company's cost of gas component in effect during the period January 1, 2002 through September 30, 2003 was as follows: Rate Per Therm Effective Date Rate Per Therm Effective Date $.728 January-February 2003 $.596 January-October 2002 $.928 March-September 2003 $.728 November-December 2002 On October 28, 2003, as part of the annual review of gas costs, the SCPSC approved the Company's request to decrease the cost of gas component from $.928 per therm to $.867 per therm effective with the first billing cycle in November 2003. The SCPSC allows the Company to recover, through a billing surcharge to its gas customers, the costs of environmental cleanup at the sites of former manufactured gas plants (MGPs). The billing surcharge is subject to annual review and provides for the recovery of substantially all actual and projected site assessment and cleanup costs and environmental claims settlements for the Company's gas operations that had previously been recorded in deferred debits. In October 2003, as a result of the annual review, the SCPSC approved the Company's request to reduce the billing surcharge from 3.0 cents per therm to 2.2 cents per therm, which is intended to provide for the recovery, prior to the end of the year 2009, of the balance remaining at September 30, 2003 of $11.6 million. 3. LONG-TERM DEBT On January 23, 2003 the Company issued $200 million of First Mortgage Bonds having an annual interest rate of 5.80% and maturing on January 15, 2033. The proceeds from the sale of these bonds were used to reduce short-term debt and for general corporate purposes. On May 21, 2003 the Company issued $300 million First Mortgage Bonds having an annual interest rate of 5.30% and maturing on May 15, 2033. The Company used the net proceeds from the sale of these bonds and certain other Company funds to redeem its $100 million principal amount of 7.625% First Mortgage Bonds due June 1, 2023, its $150 million principal amount of 7.50% First Mortgage Bonds due June 15, 2023 and its Junior Subordinated Debentures which effected the redemption of $50 million aggregate amount of 7.55% Trust Preferred Securities, Series A, issued by SCE&G Trust I. In anticipation of the issuance of debt, the Company also uses interest rate lock or similar agreements to manage interest rate risks. Payments received or made upon termination of such agreements are recorded within other deferred debits on the balance sheet and are amortized to interest expense over the term of the underlying debt. In connection with the issuance of First Mortgage Bonds in May 2003, the Company paid approximately $11.9 million upon the termination of a treasury lock agreement. 4. RETAINED EARNINGS The Company's Restated Articles of Incorporation contain provisions that, under certain circumstances, could limit the payment of cash dividends on its common stock. In addition, with respect to hydroelectric projects, the Federal Power Act requires the appropriation of a portion of certain earnings therefrom. At September 30, 2003 approximately $43.4 million of retained earnings were restricted by this requirement as to payment of cash dividends on common stock. 5. COMMITMENTS AND CONTINGENCIES Reference is made to Note 11 of Notes to Consolidated Financial Statements appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Commitments and Contingencies at September 30, 2003 include the following: A. Lake Murray Dam Reinforcement In October 1999 the United States Federal Energy Regulatory Commission (FERC) mandated that the Company reinforce its Lake Murray dam in order to comply with new federal safety standards and maintain the lake in case of an extreme earthquake. Construction for the project and related activities, which began in the third quarter of 2001, is expected to cost approximately $275 million and be completed in 2005. Costs incurred through September 30, 2003 totaled approximately $126 million. B. 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 $10.9 billion. Each reactor licensee is currently liable for up to $100.6 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 Summer Station, would be approximately $67.1 million per incident, but not more than $6.7 million per year. The Price-Anderson Indemnification Act was anticipated to renew in August 2002. However, Congress concluded their session in 2002 without approving this renewal. The Act is now expected to renew with only modest changes in 2003. The delayed renewal has no impact on SCE&G at present due to the "grandfathered" status of existing licensees under the expired Act until such time as it is renewed. The Company currently maintains policies (for itself and on behalf of the South Carolina Public Service Authority) with Nuclear Electric Insurance Limited. The policies, covering the nuclear facility for property damage, excess property damage and outage costs, permit assessments under certain conditions to cover insurer's losses. Based on the current annual premium, the Company's portion of the retrospective premium assessment would not exceed $15.8 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 would have a material adverse impact on the Company's results of operations, cash flows and financial position. C. Environmental The Company maintains an environmental assessment program to identify and evaluate current and former operations sites that could require environmental cleanup. As site assessments are initiated, estimates are made of the amount of 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 solely to regulated operations. At the Company, site assessment and cleanup costs are deferred and amortized with recovery provided through rates. Deferred amounts, net of amounts previously recovered through rates and insurance settlements, totaled $11.6 million at September 30, 2003. The deferral includes the estimated costs associated with the following matters. The Company owns a decommissioned MGP site in the Calhoun Park area of Charleston, South Carolina. The site is currently being remediated for benzene contamination in the intermediate aquifer on surrounding properties. SCE&G anticipates that the remaining remediation activities will be completed by the end of 2004, with certain monitoring and retreatment activities continuing until 2007. As of September 30, 2003, the Company has spent approximately $19.6 million to remediate the Calhoun Park site. Total remediation costs are estimated to be $21.9 million. The Company owns three other decommissioned MGP sites in South Carolina which contain residues of by-product chemicals. Two of these sites are currently being remediated under work plans approved by DHEC. In addition, in March 2003 the Company signed a consent agreement with DHEC related to a site formerly owned by the Company. The site contained residue material that was moved from the Columbia MGP. The removal action for this site has been completed. The Company is continuing to investigate the remaining site and is monitoring the nature and extent of residual contamination. The Company anticipates that major remediation activities for the three owned sites will be completed before 2006. As of September 30, 2003, the Company has spent approximately $3.9 million related to these three sites, and expects to spend an additional $5.2 million. Total remediation costs are estimated to be $9.1 million D. Parts Availability Agreement In June 2002 the Company entered into a parts availability agreement with a supplier whereby turbine and stator bar parts will be stored by the Company to be available when needed. The parts will remain the property of the supplier until such time as they are removed from storage by the Company and payment is made. The Company bears the risk of loss or repair for any part damaged while in storage and will pay an availability fee each quarter based on the daily available parts stored. In addition, the Company is obligated to purchase all remaining parts at the termination dates of the contract, June 2009 for the turbine parts and December 2006 for the stator bar stored parts. As such, the Company has recorded a liability in Other Long-Term Debt with an offsetting asset in Deferred Debits. At September 30, 2003 the Company had recorded $30.8 million for the turbine parts and $3.2 million for the stator bar parts. 6. 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 regulated operations. Therefore, net income is not allocated to the Electric Operations and Gas Distribution segments. Accumulated depreciation is not assignable to Electric Operations and Gas Distribution segments; therefore, it is reflected as an adjustment to arrive at the consolidated total assets. Intersegment revenues were not significant.
Disclosure of Reportable Segments (Millions of Dollars) Three Months Ended September 30, 2003 2002 - ------------------------------- ---------------------------- --------------------------- - ------------------------------- ----------- ---------------- External Operating External Operating Revenue Income (Loss) Revenue Income (Loss) - ------------------------------- ----------- ---------------- ------------ -------------- ------------ -------------- Electric Operations $430 $158 $425 $162 Gas Distribution 54 (8) 47 (6) Adjustments/Eliminations - - - (1) - ------------------------------- ----------- ---------------- ------------ -------------- - ------------------------------- ----------- ---------------- ------------ -------------- Consolidated Total $484 $150 $472 $155 =============================== =========== ================ ============ ============== Nine Months Ended September 30, 2003 2002 - ----------------------------- ---------- -------------- ---------- ------------ -------------- ----------- External Operating Segment External Operating Segment Revenue Income (Loss) Assets Revenue Income (Loss) Assets - ----------------------------- ---------- -------------- ---------- ------------ -------------- ----------- Electric Operations $1,125 $332 $5,991 $1,079 $329 $5,414 Gas Distribution 258 5 457 207 6 440 All Other - - - 4 - - Adjustments/Eliminations (1) - (1) (554) - (583) - ----------------------------- ---------- -------------- ---------- ------------ -------------- ----------- - ----------------------------- ---------- -------------- ---------- ------------ -------------- ----------- Consolidated Total $1,383 $336 $5,865 $1,286 $334 $5,304 ============================= ========== ============== ========== ============ ============== ===========
7. SUBSEQUENT EVENT On November 6, 2003 the Company issued $250 million First Mortgage Bonds having an annual interest rate of 5.25% and maturing on November 1, 2018. The Company will use the net proceeds from the sale of these bonds for the payment at maturity of the Company's $100 million principal amount of 6.25% First Mortgage Bonds due December 15, 2003, for repayment of short-term debt primarily incurred as a result of the Company's construction program and for general corporate purposes. 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, 2002. Statements included in this discussion and analysis (or elsewhere in this quarterly report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: (1) that the information is of a preliminary nature and may be subject to further and/or continuing review and adjustment, (2) changes in the utility regulatory environment, (3) changes in the economy, especially in SCE&G's service territory, (4) the impact of competition from other energy suppliers, including competition from alternate fuels in industrial interruptible markets, (5) growth opportunities, (6) the results of financing efforts, (7) changes in SCE&G's accounting policies, (8) weather conditions, especially in areas served by SCE&G, (9) performance of SCANA Corporation's pension plan assets and the impact on SCE&G's results of operations, (10) inflation, (11) changes in environmental regulations and (12) the other risks and uncertainties described from time to time in SCE&G's periodic reports filed with the United States Securities and Exchange Commission. SCE&G disclaims any obligation to update any forward-looking statements. COMPETITION Electric Operations In South Carolina electric restructuring efforts remain stalled, and the state legislature adjourned for the year without considering electric restructuring legislation. At the federal level, energy legislation passed both houses of Congress in 2003, though significant differences exist between the House and Senate versions. Some of the more stringent provisions of this legislation, either currently included or expected to be debated in conference committee, would require that one percent of the electric energy sold by retail electric suppliers, beginning in 2005, escalating to ten percent by 2020, be generated from renewable energy resources. Renewable energy resources, as defined in the legislation, may exclude hydroelectric generation. Substantial penalties would be levied for failure to comply. Electric cooperatives and municipal utilities would be exempt from these requirements. In addition, largely in response to the August 2003 blackout in eight northern states and parts of Canada, the energy legislation being considered includes several provisions to develop and enforce reliability standards for high-voltage transmission systems and to expedite construction of transmission lines. SCE&G cannot predict whether such legislation will be enacted, and if it is, the conditions it would impose on utilities. In July 2002 the United States Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) on Standard Market Design (SMD) which proposed sweeping changes to the country's existing regulatory framework governing transmission, open access and energy markets and would attempt, in large measure, to standardize the national energy market. If implemented, the proposed rule could have a significant impact on SCE&G's access to or cost of power for its native load customers and on SCE&G's marketing of power outside its service territory. On April 28, 2003 FERC issued a "white paper" regarding SMD which describes how the final SMD rule being considered would differ from the NOPR. SCE&G is currently evaluating FERC's actions to determine potential effects on SCE&G's operations. Additional directives from FERC are expected, and would likely be significantly influenced by the energy legislation discussed in the preceding paragraph. Gas Distribution Natural gas competes with electricity, propane and heating oil to serve the heating and, to a lesser extent, other household energy needs of residential and small commercial customers. This competition is generally based on price and convenience. Large commercial and industrial customers often have the ability to switch from natural gas to an alternate fuel, such as propane or fuel oil. Natural gas competes with these alternate fuels based on price. As a result, any significant disparity between supply and demand, either of natural gas or of alternate fuels, and due either to production or delivery disruptions or other factors, will affect price and impact SCE&G's ability to retain large commercial and industrial customers. LIQUIDITY AND CAPITAL RESOURCES SCE&G anticipates that its contractual cash obligations will be met through internally generated funds and the incurrence of additional short-term and long-term indebtedness. SCE&G's cash requirements arise primarily from its operational needs, funding its construction programs and payment of dividends to SCANA. The ability of SCE&G to replace existing plant investment, as well as to expand to meet future demand for electricity and gas, will depend upon its ability to attract the necessary financial capital on reasonable terms. SCE&G recovers the costs of providing services through rates charged to customers. Rates for regulated services are generally based on historical costs. As customer growth and inflation occur and SCE&G continues its ongoing construction program, SCE&G expects to seek increases in rates. SCE&G's future financial position and results of operations will be affected by its ability to obtain adequate and timely rate and other regulatory relief, if requested. In January 2003 the Public Service Commission of South Carolina (SCPSC) issued an order granting SCE&G a composite increase in retail electric rates of 5.8% which is designed to produce additional annual revenues of approximately $70.7 million based on a test year calculation. The SCPSC authorized a return on common equity of 12.45%. The new rates were effective for service rendered on and after February 1, 2003. As a part of the order, the SCPSC extended through 2005 its approval of the accelerated capital recovery plan for SCE&G's Cope Generating Station. Under the plan, based on the level of revenues and operating expenses, SCE&G may increase depreciation of its Cope Generating Station in excess of amounts that would be recorded based upon currently approved depreciation rates, not to exceed $36 million annually without the approval of the SCPSC. Any unused portion of the $36 million in any given year may be carried forward for possible use in the following year. The following table summarizes how SCE&G generated and used funds for property additions and construction expenditures during the nine months ended September 30, 2003 and 2002: - ------------------------------------------------------------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 - -------------------------------------------------------------------- ---------- Net cash provided from operating activities $373 $210 Net cash provided from financing activities 58 157 Cash provided from sale of assets - 1 Funds used for investments (11) (7) Cash and temporary cash investments available at the beginning of the period 56 37 Funds used for utility property additions and construction expenditures, net of noncash allowance for funds used during construction $(451) $(362) Funds used for nonutility property additions - (2) SCE&G expects that it has or can obtain adequate sources of financing to meet its projected cash requirements for the next 12 months and for the foreseeable future. SCE&G's ratio of earnings to fixed charges for the 12 months ended September 30, 2003 was 3.29. CAPITAL TRANSACTIONS On January 23, 2003 SCE&G issued $200 million of First Mortgage Bonds having an annual interest rate of 5.80% and maturing January 15, 2033. The proceeds from the sale of these bonds were used to reduce short-term debt and for general corporate purposes. On May 21, 2003 SCE&G issued $300 million First Mortgage Bonds having an annual interest rate of 5.30% and maturing on May 15, 2033. SCE&G used the net proceeds from the sale of these bonds and certain other SCE&G funds to redeem its $100 million principal amount of 7.625% First Mortgage Bonds due June 15, 2023, its $150 million principal amount of 7.50% First Mortgage Bonds due June 1, 2023 and its Junior Subordinated Debentures which effected the redemption of $50 million aggregate amount of 7.55% Trust Preferred Securities, Series A, issued by SCE&G Trust I. On November 6, 2003 SCE&G issued $250 million First Mortgage Bonds having an annual interest rate of 5.25% and maturing on November 1, 2018. SCE&G will use the net proceeds from the sale of these bonds for the payment at maturity of SCE&G's $100 million principal amount of 6.25% First Mortgage Bonds due December 15, 2003, for repayment of short-term debt primarily incurred as a result of SCE&G's construction program and for general corporate purposes. CAPITAL PROJECTS In May 2002 SCE&G began construction of an 875 megawatt generation facility in Jasper County, South Carolina to supply electricity to its South Carolina customers. The facility will include three natural gas combustion-turbine generators and one steam-turbine generator. The $450 million facility is expected to begin commercial operation in mid-2004, and SCG Pipeline, Inc., an affiliate, will transport natural gas to the facility. Costs incurred through September 30, 2003 totaled approximately $421 million. In October 1999 FERC mandated that SCE&G reinforce its Lake Murray dam in order to comply with new federal safety standards and maintain the lake in case of an extreme earthquake. Construction for the project and related activities, which began in the third quarter of 2001, is expected to cost approximately $275 million and be completed in 2005. Costs incurred through September 30, 2003 totaled approximately $126 million. In 2002 SCE&G entered into an agreement with the South Carolina Transportation Infrastructure Bank (the Bank) and the South Carolina Department of Transportation (SCDOT) that allows SCE&G to borrow funds from the Bank to construct a roadbed for SCDOT in connection with the above Lake Murray dam remediation project. The loan agreement provides for interest-free borrowings for costs incurred not to exceed $59 million, with such borrowings being repaid over ten years from the initial borrowing. At September 30, 2003 SCE&G had not yet borrowed under the agreement. ENVIRONMENTAL MATTERS For information on environmental matters see Note 5C of Notes To Condensed Consolidated Financial Statements. OTHER MATTERS Nuclear Station License Extension In August 2002 SCE&G filed an application with the Nuclear Regulatory Commission (NRC) for a 20-year license extension for its V. C. Summer Nuclear Station (Summer Station). If approved, the extension would allow the plant to operate through 2042. At September 30, 2003 SCE&G had capitalized in construction work in progress approximately $7 million related to the application process and expects to capitalize an additional $2 million. SCE&G expects the extension to be granted in mid-2004. Synthetic Fuel SCE&G holds two equity-method investments in partnerships involved in converting coal to non-conventional fuel, the use of which fuel qualifies for federal income tax credits. The aggregate investment in these partnerships as of September 30, 2003 is approximately $3 million, and through September 30, 2003, they have generated and passed through to SCE&G approximately $83 million in such tax credits. At September 30, 2003 SCE&G has recorded $59 million of deferred fuel tax benefits, which include partnership losses, net of tax. Under a plan approved by the SCPSC, any tax credits generated and ultimately passed through SCE&G from synfuel produced and consumed by SCE&G, net of partnership losses and other expenses, have been and will be deferred and will be applied to offset the capital costs of projects required to comply with legislative or regulatory actions. See Note 1A of Notes to Consolidated Financial Statements. On June 27, 2003 the Internal Revenue Service (IRS) announced that it is reviewing the scientific validity of certain test procedures and results that have been presented as evidence that solid coal-based synthetic fuels have undergone a significant chemical change. Pending completion of this review, the IRS suspended the issuance of Private Letter Rulings on the question of significant chemical change for requests that rely on the testing procedures and results being reviewed. Upon finishing this review, on October 29, 2003, the IRS issued Announcement 2003-70, finishing its review, and confirming that the test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner. SCE&G believes its test procedures will meet the standards contemplated in the Announcement. Although one of the partnerships in which SCE&G owns an interest is currently under audit by the IRS, there have been no issues raised with respect to the validity of synthetic fuel tax credits. While SCE&G is not able to determine what conclusion the IRS will reach in these matters, to the extent the IRS disallows synfuel tax credits generated by either of the two partnerships, the Company's and SCE&G's financial position, results of operations and cash flows would not be materially adversely affected. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THE CORRESPONDING PERIODS IN 2002
Net Income Net income for the third quarter and year to date periods ended September 30, 2003 and 2002 was as follows: - -------------------------------------------------------------- ------------------------------------------ Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change - ----------------------------- ---------- --------------------- ---------- ---------- -------------------- --------- ---------- ---------- ---------- Net income $87.8 $86.2 $1.6 1.9% $174.8 $177.5 $(2.7) (1.5%) - ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Third Quarter 2003 vs 2002 Net income increased slightly due to higher electric margins of $6.3 million, reduced income tax expense due primarily to favorable income tax adjustments related to prior periods of $4.6 million and reduction of preferred dividend requirements of $0.9, which were partially offset by higher operation and maintenance expense of $4.0 million, higher depreciation expense of $4.8 million and higher property taxes of $2.6 million. Year to Date 2003 vs 2002 Net income decreased primarily due to higher operation and maintenance expense of $26.2 million, higher depreciation expense of $15.7 million, higher interest expense of $9.9 million, higher property taxes of $8.9 million and lower equity AFC of $2.9 million, which were partially offset by higher electric margins of $48.2 million, higher gas margins of $5.5 million and reduced income tax expense due primarily to favorable income tax adjustments related to prior periods of $4.6 million. Pension Income Pension income during the three and nine months ended September 30, 2003 was recorded on SCE&G's financial statements as follows:
- ---------------------------------------------------------------------------- ------------------- ------------------- Third Quarter Year to Date Millions of dollars 2003 2002 2003 2002 - ---------------------------------------------------------------------------- --------- --------- --------- --------- - ---------------------------------------------------------------------------- --------- --------- --------- --------- Income Statement Impact: (Component of) reduction in employee benefit costs $0.7 $1.3 $(0.7) $7.8 Other income 2.2 4.4 6.1 8.4 Balance Sheet Impact: (Component of) reduction in capital expenditures 0.2 0.4 (0.2) 2.3 Component of (reduction in) amount due to Summer Station co-owner 0.1 0.1 (0.1) 0.7 - ---------------------------------------------------------------------------- --------- --------- --------- --------- - ---------------------------------------------------------------------------- --------- --------- --------- --------- Total Pension Income $3.2 $6.2 $5.1 $19.2 ============================================================================ ========= ========= ========= =========
For the last several years, the market value of SCE&G's retirement plan (pension) assets has exceeded the total actuarial present value of accumulated plan benefits. Pension income in all periods of 2003 decreased significantly compared to corresponding periods in 2002 primarily as a result of a less favorable investment market. Allowance for Funds Used During Construction (AFC) 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. SCE&G includes an equity portion of AFC in nonoperating income and a debt portion of AFC in interest charges (credits) as noncash items, both of which have the effect of increasing reported net income. The decrease in AFC for the nine months ended September 30, 2003 is primarily the result of the completion of the Urquhart Station repowering project in June 2002. In addition, in January 2003 the SCPSC issued an order allowing SCE&G to include all Jasper County Generating project expenditures as of December 31, 2002 and other construction work in progress expenditures as of June 30, 2002 in electric rate base. At the time the expenditures were included in rate base, AFC was no longer calculated on those amounts. These decreases were partially offset by increased AFC from subsequent construction expenditures related to the Jasper County Generating Station project in 2003 and the Lake Murray Dam project (see discussion at CAPITAL PROJECTS). Dividends Declared SCE&G's Board of Directors has declared the following dividends on common stock held by SCANA during 2003:
--------------------------- ----------------------------- ---------------------------- ----------------------- Declaration Date Amount Quarter Ended Payment Date --------------------------- ----------------------------- ---------------------------- ----------------------- February 20, 2003 $35.3 million March 31, 2003 April 1, 2003 May 1, 2003 $36.5 million June 30, 2003 July 1, 2003 July 31, 2003 $37.0 million September 30, 2003 October 1, 2003 --------------------------- ----------------------------- ---------------------------- -----------------------
Electric Operations Electric Operations is comprised of the electric portion of SCE&G and South Carolina Fuel Company, Inc. Changes in the electric operations sales margins were as follows:
---------------------------------- -------------------------------------- ----------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change ---------------------------------- --------- --------- ------------------ ---------- ---------- ------------------- ---------------------------------- --------- --------- -------- --------- ---------- ---------- --------- --------- Operating Revenues $429.8 $425.4 $4.4 1.0% $1,125.0 $1,079.3 $45.7 4.2% Less: Fuel used in generation 78.0 85.9 (7.9) (9.2%) 217.9 216.6 1.3 0.6% Purchased power 41.7 35.7 6.0 16.8% 107.0 110.8 (3.8) (3.4%) ---------------------------------- --------- --------- -------- --------- ---------- ---------- --------- --------- ---------------------------------- --------- --------- -------- --------- ---------- ---------- --------- --------- Margin $310.1 $303.8 $6.3 2.1% $800.1 $751.9 $48.2 6.4% ================================== ========= ========= ======== ========= ========== ========== ========= =========
Third Quarter 2003 vs 2002 Margin increased primarily due to the increase in retail electric base rates approved in January 2003 of $24.5 million partially offset by less favorable weather of $18.5 million. Fuel used in generation decreased and purchased power increased due to planned plant outages. Year to Date 2003 vs 2002 Margin increased primarily due to the increase in retail electric base rates approved in January 2003 of $58.6 million and by $10.4 million due to customer growth and increased consumption. These increases were partially offset by $20.8 million due to the effects of less favorable weather. Fuel used in generation increased and purchased power decreased primarily due to a planned outage at GENCO in the second quarter of 2003. Gas Distribution Gas Distribution is comprised of the local distribution operations of SCE&G. Changes in the gas distribution sales margins were as follows:
---------------------------------- --------------------------------------- ---------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change ---------------------------------- --------- --------- ------------------- --------- ---------- ------------------- ---------------------------------- --------- --------- --------- --------- --------- ---------- -------- ---------- Operating Revenues $54.6 $47.1 $7.5 15.9% $258.6 $207.2 $51.4 24.8% Less: Gas purchased for resale 43.8 36.0 7.8 21.7% 194.1 148.2 45.9 31.0% ---------------------------------- --------- --------- --------- -------- --------- ---------- Margin $10.8 $11.1 $(0.3) (2.7%) $64.5 $59.0 $5.5 9.3% ================================== ========= ========= ========= ========= ========= ========== ======== ==========
Third Quarter 2003 vs 2002 Margin decreased primarily due to an unfavorable competitive position of natural gas relative to alternate fuels of $1.3 million, partially offset by customer growth and increased consumption of $1.1 million. Year to Date 2003 vs 2002 Margin increased primarily due to customer growth of 1.3% and recovery of environmental remediation expenses of $1.7 million (offset in operations and maintenance), partially offset by increased competition with alternate fuels of $2.7 million.
Other Operating Expenses Changes in other operating expenses were as follows: ------------------------------------- -------------------------------------- ----------------------------------------- Third Quarter Year to Date Millions of dollars 2003 2002 Change 2003 2002 Change ------------------------------------- ---------- --------- ----------------- --------- ---------- -------------------- Other operation and maintenance $93.7 $89.7 $4.0 4.5% $295.4 $269.2 $26.2 9.7% Depreciation and amortization 47.4 42.6 4.8 11.3% 142.3 126.6 15.7 12.4% Other taxes 29.9 27.3 2.6 9.5% 90.5 81.6 8.9 10.9% ------------------------------------- ---------- --------- ------- --------- ---------- --------- ------------------------------------- ---------- --------- ------- --------- ---------- --------- Total $171.0 $159.6 $11.4 7.1% $528.2 $477.4 $50.8 10.6% ===================================== ========== ========= ======= ========= ========= ========== ========= ==========
Third Quarter 2003 vs 2002 Other operation and maintenance expenses increased primarily due to reduced pension income of $0.6 million and increased labor and benefit costs of $3.5 million. Depreciation and amortization expense increased primarily due to normal net property changes. Other taxes increased primarily due to increased property taxes. Year to Date 2003 vs 2002 Other operation and maintenance expenses increased primarily due to reduced pension income of $8.6 million, increased labor and benefits costs of $11.7 million, increased environmental remediation costs of $1.7 million and increased other operating expenses for electric generation and transmission of $1.0 million. Depreciation and amortization expense increased primarily due to normal net property additions of $9.4 million and the completion of the Urquhart Station repowering project in June 2002 of $4.2 million. Other taxes increased primarily due to increased property taxes. Other Income Other income, including AFC, for the year to date 2003 vs 2002 period decreased primarily due to completion of the Urquhart Station Repowering project in June 2002. In addition, in January 2003 the SCPSC issued an order allowing SCE&G to include all Jasper County Generating Project expenditures as of December 31, 2002 and other construction work in progress expenditures as of June 30, 2002 in electric rate base. At the time the expenditures were included in rate base, AFC was no longer calculated on those amounts. These decreases were partially offset by increased AFC from subsequent Jasper County Generation Station project expenditures and the Lake Murray Dam Project. Interest Expense Third Quarter 2003 vs 2002 Interest expense increased by $4.9 million due to increased long-term debt partially offset by $3.0 million due to lower interest rates. Year to Date 2003 vs 2002 Interest expense increased by $15.8 million due to increased long-term debt and by $2.9 million due to lower AFC. These increases were partially offset by $7.9 million due to lower interest rates. Income Taxes Income taxes for both the third quarter and year to date 2003 vs 2002 decreased primarily as a result of changes in operating income and favorable income tax adjustments related to prior periods. Item 3. Quantitative and Qualitative Disclosures About Market Risk All financial instruments held by SCE&G and described below are held for purposes other than trading. Interest rate risk - The table below provides information about long-term debt issued by SCE&G which is sensitive to changes in interest rates. For debt obligations the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Fair values for debt represent quoted market prices.
As of September 30, 2003 Millions of dollars Expected Maturity Date There- Fair Liabilities 2003 2004 2005 2006 2007 after Total Value - ------------------------------ --------- -------- -------- -------- --------- ------------- ---------- -------------- - ------------------------------ --------- -------- -------- -------- --------- ------------- ---------- -------------- Long-Term Debt: Fixed Rate ($) 138.4 138.4 188.4 169.1 38.2 1,430.6 2,103.1 2,078.6 Average Interest Rate (%) 6.39 7.44 7.35 8.49 6.74 6.22 6.60
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. In June 2002 SCE&G entered into a parts availability agreement with a supplier whereby turbine and stator bar parts will be stored by SCE&G to be available when needed. The parts will remain the property of the supplier until such time as they are removed from storage by SCE&G and payment is made. SCE&G bears the risk of loss or repair for any part damaged while in storage and will pay an availability fee each quarter based on the daily available parts stored. In addition, SCE&G is obligated to purchase all remaining stored parts at the termination dates of the contract, June 2009 for the turbine parts and December 2006 for the stator bar parts. As such, SCE&G has recorded a liability in Other Long-Term Debt with an offsetting asset in Deferred Debits. At September 30, 2003 SCE&G had recorded $30.8 million for the turbine parts and $3.2 million for the stator bar parts. Item 4. Controls and Procedures As of September 30, 2003 an evaluation was performed under the supervision and with the participation of SCE&G's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of SCE&G's disclosure controls and procedures. Based on that evaluation, SCE&G's management, including the CEO and CFO, concluded that as of September 30, 2003 SCE&G's disclosure controls and procedures were effective. There has been no change in SCE&G's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected or is reasonably likely to materially affect SCE&G's internal control over financial reporting. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED FINANCIAL SECTION Public Service Company of North Carolina, Incorporated meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this form with the reduced disclosure format allowed under General Instruction H(2).
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - -------------------------------------------------------- ---------------- ------------------- September 30, December 31, Millions of dollars 2003 2002 - -------------------------------------------------------- ---------------- ------------------- Assets Gas Utility Plant $932 $895 Accumulated depreciation (344) (318) Acquisition adjustment, net of accumulated amortization 210 210 - -------------------------------------------------------- ---------------- ------------------- Gas Utility Plant, Net 798 787 - -------------------------------------------------------- ---------------- ------------------- Nonutility Property and Investments, Net 27 28 - -------------------------------------------------------- ---------------- ------------------- Current Assets: Cash and temporary investments 5 1 Restricted cash and temporary investments 7 7 Receivables, net of allowance for uncollectible accounts of $1 and $2 38 98 Receivables-affiliated companies 13 14 Inventories (at average cost): Stored gas 62 38 Materials and supplies 5 6 Prepayments 8 1 Deferred income taxes, net 3 3 - -------------------------------------------------------- ---------------- ------------------- Total Current Assets 141 168 - -------------------------------------------------------- ---------------- ------------------- Deferred Debits: Due from affiliate-pension asset 14 14 Regulatory assets 30 20 Other 5 7 - -------------------------------------------------------- ---------------- ------------------- Total Deferred Debits 49 41 - -------------------------------------------------------- ---------------- ------------------- Total $1,015 $1,024 ======================================================== ================ =================== ======================================================== ================ =================== Capitalization and Liabilities Capitalization: Common equity $493 $487 Long-term debt, net 283 286 - -------------------------------------------------------- ---------------- ------------------- Total Capitalization 776 773 - -------------------------------------------------------- ---------------- ------------------- Current Liabilities: Short-term borrowings 35 31 Current portion of long-term debt 8 8 Accounts payable 27 44 Accounts payable-affiliated companies 4 7 Customer prepayments and deposits 10 12 Taxes accrued 5 5 Interest accrued 4 6 Distributions/dividends declared 4 5 Other 10 11 - -------------------------------------------------------- ---------------- ------------------- Total Current Liabilities 107 129 - -------------------------------------------------------- ---------------- ------------------- Deferred Credits: Deferred income taxes, net 96 91 Deferred investment tax credits 2 2 Due to affiliate-postretirement benefits 17 16 Regulatory liabilities 6 1 Other 11 12 - -------------------------------------------------------- ---------------- ------------------- Total Deferred Credits 132 122 - -------------------------------------------------------- ---------------- ------------------- Total $1,015 $1,024 ======================================================== ================ =================== See Notes to Condensed Consolidated Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------------------- -------------------------- Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2003 2002 2003 2002 - --------------------------------------------------------------------------- ----------- ------------ ------------- Operating Revenues $59 $39 $344 $222 Cost of Gas 37 18 221 107 - --------------------------------------------------------------------------- ----------- ------------ ------------- Gross Margin 22 21 123 115 - --------------------------------------------------------------------------- ----------- ------------ ------------- Operating Expenses: Operation and maintenance 19 16 57 50 Depreciation 9 9 26 26 Other taxes 2 2 5 5 - --------------------------------------------------------------------------- ----------- ------------ ------------- Total Operating Expenses 30 27 88 81 - --------------------------------------------------------------------------- ----------- ------------ ------------- Operating Income (Loss) (8) (6) 35 34 Other Income, Including Allowance for Equity Funds Used During Construction 2 1 6 3 Interest Charges, Net of Allowance for Borrowed Funds Used During Construction 5 5 16 17 - --------------------------------------------------------------------------- ----------- ------------ ------------- Income (Loss) Before Income Tax Expense (Benefit) and Cumulative Effect of Accounting Change (11) (10) 25 20 Income Tax Expense (Benefit) (4) (4) 9 7 - --------------------------------------------------------------------------- ----------- ------------ ------------- - --------------------------------------------------------------------------- ----------- ------------ ------------- Income (Loss) Before Cumulative Effect of Accounting Change (7) (6) 16 13 Cumulative Effect of Accounting Change, net of taxes - - - (230) - --------------------------------------------------------------------------- ----------- ------------ ------------- - --------------------------------------------------------------------------- ----------- ------------ ------------- Net Income (Loss) $(7) $(6) $16 $(217) =========================================================================== =========== ============ ============= See Notes to Condensed Consolidated Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------------------ Nine Months Ended September 30, Millions of dollars 2003 2002 - ---------------------------------------------------------------------------- ------------- Cash Flows From Operating Activities: Net income (loss) $16 $(217) Adjustments to reconcile net income to net cash provided from operating activities: Cumulative effect of accounting change, net of taxes - 230 Depreciation 28 28 Allowance for funds used during construction (1) (1) Over (under) collection, gas cost adjustment clause (5) (26) Changes in certain assets and liabilities: (Increase) decrease in receivables, net 61 43 (Increase) decrease in inventories (23) 4 (Increase) decrease in regulatory assets - 1 Increase (decrease) in accounts payable and advances (20) (29) Increase (decrease) in deferred income taxes, net 5 (2) Increase (decrease) in taxes accrued - (1) Changes in other assets (5) (1) Changes in other liabilities 4 - - ---------------------------------------------------------------------------- ------------- Net Cash Provided From Operating Activities 60 29 - ---------------------------------------------------------------------------- ------------- Cash Flows From Investing Activities: Construction expenditures (36) (34) Nonutility and other (1) (1) - ------------------------------------------------------------------------- ------------- Net Cash Used For Investing Activities (37) (35) - ------------------------------------------------------------------------- ------------- Cash Flows From Financing Activities: Repayment of short-term borrowings, net (4) - Capital contributions from parent 3 1 Retirement of long-term debt (3) - Distributions/dividend payments (15) (9) - ------------------------------------------------------------------------- ------------- Net Cash Used For Financing Activities (19) (8) - ------------------------------------------------------------------------- ------------- Net Increase (Decrease) In Cash and Temporary Investments 4 (14) Cash and Temporary Investments, January 1 1 18 - ------------------------------------------------------------------------- ------------- Cash and Temporary Investments, September 30 $5 $4 ========================================================================= ============= Supplemental Cash Flow Information: Cash paid for - Interest (net of capitalized interest of $0.8 and $0.7) $16 $16 - Income taxes 14 13 See Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) The following notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in Public Service Company of North Carolina, Incorporated's (the Company) Annual Report on Form 10-K for the year ended December 31, 2002. These are interim financial statements, and due to the seasonality of the Company's business, the amounts reported in the Condensed Consolidated Statements of Operations 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, 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 (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires cost-based rate-regulated utilities to recognize in their financial statements certain 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, 2003 approximately $30 million and $6 million of regulatory assets and liabilities, respectively, as shown below. September 30, December 31, Millions of dollars 2003 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Excess deferred income taxes $- $(1) Under-collections-gas cost adjustment clause, net 15 11 Deferred environmental remediation costs 9 9 - -------------------------------------------------------------------------------- Total $24 $19 ================================================================================ Excess deferred income taxes represent deferred income taxes recorded in prior years at a rate higher than the current statutory rate. Pursuant to a North Carolina Utilities Commission (NCUC) order, the Company is required to refund these amounts to customers through a rate decrement. Under-collections-gas cost adjustment clause, net represents amounts under-collected from customers pursuant to the Company's Rider D mechanism approved by the NCUC. This mechanism allows the Company to recover all prudently incurred gas costs. Deferred environmental remediation costs represent costs associated with the assessment and clean-up of manufactured gas plant (MGP) sites currently or formerly owned by the Company. Management believes that all MGP cleanup costs will be recoverable through gas rates. A portion of the costs incurred are being recovered through rates, and management believes the remaining costs of approximately $7.5 million will be recoverable. Amounts incurred and deferred to date that are not currently being recovered through gas rates are approximately $1.5 million. (See Note 5.) The NCUC has reviewed and approved through specific orders most of the items shown as regulatory assets. Other items represent costs which are not yet approved for recovery by the NCUC. In recording these costs as regulatory assets, management believes the costs will be allowable under existing rate-making concepts that are embodied in rate orders received by the Company. However, ultimate recovery is subject to NCUC approval. 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, liquidity or financial position in the period the write-off would be recorded. B. New Accounting Standards The Company adopted SFAS 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. In connection with this implementation, the Company performed a valuation analysis of its acquisition adjustment using an independent appraisal. The analysis indicated that the carrying amount of the acquisition adjustment exceeded its fair value by approximately $230 million. The resulting impairment charge is reflected on the Condensed Consolidated Statement of Operations as the cumulative effect of an accounting change. SFAS 142 requires that an impairment evaluation be performed annually and at the same time each year. The Company performed its annual evaluation as of January 1, 2003 and no further impairment was indicated. The Company adopted SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS 143 applies to legal obligations associated with the retirement of tangible long-lived assets (ARO) and requires the Company to recognize, as a liability, the fair value of an ARO in the period in which it is incurred and to accrete the liability to its present value in future periods. The Company believes that any ARO related to the Company's property would be insignificant and, due to the indeterminate life of the related assets, an ARO could not be reasonably estimated. The Company adopted SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective January 1, 2003. The provisions of SFAS 145, among other things, discontinue treatment of gains or losses from the early extinguishment of debt as extraordinary items unless such early extinguishment meets the criteria of Accounting Principles Board Opinion (APB) 30. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 145. The Company adopted SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities," effective January 1, 2003. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 146. SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued in April 2003. SFAS 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 149. SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued in May 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. There was no impact on the Company's results of operations, cash flows or financial position from the initial adoption of SFAS 150. C. Total Comprehensive Income Total comprehensive income (loss) was not significantly different from net income (loss) for any period reported. Accumulated other comprehensive income (loss) of the Company totaled $(1.1) million and $(1.3) million as of September 30, 2003 and December 31, 2002, respectively. D. Reclassifications Certain amounts from prior periods have been reclassified to conform with the presentation adopted for 2003. 2. ACCOUNTING CHANGE As a result of the January 1, 2002 adoption of SFAS 142, the Company recorded a $230 million impairment charge related to the acquisition adjustment which had been recorded in connection with its acquisition by SCANA Corporation. The charge is reflected on the Condensed Consolidated Statements of Operations as the cumulative effect of an accounting change. See additional information at Note 1B. 3. RATE AND OTHER REGULATORY MATTERS The Company's rates are established using a benchmark cost of gas approved by the NCUC, which may be modified periodically to reflect changes in the market price of natural gas. The Company revises its tariffs with the NCUC as necessary to track these changes and accounts for any over- or under-collections of the delivered cost of gas in its deferred accounts for subsequent rate consideration. The NCUC reviews the Company's gas purchasing practices annually. The Company's benchmark cost of gas in effect during the period January 1, 2002 through September 30, 2003 was as follows: Rate Per Therm Effective Date Rate Per Therm Effective Date $.460 January-February 2003 $.300 January 2002 $.595 March 2003 $.215 February-June 2002 $.725 April-September 2003 $.350 July-October 2002 $.410 November-December 2002 On October 13, 2003 in connection with the Company's 2003 Annual Prudence Review, the NCUC determined that the Company's gas costs, including all hedging transactions, were reasonable and prudently incurred during the 12-month review period ended March 31, 2003. The NCUC also authorized new rate decrements to refund overcollections of certain gas costs included in the Company's deferred accounts, effective November 1, 2003. A state expansion fund, established by the North Carolina General Assembly and funded by refunds from the Company's interstate pipeline transporters, provides financing for expansion into areas that otherwise would not be economically feasible to serve. In June 2000 the NCUC approved the Company's requests for disbursement of up to $28.4 million from the Company's expansion fund to extend natural gas service to Madison, Jackson and Swain Counties in western North Carolina. The Company estimates that the cost of this project will be approximately $31.4 million. The Madison County and Jackson County portions of the project were completed in 2002, and the Swain County portion is expected to be completed in the spring of 2004. Through September 30, 2003 approximately $24.4 million had been spent on this project. In December 1999 the NCUC issued an order approving SCANA Corporation's acquisition of the Company. As specified in the order, the Company agreed to a moratorium on general rate cases until August 2005. General rate relief can be obtained during this period to recover costs associated with material adverse governmental actions and force majeure events. 4. FINANCIAL INSTRUMENTS SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the Company to recognize all derivative instruments as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. SFAS 133 further provides that changes in the fair value of derivative instruments are either recognized in earnings or reported as a component of other comprehensive income, depending upon the intended use of the derivative and the resulting designation. The fair value of the derivative instruments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. In January 2003 the Company filed a summary of its hedging program for natural gas purchases with the NCUC for informational purposes. The primary goal of the program is to reduce price volatility to firm customers. In an October 2003 order, the NCUC declared the program was reasonable. Transaction fees and any gains or losses are recorded in deferred accounts for subsequent rate consideration. As of September 30, 2003 the Company had deferred a net gain of approximately $0.6 million. The Company uses interest rate swap agreements to manage interest rate risk. These swap agreements provide for the Company to pay variable rate and receive fixed rate interest payments and are designated as fair value hedges of certain debt instruments. The Company may terminate a swap agreement and may replace it with a new swap also designated as a fair value hedge. The fair value of interest rate swaps is recorded within other deferred debits on the balance sheet. The resulting credits serve to reflect the hedged long-term debt at its fair value. Periodic receipts or payments related to the interest rate swaps are credited or charged to interest expense as incurred. At September 30, 2003 the estimated fair value of the Company's swaps totaled $2.9 million related to combined notional amounts of $37.4 million. 5. COMMITMENTS AND CONTINGENCIES The Company is responsible for environmental cleanup at five sites in North Carolina on which MGP residuals are present or suspected. The Company's actual remediation costs for these sites will depend on a number of factors, such as actual site conditions, third-party claims and recoveries from other potentially responsible parties. The Company has recorded a liability and associated regulatory asset of $7.5 million, which reflects the estimated remaining liability at September 30, 2003. Amounts incurred and deferred to date that are not currently being recovered through gas rates are approximately $1.5 million. Management believes that all MGP cleanup costs will be recoverable through gas rates. 6. SEGMENT OF BUSINESS INFORMATION Gas Distribution is the Company's only reportable segment. Gas Distribution uses operating income to measure profitability. Intersegment revenues between Gas Distribution and nonreportable segments were not significant. Disclosure of Reportable Segments (Millions of dollars) Three Months Ended September 30, 2003 2002 -------------------------------------------------- --------------------------- -------------------------------------------------- ------------- ------------- External Operating External Operating Revenue Loss Revenue Loss -------------------------------------------------- ------------- ------------- Gas Distribution $59 $(8) $39 $(6) All Other - n/a - n/a -------------------------------------------------- ------------- ------------- Consolidated Total $59 $(8) $39 $(6) ================================================== ============= =============
Nine Months Ended September 30, 2003 2002 ----------------------------------------------------------- ------------- -------------- ------------- ----------------------------------------------------------- ------------- -------------- ------------- External Operating Segment External Operating Segment Revenue Income Assets Revenue Income Assets ----------------------------------------------------------- ------------- -------------- ------------- Gas Distribution $344 $35 $997 $222 $34 $1,155 All Other - n/a 28 - n/a 29 Adjustments/Eliminations - - (10) - - 2 ----------------------------------------------------------- ------------- -------------- ------------- Consolidated Total $344 $35 $1,015 $222 $34 $1,186 =========================================================== ============= ============== =============
Item 2. Management's Narrative Analysis of Results of Operations. --------------------------------------------------------- PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Narrative Analysis of Results of Operations appearing in Public Service Company of North Carolina, Incorporated's (PSNC Energy) Annual Report on Form 10-K for the year ended December 31, 2002. Statements included in this narrative analysis (or elsewhere in this quarterly report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: (1) that the information is of a preliminary nature and may be subject to further and/or continuing review and adjustment, (2) changes in the utility regulatory environment, (3) changes in the economy, especially in PSNC Energy's service territory, (4) the impact of competition from other energy suppliers, including competition from alternate fuels in industrial interruptible markets, (5) growth opportunities, (6) the results of financing efforts, (7) changes in PSNC Energy's accounting policies, (8) weather conditions, especially in areas served by PSNC Energy, (9) performance of SCANA Corporation's pension plan assets and the impact on PSNC Energy's results of operations, (10) inflation, (11) changes in environmental regulations and (12) the other risks and uncertainties described from time to time in PSNC Energy's periodic reports filed with the United States Securities and Exchange Commission. PSNC Energy disclaims any obligation to update any forward-looking statements. Net Income (Loss) and Distributions/Dividends Net income (loss) for the nine months ended September 30, 2003 and 2002 was as follows: - ------------------------------------------------------------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 - ------------------------------------------------------------------ ------------ Net income (loss) $15.9 $(216.5) Less: Cumulative effect of accounting change - (229.6) - ------------------------------------------------------------------ ------------ - ------------------------------------------------------------------ ------------ Income before cumulative effect of accounting change $15.9 $13.1 ================================================================== ============ Income before cumulative effect of accounting change increased approximately $2.8 million primarily due to increased margin of $8.1 million and other income of $3.2 million which were partially offset by higher operating expenses of $6.4 million and higher income taxes of $2.2 million. In connection with the implementation of SFAS 142, PSNC Energy performed a valuation analysis of its acquisition adjustment using an independent appraisal. The analysis indicated that the carrying amount of the acquisition adjustment exceeded its fair value by $230 million. As a result, PSNC Energy recorded an impairment charge of $230 million effective January 1, 2002. The charge is presented on the Condensed Consolidated Statements of Operations as the Cumulative Effect of an Accounting Change. SFAS 142 requires that an impairment evaluation be performed annually and at the same time each year. PSNC Energy performed an annual evaluation as of January 1, 2003 and no further impairment was indicated. The nature of PSNC Energy's business is seasonal. The quarters ending June 30 and September 30 are generally PSNC Energy's least profitable quarters due to decreased demand for natural gas related to space heating requirements. PSNC Energy's Board of Directors has authorized the following distributions/dividends on common stock held by SCANA during 2003: - --------------------- --------------- -------------------- ------------------- Declaration Date Amount Quarter Ended Payment Date - --------------------- --------------- -------------------- ------------------- - --------------------- --------------- -------------------- ------------------- February 20, 2003 $4.5 million March 31, 2003 April 1, 2003 May 1, 2003 $4.5 million June 30, 2003 July 1, 2003 July 31, 2003 $4.0 million September 30, 2003 October 1, 2003 - --------------------- --------------- -------------------- ------------------- Gas Distribution Gas distribution is comprised of the local distribution operations of PSNC Energy. Changes in the gas distribution sales margins were as follows: ------------------------ ----------------------------------------- Nine Months Ended September 30, Millions of dollars 2003 2002 Change ------------------------ --------- --------- --------------------- ------------------------ ---------- Operating revenues $344.0 $222.0 $122.0 55.0% Less: Cost of gas 220.6 106.7 113.9 106.8% ------------------------ --------- --------- ---------- Gross margin $123.4 $115.3 $8.1 7.0% ======================== ========= ========= ========== ========== Gas distribution sales margin for the nine months ended September 30, 2003 increased primarily due to weather that was 14% colder than in 2002 and increased customer growth of approximately 2.7%. Revenues and cost of gas increased as a result of higher commodity natural gas prices. Operation and Maintenance Expenses Operation and maintenance expenses increased $6.4 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to increased bad debt expense of $2.4 million related to greater natural gas throughput and increased cost of gas. Also contributing to the increase are higher labor and benefits costs of $1.6 million, increased outside labor and general business expenses of $1.7 million and the impact of reduced pension income of $0.7 million. Other Income Other income increased $3.2 million compared to the same period in 2002 primarily due to increased income of $1.1 million from secondary market activities, such as off-system gas sales and pipeline capacity release, and increased interest income of $0.7 million on amounts under-collected from customers through the operation of the Rider D mechanism. This mechanism allows PSNC Energy to recover all prudently incurred gas costs. In addition, merchandising and jobbing income increased $1.4 million due to reduced interest income of $0.8 million in 2002 and a reduced provision for bad debt of $0.6 million. Income Taxes Income taxes changed primarily as a result of changes in operating and other income. Capital Expansion Program and Liquidity Matters PSNC Energy's capital expansion program includes the construction of lines, systems and facilities and the purchase of related equipment. PSNC Energy's 2003 construction budget is approximately $46.7 million, compared to actual construction expenditures for 2002 of $47.8 million. PSNC Energy's ratio of earnings to fixed charges for the 12 months ended September 30, 2003 was 2.96. At September 30, 2003 PSNC Energy had $35.4 million in outstanding short-term borrowings and unused lines of credit of $89.6 million. Item 4. Controls and Procedures As of September 30, 2003 an evaluation was performed under the supervision and with the participation of PSNC Energy's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of PSNC Energy's disclosure controls and procedures. Based on that evaluation, PSNC Energy's management, including the CEO and CFO, concluded that as of September 30, 2003 PSNC Energy's disclosure controls and procedures were effective. There has been no change in PSNC Energy's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected or is reasonably likely to materially affect PSNC Energy's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings The following legal proceedings were pending at September 30, 2003. These proceedings affect SCANA Corporation and its subsidiaries (the Company) and, to the extent indicated, they also affect SCE&G or PSNC Energy. Rate and Other Regulatory Matters In May 2002 the SCPSC issued an order approving SCE&G's request to increase the fuel component of rates charged to electric customers from 1.579 cents per KWh to 1.722 cents per KWh. The increase reflected higher fuel costs projected for the period May 2002 through April 2003. The increase also provided continued recovery for under-collected actual fuel costs through April 2001, including short-term purchased power costs necessitated by outages at two of SCE&G's base load generating plants in winter 2000-2001. The new rates were effective as of the first billing cycle in May 2002. The Consumer Advocate of South Carolina appealed to the South Carolina Circuit Court (Circuit Court) the portion of the SCPSC's order related to the recovery of certain purchased power costs. The appeal is still pending. In April 2003 the SCPSC issued an order approving SCE&G's request to maintain the fuel cost component of rates at 1.678 cents per KWh, effective May 1, 2003. The SCPSC also reaffirmed the prudence of SCE&G's purchasing practices and recognized the efficiency of SCE&G's electric generating plants; however, it deferred action on the recovery of certain purchased power costs pending the appeal to the Circuit Court of the SCPSC's May 2002 order. On October 13, 2003 in connection with PSNC Energy's 2003 Annual Prudence Review, the NCUC determined that PSNC Energy's gas costs, including all hedging transactions, were reasonable and prudently incurred during the 12-month review period ended March 31, 2003. The NCUC also authorized new rate decrements to refund overcollections of certain gas costs included in PSNC Energy's deferred accounts, effective November 1, 2003. On October 28, 2003, as part of the annual review of gas costs, the SCPSC approved SCE&G's request to decrease the cost of gas component from $.928 per therm to $.867 per therm effective with the first billing cycle in November 2003. The SCPSC allows SCE&G to recover through a billing surcharge to its gas customers the costs of environmental cleanup at the sites of former MGPs. The billing surcharge is subject to annual review and provides for the recovery of substantially all actual and projected site assessment and cleanup costs and environmental claims settlements for SCE&G's gas operations that had previously been recorded in deferred debits. In October 2003, as a result of the annual review, the SCPSC approved SCE&G's request to reduce the billing surcharge from 3.0 cents per therm to 2.2 cents per therm, which is intended to provide for the recovery, prior to the end of the year 2009, of the balance remaining at September 30, 2003 of $11.6 million Lake Murray Dam Reinforcement In October 1999 the United States Federal Energy Regulatory Commission (FERC) mandated that SCE&G reinforce its Lake Murray dam in order to comply with new federal safety standards and maintain the lake in case of an extreme earthquake. Construction for the project and related activities, which began in the third quarter of 2001 is expected to cost approximately $275 million and be completed in 2005. Costs incurred through September 30, 2003 totaled approximately $126 million. Environmental SCE&G owns a decommissioned MGP site in the Calhoun Park area of Charleston, South Carolina. The site is currently being remediated for benzene contamination in the intermediate aquifer on surrounding properties. SCE&G anticipates that the remaining remediation activities will be completed by the end of 2004, with certain monitoring and retreatment activities continuing until 2007. As of September 30, 2003, SCE&G has spent approximately $19.6 million to remediate the Calhoun Park site. Total remediation costs are estimated to be $21.9 million. SCE&G owns three other decommissioned MGP sites in South Carolina which contain residues of by-product chemicals. Two of these sites are currently being remediated under work plans approved by DHEC. SCE&G is continuing to investigate the remaining site and is monitoring the nature and extent of residual contamination. In addition, in March 2003 SCE&G signed a consent agreement with DHEC related to a site formerly owned by SCE&G. The site contained residue material that was moved from an MGP site. The removal action for this site has been completed. SCE&G anticipates that major remediation activities for the three owned sites will be completed before 2006. As of September 30, 2003, SCE&G has spent approximately $3.9 million related to these three sites, and expects to spend an additional $5.2 million. Total remediation costs are estimated to be $9.1 million. PSNC Energy is responsible for environmental cleanup at five sites in North Carolina on which MGP residuals are present or suspected. PSNC Energy's actual remediation costs for these sites will depend on a number of factors, such as actual site conditions, third-party claims and recoveries from other potentially responsible parties. PSNC Energy has recorded a liability and associated regulatory asset of $7.5 million, which reflects the estimated remaining liability at September 30, 2003. Amounts incurred and deferred to date that are not currently being recovered through gas rates are approximately $1.5 million. Management believes that all MGP cleanup costs incurred by PSNC Energy will be recoverable through gas rates. Pending or Threatened Litigation In 1999 an unsuccessful bidder for the purchase of propane gas assets of a subsidiary of the Company filed suit against SCANA Corporation in South Carolina Circuit Court seeking unspecified damages. The suit alleges the existence of a contract for the sale of assets to the plaintiff and various causes of action associated with that contract. The Company is confident in its position and intends to vigorously defend the lawsuit. The Company does not believe that the resolution of this issue will have a material adverse impact on its results of operations, cash flows or financial position. In 2001 a subsidiary of the Company entered into, in the ordinary course of business, a 15-year take-and-pay contract with an unaffiliated natural gas supplier to purchase 190,000 DT of natural gas per day beginning in the spring of 2004. In December 2002, as a result of the failure of the supplier and its guarantor to meet contractual obligations related to credit support provisions, the subsidiary terminated the contract and the supplier initiated arbitration. A hearing under the binding arbitration provisions of the contract was postponed from September 2003 until at least January 2004 after the parties made progress towards a settlement. In initial pleadings for the hearing, the supplier demanded payment of at least $134 million in damages from the subsidiary; conversely, the subsidiary demanded payment of no less than $154 million in damages from the supplier. The Company is confident of the propriety of its actions and will vigorously pursue its position if the arbitration hearing is held. The Company further believes that the resolution of these claims will not have a material adverse impact on its results of operations, cash flows or financial condition. An action was filed on October 22, 2003 against SCE&G by the State of South Carolina. The Complaint alleges SCE&G violates the Unfair Trade Practices Act by charging municipal franchise fees to some customers residing outside a municipality's limits. The Complaint also alleges that SCE&G failed to obey, observe, or comply with the lawful order of the SCPSC by charging franchise fees to those not residing in a municipality. The Complaint seeks restitution to all affected customers and penalties up to $5,000 for each separate violation. SCE&G is confident of the reasonableness of its actions and intends to mount a vigorous defense. The allegations contained in this Complaint are the subject of a similar lawsuit that was filed and served on SCE&G and a Motion to Dismiss is pending. The allegations are also the subject of a threatened class action lawsuit. SCE&G further believes that the resolution of this action will not have a material adverse impact on its results of operations, cash flows or financial condition. In addition, SCE&G filed a petition with the SCPSC on October 23, 2003 pursuant to S. C. Code Ann. R.103-836. The petition requests that the SCPSC exercise its jurisdiction to investigate the operation of the municipal franchise fee collection requirements applicable to SCE&G's electric and gas service, to approve SCE&G's efforts to correct any past franchise fee billing errors, to adopt improvements in the system which will reduce such errors in the future, and to adopt any regulation which the SCPSC deems just and proper to regulate the franchise fee collection process. On August 21, 2003, SCE&G was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation, Progress Energy Services Company, and South Carolina Electric & Gas Company, in South Carolina's Circuit Court of Common Pleas for the Fifth Judicial Circuit. The plaintiffs are seeking damages for the alleged improper use of electric transmission easements but have not asserted a dollar amount for their claims. Specifically, the plaintiffs contend that the licensing of attachments on electric utility poles, towers and other facilities to non-utility third parties or telecommunication companies for other than the electric utilities' internal use along the electric transmission line right-of-way constitutes a trespass. The Company is confident of the propriety of its actions and intends to mount a vigorous defense. The Company further believes that the resolution of these claims will not have a material adverse impact on its results of operations, cash flows or financial condition. The Company, SCE&G and PSNC Energy are also engaged in various other claims and litigation incidental to their business operations which management anticipates will be resolved without material loss to the Company. Item 2, 3, 4 and 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K A. Exhibits SCANA Corporation, South Carolina Electric & Gas Company and Public Service Company of North Carolina, Incorporated: 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 2003 were as follows: SCANA Corporation: Date of Report: July 25, 2003 Items reported: Items 7 and 9 (Item 12 disclosure) South Carolina Electric & Gas Company: Date of Report: July 25, 2003 Items reported: Items 7 and 9 (Item 12 disclosure) Public Service Company of North Carolina, Incorporated: Date of Report: July 25, 2003 Items reported: Items 7 and 9 (Item 12 disclosure) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SCANA CORPORATION SOUTH CAROLINA ELECTRIC & GAS COMPANY PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED (Registrants) November 6, 2003 By: s/James E. Swan, IV -------------------------------------- James E. Swan, IV Controller (Principal accounting officer)
EXHIBIT INDEX Exhibit Applicable to Form 10-Q of No. SCANA SCE&G PSNC Description Energy 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 on Form S-4) 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 Articles of Amendment of SCANA, dated April 27, 1995 (Filed as Exhibit 4-B to Registration Statement No. 33-62421) 3.03 X Restated Articles of Incorporation of SCE&G, as adopted on May 3, 2001 (Filed as Exhibit 3.01 to Registration Statement No. 333-65460) 3.04 X Articles of Amendment of the Articles of Incorporation of SCE&G dated as of the dates indicated below and filed as exhibits to the Registration Statements or Exchange Act filings as set forth below May 22, 2001 Exhibit 3.02 to Registration No. 333-65460 June 14, 2001 Exhibit 3.04 to Registration No. 333-65460 August 30, 2001 Exhibit 3.05 to Registration No. 333-101449 March 13, 2002 Exhibit 3.06 to Registration No. 333-101449 May 9, 2002 Exhibit 3.07 to Registration No. 333-101449 June 4, 2002 Exhibit 3.08 to Registration No. 333-101449 August 12, 2002 Exhibit 3.09 to Registration No. 333-101449 March 13, 2003 Exhibit 3.05 to Registration No. 333-108760 May 22, 2003 Exhibit 3.05 to Registration No. 333-108760 June 18, 2003 Exhibit 3.06 to Registration No. 333-108760 August 7, 2003 Exhibit 3.06 to Registration No. 333-108760 3.05 X Articles of Correction of the Articles of Incorporation of SCE&G dated June 1, 2001 (Filed as Exhibit 3.03 to Registration Statement No. 333-65460) 3.06 X Articles of Incorporation of PSNC Energy (formerly New Sub II, Inc.) dated February 12, 1999 (Filed as Exhibit 3.01 to Registration Statement No. 333-45206) 3.07 X Articles of Amendment of PSNC Energy as adopted on February 10, 2000 (Filed as Exhibit 3.02 to Registration Statement No. 333-45206) 3.08 X Articles of Correction of PSNC Energy dated February 11, 2000 (Filed as Exhibit 3.03 to Registration Statement No. 333-45206) 3.09 X By-Laws of SCANA as revised and amended on December 13, 2000 (Filed as Exhibit 3.01 to Registration Statement No. 333-68266) 3.10 X By-Laws of SCE&G as amended and adopted on February 22, 2001 (Filed as Exhibit 3.05 to Registration Statement No. 333-65460) Exhibit Applicable to Form 10-Q of No. SCANA SCE&G PSNC Description Energy 3.11 X By-Laws of PSNC Energy as revised and amended on February 22, 2001 (Filed as Exhibit 3.01 to Registration Statement No. 333-68516) 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 between SCANA Corporation and The Bank of New York, as Trustee (Filed as Exhibit 4-A to Registration Statement No. 33-32107) 4.03 X X Indenture dated as of January 1, 1945, between the South Carolina Power Company and 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 Indentures to 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 May 1, 1977 Exhibit 4-C to Registration No. 33-38580 Exhibit Applicable to Form 10-Q of No. SCANA SCE&G PSNC Description Energy 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 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 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 4.06 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 4.06 dated as of June 15, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-57955) 4.09 X X Indenture dated as of January 1, 1996 between PSNC Energy and First Union National Bank of North Carolina, as Trustee (Filed as Exhibit 4.08 to Registration Statement No. 333-45206) 4.10 X X First through Fourth Supplemental Indentures referred to Exhibit 4.09 dated as of the dates indicated below and filed as exhibits to the Registration Statements whose file numbers are set forth below January 1, 1996 Exhibit 4.09 to Registration No. 333-45206 December 15, 1996 Exhibit 4.10 to Registration No. 333-45206 February 10, 2000 Exhibit 4.11 to Registration No. 333-45206 February 12, 2001 Exhibit 4.05 to Registration No. 333-68516 Exhibit Applicable to Form 10-Q of No. SCANA SCE&G PSNC Description Energy 4.11 X PSNC Energy $150 million medium-term note issued February 16, 2002 (Filed as Exhibit 4.06 to Registration Statement No. 333-68516) *10.01 X SCANA Executive Deferred Compensation Plan as amended February 20, 2003 (Filed as Exhibit 10.01 to Form 10-Q for the quarter ended June 30, 2003) *10.02 X SCANA Director Compensation and Deferral Plan as amended January 1, 2001 (Filed as Exhibit 4.03 to Registration Statement No. 333-18973) *10.03 X SCANA Supplemental Executive Retirement Plan as amended July 1, 2001 (Filed as Exhibit 10.02 to Form 10-Q for the quarter ended September 30, 2001) *10.04 X SCANA Key Executive Severance Benefits Plan as amended July 1, 2001 (Filed as Exhibit 10.03 to Form 10-Q for the quarter ended September 30, 2001) *10.05 X SCANA Supplementary Key Executive Severance Benefits Plan as amended July 1, 2001 (Filed as Exhibit 10.03a to Form 10-Q for the quarter ended September 30, 2001) *10.06 X SCANA Long-Term Equity Compensation Plan dated January 2000 filed as Exhibit 4.04 to Registration Statement No. 333-37398) *10.07 X Request for Action by the SCANA Long-Term Equity Compensation Plan Committee of the Board dated August 1, 2002 (Filed as Exhibit 10.06 to Form 10-Q for the quarter ended June 30, 2003) *10.08 X Description of SCANA Whole Life Option (Filed as Exhibit 10-F to 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 Executive Annual Incentive Plan (Filed as Exhibit 10-G to Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809) 10.10 X Operating Agreement of Pine Needle LNG Company, LLC dated August 8, 1995 (Filed as Exhibit 10.01 to Registration Statement No. 333-45206) 10.11 X Amendment to Operating Agreement of Pine Needle LNG Company, LLC dated October 1, 1995 (Filed as Exhibit 10.02 to Registration Statement No. 333-45206) 10.12 X Amended Operating Agreement of Cardinal Extension Company, LLC dated December 19, 1996 (Filed as Exhibit 10.03 to Registration Statement No. 333-45206) 10.13 X Amended Construction, Operation and Maintenance Agreement by and between Cardinal Operating Company and Cardinal Extension Company, LLC dated December 19, 1996 (Filed as Exhibit 10.04 to Registration Statement No. 333-45206) Exhibit Applicable to Form 10-Q of No. SCANA SCE&G PSNC Description Energy *10.15 X Form of Severance Agreement between PSNC Energy and its Executive Officers (Filed as Exhibit 10.05 to Registration Statement No. 333-45206) 10.16 X Service Agreement between PSNC Energy and SCANA Services, Inc., effective April 1, 2000 (Filed as Exhibit 10.06 to Registration Statement No. 333-45206) 10.17 X Service Agreement between SCE&G and SCANA Services, Inc., effective April 1, 2002 (Filed as Exhibit 10.01 to Registration Statement No. 333-101449) 31.1 X Certification of Principal Executive Officer Required by Rule 13a-14 (Filed herewith) 31.2 X Certification of Principal Financial Officer Required by Rule 13a-14 (Filed herewith) 31.3 X Certification of Principal Executive Officer Required by Rule 13a-14 (Filed herewith) 31.4 X Certification of Principal Financial Officer Required by Rule 13a-14 (Filed herewith) 31.5 X Certification of Principal Executive Officer Required by Rule 13a-14 (Filed herewith) 31.6 X Certification of Principal Financial Officer Required by Rule 13a-14 (Filed herewith) 32.1 X Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) 32.2 X Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) 32.3 X Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) 32.4 X Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) 32.5 X Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) 32.6 X Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith) * Management Contract or Compensatory Plan or Arrangement
EX-31 3 exh31.txt EXHIBIT 31-1-6 Exhibit 31.1 CERTIFICATION I, William B. Timmerman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SCANA Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, President, Chief Executive Officer and Director Exhibit 31.2 CERTIFICATION I, Kevin B. Marsh, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SCANA Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer Exhibit 31.3 CERTIFICATION I, William B. Timmerman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of South Carolina Electric & Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, Chief Executive Officer and Director Exhibit 31.4 CERTIFICATION I, Kevin B. Marsh, certify that: 1. I have reviewed this quarterly report on Form 10-Q of South Carolina Electric & Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer Exhibit 31.5 CERTIFICATION I, William B. Timmerman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Service Company of North Carolina, Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, Chief Executive Officer and Director Exhibit 31.6 CERTIFICATION I, Kevin B. Marsh, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Service Company of North Carolina, Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer EX-32 4 exh32.txt EXHIBIT 32-1-6 Exhibit 32.1 SCANA CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of SCANA Corporation (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, President, Chief Executive Officer and Director A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 SCANA CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of SCANA Corporation (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.3 SOUTH CAROLINA ELECTRIC AND GAS COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of South Carolina Electric and Gas Company (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, Chief Executive Officer and Director A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.4 SOUTH CAROLINA ELECTRIC AND GAS COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of South Carolina Electric and Gas Company (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.5 PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Public Service Company of North Carolina, Incorporated (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/William B. Timmerman William B. Timmerman Chairman of the Board, Chief Executive Officer and Director A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.6 PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Public Service Company of North Carolina, Incorporated (the "Company") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2003 s/Kevin B. Marsh Kevin B. Marsh Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----