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SCG > SEC Filings for SCG > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for SCANA CORP


7-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SCANA CORPORATION

The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in SCANA's Annual Report on Form 10-K for the year ended December 31, 2011.

                             RESULTS OF OPERATIONS
             FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
                AS COMPARED TO THE CORRESPONDING PERIODS IN 2011

Earnings Per Share

Earnings per share was as follows:
                            Third Quarter   Year to Date
Millions of dollars          2012     2011   2012    2011
Basic earnings per share    $0.93    $0.81  $2.41   $2.25
Diluted earnings per share  $0.91    $0.81  $2.37   $2.23

Third Quarter

Basic earnings per share increased by $.11 due to higher electric margin, by $.02 due to higher gas margin, by $.01 due to lower operating expenses and by $.01 due to other items. These increases were partially offset by $.01 due to higher depreciation expense, by $.01 due to higher interest expense and by $.01 due to dilution from additional shares outstanding.

Year to Date

Basic earnings per share increased by $.36 due to higher electric margin and by $.01 due to other items. This increase was partially offset by $.02 due to lower gas margin, by $.05 due to higher operating expenses, by $.04 due to higher depreciation expense, by $.04 due to higher interest expense, by $.02 due to higher property taxes and by $.04 due to dilution from additional shares outstanding.

Diluted Earnings Per Share

In May 2010, SCANA entered into equity forward contracts for the sale of approximately 6.6 million common shares. During periods when the average market price of SCANA's common stock is above the per share adjusted forward sales price, the Company computes diluted earnings per share giving effect to this dilutive potential common stock using the treasury stock method. SCANA has extended the equity forward contracts and expects to settle them in the first quarter of 2013.

Dividends Declared

SCANA's Board of Directors has declared the following dividends on common stock
during 2012:
Declaration Date    Dividend Per Share   Record Date          Payment Date
February 15, 2012   $0.495               March 10, 2012       April 1, 2012
May 3, 2012         $0.495               June 11, 2012        July 1, 2012
August 2, 2012      $0.495               September 10, 2012   October 1, 2012
October 24, 2012    $0.495               December 10, 2012    January 1, 2013


Table of Contents

Electric Operations

Electric Operations is comprised of the electric operations of SCE&G, GENCO and
Fuel Company.  Electric operations sales margin (including transactions with
affiliates) was as follows:
                                        Third Quarter                                Year to Date
Millions of dollars          2012          % Change         2011         2012          % Change         2011
Operating revenues        $  716.2            (1.9 )%     $ 730.2     $ 1,857.6          (2.7 )%     $ 1,908.2
Less:  Fuel used in                                                       621.9
generation                   240.0           (13.6 )%       277.9                       (16.3 )%         742.8
Purchased power                9.4            59.3  %         5.9          19.7          23.1  %          16.0
Margin                    $  466.8             4.6  %     $ 446.4     $ 1,216.0           5.8  %     $ 1,149.4

Third Quarter

Margin increased approximately $16.6 million due to base rate increases under the BLRA, by $3.3 million due to customer growth and higher average use and by $1.5 million due to lower fuel handling expenses.

Year to Date

Margin increased approximately $42.6 million due to base rate increases under
the BLRA, by $16.4 million due to customer growth and higher average use and by
$4.8 million due to lower fuel handling expenses.

Sales volumes (in GWh) related to the electric margin above, by class, were as
follows:
                               Third Quarter                        Year to Date
Classification        2012       % Change        2011     2012        % Change       2011
Residential          2,372         (6.7 )%      2,542     5,861        (11.3 )%      6,609
Commercial           2,132         (2.2 )%      2,180     5,622         (2.5 )%      5,769
Industrial           1,531         (3.5 )%      1,586     4,430         (2.3 )%      4,536
Other                  167         (1.2 )%        169       449          2.0  %        440
Total Retail Sales   6,202         (4.2 )%      6,477    16,362         (5.7 )%     17,354
Wholesale              677          9.4  %        619     1,935         19.6  %      1,618
Total Sales          6,879         (3.1 )%      7,096    18,297         (3.6 )%     18,972

Retail sales volume decreased for the periods shown primarily due to the effects of milder weather. The increase in wholesale sales for the periods shown is primarily due to higher contract utilization by a wholesale customer.

Gas Distribution

Gas Distribution is comprised of the local distribution operations of SCE&G and
PSNC Energy.  Gas distribution sales margin (including transactions with
affiliates) was as follows:
                                               Third Quarter                              Year to Date
Millions of dollars                 2012          % Change         2011        2012         % Change        2011
Operating revenues                $ 107.0            (5.8 )%     $ 113.6     $ 507.0         (16.4 )%     $ 606.2
Less:  Gas purchased for resale      53.4           (14.1 )%        62.2       239.2         (31.3 )%       348.0
Margin                            $  53.6             4.3  %     $  51.4     $ 267.8           3.7  %     $ 258.2


Table of Contents

Sales volumes (in DT) by class, including transportation, were as follows:

                                            Third Quarter                           Year to Date
Classification (in thousands)     2012        % Change         2011       2012        % Change        2011
Residential                      1,883             1.6 %      1,853     20,052         (20.6 )%     25,253
Commercial                       3,898             3.6 %      3,764     16,946          (8.3 )%     18,480
Industrial                       4,939            13.3 %      4,359     15,410           9.8  %     14,032
Transportation                   9,264            22.6 %      7,556     28,417          14.0  %     24,925
Total                           19,984            14.0 %     17,532     80,825          (2.3 )%     82,690

Third Quarter

Margin at SCE&G increased primarily due to the SCPSC-approved increase in retail gas base rates under the RSA which became effective with the first billing cycle of November 2011. Margin at PSNC Energy increased by $0.9 million primarily due to residential and commercial customer growth of approximately 2% as well as increased industrial usage. Total sales volumes increased due to higher industrial usage resulting from competitive natural gas prices, which also increased usage of natural gas fired electric generation.

Year to Date

Margin at SCE&G increased primarily due to the SCPSC-approved increase in retail gas base rates under the RSA which became effective with the first billing cycle of November 2011. Margin at PSNC Energy increased by $3.3 million primarily due to residential and commercial customer growth of approximately 2%. Residential and commercial sales volumes decreased primarily as a result of milder weather. Industrial sales volumes increased due to the competitive price of gas versus alternate fuel sources.

Retail Gas Marketing

Retail Gas Marketing is comprised of SCANA Energy, which operates in Georgia's
natural gas market.  Retail Gas Marketing revenues and net income were as
follows:
                                 Third Quarter                           Year to Date
Millions               2012        % Change         2011       2012        % Change        2011
Operating revenues   $ 63.7          (6.2 )%      $ 67.9     $ 287.8        (17.3 )%     $ 348.0
Net Income (Loss)      (4.7 )         9.3  %        (4.3 )       3.2        (77.9 )%        14.5

Third Quarter

Changes in operating revenues and net loss are primarily due to lower gas prices and a decrease in regulated provider participants in 2012.

Year to Date

Changes in operating revenues and net income are primarily due to milder weather in 2012.

 Energy Marketing

Energy Marketing is comprised of the Company's non-regulated marketing
operations, excluding SCANA Energy.  Energy Marketing operating revenues and net
income were as follows:
                                 Third Quarter                           Year to Date
Millions               2012        % Change         2011       2012        % Change        2011
Operating revenues   $ 186.7         (19.1 )%     $ 230.7    $ 485.8        (26.1 )%     $ 657.2
Net Income               1.7           6.3  %         1.6        5.3         32.5  %         4.0

Operating revenues are lower due to lower market prices. Net income is higher due to increases in consumption.


Table of Contents

 Other Operating Expenses

Other operating expenses were as follows:
                                                Third Quarter                             Year to Date
Millions of dollars                 2012          % Change          2011        2012        % Change        2011
Other operation and maintenance   $ 164.8            (1.1 )%      $ 166.7     $ 509.7           1.7 %     $ 501.1
Depreciation and amortization        88.7             2.0  %         87.0       266.6           3.0 %       258.9
Other taxes                          50.7             2.0  %         49.7       156.3           2.6 %       152.3

Third Quarter

Other operation and maintenance expenses decreased by $0.5 million due to lower generation, transmission and distribution expenses and by $2.5 million due to lower customer service expense and general expenses. These decreases were partially offset by $0.7 million due to higher compensation and other benefits. Depreciation and amortization expense increased primarily due to a higher level of plant in service. Other taxes increased primarily due to higher property taxes.

Year to Date

Other operation and maintenance expenses increased by $9.8 million due to higher generation, transmission and distribution expenses and by $7.1 million due to higher compensation and other benefits. These increases were partially offset by $9.0 million due to lower customer service expense and general expenses, including bad debt expense. Depreciation and amortization expense increased primarily due to a higher level of plant in service. Other taxes increased primarily due to higher property taxes.

Other Income (Expense)

Other income (expense) includes the results of certain incidental (non-utility) activities, the activities of certain non-regulated subsidiaries and 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), both of which have the effect of increasing reported net income.

Interest Expense

Interest charges increased primarily due to increased borrowings.

Income Taxes

Income taxes for the three and nine months ended September 30, 2012 were higher than the same periods in 2011 primarily due to higher income.

LIQUIDITY AND CAPITAL RESOURCES

The Company anticipates that its contractual cash obligations will be met through internally generated funds, the incurrence of additional short- and long-term indebtedness and sales of equity securities. The Company expects that, barring a future impairment of the capital markets, it has or can obtain adequate sources of financing to meet its projected cash requirements for the foreseeable future, including the cash requirements for nuclear construction and refinancing maturing long-term debt. The Company's ratio of earnings to fixed charges for the nine and 12 months ended September 30, 2012 was 2.95 and 2.94, respectively.


Table of Contents

The Company is obligated with respect to an aggregate of $67.8 million of industrial revenue bonds which are secured by letters of credit issued by Branch Banking and Trust Company. These letters of credit expire, subject to renewal, in the fourth quarter of 2014.

At September 30, 2012, the Company had net available liquidity of approximately $1.1 billion. The Company's credit agreements were amended and extended in October 2012 and expire in October 2017. In connection with the amendment and extension of the agreements, Fuel Company's credit agreement was increased to $500 million, and the other companies' credit agreement remained the same size. In addition, SCE&G entered into a new three-year credit agreement in the amount of $200 million, which is scheduled to expire in October 2015. The amended and extended credit agreements, together with SCE&G's new three-year credit agreement, total an aggregate of $1.8 billion.The Company regularly monitors the commercial paper and short-term credit markets to optimize the timing of repayment of any outstanding balance on its draws from the credit facilities. The Company's long-term debt portfolio has a weighted average maturity of approximately 18 years and bears an average interest cost of 5.9%. Substantially all of the long-term debt bears fixed interest rates or is swapped to fixed. To further preserve liquidity, the Company rigorously reviews its projected capital expenditures and operating costs and adjusts them where possible without impacting safety, reliability, and core customer service.

SCE&G and GENCO have obtained FERC authority to issue short-term debt securities and assume liabilities as a guarantor (pursuant to Section 204 of the Federal Power Act). SCE&G may issue up to $2.2 billion of debt with maturity dates of one year or less, consisting of no more than $1.6 billion outstanding of short-term debt and no more than $600 million in liability as a guarantor, and GENCO may issue up to $150 million of short-term debt. The authority to make such issuances expires in October 2014.

SCANA issued $73 million of stock during the nine months ended September 30, 2012 through various compensation and dividend reinvestment plans. Similar issuances are expected in future quarters. The Company expects to issue approximately 6.6 million common shares under forward sales contracts in the first quarter of 2013 which will result in net proceeds of approximately $196 million.

In July 2012, SCE&G issued $250 million of 4.35% first mortgage bonds due February 1, 2042 (issued at a premium with a yield to maturity of 3.86%), which constituted a reopening of $250 million of its 4.35% first mortgage bonds issued in January 2012. Proceeds from these sales were used to repay short-term debt primarily incurred as a result of our construction program, to finance capital expenditures and for general corporate purposes.

In January 2012, SCANA issued $250 million of 4.125% medium term notes due February 1, 2022. Proceeds from the sale were used to retire SCANA's $250 million 6.25% medium term notes due February 1, 2012.

The Company has paid approximately $37 million, net, in 2012 to settle interest rate contracts associated with the issuance of long-term debt.
OTHER MATTERS

Nuclear Generation

SCE&G and Santee Cooper are parties to construction and operating agreements in which they agreed to be joint owners, and share operating costs and generation output, of two 1,117-MW nuclear generation units currently being constructed at the site of Summer Station, with SCE&G responsible for 55% of the cost and receiving 55% of the output, and Santee Cooper responsible for and receiving the remaining 45%. Under these agreements, SCE&G has the primary responsibility for oversight of the construction of the New Units and will be responsible for the operation of the New Units as they come online.

SCE&G, on behalf of itself and as agent for Santee Cooper, entered into the EPC Contract with the Consortium for the design, procurement and construction of the New Units. SCE&G's share of the estimated cash outlays (future value, excluding AFC) totals approximately $6 billion for plant costs and related transmission infrastructure costs, which costs are projected based on historical one-year and five-year escalation rates as required by the SCPSC.

On March 30, 2012, the NRC approved and issued COLs for the New Units. On April 19, 2012, SCE&G, on behalf of itself and as agent for Santee Cooper, issued a Full Notice to Proceed to the Consortium for construction of the New Units, allowing for the commencement of safety related aspects of the project. The first New Unit is scheduled for substantial completion in March 2017, and the second New Unit is scheduled for substantial completion in May 2018.


Table of Contents

The parties to the EPC Contract have established both informal and formal dispute resolution procedures in order to resolve issues that arise during the course of constructing a project of this magnitude. During the course of activities under the EPC Contract, issues have materialized that impact project budget and schedule. Claims specifically relating to COL delays, design modifications of the shield building and certain pre-fabricated structural modules for the New Units and unanticipated rock conditions at the site resulted in assertions of contractual entitlement to recover additional costs to be incurred. On July 11, 2012, SCE&G and the Consortium finalized an agreement which set SCE&G's portion of the costs for these specific claims at approximately $138 million (in 2007 dollars). SCE&G anticipates that these additional costs, as well as other costs that may be identified from time to time, will be recoverable through rates.

On May 15, 2012, SCE&G filed a petition with the SCPSC seeking an order approving an updated capital cost and construction schedule for the New Units. This petition replaced a February 29, 2012 petition, which was withdrawn. The updated capital cost schedule in this petition reflects an increase of $283 million (SCE&G's portion in 2007 dollars) over the cost approved in a May 2011 order. This petition includes additional identifiable capital costs of approximately $6 million (SCE&G's portion in 2007 dollars) related to new federal healthcare laws, information security measures, and certain minor design modifications; approximately $8 million (SCE&G's portion in 2007 dollars) related to transmission infrastructure; and approximately $132 million (SCE&G's portion in 2007 dollars) related to additional labor for the oversight of the New Units during construction and for preparing to operate the New Units, and facilities and information technology systems required to support the New Units and their personnel. In addition, this petition includes revised substantial completion dates for the New Units based on the March 30, 2012 issuance of the COL and costs finalized in the July 11, 2012 agreement previously discussed. The SCPSC approved the updated construction schedule and substantially all of the capital costs in this petition on November 7, 2012.

When the NRC issued the COLs for the New Units, it imposed two conditions on the COLs, with the first requiring inspection and testing of certain components of the New Units' passive cooling system, and the second requiring the development of strategies to respond to extreme natural events resulting in the loss of power at the New Units. In addition, the NRC directed the Office of New Reactors to issue to SCE&G an order requiring enhanced, reliable spent fuel pool instrumentation, as well as a request for information related to emergency plant staffing. These conditions and requirements are responsive to the NRC's Near-Term Task Force report titled "Recommendations for Enhancing Reactor Safety in the 21st Century." This report was prepared in the wake of the March 2011 tsunami resulting from a massive earthquake, which severely damaged several nuclear generating units and their back-up cooling systems in Japan. SCE&G is evaluating the impact these conditions and requirements impose on the construction and operation of the New Units. SCE&G cannot predict what additional regulatory or other outcomes may be implemented in the United States, or how such initiatives would impact SCE&G's existing Summer Station or the construction or operation of the New Units.

As previously reported, SCE&G has been advised by Santee Cooper that it is reviewing certain aspects of its capital improvement program and long-term power supply plan, including the level of its participation in the New Units. Santee Cooper has entered into letters of intent with several parties that may result in one or more of them executing a power purchase agreement or acquiring a portion of Santee Cooper's ownership interest in the New Units. SCE&G is unable to predict whether any change in Santee Cooper's ownership interest or the addition of new joint owners will increase project costs or delay the commercial operation dates of the New Units. Any such project cost increase or delay could be material.

For additional information related to environmental matters and claims and litigation, see Note 9 to the condensed consolidated financial statements.

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