ITEM 1. BUSINESS
THE COMPANY
ORGANIZATION
SCANA, a South Carolina corporation having general business powers, was incorporated on October 10, 1984 and is a public utility holding company within the meaning of PUHCA but is exempt from registration under such Act (see "Regulation"). SCANA has its principal executive office at 1426 Main Street, Columbia, South Carolina 29201, telephone number (803) 748-3000. SCANA holds, directly or indirectly, all of the capital stock of each of its subsidiaries except for the Preferred Stock of SCE&G. SCANA and its subsidiaries had 4,545 full-time, permanent employees as of December 31, 1997 as compared to 4,285 full-time, permanent employees as of December 31, 1996.
SEGMENTS OF BUSINESS
SCANA neither owns nor operates any physical properties. It has thirteen direct, wholly owned subsidiaries which are engaged in the functionally distinct operations described below. It also has an investment in a LLC which is building and will operate a cogeneration facility in Charleston, South Carolina.
Regulated Utilities
The Company's principal subsidiary, SCE&G, is a regulated public utility engaged in the generation, transmission, distribution and sale of electricity and in the purchase and sale, primarily at retail, of natural gas in South Carolina. SCE&G also renders urban bus service in the metropolitan area of Columbia, South Carolina. SCE&G's business is subject to seasonal fluctuations. Generally, sales of electricity are higher during the summer and winter months because of air- conditioning and heating requirements, and sales of natural gas are greater in the winter months due to its use for heating requirements.
SCE&G's electric service area extends into 24 counties covering more than 15,000 square miles in the central, southern and southwestern portions of South Carolina. The service area for natural gas encompasses all or part of 30 of the 46 counties in South Carolina and covers more than 21,000 square miles. The total population of the counties representing the combined service area is approximately 2.4 million.
The predominant industries in the territories served by SCE&G include: synthetic fibers; chemicals and allied products; fiberglass and fiberglass products; paper and wood products; metal fabrication; stone, clay and sand mining and processing; and various textile-related products.
GENCO owns and operates Williams Station and sells electricity solely to SCE&G. Fuel Company acquires, owns and provides financing for SCE&G's nuclear fuel, fossil fuel and sulfur dioxide emission allowance requirements.
Pipeline Corporation is engaged in the purchase, transmission and sale of natural gas on a wholesale basis to distribution companies and directly to industrial customers in 40 counties throughout South Carolina. Pipeline Corporation owns LNG liquefaction and storage facilities. It owns and operates a 62-mile, six-inch propane pipeline that connects the SCANA Propane Services, Inc. propane storage facility with Dixie Pipeline Company's system, which traverses central South Carolina. It also supplies the natural gas for SCE&G's gas distribution system. Other resale customers include municipalities and county gas authorities and gas utilities. The industrial customers of Pipeline Corporation are primarily engaged in the manufacturing or processing of ceramics, paper, metal, food and textiles.
Nonregulated Businesses
Petroleum Resources sold substantially all of its assets on December 1, 1997.
Energy Marketing markets electricity, natural gas and other light hydrocarbons.
SCANA Propane Gas, Inc. purchases, delivers and sells propane within the Southeast. In 1997 SCANA Propane Gas sold approximately 31 million gallons of propane and had approximately 37,000 residential, commercial and industrial customers at year end.
SCANA Propane Services, Inc. owns and operates a 60-million gallon underground propane storage facility near York, South Carolina and leases cavern storage space to industries, utilities and others. SCI owns and operates a 300 mile fiber optics telecommunications network in South Carolina as well as an 800 Mhz radio service network within the state. SCI also has investments in Powertel, ITC Holding Company, Inc. and ITC^DeltaCom, Inc., which are companies providing telecommunications services in the southeastern United States.
ServiceCare, Inc. is engaged in providing energy-related products and services beyond the energy meter. Its primary business is providing homeowners with service contracts on their home appliances. On January 1, 1997 ServiceCare initiated its home security monitoring business. At year end, ServiceCare, Inc. had approximately 34,000 customers in South Carolina and, through a franchise agreement with another company, 12,150 customers in Kentucky.
Primesouth, Inc. is engaged in power plant management and maintenance services.
SCANA Resources, Inc. conducts energy-related businesses and services.
Information with respect to major segments of business for the years ended December 31, 1997, 1996 and 1995 is contained in Note 11 of the Notes to Consolidated Financial Statements and all such information is incorporated herein by reference.
COMPETITION
The electric utility industry has begun a major transition that could lead to expanded market competition and less regulation. Deregulation of electric wholesale and retail markets is creating opportunities to compete for new and existing customers and markets. As a result, profit margins and asset values of some utilities could be adversely affected. Legislative initiatives at the Federal and state levels are being considered and, if enacted, could mandate market deregulation. The pace of deregulation, future prices of electricity, and the regulatory actions which may be taken by the PSC and the FERC in response to the changing environment cannot be predicted. However, the FERC, in issuing Order 888 in April 1996, has accelerated competition among electric utilities by providing for open access to wholesale transmission service. Order 888 requires utilities under FERC jurisdiction that own, control or operate transmission lines to file nondiscriminatory open access tariffs that offer to others the same transmission service they provide themselves. The FERC has also permitted utilities to seek recovery of wholesale stranded costs from departing customers by direct assignment. Approximately two percent of the Company's electric revenue is under FERC jurisdiction for the purpose of setting rates for wholesale service. Legislation is pending in South Carolina that would deregulate the state's retail electric market and enable customers to choose their supplier of electricity. The Company is not able to predict whether the legislation will be enacted and, if it is, the conditions it will impose on utilities that currently operate in the state and future market participants.
The Company is aggressively pursuing actions to position itself strategically for the transformed environment. To enhance its flexibility and responsiveness to change, the Company's electric and gas utility, SCE&G, operates Strategic Business Units. Maintaining a competitive cost structure is of paramount importance in the utility's strategic plan. SCE&G has undertaken a variety of initiatives, including reductions in operation and maintenance costs, the accelerated recovery of SCE&G's electric regulatory assets and the shift, for retail ratemaking purposes only, of depreciation reserves from transmission and distribution assets to nuclear production assets. SCE&G has also established open access transmission tariffs and is selling bulk power to wholesale customers at market-based rates. Significant new customer and management information systems will be implemented in 1998. Marketing of services to commercial and industrial customers has been increased significantly. SCE&G has obtained long-term power supply contracts with a significant portion of its industrial customers. The Company believes that these actions as well as numerous others that have been and will be taken demonstrate its ability and commitment to succeed in the new operating environment to come.
Regulated public utilities are allowed to record as assets some costs that would be expensed by other enterprises. If deregulation or other changes in the regulatory environment occur, the Company may no longer be eligible to apply this accounting treatment and may be required to eliminate such regulatory assets from its balance sheet. Although the potential effects of deregulation cannot be determined at present, discontinuation of the accounting treatment could have a material adverse effect on the Company's results of operations in the period the write-off is recorded. It is expected that cash flows and the financial position of the Company would not be materially affected by the discontinuation of the accounting treatment. The Company reported approximately $241 million and $68 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $58 million, respectively, on its balance sheet at December 31, 1997.
The Company's generation assets are exposed to considerable financial risks in a deregulated electric market. If market prices for electric generation do not produce adequate revenue streams and the enabling legislation or regulatory actions do not provide for recovery of the resulting stranded costs, the Company could be required to write down its investment in these assets. The Company cannot predict whether any write-downs will be necessary and, if they are, the extent to which they would adversely affect the Company's results of operations in the period in which they are recorded. As of December 31, 1997, the Company's net investment in fossil\hydroelectric generation and nuclear generation assets was approximately $1,150.6 million and $659.1 million, respectively.
CAPITAL REQUIREMENTS AND FINANCING PROGRAM
Capital Requirements
The cash requirements of the Company arise primarily from SCE&G's operational needs, the Company's construction program and the need to fund the activities or investments of the Company's nonregulated subsidiaries. The ability of the Company's regulated subsidiaries to replace existing plant investment, as well as to expand to meet future demand for electricity and gas, will depend upon their ability to attract the necessary financial capital on reasonable terms. The Company's 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 the regulated subsidiaries continue their ongoing construction programs, it is necessary to seek increases in rates. As a result, the Company's future financial position and results of operations will be affected by the regulated subsidiaries' ability to obtain adequate and timely rate and other regulatory relief.
On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
During 1998 the Company is expected to meet its capital requirements principally through internally generated funds (approximately 59%, after payment of dividends), and the issuance and sale of debt securities. Short-term liquidity is expected to be provided primarily by issuance of commercial paper. The timing and amount of such sales and the type of securities to be sold will depend upon market conditions and other factors.
The Company's revised estimates of its cash requirements for construction and nuclear fuel expenditures, which are subject to continuing review and adjustment, for 1998 and the two-year period 1999-2000 are as follows:
Type of Facilities 1999-2000 1998 (Millions of Dollars) South Carolina Electric & Gas Company: Electric Plant: Generation . . . . . . . . . . . . . . $ 93 $ 56 Transmission . . . . . . . . . . . . . 31 16 Distribution . . . . . . . . . . . . . 126 46 Other. . . . . . . . . . . . . . . . . 22 13 Nuclear Fuel. . . . . . . . . . . . . . . 33 23 Gas . . . . . . . . . . . . . . . . . . . 35 13 Common . . . . . . . . . . . . . . . . . 27 29 Other . . . . . . . . . . . . . . . . . . - 1 Total . . . . . . . . . . . . . . . . . 367 197 Other Companies Combined. . . . . . . . . . 46 76 Total . . . . . . . . . . . $413 $273
The above estimates exclude AFC.
During 1997 SCE&G and GENCO expended approximately $25.2 million as part of a program to extend the operating lives of certain non-nuclear generating facilities. Additional improvements to be made under the program during 1998, included in the table above, are estimated to cost approximately $79.4 million.
In addition to the Company's capital requirements for 1998 described above, approximately $73.6 million will be required for refunding and retiring outstanding securities and obligations. For the years 1999-2002, the Company has an aggregate of $414.1 million of long-term debt maturing (including approximately $69.2 million for sinking fund requirements, of which $68.7 million may be satisfied by deposit and cancellation of bonds issued upon the basis of property additions or bond retirement credits) and $2.2 million of purchase or sinking fund requirements for preferred stock.
The Company and Westvaco Corporation have formed a limited liability company, Cogen South LLC, to build and operate a $170 million cogeneration facility at Westvaco's Kraft Division Paper Mill in North Charleston, South Carolina. The Company and Westvaco each own a 50% interest in the LLC. The facility will provide industrial process steam for the Westvaco paper mill and shaft horsepower to enable SCE&G to generate up to 99 megawatts of electricity. Construction financing is being provided to Cogen South LLC by banks. A $15 million capital contribution to the LLC by each partner is expected prior to operation of the facility. In addition to the cogeneration LLC, Westvaco has entered into a 20-year contract with SCE&G for all its electricity requirements at the North Charleston mill at SCE&G's standard industrial rate. Construction of the plant began in September 1996 and it is expected to be operational in the fall of 1998.
Financing Program
The Company has in effect a medium-term note program for the issuance from time to time of unsecured medium-term debt securities. The proceeds from the sales of these securities may be used to fund additional business activities in nonutility subsidiaries, to reduce short-term debt incurred in connection therewith or for general corporate purposes. Subsequent to the issuance of $60 million on January 13, 1998, the Company had available for issuance $190.0 million under this program.
SCE&G's First and Refunding Mortgage Bond Indenture, dated April 1, 1945 (Old Mortgage), contains provisions prohibiting the issuance of additional bonds thereunder (Class A Bonds) unless net earnings (as therein defined) for twelve consecutive months out of the fifteen months prior to the month of issuance are at least twice the annual interest requirements on all Class A Bonds to be outstanding (Bond Ratio). For the year ended December 31, 1997 the Bond Ratio was 4.32. The issuance of additional Class A Bonds also is restricted to an additional principal amount equal to (i) 60% of unfunded net property additions (which unfunded net property additions totaled approximately $579 million at December 31, 1997), (ii) retirements of Class A Bonds (which retirement credits totaled $67.5 million at December 31, 1997), and (iii) cash on deposit with the Trustee.
SCE&G has a bond indenture dated April 1, 1993 (New Mortgage) covering substantially all of its electric properties under which its future mortgage-backed debt (New Bonds) will be issued. New Bonds are issued under the New Mortgage on the basis of a like principal amount of Class A Bonds issued under the Old Mortgage which have been deposited with the Trustee of the New Mortgage (of which $185 million were available for such purpose at December 31, 1997), until such time as all presently outstanding Class A Bonds are retired. Thereafter, New Bonds will be issuable on the basis of property additions in a principal amount equal to 70% of the original cost of electric and common plant properties (compared to 60% of value for Class A Bonds under the Old Mortgage), cash deposited with the Trustee, and retirement of New Bonds. New Bonds will be issuable under the New Mortgage only if adjusted net earnings (as therein defined) for twelve consecutive months out of the eighteen months immediately preceding the month of issuance are at least twice the annual interest requirements on all outstanding bonds (including Class A Bonds) and New Bonds to be outstanding (New Bond Ratio). For the year ended December 31, 1997 the New Bond Ratio was 5.87.
The following additional financing transactions have occurred since December 31, 1996:
, On January 10, 1997 SCANA closed on unsecured bank loans totaling $60 million due January 9, 1998 and used the proceeds to pay off a loan in a like total amount. On January 13, 1998 SCANA refinanced the loans with $60 million of medium-term notes due January 13, 2003 at an interest rate of 6.05%.
, On February 12, 1997 SCANA closed on the sale of $25 million of medium-term notes having an annual interest rate of 6.9% and maturing February 15, 2007. These funds were used to reduce short-term borrowings at SCANA.
, On April 24, 1997, SCE&G sold $100 million of 6.52% cumulative preferred stock, par value $100 per share. Proceeds from the sale were used to reduce short-term indebtedness incurred for SCE&G's construction program, to refinance senior securities and for general corporate purposes.
, On October 28, 1997 SCE&G Trust I (the "Trust"), a Delaware statutory business trust and a subsidiary of SCE&G, issued $50 million of 7.55% Trust Preferred Securities, Series A. The Trust used the proceeds from the sale to purchase unsecured 7.55% Junior Subordinated Debentures of SCE&G. SCE&G used the funds to redeem certain series of its preferred stock. The financial statements of the Trust are consolidated with those of SCE&G.
Without the consent of at least a majority of the total voting power of SCE&G's preferred stock, SCE&G may not issue or assume any unsecured indebtedness if, after such issue or assumption, the total principal amount of all such unsecured indebtedness would exceed 10% of the aggregate principal amount of all of SCE&G's secured indebtedness and capital and surplus; however, no such consent is required to enter into agreements for payment of principal, interest and premium for securities issued for pollution control purposes.
Pursuant to Section 204 of the Federal Power Act, SCE&G and GENCO must obtain FERC authority to issue short-term debt. The FERC has authorized SCE&G to issue up to $250 million of unsecured promissory notes or commercial paper with maturity dates of twelve months or less but not later than December 31, 1999. GENCO has not sought such authorization.
At December 31, 1997 SCE&G had $315 million of authorized lines of credit which includes a credit agreement for a maximum of $250 million to support the issuance of commercial paper. Unused lines of credit at December 31, 1997 totaled $315 million. SCE&G commercial paper outstanding at December 31, 1997 and December 31, 1996 was $13.3 million and $90.0 million, respectively. See "Fuel Financing Agreements" for a discussion of Fuel Company's credit agreement.
SCE&G's Restated Articles of Incorporation prohibit issuance of additional shares of preferred stock without consent of the preferred stockholders unless net earnings (as defined therein) for the twelve consecutive months immediately preceding the month of issuance are at least one and one-half times the aggregate of all interest charges and preferred stock dividend requirements (Preferred Stock Ratio). For the year ended December 31, 1997 the Preferred Stock Ratio was 2.69.
On January 14, 1997 an additional 2,500,000 shares of SCANA common stock were registered for sale under the Investor Plus Plan. During 1997, prior to its conversion to a market purchase plan from an original issue plan on February 1, 1997, SCANA issued 184,743 shares of the Company's common stock under its Investor Plus Plan. In addition, pursuant to its SPSP SCANA issued 961,097 shares of its common stock during 1997, prior to the plan's conversion from an original issue plan to a market purchase plan on July 1, 1997. On January 26, 1998 an additional 3,000,000 shares of SCANA common stock were registered for sale under the SPSP.
The ratios of earnings to fixed charges (SEC method) were 3.65, 3.60, 3.00, 2.55 and 3.38 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
The Company expects that it has or can obtain adequate sources of financing to meet its projected cash requirements for the next twelve months and for the foreseeable future.
Fuel Financing Agreements
SCE&G has assigned to Fuel Company all of its rights and interests in its various contracts relating to the acquisition and ownership of nuclear and fossil fuels. To finance nuclear and fossil fuels and sulfur dioxide emission allowances, Fuel Company issues, from time to time, commercial paper which is supported, up to $125 million, by an irrevocable revolving credit agreement which expires December 19, 2000. Accordingly, the amounts outstanding have been included in long-term debt. This commercial paper and amounts outstanding under the revolving credit agreement, if any, are guaranteed by SCE&G. The full amount of the credit agreement was available at December 31, 1997. At December 31, 1997 commercial paper outstanding was approximately $80.3 million at a weighted average interest rate of 5.87%. (See Note 4 of Notes to Consolidated Financial Statements.)
ELECTRIC OPERATIONS
Electric Sales
In 1997 residential sales of electricity accounted for 41% of electric sales revenues; commercial sales 31%; industrial sales 20%; sales for resale 2%; and all other 6%. KWH sales by classification for the years ended December 31, 1997 and 1996 are presented below:
Sales KWH % Classification 1997 1996 Change (thousands)
Residential 5,647,185 5,939,703 (4.92) Commercial 5,320,951 5,220,627 1.92 Industrial 5,434,231 5,320,515 2.14 Sale for resale 485,206 1,023,211 (52.6) Other 505,809 505,793 - Total Territorial 17,393,382 18,009,849 (3.42) Negotiated Market Sales Tariff 1,459,096 895,016 63.0 Total 18,852,478 18,904,865 (0.28)
Sales for resale includes electricity furnished for resale to three municipalities and two electric cooperatives. One electric cooperative has notified the Company of its intent to terminate in the year 2000 its wholesale power contract with the Company and bid out its electric requirements. Sales under the Negotiated Market Sales Tariff during 1997 include sales to 28 investor-owned utilities, three electric cooperatives, two municipalities and three federal/state electric agencies. During 1996, sales under the Negotiated Market Sales Tariff include sales to thirteen investor-owned utilities, one electric cooperative and two state electric agencies.
The electric sales volume from residential sales decreased for 1997 as a result of milder weather. The decrease in sales for resale and the increase of sales under the Negotiated Market Sales Tariff was a result of a municipality terminating their wholesale power contract and transferring to a Negotiated Market Rate. During 1997 the Company recorded a net increase of 10,582 customers, increasing its total customers to 503,887. The all- time peak demand of 3,734 MW was set on August 18, 1997.
Electric Interconnections
SCE&G's transmission system is part of the interconnected grid extending over a large part of the southern and eastern portions of the nation. SCE&G, Virginia Power Company, Duke Power Company, Carolina Power & Light Company, Yadkin, Incorporated and PSA are members of the Virginia-Carolinas Reliability Group, one of the several geographic divisions within the Southeastern Electric Reliability Council. This Council provides for coordinated planning for reliability among bulk power systems in the Southeast. SCE&G is also interconnected with Georgia Power Company, Savannah Electric & Power Company, Oglethorpe Power Corporation and Southeastern Power Administration's Clark Hill Project.
Fuel Costs
The following table sets forth the average cost of nuclear fuel and coal and the weighted average cost of all fuels (including oil and natural gas) used by the Company for the years 1995-1997.
1997 1996 1995 Nuclear: Per million BTU $ .47 $ .47 $ .48 Coal: Per ton $39.16 $39.33 $40.57 Per million BTU 1.54 1.57 1.58 Weighted Average Cost of All Fuels: Per million BTU $ 1.52 $ 1.52 $ 1.26
The fuel costs for 1995 shown above exclude the effects of a PSC-approved offsetting of fuel costs through the application of credits carried on the Company's books as a result of a 1980 settlement of certain litigation.
Fuel Supply
The following table shows the sources and approximate percentages of the Company's total KWH generation by each category of fuel for the years 1995-1997 and the estimates for 1998 and 1999.
Percent of Total KWH Generated Estimated Actual 1999 1998 1997 1996 1995
Coal 73% 69% 71% 71% 65% Nuclear 22 26 24 24 27 Hydro 5 5 5 5 5 Natural Gas & Oil - - - - 3 100% 100% 100% 100% 100%
Coal is used at all five of SCE&G's major fossil fuel-fired plants and GENCO's Williams Station. Unit train deliveries are used at all of these plants and truck deliveries are used at three of these plants. On December 31, 1997 SCE&G had approximately a 41-day supply of coal in inventory and GENCO had approximately a 30-day supply.
The supply of coal is obtained through contracts and purchases on the spot market. Spot market purchases are expected to continue for coal requirements in excess of those provided by the Company's existing contracts. Contracts for the purchase of coal represent 96.1% of estimated requirements for 1998 (approximately 5.8 million tons).
The supply of contract coal is purchased from nine suppliers located in eastern Kentucky, Tennessee and southwest Virginia. Contract commitments, which expire at various times from 1998 through 2006, approximate 5.5 million tons annually. Sulfur restrictions on the contract coal range from .75% to 2%.
The Company believes that SCE&G's and GENCO's operations are in substantial compliance with all existing regulations relating to the discharge of sulfur dioxide. The Company is unaware that any more stringent sulfur content requirements for existing plants are contemplated at the State level by DHEC. However, the Company will be required to meet the more stringent Federal emissions standards established by the Clean Air Act (see "Environmental Matters").
SCE&G has adequate supplies of uranium or enriched uranium product under contract to manufacture nuclear fuel for Summer Station through 2005. The following table summarizes all contract commitments for the stages of nuclear fuel assemblies: Remaining Expiration Commitment Contractor Regions(1) Date
Enrichment USEC (2) 13-18 2005 Fabrication Westinghouse 13-21 2009
(1) A region represents approximately one-third to one-half of the nuclear core in the reactor at any one time. Region no. 13 was loaded in 1997 and Region no. 14 will be loaded in 1999.
(2) Contract provisions for the delivery of enriched uranium product encompass uranium supply and conversion and enrichment services.
SCE&G has on-site spent nuclear fuel storage capability until at least 2009 and expects to be able to expand its storage capacity to accommodate the spent fuel output for the life of the plant through rod consolidation, dry cask storage or other technology as it becomes available. In addition, there is sufficient on-site storage capacity over the life of Summer Station to permit storage of the entire reactor core in the event that complete unloading should become desirable or necessary for any reason. (See "Nuclear Fuel Disposal" under "Environmental Matters" for information regarding the contract with the DOE for disposal of spent fuel.)
Decommissioning
Decommissioning of Summer Station is presently scheduled to commence when the operating license expires in the year 2022. Based on a 1991 study, the expenditures (on a before-tax basis) related to SCE&G's share of decommissioning activities are estimated, in 2022 dollars assuming a 4.5% annual rate of inflation, to be $545.3 million including partial reclamation costs. SCE&G is providing for its share of estimated decommissioning costs of Summer Station over the life of Summer Station. SCE&G's method of funding decommissioning costs is referred to as COMReP (Cost of Money Reduction Plan). Under this plan, funds collected through rates ($3.2 million in 1997 and 1996) are used to pay premiums on insurance policies on the lives of certain Company personnel. SCE&G is the beneficiary of these policies. Through these insurance contracts, SCE&G is able to take advantage of income tax benefits and accrue earnings on the fund on a tax-deferred basis at a rate higher than can be achieved using more traditional funding approaches. Amounts for decommissioning collected through electric rates, insurance proceeds, and interest on proceeds less expenses are transferred by SCE&G to an external trust fund in compliance with the financial assurance requirements of the NRC. Management intends for the fund, including earnings thereon, to provide for all eventual decommissioning expenditures on an after-tax basis. The trust's sources of decommissioning funds under the COMReP program include investment components of life insurance policy proceeds, return on investment and the cash transfers from SCE&G described above. SCE&G records its liability for decommissioning costs in deferred credits. GAS OPERATIONS
Gas Sales
In 1997 residential sales accounted for 24% of gas sales revenues; commercial sales 17%; industrial sales 45%; sales for resale 14%. Dekatherm sales by classification for the years ended December 31, 1997 and 1996 are presented below:
SALES DEKATHERMS % CLASSIFICATION 1997 1996 CHANGE
Residential 11,919,843 14,108,058 (15.5) Commercial 10,985,926 11,105,250 (1.1) Industrial 55,337,058 47,909,555 15.5 Sale for resale 16,667,181 16,506,523 1.0 Transportation gas 5,804,447 6,758,348 (14.1) Total 100,714,455 96,387,734 4.5
The gas sales volume increased for 1997 as a result of fewer curtailments to industrial interruptible customers and higher demand. During 1997 the Company recorded a net increase of 4,135 customers, increasing its total customers to 252,816.
The demand for gas is affected by conservation, the weather, the price relationship between gas and alternate fuels and other factors.
Pipeline Corporation has been successful in purchasing lower cost natural gas in the spot market and arranging for its transportation to South Carolina. Pipeline Corporation has also negotiated contracts with certain direct and indirect industrial customers for the transportation of natural gas that the industrial customers purchase directly from suppliers.
Pipeline Corporation, operating wholly within the State of South Carolina, provides natural gas utility service, including transportation services, for its customers, and supplies natural gas to SCE&G and other wholesale purchasers. Energy Marketing acquires and sells natural gas in the newly deregulated markets. Petroleum Resources owned natural gas reserves and supplied natural gas. Neither Energy Marketing nor Petroleum Resources supplies natural gas to any affiliate for use in providing regulated gas utility services.
Gas Cost and Supply
Pipeline Corporation purchases natural gas under contracts with producers and marketers on a short-term basis at current price indices and on a long-term basis for reliability assurance at index prices plus a gas inventory charge. The gas is brought to South Carolina through transportation agreements with both Southern Natural and Transco, which expire at various times through 1998 to 2017. The volume of gas which Pipeline Corporation is entitled to transport under these contracts on a firm basis is shown below:
Maximum Daily Supplier Contract Demand Capacity (MCF)
Southern Natural Firm Transportation 188,000 Transco Firm Transportation 105,000 Total 293,000
Additional natural gas volumes are brought to Pipeline Corporation's system as capacity is available for interruptible transportation.
During 1997 the average cost per MCF of natural gas purchased for resale, excluding firm service demand charges, was approximately $2.71 compared to approximately $2.85 during 1996.
Pipeline Corporation has engaged in hedging activities on the New York Mercantile Exchange (NYMEX) of its gas supply pursuant to an experimental and limited program authorized and monitored by the PSC. Any gains or losses associated with that hedging activity are accounted for in Pipeline Corporation's purchased gas adjustment clause and, therefore, have no impact on net income.
To meet the requirements of its other high priority natural gas customers during periods of maximum demand, Pipeline Corporation supplements its supplies of natural gas from two LNG plants. The LNG plants are capable of storing the liquefied equivalent of 1,900,000 MCF of natural gas, of which approximately 1,286,570 MCF were in storage at December 31, 1997. On peak days the LNG plants can regasify up to 150,000 MCF per day. Additionally, Pipeline Corporation had contracted for 6,447,214 MCF of natural gas storage space of which 4,197,154 MCF were in storage on December 31, 1997.
The Company believes that supplies under contract and available for spot market purchase are adequate to meet existing customer demands and to accommodate growth.
Curtailment Plans The FERC has established allocation priorities applicable to firm and interruptible capacities on interstate pipeline companies which require Southern Natural and Transco to allocate capacity to Pipeline Corporation. The FERC allocation priorities are not applicable to deliveries by Pipeline Corporation to its customers, which are governed by a separate curtailment plan approved by the PSC.
Gas Marketing
Energy Marketing markets natural gas and light hydrocarbons and provides energy-related risk management services to producers and consumers. In 1996, the FERC approved Energy Marketing's application to become a power marketer, allowing Energy Marketing to buy and sell large blocks of electric capacity in wholesale markets.
Propane Operations
SCANA Propane Gas Inc. purchases, delivers and sells propane in the Southeast. In 1997 SCANA Propane Gas sold approximately 31 million gallons of propane and had approximately 37,000 residential, commercial and industrial customers at year-end.
SCANA Propane Services, Inc. owns and operates a 60-million gallon underground propane storage facility near Rock Hill, South Carolina and leases storage space to industrial companies, utilities and others.
Pipeline Corporation owns and operates a 62-mile propane pipeline that connects SCANA Propane Services, Inc.'s propane storage facility with the Dixie Pipeline System which traverses central South Carolina.
REGULATION
General
SCANA is a public utility holding company within the meaning of PUHCA, but is exempt under Section 3(a)(1) of PUHCA from regulation by the SEC as a registered holding company unless and until the SEC otherwise orders, except for Section 9(a)(2) thereof prohibiting the acquisition of securities of other public utilities without a prior order of the SEC.
SCE&G is subject to the jurisdiction of the PSC as to retail electric, gas and transit rates, service, accounting, issuance of securities (other than short-term promissory notes) and other matters.
Federal Energy Regulatory Commission
SCE&G and GENCO are subject to regulation under the Federal Power Act, administered by the FERC and the DOE, in the transmission of electric energy in interstate commerce and in the sale of electric energy at wholesale for resale, as well as with respect to licensed hydroelectric projects and certain other matters, including accounting and the issuance of short-term promissory notes. (See "Capital Requirements and Financing Program.")
SCE&G holds licenses under the Federal Water Power Act or the Federal Power Act with respect to all its hydroelectric projects. The expiration dates of the licenses covering the projects are as follows:
Project Capability (KW) License Expiration Date
Neal Shoals 5,000 2036 Stevens Creek 9,000 2025 Columbia 10,000 2000 Saluda 206,000 2007 Parr Shoals 14,000 2020 Fairfield Pumped Storage 512,000 2020
SCE&G filed a notice of intent to file an application for a new license for Columbia on June 29, 1995. The application for the new license will be filed by June 30, 1998.
At the termination of a license under the Federal Power Act, the United States government may take over the project covered thereby, or the FERC may extend the license or issue a license to another applicant. If the Federal government takes over a project or the FERC issues a license to another applicant, the original licensee is entitled to be paid its net investment in the project, not to exceed fair value, plus severance damages.
In May 1996 the FERC approved the Company's application establishing open access transmission tariffs and requesting authorization to sell bulk power to wholesale customers at market-based rates.
Nuclear Regulatory Commission
SCE&G is subject to regulation by the NRC with respect to the ownership and operation of Summer Station. The NRC's jurisdiction encompasses broad supervisory and regulatory powers over the construction and operation of nuclear reactors, including matters of health and safety, antitrust considerations and environmental impact. In addition, the Federal Emergency Management Agency is responsible for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants.
In 1996 the NRC completed the Systematic Assessment of Licensee Performance (SALP) for Summer Station. The station was assessed in four functional areas. The results of the assessment identified superior performance in Plant Operations, Maintenance and Engineering and good performance in Plant Support. Superior is the highest assessment given by the NRC.
Summer Station has received a category one rating from the Institute of Nuclear Power Operations (INPO) in the last five out of six evaluations. The category one rating is the highest given by INPO for a nuclear plant's overall operations.
In 1997 Summer Station successfully completed its refueling outage ahead of schedule and under budget.
National Energy Policy Act of 1992 and FERC Orders 636 and 888
The Company's regulated business operations were impacted by the NEPA and FERC Orders No. 636 and 888. NEPA was designed to create a more competitive wholesale power supply market by creating "exempt wholesale generators" and by potentially requiring utilities owning transmission facilities to provide transmission access to wholesalers. See "Competition" for a discussion of FERC Order 888. Order No. 636 was intended to deregulate the markets for interstate sales of natural gas by requiring that pipelines provide transportation services that are equal in quality for all gas suppliers whether the customer purchases gas from the pipeline or another supplier. In the opinion of the Company, it continues to be able to meet successfully the challenges of these altered business climates and does not anticipate there to be any material adverse impact on the results of operations, cash flows, financial position or business prospects.
RATE MATTERS
The following table presents a summary of significant rate activity for the years 1993 - 1997 based on test years:
*As modified to reflect lowering of rate of return SCE&G was seeking.
On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
In 1994 the PSC issued an order approving the Company's request to recover through a billing surcharge to its gas customers the costs of environmental cleanup at the sites of former manufactured gas plants. 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 deferred. In October 1997, as a result of the annual review, the PSC approved the Company's request to increase the billing surcharge from $.006 per therm to $.011 per therm which should enable the Company to recover the remaining balance of $29.6 million by December 2002.
In September 1992 the PSC issued an order granting the Company a $.25 increase in transit fares from $.50 to $.75 in both Columbia and Charleston, South Carolina; however, the PSC also required $.40 fares for low income customers and denied the Company's request to reduce the number of routes and frequency of service. The new rates were placed into effect in October 1992. The Company appealed the PSC's order to the Circuit Court, which in May 1995 ordered the case back to the PSC for reconsideration of several issues including the low income rider program, routing changes, and the $.75 fare. The Supreme Court declined to review an appeal of the Circuit Court decision and dismissed the case. The PSC and other intervenors filed another Petition for Reconsideration, which the Supreme Court denied. The PSC and other intervenors filed another appeal to the Circuit Court which the Circuit Court denied in an Order dated May 9, 1996. In this Order, the Circuit Court upheld its previous Orders and remanded them back to the PSC. During August 1996, the PSC heard oral arguments on the Orders on remand for the Circuit Court. On September 30, 1996, the PSC issued an order affirming its previous orders and denied the Company's request for reconsideration. The Company has appealed these two PSC orders back to the Circuit Court where they are awaiting action.
On August 8, 1990, the PSC issued an order approving changes in Pipeline Corporation's gas rate design for sales for resale service and upholding the "value-of-service" method of regulation for its direct industrial service. Direct industrial customers seeking "cost-of-service" based rates initiated two separate appeals to the Circuit Court, which reversed and remanded to the PSC its August 8, 1990 order. Pipeline Corporation appealed that decision to the Supreme Court, which on January 10, 1994 reversed the two Circuit Court decisions and reinstated the PSC Order. The Supreme Court held that the industrial customer group's appeal was premature and failed to exhaust administrative remedies. Additionally, the Supreme Court interpreted the rate- making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in setting rates for natural gas service. The PSC then held another hearing and issued its Order dated December 12, 1995 maintaining the present level of the maximum markup on industrial sales ("cap"). This Order was appealed to the Circuit Court by Pipeline Corporation and the industrial customer group with several other parties intervening, including the Consumer Advocate of South Carolina. On October 10, 1997, the Circuit Court issued an order in favor of the Consumer Advocate and the industrial customer group which remanded the case to the PSC to determine an overall rate of return for Pipeline Corporation and a second order which ruled against Pipeline Corporation and affirmed the PSC's decision that the cap should not be increased. Several motions and appeals were filed subsequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corporation from the first order without prejudice until the PSC completes proceedings on remand and held Pipeline Corporation's appeal of the second order in abeyance until the PSC completes proceedings on remand. The Company expects the remanded case to be heard at the PSC in May 1998.
Fuel Cost Recovery Procedures
The PSC has established a fuel cost recovery procedure which determines the fuel component in SCE&G's retail electric base rates annually based on projected fuel costs for the ensuing twelve-month period, adjusted for any overcollection or undercollection from the preceding twelve-month period. SCE&G has the right to request a formal proceeding at any time should circumstances dictate such a review.
In the April 1997 annual review of the fuel cost component of electric rates, the PSC decreased the rate from 13.10 mills per KWH to 12.85 mills per KWH, a monthly decrease of $0.25 for an average customer using 1,000 KWH per month.
In the October 1997 review the PSC decreased the base cost of gas from 51.260 cents per therm to 48.182 cents per therm which resulted in a monthly decrease of $3.08 (including applicable taxes) based on an average of 100 therms per month on a residential bill during the heating season.
SCE&G's gas rate schedules and contracts include mechanisms which allow it to recover from its customers changes in the actual cost of gas. SCE&G's firm gas rates allow for the recovery of a fixed cost of gas, based on projections, as established by the PSC in annual gas cost and gas purchase practice hearings. Any differences between actual and projected gas costs are deferred and included when projecting gas costs during the next annual gas cost recovery hearing.
ENVIRONMENTAL MATTERS
General
Federal and state authorities have imposed environmental regulations and standards relating primarily to air emissions, wastewater discharges and solid, toxic and hazardous waste management. Developments in these areas may require that equipment and facilities be modified, supplemented or replaced. The ultimate effect of these regulations and standards upon existing and proposed operations cannot be forecast.
Capital Expenditures
In the years 1995 through 1997, capital expenditures for environmental control amounted to approximately $48.5 million. In addition, approximately $17.1 million, $13.9 million, and $12.6 million of environmental control expenditures were made during 1997, 1996 and 1995, respectively, which are included in "Other operation" and "Maintenance" expenses. It is not possible to estimate all future costs for environmental purposes, but forecasts for capitalized expenditures are $48.0 million for 1998 and $91.2 million for the four-year period 1999 through 2002. These expenditures are included in the Company's construction program.
Air Quality Control
The Clean Air Act requires electric utilities to reduce emissions of sulfur dioxide and nitrogen oxide substantially by the year 2000. These requirements are being phased in over two periods. The first phase had a compliance date of January 1, 1995 and the second, January 1, 2000. The Company's facilities did not require modifications to meet the requirements of Phase I. The Company will most likely meet the Phase II requirements through the burning of natural gas and/or lower sulfur coal in its generating units and the purchase and use of sulfur dioxide emission allowances. Low nitrogen oxide burners are being installed to reduce nitrogen oxide emissions to the levels required by Phase II. Air toxicity regulations for the electric generating industry are likely to be promulgated around the year 2000.
SCE&G and GENCO filed with the DHEC compliance plans related to Phase II sulfur dioxide requirements in 1995 and Phase II nitrogen oxide requirements in December, 1997. The Company currently estimates that air emissions control equipment will require capital expenditures of $102 million in 1998 through 2002 period to retrofit existing facilities, with increased operation and maintenance cost of approximately $1 million per year. To meet compliance requirements through the year 2007, the Company anticipates total capital expenditures of approximately $209 million.
Water Quality Control
The Federal Clean Water Act, as amended, provides for the imposition of effluent limitations that require various levels of treatment for each wastewater discharge. Under this Act, compliance with applicable limitations is achieved under a national permit program. Discharge permits have been issued for all and renewed for nearly all of SCE&G's and GENCO's generating units. Concurrent with renewal of these permits the permitting agency has implemented a more rigorous program in monitoring and controlling thermal discharges and strategies for toxicity reduction in wastewater streams. The Company has been developing compliance plans for these initiatives. Amendments to the Clean Water Act proposed in Congress include several provisions which, if passed, could prove costly to SCE&G. These include, but are not limited to, limitations to mixing zones and the implementation of technology-based standards.
Comprehensive Environmental Recovery, Compensation and Liabilities Act (Superfund) and Environmental Assessment Program
The Company has an environmental assessment program to identify and assess current and former operations sites that could require environmental cleanup. As site assessments are initiated an estimate is made of the amount of expenditures, if any, necessary to investigate and clean up each site. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Amounts estimated, accrued and actually expended to date for site assessments and cleanup relate primarily to regulated operations; such amounts are deferred and are being amortized and recovered through rates over a five-year period for electric operations and an eight-year period for gas operations. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $32.4 million and $41.4 million at December 31, 1997 and 1996, respectively. The deferral includes the estimated costs associated with the matters discussed below.
, In September 1992, the EPA notified SCE&G, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G's decommissioned manufactured gas plants, properties owned by the National Park Service and the City of Charleston and private properties. The site has not been placed on the National Priorities List, but may be added before cleanup is initiated. The PRPs have agreed with the EPA to participate in an innovative approach to site investigation and cleanup called "Superfund Accelerated Cleanup Model," allowing the pre-cleanup site investigation process to be compressed significantly. The PRPs have negotiated an administrative order by consent for the conduct of a Remedial Investigation/Feasibility Study and a corresponding Scope of Work. Field work began in November 1993 and the EPA conditionally approved a Remedial Investigation Report in March 1997. Although SCE&G is continuing to investigate cost-effective clean-up methodologies, further work is pending EPA approval of the final draft of the Remedial Investigation Report.
In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996 through 1999) by SCE&G to the City. SCE&G is recovering the amount of the settlement, which does not encompass site assessment and cleanup costs, through rates in the same manner as other amounts accrued for site assessments and cleanup as discussed above. As part of the environmental settlement, SCE&G agreed to construct a 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. Construction is expected to begin in 1998. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
, SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. SCE&G is investigating the sites to monitor the nature and extent of the residual contamination.
Solid Waste Control
The South Carolina Solid Waste Policy and Management Act of 1991 directed DHEC to promulgate regulations for the disposal of industrial solid waste. DHEC has promulgated a proposed regulation, which if adopted as a final regulation in its present form, would significantly increase SCE&G's and GENCO's costs of construction and operation of existing and future ash management facilities.
Nuclear Fuel Disposal
The Nuclear Waste Policy Act of 1982 requires that the United States government make available by 1998 a permanent repository for high-level radioactive waste and spent nuclear fuel and imposes a fee of 1.0 mil per KWH of net nuclear generation after April 7, 1983. Payments, which began in 1983, are subject to change and will extend through the operating life of SCE&G's Summer Station. SCE&G entered into a contract with the DOE on June 29, 1983 providing for permanent disposal of its spent nuclear fuel by the DOE. The DOE presently estimates that the permanent storage facility will not be available until 2010. SCE&G has on-site spent nuclear fuel storage capability until at least 2009 and expects to be able to expand its storage capacity to accommodate the spent nuclear fuel output for the life of the plant through rod consolidation, dry cask storage or other technology as it becomes available. The Act also imposes on utilities the primary responsibility for storage of their spent nuclear fuel until the repository is available.
OTHER MATTERS
With regard to SCE&G's insurance coverage for Summer Station, reference is made to Note 10B of Notes to Consolidated Financial Statements, which is incorporated herein by reference.
On December 1, 1997, Petroleum Resources sold substantially all of its assets for $110 million. The resulting gain of $17.6 million is recorded in "Other Income." Proceeds from the sale are expected to be used to repurchase up to $110 million of SCANA's outstanding common stock from time to time through open market purchases and through privately negotiated transactions. The Company may also use the proceeds from the sale to pay down debt or for other corporate purposes. All of the shares repurchased under this program will be retired, reducing the number of shares issued and outstanding. The common stock repurchase program was authorized by the Company's board of directors on October 21, 1997.
SCI owns approximately 4.5 million common shares and 100,000 non-voting series B and 50,000 non-voting series D convertible preferred shares of Powertel, Inc. (Powertel), formerly InterCel, Inc., a publicly traded telecommunications company which owns and operates personal communications services (PCS) systems in several major markets in the Southeast. The costs of such investments were approximately $66.7 million, $75.1 million and $22.5 million, respectively. Common shares were initially recorded at $14.85 per share. Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Powertel common stock, which trades on NASDAQ, closed at $16 3/4 on
December 31, 1997, resulting in a pre-tax unrealized holding gain of $8.5 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $105.7 million at December 31, 1997, resulting in an unrecorded pre-tax holding gain of $8.1 million.
In March 1997, SCI sold its interest in GulfStates Fibernet, a Georgia general partnership (constituting SCI's remaining interests in the GulfStates Fibernet joint venture), and certain fiber optic assets of SCI located within the State of Georgia, to ITC Holding Company Inc. (Old ITC), a Georgia-based telecommunications company and an affiliate of Powertel, in exchange for 588,411 shares of series A convertible preferred stock of Old ITC (Old ITC Preferred) and a subordinated note of Old ITC. As part of an earnout provision related to the GulfStates Fibernet transaction and the receipt of Old ITC Preferred through the earnout provision, SCI received in October 1997, 56,742 additional shares of Old ITC Preferred resulting in a pre-tax gain of $2.2 million which was recorded in "Other Income."
On October 20, 1997, as part of a reorganization involving Old ITC, its subsidiary, ITC West Point, Inc., and ITC^DeltaCom, Inc. (ITCD), a Georgia-based telecommunications company and an affiliate of Powertel, Old ITC merged with ITCD, and each of Old ITC's common shareholders (including SCI) received one share of common stock of ITC West Point, Inc. for each whole share of Old ITC common stock owned by such shareholders. In addition, SCI received one share of series A convertible preferred stock of ITC West Point, Inc. for each share of Old ITC Preferred owned by SCI. ITC West Point, Inc. changed its name to ITC Holding Company, Inc. (ITC) subsequent to the Old ITC merger.
Through the merger, SCI received approximately 1,777,919 shares, representing approximately 7.2%, of ITCD common stock, and 1,480,771 shares of series A preferred stock of ITCD convertible in March 2002 into 1,480,771 shares of ITCD common stock. ITCD common stock, which began trading on NASDAQ on October 24, 1997, closed at $16 1/2 per share on December 31, 1997, resulting in a pre-tax unrealized holding gain of $20.3 million. The after-tax amount of such gain amount is included in the balance sheet as a component of "Common Equity." The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $24.4 million at December 31, 1997 resulting in an unrecorded pre-tax holding gain of $13.2 million.
Knology Holdings, Inc. (Knology), also an affiliate of Powertel, is developing a system which will provide interactive video, voice and data services for broadband systems in certain southeastern markets. SCI on October 22, 1997 purchased from Knology 71,050 units, each consisting of one 11.875% Senior Discount Note (Note) due 2007 and one Warrant to purchase preferred stock of Knology. The purchase price of the units was approximately $40 million. In addition to the acquisition of the Knology units, SCI has invested $5.3 million to purchase 3,639 shares of preferred stock of Knology and Knology has agreed to issue to SCI warrants to purchase 753 shares of preferred stock at $1,500 per share.
In September 1996 SCI, as a result of an internal audit, informed the FCC that it violated certain licensing requirements in establishing and operating an 800 Mhz radio system in South Carolina for public safety and utility use. As a result, SCI has returned to the FCC several licenses obtained in violation of FCC rules and the FCC is conducting an investigation of the system. The Company does not believe that the resolution of this issue will have a material impact on its results of operations, cash flows or financial position.
The year 2000 issue could have a material impact on the operations of the Company if required modifications and conversions are not made to ensure that all system software is date code compliant. The Company has formed a steering committee to direct the resolution of this major issue. The steering committee, which reports to the senior officers of the Company and to the board of directors, is chaired by the chief financial officer of the Company and is comprised of officers representing all operational areas. Reporting to the committee are the technical personnel responsible for the evaluation and remediation of system software.
The Company has evaluated the impact of the year 2000 on its information systems applications and operating software and is implementing a plan of remediation expected to be completed during the first quarter of 1999. The present estimated cost of the plan of remediation is not material to results of operations, financial position or cash flows.
The Company also has begun evaluating embedded processors located in field operations areas for the purpose of identifying those that will have to be modified or replaced. The initial inventory has been completed and impact assessment is expected to be completed by mid-1998. At that time the Company will prepare and implement a plan designed to complete all substantive required modifications and replacements in time to prevent problems with operational systems related to date codes. An estimate of the cost of the required changes is not available.
In particular, with regard to the evaluation and remediation of the year 2000 issue at SCE&G's Summer Station, SCE&G is closely cooperating with other utility companies, including utilities in the southeast, that own nuclear power plants. The utilities are sharing technical nuclear plant operating and monitoring systems information to ensure the prompt and effective resolution of the year 2000 issue.
The Company is communicating with all of its significant suppliers to determine the extent to which the Company is vulnerable to those suppliers' failure to remediate their own year 2000 issue. The extent to which significant customers have resolved the year 2000 issue, and the resulting impact on the demand for the Company's products, is not determinable. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted. A failure to convert by another company, or a conversion that is incompatible with the Company's systems, could have material adverse effect on the results of operations, financial position or cash flows of the Company.
ITEM 2.
ITEM 2. PROPERTIES
SCANA owns no significant property other than the capital stock of each of its subsidiaries. It holds, directly or indirectly, all of the capital stock of each of its subsidiaries except for the preferred stock of SCE&G. It also has an investment in a LLC which is building and will operate a cogeneration facility in Charleston.
SCE&G's bond indentures, securing the First and Refunding Mortgage Bonds and First Mortgage Bonds issued thereunder, constitute direct mortgage liens on substantially all of its property. GENCO's Williams Station is subject to a first mortgage lien.
For a brief description of the properties of the Company's other subsidiaries, which are not significant as defined in Rule 1-02 of Regulation S-X, see Item 1, "Business-Segments of Business-Nonregulated Businesses."
ELECTRIC
The following table gives information with respect to electric generating facilities, all of which are owned by SCE&G except as noted.
Net Generating Present Year Capability Facility Fuel Capability Location In-Service (KW)(1)
Steam Urquhart Coal/Gas Beech Island, SC 1953 250,000 McMeekin Coal/Gas Irmo, SC 1958 252,000 Canadys Coal/Gas Canadys, SC 1962 430,000 Wateree Coal Eastover, SC 1970 700,000 Williams (2) Coal Goose Creek, SC 1973 560,000 Summer (3) Nuclear Parr, SC 1984 635,000 D-Area (4) Coal DOE Savannah River Site, SC 1995 35,000 Cope (5) Coal Cope, SC 1996 408,000
Gas Turbines Burton Gas/Oil Burton, SC 1961 28,500 Faber Place Gas Charleston, SC 1961 9,500 Hardeeville Oil Hardeeville, SC 1968 14,000 Urquhart Gas/Oil Beech Island, SC 1969 38,000 Coit Gas/Oil Columbia, SC 1969 30,000 Parr Gas/Oil Parr, SC 1970 60,000 Williams (6) Gas/Oil Goose Creek, SC 1972 49,000 Hagood Gas/Oil Charleston, SC 1991 95,000
Hydro Neal Shoals Carlisle, SC 1905 5,000 Parr Shoals Parr, SC 1914 14,000 Stevens Creek Martinez, GA 1914 9,000 Columbia Columbia, SC 1927 10,000 Saluda Irmo, SC 1930 206,000
Pumped Storage Fairfield Parr, SC 1978 512,000
Total 4,350,000
(1) Summer rating. (2) The steam unit at Williams Station is owned by GENCO. (3) Represents SCE&G's two-thirds portion of the Summer Station. (4) This plant is operated under lease from the DOE and is dispatched to DOE's Savannah River Site steam needs. "Net Generating Capability" for this plant is expected average hourly output. The lease expires on October 1, 2005. (5) Plant began commercial operation in January 1996. (6) The two gas turbines at Williams were purchased upon expiration of the lease on June 29, 1997.
SCE&G owns 428 substations having an aggregate transformer capacity of 21,356,393 KVA. The transmission system consists of 3,122 miles of lines and the distribution system consists of 16,129 pole miles of overhead lines and 3,500 trench miles of underground lines.
GAS
Natural Gas
SCE&G's gas system consists of approximately 11,728 miles of distribution mains and related service facilities.
Pipeline Corporation's gas system consists of approximately 1,913 miles of transmission pipeline of up to 24 inches in diameter which connect its resale customers' distribution systems with transmission systems of Southern Natural and Transco.
Pipeline Corporation owns two LNG plants, one located near Charleston, South Carolina and the other in Salley, South Carolina. The Charleston facility can liquefy up to 6,000 MCF per day and store the liquefied equivalent of 1,000,000 MCF of natural gas. The Salley facility can store the liquefied equivalent of 900,000 MCF of natural gas and has no liquefying capabilities. On peak days, the Charleston facility can regasify up to 60,000 MCF per day and the Salley facility can regasify up to 90,000 MCF.
Propane
SCE&G has propane air peak shaving facilities which can supplement the supply of natural gas by gasifying propane to yield the equivalent of 102,000 MCF per day of natural gas. These facilities can store the equivalent of 430,405 MCF of natural gas.
TRANSIT
SCE&G owns 61 motor coaches used in the operation of the Columbia transit system. The Columbia system is comprised of fifteen routes covering 177 miles.
Effective October 1, 1996, SCE&G transferred ownership and operation of the Charleston transit system to the City of Charleston. As part of the transfer, the Company conveyed ownership to the City of Charleston facilities, equipment and four motor coaches used in the operation of the transit system. The City and SCE&G entered into an interim operating agreement, with provisions for renewing, whereby SCE&G will operate the system for the City until a Regional Transit Authority is established. SCE&G and the City have agreed upon a rate structure designed to allow SCE&G to recover its costs of operating the Charleston transit system. The Charleston system is composed of fourteen routes covering 110 miles.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see ITEM 1., "BUSINESS - RATE MATTERS" and "BUSINESS - ENVIRONMENTAL MATTERS - Comprehensive Environmental Recovery, Compensation and Liabilities Act (Superfund) and Environmental Assessment Program" and Note 10 of Notes to Consolidated Financial Statements appearing in Item 8., "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
CORPORATE STRUCTURE
SCANA CORPORATION A Holding Company, Owning Thirteen Direct, Wholly Owned Subsidiaries
SOUTH CAROLINA SCANA ENERGY MARKETING, INC. ELECTRIC & GAS COMPANY Markets electricity, natural Generates and sells electricity gas and other light to wholesale and retail customers, hydrocarbons. Also provides purchases, sells and transports energy-related risk management natural gas at retail and provides services to producers and public transit service in Columbia. consumers.
SOUTH CAROLINA GENERATING SCANA PETROLEUM RESOURCES, INC. COMPANY, INC. In liquidation following sale Owns and operates Williams of oil and gas properties. Station and sells electricity to SCE&G. SERVICECARE, INC. Provides energy-related products SOUTH CAROLINA FUEL and services, principally service COMPANY, INC. contracts on home appliances and Acquires, owns and provides home security services. financing for SCE&G's nuclear fuel, fossil fuel and sulfur PRIMESOUTH, INC. dioxide emission allowances. Engages in power plant management and maintenance SCANA PROPANE GAS, INC. services. Purchases, delivers and sells propane. SCANA DEVELOPMENT CORPORATION Engaged in the sale of real SCANA RESOURCES, INC. estate. (In liquidation.) Conducts energy-related businesses and services. SOUTH CAROLINA PIPELINE CORPORATION SCANA COMMUNICATIONS, INC. Purchases, sells and transports Provides fiber optic tele- natural gas to wholesale and communications in South Carolina, direct industrial customers. a public safety radio communications Owns and operates a propane pipe- network, and tower construction line and two LNG plants for the services for wireless providers liquefaction, regasification and and invests in telecommunications storage of natural gas. companies.
SCANA PROPANE SERVICES, INC. Owns and operates an underground propane storage facility and leases cavern storage to industries, utilities and others.
Each of the above listed companies is organized and incorporated under the laws of the State of South Carolina.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers are elected at the annual organizational meeting of the Board of Directors, held immediately after the annual meeting of stockholders, and hold office until the next such organizational meeting, unless a resignation is submitted, or unless the Board of Directors shall otherwise determine.
Positions Held During Name Age Past Five Years Dates
W.B. Timmerman 51 Chairman of the Board and Chief Executive Officer 1997-present Chief Operating Officer of SCANA 1996-1997 President of SCANA 1995-present President of SCI 1996-1997 Executive Vice President, 1994-1995 SCANA Assistant Secretary 1993-1996 Chief Financial Officer *-1996 Controller, SCANA *-1996 Senior Vice President, *-1994 SCANA
J. L. Skolds 47 Group Executive - SCANA Electric Group 1997-present President and Chief Operating Officer - SCE&G 1996-present Senior Vice President - Generation, SCE&G 1994-1996 Vice President - Nuclear Operations, SCE&G *-1994
A.H. Gibbes 51 Group Executive - SCANA Gas Group 1996-present President - Pipeline Corporation 1996-present President - C&T Pipeline, LLC 1996-present Senior Vice President General Counsel and Assistant Secretary 1994-1996 Assistant Secretary - SCE&G, GENCO, Fuel Company, SCI, PrimeSouth, ServiceCare and SCANA Development Corp. 1994-1996 Vice President, General Counsel and Assistant Secretary 1993-1994 President and Treasurer - SCANA Development Corp. *-present
C.B. Novinger 48 Senior Vice President - Administration, SCANA *-present
K.B. Marsh 42 Vice President - Finance, Chief Financial Officer and Controller, SCANA 1996-present Vice President - Finance, Treasurer and Secretary, SCANA *-1996
H.T. Arthur, II 52 Vice President, General Counsel and Assistant Secretary 1996-present Assistant Secretary - SCE&G, and other subsidiaries 1996-present Vice President and General Counsel - Pipeline Corporation *-1996
* Indicates position held at least since March 1, 1993.
Between October 1, 1997 and January 20, 1998 561,791 shares of the Company's no par value common stock ("Common Stock") were purchased in open market transactions by First Union National Bank of SC as Trustee of the Company's Stock Purchase-Savings Plan (the "Plan"). These shares were purchased for the accounts of those employees of the Company and its subsidiaries that participate in the Plan. Under the terms of the Plan employees may contribute up to 15% of their "eligible earnings" to the Plan and the Company matches the first 6% of such contributions on a dollar-for- dollar basis. The Company believes that the open market purchase of shares by the Trustee should not be deemed to be an offer or sale of securities subject to the registration requirements of the Securities Act of 1933, as amended. Nevertheless because the matter is not free from doubt and because the Plan provides for original issue purchases as well as open market purchases, the Company filed a registration statement on January 26, 1998, on Form S-8 (333-44885) registering 3,000,000 shares of Common Stock for sale under the Plan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in this discussion and analysis (or elsewhere in this annual report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward- looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: (1) that the information is of a preliminary nature and may be subject to further and/or continuing review and adjustment, (2) changes in the utility regulatory environment, (3) changes in the economy in areas served by the Company's subsidiaries, (4) the impact of competition from other energy suppliers, (5) the management of the Company's operations (6) growth opportunities for the Company's regulated and diversified subsidiaries, (7) the results of financing efforts, (8) changes in the Company's accounting policies, (9) weather conditions in areas served by the Company's utility subsidiaries, (10) performance of the telecommunications companies in which the Company has made significant investments, (11) inflation, (12) changes in environmental regulations and (13) the other risks and uncertainties described from time to time in the Company's periodic reports filed with the SEC. The Company disclaims any obligation to update any forward-looking statements.
COMPETITION
The electric utility industry has begun a major transition that could lead to expanded market competition and less regulation. Deregulation of electric wholesale and retail markets is creating opportunities to compete for new and existing customers and markets. As a result, profit margins and asset values of some utilities could be adversely affected. Legislative initiatives at the Federal and state levels are being considered and, if enacted, could mandate market deregulation. The pace of deregulation, future prices of electricity, and the regulatory actions which may be taken by the PSC and the FERC in response to the changing environment cannot be predicted. However, the FERC, in issuing Order 888 in April 1996, has accelerated competition among electric utilities by providing for open access to wholesale transmission service. Order 888 requires utilities under FERC jurisdiction that own, control or operate transmission lines to file nondiscriminatory open access tariffs that offer to others the same transmission service they provide themselves. The FERC has also permitted utilities to seek recovery of wholesale stranded costs from departing customers by direct assignment. Approximately two percent of the Company's electric revenues is under FERC jurisdiction for the purpose of setting rates for wholesale service. Legislation is pending in South Carolina that would deregulate the state's retail electric market and enable customers to choose their supplier of electricity. The Company is not able to predict whether the legislation will be enacted and, if it is, the conditions it will impose on utilities that currently operate in the state and future market participants.
The Company is aggressively pursuing actions to position itself strategically for the transformed environment. To enhance its flexibility and responsiveness to change, the Company's electric and gas utility, SCE&G, operates Strategic Business Units. Maintaining a competitive cost structure is of paramount importance in the utility's strategic plan. SCE&G has undertaken a variety of initiatives, including reductions in operation and maintenance costs and in staffing levels, the accelerated recovery of SCE&G's electric regulatory assets and the shift, for retail ratemaking purposes only, of depreciation reserves from transmission and distribution assets to nuclear production assets. SCE&G has also established open access transmission tariffs and is selling bulk power to wholesale customers at market-based rates. Significant new customer and management information systems will be implemented in 1998. Marketing of services to commercial and industrial customers has been increased significantly. SCE&G has obtained long term power supply contracts with a significant portion of its industrial customers. The Company believes that these actions as well as numerous others that have been and will be taken demonstrate its ability and commitment to succeed in the new operating environment to come.
Regulated public utilities are allowed to record as assets some costs that would be expensed by other enterprises. If deregulation or other changes in the regulatory environment occur, the Company may no longer be eligible to apply this accounting treatment and may be required to eliminate such regulatory assets from its balance sheet. Although the potential effects of deregulation cannot be determined at present, discontinuation of the accounting treatment could have a material adverse effect on the Company's results of operations in the period the write-off is recorded. It is expected that cash flows and the financial position of the Company would not be materially affected by the discontinuation of the accounting treatment. The Company reported approximately $241 million and $68 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $58 million, respectively, on its balance sheet at December 31, 1997.
The Company's generation assets are exposed to considerable financial risks in a deregulated electric market. If market prices for electric generation do not produce adequate revenue streams and the enabling legislation or regulatory actions do not provide for recovery of the resulting stranded costs, the Company could be required to write down its investment in these assets. The Company cannot predict whether any write-downs will be necessary and, if they are, the extent to which they would adversely affect the Company's results of operations in the period in which they are recorded. As of December 31, 1997, the Company's net investment in fossil/hydroelectric generation and nuclear generation assets was $1,150.6 million and $659.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The cash requirements of the Company arise primarily from SCE&G's operational needs, the Company's construction program and the need to fund the activities or investments of the Company's nonregulated subsidiaries. The ability of the Company's regulated subsidiaries to replace existing plant investment, as well as to expand to meet future demand for electricity and gas, will depend upon their ability to attract the necessary financial capital on reasonable terms. The Company's 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 the regulated subsidiaries continue their ongoing construction programs, it is necessary to seek increases in rates. As a result, the Company's future financial position and results of operations will be affected by the regulated subsidiaries' ability to obtain adequate and timely rate and other regulatory relief.
The Company and Westvaco Corporation have formed a limited liability company, Cogen South LLC, to build and operate a $170 million cogeneration facility at Westvaco's Kraft Division Paper Mill in North Charleston, South Carolina. The Company and Westvaco each own a 50% interest in the LLC. The facility will provide industrial process steam for the Westvaco paper mill and shaft horsepower to enable SCE&G to generate up to 99 megawatts of electricity. Construction financing is being provided to Cogen South LLC by banks. A $15 million capital contribution to the LLC by each partner is expected prior to operation of the facility. In addition to the cogeneration LLC, Westvaco has entered into a 20-year contract with SCE&G for all its electricity requirements at the North Charleston mill at SCE&G's standard industrial rate. Construction of the plant began in September 1996 and it is expected to be operational in the fall of 1998.
On August 7, 1996 the City of Charleston executed 30-year electric and gas franchise agreements with SCE&G. In consideration for the electric franchise agreement, SCE&G is paying the City $25 million over seven years (1996 through 2002) and has donated to the City the existing transit assets in Charleston. The $25 million is included in electric plant-in-service. In settlement of environmental claims the City may have had against SCE&G involving the Calhoun Park area, where SCE&G and its predecessor companies operated a manufactured gas plant until the 1960's, SCE&G is paying the City $26 million over a four-year period (1996 through 1999). As part of the environmental settlement, SCE&G has agreed to construct an 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
The revised estimated primary cash requirements for 1998, excluding requirements for fuel liabilities and short-term borrowings, and the actual primary cash requirements for 1997 are as follows:
1998 1997 (Millions of Dollars)
Property additions and construction expenditures, net of allowance for funds used during construction $250 $258 Nuclear fuel expenditures 23 31 Maturing obligations, redemptions and sinking and purchase fund requirements 117 146 Total $390 $435
Approximately 62% of total cash requirements (after payment of dividends) was provided from internal sources in 1997 as compared to 55% in 1996.
The Company has in effect a medium-term note program for the issuance from time to time of unsecured medium-term debt securities. The proceeds from the sales of these securities may be used to fund additional business activities in nonutility subsidiaries, to reduce short-term debt incurred in connection therewith or for general corporate purposes. Subsequent to the issuance of $60 million on January 13, 1998, the Company had available for issuance $190.0 million under this program.
SCE&G's First and Refunding Mortgage Bond Indenture, dated April 1, 1945 (Old Mortgage), contains provisions prohibiting the issuance of additional bonds thereunder (Class A Bonds) unless net earnings (as therein defined) for twelve consecutive months out of the fifteen months prior to the month of issuance are at least twice the annual interest requirements on all Class A Bonds to be outstanding (Bond Ratio). For the year ended December 31, 1997 the Bond Ratio was 4.32. The issuance of additional Class A Bonds also is restricted to an additional principal amount equal to (i) 60% of unfunded net property additions (which unfunded net property additions totaled approximately $579 million at December 31, 1997), (ii) retirements of Class A Bonds (which retirement credits totaled $67.5 million at December 31, 1997), and (iii) cash on deposit with the Trustee. SCE&G has a bond indenture dated April 1, 1993 (New Mortgage) covering substantially all of its electric properties under which its future mortgage-backed debt (New Bonds) will be issued. New Bonds are issued under the New Mortgage on the basis of a like principal amount of Class A Bonds issued under the Old Mortgage which have been deposited with the Trustee of the New Mortgage (of which $185 million were available for such purpose as of December 31, 1997), until such time as all presently outstanding Class A Bonds are retired. Thereafter, New Bonds will be issuable on the basis of property additions in a principal amount equal to 70% of the original cost of electric and common plant properties (compared to 60% of value for Class A Bonds under the Old Mortgage), cash deposited with the Trustee, and retirement of New Bonds. New Bonds will be issuable under the New Mortgage only if adjusted net earnings (as therein defined) for twelve consecutive months out of the eighteen months immediately preceding the month of issuance are at least twice the annual interest requirements on all outstanding bonds (including Class A Bonds) and New Bonds to be outstanding (New Bond Ratio). For the year ended December 31, 1997 the New Bond Ratio was 5.87.
The following additional financing transactions have occurred since December 31, 1996:
, On January 10, 1997 SCANA closed on unsecured bank loans totaling $60 million due January 9, 1998 and used the proceeds to pay off a loan in a like total amount. On January 13, 1998 SCANA refinanced the loans with $60 million of medium-term notes due January 13, 2003 at an interest rate of 6.05%.
, On February 12, 1997 SCANA closed on the sale of $25 million of medium-term notes having an annual interest rate of 6.9% and maturing February 15, 2007. These funds were used to reduce short-term borrowings at SCANA.
, On April 24, 1997, SCE&G sold $100 million of 6.52% cumulative preferred stock, par value $100 per share. Proceeds from the sale were used to reduce short-term indebtedness incurred for SCE&G's construction program, to refinance senior securities and for general corporate purposes.
, On October 28, 1997 SCE&G Trust I (the "Trust"), a Delaware statutory business trust and a subsidiary of SCE&G, issued $50 million of 7.55% Trust Preferred Securities, Series A. The Trust used the proceeds from the sale to purchase unsecured 7.55% Junior Subordinated Debentures of SCE&G. SCE&G used the funds to redeem certain series of its preferred stock. The financial statements of the Trust are consolidated with those of SCE&G.
Without the consent of at least a majority of the total voting power of SCE&G's preferred stock, SCE&G may not issue or assume any unsecured indebtedness if, after such issue or assumption, the total principal amount of all such unsecured indebtedness would exceed 10% of the aggregate principal amount of all of SCE&G's secured indebtedness and capital and surplus; however, no such consent is required to enter into agreements for payment of principal, interest and premium for securities issued for pollution control purposes.
Pursuant to Section 204 of the Federal Power Act, SCE&G and GENCO must obtain FERC authority to issue short-term debt. The FERC has authorized SCE&G to issue up to $250 million of unsecured promissory notes or commercial paper with maturity dates of twelve months or less, but not later than December 31, 1999. GENCO has not sought such authorization.
At December 31, 1997 SCE&G had $315 million of authorized lines of credit which includes a credit agreement for a maximum of $250 million to support the issuance of commercial paper. Unused lines of credit at December 31, 1997 totaled $315 million. SCE&G commercial paper outstanding at December 31, 1997 and December 31, 1996 was $13.3 million and $90 million, respectively. In addition, Fuel Company had a credit agreement for a maximum of $125 million with the full amount available at December 31, 1997. The credit agreement supports the issuance of short-term commercial paper for the financing of nuclear and fossil fuels and sulfur dioxide emission allowances. Fuel Company commercial paper outstanding at December 31, 1997 was $80.3 million.
SCE&G's Restated Articles of Incorporation prohibit issuance of additional shares of preferred stock without consent of the preferred stockholders unless net earnings (as defined therein) for the twelve consecutive months immediately preceding the month of issuance are at least one and one-half times the aggregate of all interest charges and preferred stock dividend requirements (Preferred Stock Ratio). For the year ended December 31, 1997 the Preferred Stock Ratio was 2.69.
On January 14, 1997 an additional 2,500,000 shares of SCANA common stock were registered for sale under the Investor Plus Plan. During 1997, prior to its conversion to a market purchase plan from an original issue plan on February 1, 1997, SCANA issued 184,743 shares of the Company's common stock under its Investor Plus Plan. In addition, pursuant to its SPSP, SCANA issued 961,097 shares of its common stock during 1997, prior to the plan's conversion from an original issue plan to a market purchase plan on July 1, 1997. On January 26, 1998 an additional 3,000,000 shares of SCANA common stock were registered for sale under the SPSP.
The Company anticipates that its 1998 cash requirements of $389.6 million will be met through internally generated funds (approximately 59%, after payment of dividends), and the incurrence of additional short-term and long-term indebtedness. Sales of additional equity securities may also be made.
The Company expects that it has or can obtain adequate sources of financing to meet its projected cash requirements for the next twelve months and for the foreseeable future.
Environmental Matters
The Clean Air Act requires electric utilities to reduce emissions of sulfur dioxide and nitrogen oxide substantially by the year 2000. These requirements are being phased in over two periods. The first phase had a compliance date of January 1, 1995 and the second, January 1, 2000. The Company's facilities did not require modifications to meet the requirements of Phase I. The Company will most likely meet the Phase II requirements through the burning of natural gas and/or lower sulfur coal in its generating units and the purchase and use of sulfur dioxide emission allowances. Low nitrogen oxide burners are being installed to reduce nitrogen oxide emissions to the levels required by Phase II. Air toxicity regulations for the electric generating industry are likely to be promulgated around the year 2000.
SCE&G and GENCO filed with DHEC compliance plans related to Phase II sulfur dioxide requirements in 1995 and Phase II nitrogen oxide requirements in December, 1997. The Company currently estimates that air emissions control equipment will require capital expenditures of $102 million over the 1998-2002 period to retrofit existing facilities, with increased operation and maintenance cost of approximately $1 million per year. To meet compliance requirements through the year 2007, the Company anticipates total capital expenditures of approximately $209 million.
The Federal Clean Water Act, as amended, provides for the imposition of effluent limitations that require various levels of treatment for each wastewater discharge. Under this Act, compliance with applicable limitations is achieved under a national permit program. Discharge permits have been issued for all and renewed for nearly all of SCE&G's and GENCO's generating units. Concurrent with renewal of these permits, the permitting agency has implemented a more rigorous program in monitoring and controlling thermal discharges and strategies for toxicity reduction in wastewater streams. The Company has been developing compliance plans for these initiatives. Amendments to the Clean Water Act proposed in Congress include several provisions which, if passed, could prove costly to SCE&G. These include, but are not limited to, limitations to mixing zones and the implementation of technology-based standards.
The South Carolina Solid Waste Policy and Management Act of 1991 directed DHEC to promulgate regulations for the disposal of industrial solid waste. DHEC has promulgated a proposed regulation, which, if adopted as a final regulation in its present form, would significantly increase SCE&G's and GENCO's costs of construction and operation of existing and future ash management facilities.
The Company has an environmental assessment program to identify and assess current and former operations sites that could require environmental cleanup. As site assessments are initiated, an estimate is made of the amount of expenditures, if any, necessary to investigate and clean up each site. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Amounts estimated, accrued and actually expended to date for site assessments and cleanup relate primarily to regulated operations; such amounts are deferred and are being amortized and recovered through rates over a five-year period for electric operations and an eight- year period for gas operations. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $32.4 million and $41.4 million at December 31, 1997 and 1996, respectively. The deferral includes the estimated costs associated with the matters discussed below.
, In September 1992, the EPA notified SCE&G, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were the locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G's decommissioned manufactured gas plants, properties owned by the National Park Service and the City of Charleston and private properties. The site has not been placed on the National Priorities List, but may be added before cleanup is initiated. The PRPs have agreed with the EPA to participate in an innovative approach to site investigation and cleanup called "Superfund Accelerated Cleanup Model," allowing the pre-cleanup site investigation process to be compressed significantly. The PRPs have negotiated an administrative order by consent for the conduct of a Remedial Investigation/Feasibility Study and a corresponding Scope of Work. Field work began in November 1993 and the EPA conditionally approved a Remedial Investigation Report in March 1997. Although SCE&G is continuing to investigate cost effective clean-up methodologies, further work is pending EPA approval of the final draft of the Remedial Investigation Report.
In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996-1999) by SCE&G to the City. SCE&G is recovering the amount of the settlement, which does not encompass site assessment and cleanup costs, through rates in the same manner as other amounts accrued for site assessments and cleanup as discussed above. As part of the environmental settlement, SCE&G agreed to construct a 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. Construction is expected to begin in 1998. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
, SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. SCE&G is investigating the sites to monitor the nature and extent of the residual contamination.
Regulatory Matters
On August 8, 1990 the PSC issued an order approving changes in Pipeline Corporation's gas rate design for sales for resale service and upholding the "value-of-service" method of regulation for its direct industrial service. After appeals to the Circuit Court initiated by direct industrial customers and a subsequent appeal to the Supreme Court initiated by Pipeline Corporation, the PSC order was reinstated. The Supreme Court held that the industrial customer group's appeal was premature and failed to exhaust administrative remedies. Additionally, the Supreme Court interpreted the rate-making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in setting rates for natural gas service. The PSC held another hearing and issued its order dated December 12, 1995 maintaining the present level of the maximum markup on industrial sales ("cap"). This Order was appealed to the Circuit Court by Pipeline Corporation and the industrial customer group with several other parties intervening, including the Consumer Advocate of South Carolina. On October 10, 1997, the Circuit Court issued an order in favor of the Consumer Advocate and the industrial customer group which remanded the case to the PSC to determine an overall rate of return for Pipeline Corporation and a second order which ruled against Pipeline Corporation and affirmed the PSC's decision that the caps should not be increased. Several motions and appeals were filed subsequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corporation from the first order without prejudice until the PSC completes proceedings on remand and held Pipeline Corporation's appeal of the second order in abeyance until the PSC completes proceedings on remand. The Company expects the remanded case to be heard at the PSC in May 1998. The impact, if any, on the Company's results of operations, cash flows and financial position is not presently determinable.
On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
The Company's regulated business operations were impacted by the NEPA and FERC Orders No. 636 and 888. NEPA was designed to create a more competitive wholesale power supply market by creating "exempt wholesale generators" and by potentially requiring utilities owning transmission facilities to provide transmission access to wholesalers. See "Competition" for a discussion of FERC Order 888. Order No. 636 was intended to deregulate the markets for interstate sales of natural gas by requiring that pipelines provide transportation services that are equal in quality for all gas suppliers whether the customer purchases gas from the pipeline or another supplier. In the opinion of the Company, it continues to be able to meet successfully the challenges of these altered business climates and does not anticipate there to be any material adverse impact on the results of operations, cash flows, financial position or business prospects.
Other
On December 1, 1997, Petroleum Resources sold substantially all of its assets for $110 million. Proceeds from the sale are expected to be used to repurchase up to $110 million of SCANA's outstanding common stock from time to time through open market purchases and through privately negotiated transactions. The Company may also use the proceeds from the sale to pay down debt or for other corporate activities. All of the shares repurchased under this program will be retired, reducing the number of shares issued and outstanding. The common stock repurchase program was authorized by the Company's board of directors on October 21, 1997.
SCI owns approximately 4.5 million common shares and 100,000 non-voting series B and 50,000 non-voting series D convertible preferred shares of Powertel, Inc. (Powertel), formerly InterCel, Inc., a publicly traded telecommunications company which owns and operates personal communications services (PCS) systems in several major markets in the Southeast. The costs of such investments were approximately $66.7 million, $75.1 million and $22.5 million, respectively. Common shares were initially recorded at $14.85 per share. Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Powertel common stock, which trades on NASDAQ, closed at $16 3/4 on December 31, 1997, resulting in a pre-tax unrealized holding gain of $8.5 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $105.7 million at December 31, 1997, resulting in an unrecorded pre-tax holding gain of $8.1 million.
In March 1997 SCI sold its interest in GulfStates Fibernet, a Georgia general partnership (constituting SCI's remaining interests in the GulfStates Fibernet joint venture), and certain fiber optic assets of SCI located within the State of Georgia, to ITC Holding Company, Inc. (Old ITC), a Georgia-based telecommunications company and an affiliate of Powertel, in exchange for 588,411 shares of series A convertible preferred stock of Old ITC (Old ITC Preferred) and a subordinated note of Old ITC. As part of an earnout provision related to the GulfStates Fibernet transaction and the receipt of Old ITC Preferred through the earnout provision, SCI received in October 1997, 56,742 additional shares of Old ITC Preferred resulting in a pre-tax gain of $2.2 million which was recorded in "Other Income."
On October 20, 1997, as part of a reorganization involving Old ITC, its subsidiary, ITC West Point, Inc., and ITC^DeltaCom, Inc. (ITCD), a Georgia-based telecommunications company and an affiliate of Powertel, Old ITC merged with ITCD, and each of Old ITC's common shareholders (including SCI) received one share of common stock of ITC West Point, Inc. for each whole share of Old ITC common stock owned by such shareholders. In addition, SCI received one share of series A convertible preferred stock of ITC West Point, Inc. for each share of Old ITC Preferred owned by SCI. ITC West Point, Inc. changed its name to ITC Holding Company, Inc. subsequent to the Old ITC merger.
Through the merger, SCI received approximately 1,777,919 shares, representing approximately 7.2%, of ITCD common stock, and 1,480,771 shares of series A preferred stock of ITCD convertible in March 2002 into 1,480,771 shares of ITCD common stock. ITCD common stock, which began trading on NASDAQ on October 24, 1997, closed at $16 1/2 per share on December 31, 1997, resulting in a pre-tax unrealized holding gain of $20.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $24.4 million at December 31, 1997 resulting in an unrecorded pre-tax holding gain of $13.2 million.
Knology Holdings, Inc. (Knology), also an affiliate of Powertel, is developing a system which will provide interactive video, voice and data services for broadband systems in certain southeastern markets. SCI on October 22, 1997 purchased from Knology 71,050 units, each consisting of one 11.875% Senior Discount Note (Note) due 2007 and one Warrant to purchase preferred stock of Knology. The purchase price of the units was approximately $40 million. In addition to the acquisition of the Knology units, SCI has invested $5.3 million to purchase 3,639 shares of preferred stock of Knology and Knology has agreed to issue to SCI warrants to purchase 753 shares of preferred stock at $1,500 per share.
In September 1996 SCI, as a result of an internal audit, informed the FCC that it violated certain licensing requirements in establishing and operating an 800 Mhz radio system in South Carolina for public safety and utility use. As a result, SCI has returned to the FCC several licenses obtained in violation of FCC rules and the FCC is conducting an investigation of the system. The Company does not believe that the resolution of this issue will have a material impact on its results of operations, cash flows or financial position.
The year 2000 issue could have a material impact on the operations of the Company if required modifications and conversions are not made to ensure that all system software is date code compliant. The Company has formed a steering committee to direct the resolution of this major issue. The steering committee, which reports to the senior officers of the Company and to the board of directors, is chaired by the chief financial officer of the Company and is comprised of officers representing all operational areas. Reporting to the committee are the technical personnel responsible for the evaluation and remediation of system software.
The Company has evaluated the impact of the year 2000 on its information systems applications and operating software and is implementing a plan of remediation expected to be completed during the first quarter of 1999. The present estimated cost of the plan of remediation is not material to results of operations, financial position or cash flows.
The Company also has begun evaluating embedded processors located in field operations areas for the purpose of identifying those that will have to be modified or replaced. The initial inventory has been completed and impact assessment is expected to be completed by mid-1998. At that time the Company will prepare and implement a plan designed to complete all substantive required modifications and replacements in time to prevent problems with operational systems related to date codes. An estimate of the cost of the required changes is not available.
In particular, with regard to the evaluation and remediation of the year 2000 issue at SCE&G's Summer Station, SCE&G is closely cooperating with other utility companies, including utilities in the southeast, that own nuclear power plants. The utilities are sharing technical nuclear plant operating and monitoring systems information to ensure the prompt and effective resolution of the year 2000 issue.
The Company is communicating with all of its significant suppliers to determine the extent to which the Company is vulnerable to those suppliers' failure to remediate their own year 2000 issue. The extent to which significant customers have resolved the year 2000 issue, and the resulting impact on the demand for the Company's products, is not determinable. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted. A failure to convert by another company, or a conversion that is incompatible with the Company's systems, could have material adverse effect on the results of operations, financial position or cash flows of the Company.
RESULTS OF OPERATIONS
Earnings and Dividends
Earnings per share of common stock, the percent increase (decrease) from the previous year and the rate of return earned on common equity for the years 1995 through 1997 were as follows:
1997 1996 1995 Earnings per weighted average share $2.06 $2.05 $1.70 Percent increase in earnings per share 0.5% 20.6% 39.3% Return earned on common equity 12.3% 12.8% 10.8%
, 1997 Earnings per share and return on common equity increased primarily as a result of the $17.6 million after-tax gain on the sale of the oil and gas properties of Petroleum Resources and higher gas sales margins which more than offset increases in operating expenses and a reduction to other income from the 1996 after-tax gain reported by SCI, discussed below.
, 1996 Earnings per share and return on common equity increased primarily as a result of higher electric sales margins at SCE&G and improved earnings at Petroleum Resources which more than offset increases in operating expenses. Additionally, SCI reported a nonrecurring after-tax gain of $5.7 million as a result of the business combination of Powertel PCS Partners and Powertel (formerly InterCel) in February 1996.
The Company's financial statements include 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. An equity portion of AFC is included in nonoperating income and a debt portion of AFC is included in interest charges (credits) as noncash items, both of which have the effect of increasing reported net income. AFC represented approximately 4.0% of income before income taxes in 1997, 3.9% in 1996 and 8.0% in 1995.
In 1997 SCANA's Board of Directors raised the quarterly cash dividend on common stock to 37 3/4 cents per share from 36 3/4 cents per share. The increase, effective with the dividend payable on April 1, 1997, raised the indicated annual dividend rate to $1.51 per share from $1.47. SCANA has increased the dividend rate on its common stock in 44 of the last 45 years.
On December 1, 1997, Petroleum Resources sold substantially all of its assets for $110 million. The resulting after-tax gain of $17.6 million is recorded in "Other Income."
Electric Operations
Electric sales margins for 1997, 1996 and 1995 were as follows:
1997 1996 1995 (Millions of Dollars)
Electric operating revenues $1,103.0 $1,106.5 $1,006.4 Less: Fuel used in electric generation 248.4 250.5 227.4 Purchased power 9.4 11.4 14.7 Margin $ 845.2 $ 844.6 $ 764.3
, 1997 The electric sales margin increased slightly due to the favorable impact of the rate increase placed into effect in January 1997 and economic growth factors which were offset by the effect of milder weather.
, 1996 The electric sales margin increased primarily as a result of the rate increase received by SCE&G in January 1996. Economic growth factors also contributed to the increase.
Increases (decreases) from the prior year in megawatt-hour (MWH) sales volume by classes were as follows:
Classification 1997 1996
Residential (292,518) 212,888 Commercial 100,324 144,536 Industrial 113,717 110,147 Sales for Resale (excluding interchange) (538,005) (39,853) Other 15 (1,013) Total territorial (616,467) 426,705 Negotiated Market Sales Tariff 564,081 699,425 Total (52,386) 1,126,130
The electric sales volume for residential sales decreased for 1997 as a result of milder weather. The decrease in sales for resale and the increase of sales under the Negotiated Market Sales Tariff from 1996 to 1997 were the result of a municipality terminating its wholesale power contract and transferring to a negotiated market sales tariff.
Gas Operations
Gas sales margins for 1997, 1996 and 1995 were as follows:
1997 1996 1995 (Millions of Dollars)
Gas operating revenues $418.7 $403.2 $342.7 Less: Gas purchased for resale 286.5 276.8 212.4 Margin $132.2 $126.4 $130.3
, 1997 The gas sales margin increased primarily as a result of higher margins on sales to industrial interruptible customers. The higher margins were attributable to fewer curtailments and higher system capacity from a pipeline expansion completed in 1996.
, 1996 The gas sales margin decreased primarily as a result of higher gas costs and curtailments imposed on interruptible industrial customers during abnormally cold weather. Also, contributing to the decline in the gas sales margin from 1995 to 1996 were lower gas prices in 1995 which allowed Pipeline Corporation to compete more successfully in that year with alternate fuel suppliers in industrial markets.
Increases (decreases) from the prior year in dekatherm (DT) sales volume by classes, including transportation gas, were as follows:
Classification 1997 1996
Residential (2,188,215) 1,774,289 Commercial (119,324) 585,669 Industrial 7,427,503 (1,564,759) Sales for resale 160,658 583,040 Transportation gas (953,901) (1,219,903) Total 4,326,721 158,336
The gas sales volume increased for 1997 as a result of fewer curtailments to industrial interruptible customers and higher demand.
Other Operating Expenses and Taxes
Increases (decreases) in other operating expenses, including taxes, were as follows:
Classification 1997 1996 (Millions of Dollars)
Other operation and maintenance $ 3.1 $20.1 Depreciation and amortization 5.5 17.7 Income taxes (12.5) 8.1 Other taxes 8.6 3.3 Total $ 4.7 $49.2
, 1997 Other operation and maintenance expenses increased somewhat from 1996 levels. A decrease in transit operating costs resulting from the Company's transfer of the ownership of the Charleston transit system to the City of Charleston in October 1996 largely offset increases in costs at electric generating plants and other operating costs. The increase in depreciation and amortization expenses for 1997 reflects the additions to plant-in-service. The change in income tax expense is primarily due to changes in pre-tax operating income and difference between estimated income taxes accrued and actual income tax expense per the tax returns as filed. The increase in other taxes results primarily from the accrual of additional property taxes, beginning in January 1997, related to the Cope plant and other property additions which was partially offset by a reduction in the 1997 property tax assessment. Recovery of the Cope Plant property taxes is provided for in a retail electric rate increase that became effective January 1997.
, 1996 Other operation and maintenance expenses increased primarily as a result of higher production costs attributable to the Cope plant which became operational in January 1996. The increase in depreciation and amortization expenses reflects the addition of the Cope plant and other additions to plant-in-service. The increase in income tax expense corresponds to the increase in operating income. The increase in other taxes reflects higher property taxes resulting from property additions and higher millages and assessments.
Other Income
, 1997 Other income, net of taxes, increased approximately $8.5 million. The primary factors accounting for the change in other income were the Petroleum Resources gain on the sale of oil and gas properties in 1997, offset by the gain reported by SCI in 1996 as discussed under "Earnings and Dividends" and which is included in other income reported for 1996.
, 1996 Other income, net of taxes, increased approximately $23.9 million in 1996 primarily due to the improved earnings performance of Petroleum Resources attributable to a noncash reserve adjustment recorded in the second quarter of 1995 and to higher gas prices and lower production costs. The gain reported by SCI, discussed under "Earnings and Dividends" is also included in other income reported for 1996.
Interest Expense
Increases (decreases) in interest expense, excluding the debt component of AFC, were as follows:
Classification 1997 1996 (Millions of Dollars)
Interest on long-term debt, net $ 1.1 $(1.4) Other interest expense (1.5) (3.8) Total $(0.4) $(5.2)
There was no material change in interest expense from 1996 to 1997. The decrease in interest expense from 1995 to 1996 was due primarily to reductions in outstanding debt throughout most of the year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial instruments held by the Company described below are held for purposes other than trading.
Interest rate risk - The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
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 addition, the Company has invested in a telecommunications company approximately $40 million for 11.875% senior discount notes due 2007. The fair value of these notes approximates cost. An increase in market interest rates would result in a decrease in fair value of these notes and a corresponding adjustment, net of tax, to net income.
Equity price risk - Investments in telecommunications companies' equity securities are carried at their market value of $237.7 million, in accordance with Statement of Financial Accounting Standards No. 115. A ten percent decline in market value would result in a $23.8 million reduction in fair value and a corresponding adjustment, net of tax effect, to the related equity account for unrealized gains.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
Page
Independent Auditors' Report....................................... 47
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996... 48
Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995............. 50
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................. 51
Consolidated Statements of Capitalization as of December 31, 1997 and 1996................................... 52
Notes to Consolidated Financial Statements..................... 54
Supplemental financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
INDEPENDENT AUDITORS' REPORT
SCANA CORPORATION:
We have audited the accompanying Consolidated Balance Sheets and Consolidated Statements of Capitalization of SCANA Corporation and subsidiaries (Company) as of December 31, 1997 and 1996 and the related Consolidated Statements of Income and Retained Earnings and of Cash Flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbia, South Carolina February 9, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Organization and Principles of Consolidation
SCANA Corporation (Company), a South Carolina corporation, is a public utility holding company within the meaning of the Public Utility Holding Company Act of 1935 but is exempt from registration under such Act. The Company, through wholly owned subsidiaries, is engaged predominately in the generation and sale of electricity to wholesale and retail customers in South Carolina and in the purchase, sale and transportation of natural gas to wholesale and retail customers in South Carolina. The Company is also engaged in other energy-related businesses, such as natural gas marketing. The Company has investments in telecommunications companies and provides fiber optic communications in South Carolina.
The accompanying Consolidated Financial Statements reflect the accounts of the Company and its wholly owned subsidiaries:
Regulated utilities South Carolina Electric & Gas Company (SCE&G) South Carolina Fuel Company, Inc. (Fuel Company) South Carolina Generating Company, Inc. (GENCO) South Carolina Pipeline Corporation (Pipeline Corporation)
Nonregulated businesses SCANA Energy Marketing, Inc. SCANA Propane Gas, Inc. SCANA Propane Services, Inc. SCANA Communications, Inc. (SCI) Primesouth, Inc. ServiceCare, Inc. SCANA Resources, Inc. SCANA Petroleum Resources, Inc. (Petroleum Resources) (in liquidation) SCANA Development Corporation (in liquidation)
Certain investments are reported using the cost or equity method of accounting, as appropriate. Significant intercompany balances and transactions have been eliminated in consolidation in compliance with Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" which provides that profit on intercompany sales to regulated affiliates are not eliminated if the sales price is reasonable and the future recovery of the sales price through the rate-making process is probable.
B. Basis of Accounting
The Company accounts for its regulated utility operations, assets and liabilities in accordance with the provisions of SFAS 71. The accounting standard requires cost-based rate-regulated utilities, to recognize in their financial statements revenues and expenses in different time periods than do enterprises that are not rate-regulated. As a result the Company has recorded, as of December 31, 1997, approximately $241 million and $68 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $58 million, respectively. The electric and gas regulatory assets of approximately $71 million and $44 million, respectively (excluding deferred income tax assets) are being recovered through rates and, as discussed in Note 2A, the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $45 million of the electric regulatory assets. In the future, as a result of deregulation or other changes in the regulatory environment, the Company may no longer meet the criteria for continued application of SFAS 71 and would be required to write off its regulatory assets and liabilities. Such an event could have a material adverse effect on the Company's results of operations in the period the write-off is recorded, but it is not expected that cash flows or financial position would be materially affected.
C. System of Accounts
The accounting records of the Company's regulated subsidiaries are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and as adopted by the PSC.
D. Utility Plant
Utility plant is stated substantially at original cost. The costs of additions, renewals and betterments to utility plant, including direct labor, material and indirect charges for engineering, supervision and an allowance for funds used during construction, are added to utility plant accounts. The original cost of utility property retired or otherwise disposed of is removed from utility plant accounts and generally charged, along with the cost of removal, less salvage, to accumulated depreciation. The costs of repairs, replacements and renewals of items of property determined to be less than a unit of property are charged to maintenance expense.
SCE&G, operator of the V. C. Summer Nuclear Station (Summer Station), and the South Carolina Public Service Authority (PSA) are joint owners of Summer Station in the proportions of two- thirds and one-third, respectively. The parties share the op- erating costs and energy output of the plant in these proportions. Each party, however, provides its own financing. Plant-in-service related to SCE&G's portion of Summer Station was approximately $978.2 million and $937.2 million as of December 31, 1997 and 1996, respectively. Accumulated depreciation associated with SCE&G's share of Summer Station was approximately $323.6 million and $313.2 million as of December 31, 1997 and 1996, respectively. SCE&G's share of the direct expenses associated with operating Summer Station is included in "Other operation" and "Maintenance" expenses.
E. Allowance for Funds Used During Construction
AFC, a noncash item, reflects the period cost of capital devoted to plant under construction. This accounting practice results in the inclusion of, as a component of construction cost, the costs of debt and equity capital dedicated to construction investment. AFC is included in rate base investment and depreciated as a component of plant cost in establishing rates for utility services. The Company's regulated subsidiaries calculated AFC using composite rates of 9.1%, 9.1% and 8.6% for 1997, 1996 and 1995, respectively. These rates do not exceed the maximum allowable rate as calculated under FERC Order No. 561. Interest on nuclear fuel in process and sulfur dioxide emission allowances is capitalized at the actual interest amount.
F. Revenue Recognition
Customers' meters are read and bills are rendered on a monthly cycle basis. Base revenue is recorded during the accounting period in which the meters are read.
Fuel costs for electric generation are collected through the fuel cost component in retail electric rates. The fuel cost component contained in electric rates is established by the PSC during annual fuel cost hearings. Any difference between actual fuel costs and that contained in the fuel cost component is deferred and included when determining the fuel cost component during the next annual fuel cost hearing. SCE&G had undercollected through the electric fuel cost component approximately $1.3 million at December 31, 1997 and overcollected approximately $1.9 million at December 31, 1996 which are included in "Deferred Debits - Other" and "Deferred Credits - Other," respectively.
Customers subject to the gas cost adjustment clause are billed based on a fixed cost of gas determined by the PSC during annual gas cost recovery hearings. Any difference between actual gas costs and that contained in rates is deferred and included when establishing gas costs during the next annual gas cost recovery hearing. At December 31, 1997 and 1996 the Company had undercollected through the gas cost recovery procedure approximately $7.6 million and $10.9 million, respectively, which are included in "Deferred Debits - Other."
SCE&G's gas rate schedules for residential, small commercial and small industrial customers include a weather normalization adjustment, which minimizes fluctuations in gas revenues due to abnormal weather conditions.
G. Depreciation and Amortization
Provisions for depreciation are recorded using the straight- line method for financial reporting purposes and are based on the estimated service lives of the various classes of property. The composite weighted average depreciation rates were as follows:
1997 1996 1995 SCE&G 3.09% 3.13% 3.02% GENCO 2.63% 2.68% 2.67% Pipeline Corporation 2.62% 2.56% 2.78% Aggregate of Above 3.05% 3.08% 2.98%
Nuclear fuel amortization, which is included in "Fuel used in electric generation" and is recovered through the fuel cost component of SCE&G's rates, is recorded using the units-of- production method. Provisions for amortization of nuclear fuel include amounts necessary to satisfy obligations to the Department Of Energy (DOE) under a contract for disposal of spent nuclear fuel.
The acquisition adjustment relating to the purchase of certain gas properties in 1982 is being amortized over a 40-year period using the straight-line method.
H. Nuclear Decommissioning
Decommissioning of Summer Station is presently scheduled to commence when the operating license expires in the year 2022. Based on a 1991 study, the expenditures (on a before-tax basis) related to SCE&G's share of decommissioning activities are estimated, in 2022 dollars assuming a 4.5% annual rate of inflation, to be $545.3 million including partial reclamation costs. SCE&G is providing for its share of estimated decommissioning costs of Summer Station over the life of Summer Station. SCE&G's method of funding decommissioning costs is referred to as COMReP (Cost of Money Reduction Plan). Under this plan, funds collected through rates ($3.2 million in 1997 and 1996) are used to pay premiums on insurance policies on the lives of certain Company personnel. SCE&G is the beneficiary of these policies. Through these insurance contracts, SCE&G is able to take advantage of income tax benefits and accrue earnings on the fund on a tax-deferred basis at a rate higher than can be achieved using more traditional funding approaches. Amounts for decommissioning collected through electric rates, insurance proceeds, and interest on proceeds less expenses are transferred by SCE&G to an external trust fund in compliance with the financial assurance requirements of the Nuclear Regulatory Commission. Management intends for the fund, including earnings thereon, to provide for all eventual decommissioning expenditures on an after-tax basis. The trust's sources of decommissioning funds under the COMReP program include investment components of life insurance policy proceeds, return on investment and the cash transfers from SCE&G described above. SCE&G records its liability for decommissioning costs in deferred credits.
Pursuant to the National Energy Policy Act passed by Congress in 1992 and the requirements of the Department of Energy (DOE), SCE&G has recorded a liability for its estimated share of the DOE's decontamination and decommissioning obligation. The liability, approximately $4.0 million at December 31, 1997, has been included in "Long-Term Debt, Net." SCE&G is recovering the cost associated with this liability through the fuel cost component of its rates; accordingly, this amount has been deferred and is included in "Deferred Debits - Other."
I. Income Taxes
Deferred tax assets and liabilities are recorded for the tax effects of temporary differences between the book basis and tax basis of assets and liabilities at currently enacted tax rates. Deferred tax assets and liabilities are adjusted for changes in such rates through charges or credits to regulatory assets or liabilities if they are expected to be recovered from, or passed through to, customers of the Company's regulated subsidiaries; otherwise, they are charged or credited to income tax expense.
J. Pension Expense
The Company has a noncontributory defined benefit pension plan, which covers all permanent employees. Benefits are based on years of accredited service and the employee's average annual base earnings received during the last three years of employment. The Company's policy has been to fund the plan to the extent permitted by the applicable Federal income tax regulations as determined by an independent actuary.
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995 included the following components:
1997 1996 1995 (Millions of Dollars) Service cost--benefits earned during the period $ 6.8 $ 6.5 $ 5.2 Interest cost on projected benefit obligation 23.5 22.0 19.5 Adjustments: Return on plan assets (119.5) (78.6) (103.9) Net amortization and deferral 72.8 40.1 74.8 Net periodic pension (income) expense $ (16.4) $(10.0) $ (4.4)
The determination of net periodic pension cost is based upon the following assumptions:
1997 1996 1995 Annual discount rate 7.5% 7.5% 8.0% Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% Annual rate of salary increases 3.0% 3.0% 2.5%
The following table sets forth the funded status of the plan at December 31, 1997 and 1996:
1997 1996 (Millions of Dollars)
Actuarial present value of benefit obligations: Vested benefit obligation $259.7 $243.9 Nonvested benefit obligation 25.4 23.7 Accumulated benefit obligation $285.1 $267.6
Plan assets at fair value (invested primarily in equity and debt securities) $632.9 $523.5 Projected benefit obligation 344.4 306.9 Plan assets greater than projected benefit obligation 288.5 216.6 Unrecognized net transition liability 7.4 8.2 Unrecognized prior service costs 13.4 8.2 Unrecognized net gain (227.1) (175.1) Pension asset recognized in Consolidated Balance Sheets $ 82.2 $ 57.9
The accumulated benefit obligation is based on the plan's benefit formulas without considering expected future salary increases. The following table sets forth the assumptions used in determining the amounts shown above for the years 1997 and 1996.
1997 1996
Annual discount rate used to determine benefit obligations 7.5% 7.5% Assumed annual rate of future salary increases for projected benefit obligation 4.0% 3.0%
In addition to pension benefits, the Company provides certain health care and life insurance benefits to active and retired employees. The costs of postretirement benefits other than pensions are accrued during the years the employees render the service necessary to be eligible for the applicable benefits. The Company expensed approximately $8.1 million, $9.8 million and $8.5 million, net of payments to current retirees, for the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, to accelerate the amortization of the remaining transition obligation for postretirement benefits other than pensions, as authorized by the PSC, the Company expensed approximately $15.6 million and $6.2 million for the years ended December 31, 1997 and 1996, respectively. (See Note 2A.)
Net periodic postretirement benefit cost for the years ended December 31, 1997, 1996 and 1995, included the following components:
1997 1996 1995 (Millions of Dollars)
Service cost--benefits earned during the period $ 2.5 $ 2.6 $ 2.1 Interest cost on accumulated postretirement benefit obligation 7.8 7.8 7.2 Adjustments: Return on plan assets - - - Amortization of unrecognized transition obligation 18.9 9.5 3.3 Other net amortization and deferral 0.8 1.2 0.7 Net periodic postretirement benefit cost $30.0 $21.1 $13.3
The determination of net periodic postretirement benefit cost is based upon the following assumptions:
1997 1996 1995
Annual discount rate 7.5% 7.5% 8.0% Health care cost trend rate 9.0% 9.5% 11.0% Ultimate health care cost trend rate (to be achieved in 2004) 5.5% 5.5% 6.0%
The following table sets forth the funded status of the plan at December 31, 1997 and 1996:
1997 1996 (Millions of Dollars)
Accumulated postretirement benefit obligations for: Retirees $ 76.7 $ 74.2 Other fully eligible participants 5.9 6.6 Other active participants 26.2 29.3 Accumulated postretirement benefit obligation 108.8 110.1 Plan assets at fair value - - Accumulated postretirement benefit obligation 108.8 110.1
Plan assets less than accumulated postretirement benefit obligation (108.8) (110.1) Unrecognized net transition liability 29.8 48.7 Unrecognized prior service costs 5.8 6.2 Unrecognized net loss 12.2 17.8 Postretirement benefit liability recognized in Consolidated Balance Sheets $(61.0) $(37.4)
The accumulated postretirement benefit obligation is based upon the plan's benefit provisions and the following assumptions:
1997 1996 Assumed health care cost trend rate used to measure expected costs 9.0% 9.5% Ultimate health care cost trend rate (to be achieved in 2004) 5.5% 5.5% Annual discount rate 7.5% 7.5% Annual rate of salary increases 4.0% 3.0%
The effect of a one percentage-point increase in the assumed health care cost trend rate for each future year on the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 and the accumulated postretirement benefit obligation as of December 31, 1997 would be to increase such amounts by $0.2 million and $3.2 million, respectively.
K. Debt Premium, Discount and Expense, Unamortized Loss on Reacquired Debt
For regulatory purposes, long-term debt premium, discount and expense are being amortized as components of "Interest on long-term debt, net" over the terms of the respective debt issues. Gains or losses on reacquired debt that is refinanced are deferred and amortized over the term of the replacement debt.
L. Environmental
The Company has an environmental assessment program to identify and assess current and former operations sites that could require environmental cleanup. As site assessments are initiated an estimate is made of the amount of expenditures, if any, necessary to investigate and clean up each site. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Amounts estimated, accrued and actually expended to date for site assessments and cleanup relate primarily to regulated operations; such amounts are deferred and are being amortized and recovered through rates over a five-year period for electric operations and an eight-year period for gas operations. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $32.4 million and $41.4 million at December 31, 1997 and 1996, respectively. The deferral includes the estimated costs to be associated with the matters discussed in Note 10C.
M. Oil and Gas On December 1, 1997 substantially all of the assets of the Company's oil and gas exploration and production subsidiary, Petroleum Resources were sold for $110 million, resulting in an after-tax gain of $17.6 million. The Company followed the full cost method of accounting for its oil and gas operations and, accordingly, capitalized all costs it incurred in the acquisition, exploration and development of interests in oil and gas properties. In addition, the capitalized costs were subject to a "ceiling test". Non-cash write-downs resulting from the application of the ceiling test were $24.2 million for the year ended December 31, 1995.
N. Temporary Cash Investments
The Company considers temporary cash investments having original maturities of three months or less to be cash equivalents. Temporary cash investments are generally in the form of commercial paper, certificates of deposit and repurchase agreements.
O. Reclassifications
Certain amounts from prior periods have been reclassified to conform with the 1997 presentation.
P. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. RATE MATTERS:
A. On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
B. In 1994 the PSC issued an order approving SCE&G's request to recover through a billing surcharge to its gas customers the costs of environmental cleanup at the sites of former manufactured gas plants. 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 deferred. In October 1997, as a result of the annual review, the PSC approved SCE&G's request to increase the billing surcharge from $.006 per therm to $.011 per therm which should enable SCE&G to recover the remaining balance of $29.6 million by December 2002.
C. In September 1992 the PSC issued an order granting SCE&G a $.25 increase in transit fares from $.50 to $.75 in both Columbia and Charleston, South Carolina; however, the PSC also required $.40 fares for low income customers and denied SCE&G's request to reduce the number of routes and frequency of service. The new rates were placed into effect in October 1992. SCE&G appealed the PSC's order to the Circuit Court, which in May 1995 ordered the case back to the PSC for reconsideration of several issues including the low income rider program, routing changes, and the $.75 fare. The Supreme Court declined to review an appeal of the Circuit Court decision and dismissed the case. The PSC and other intervenors filed another Petition for Reconsideration, which the Supreme Court denied. The PSC and other intervenors filed another appeal to the Circuit Court which the Circuit Court denied in an order dated May 9, 1996. In this order, the Circuit Court upheld its previous orders and remanded them to the PSC. During August 1996, the PSC heard oral arguments on the orders on remand from the Circuit Court. On September 30, 1996, the PSC issued an order affirming its previous orders and denied SCE&G's request for reconsideration. SCE&G has appealed these two PSC orders to the Circuit Court where they are awaiting action.
D. On August 8, 1990, the PSC issued an order approving changes in Pipeline Corporation's gas rate design for sales for resale service and upholding the "value-of-service" method of regulation for its direct industrial service. Direct industrial customers seeking "cost-of-service" based rates appealed to the Circuit Court, which reversed and remanded to the PSC its August 8, 1990 order. Pipeline Corporation appealed that decision to the Supreme Court, which on January 10, 1994 reversed the Circuit Court decision and reinstated the PSC order. Additionally, the Supreme Court interpreted the rate-making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in setting rates for natural gas service. The PSC then held another hearing and issued its order dated December 12, 1995 maintaining the present level of the maximum markup on industrial sales ("cap"). This Order was appealed to the Circuit Court by Pipeline Corporation and the industrial customer group with several other parties intervening, including the Consumer Advocate of South Carolina. On October 10, 1997, the Circuit Court issued an order in favor of the Consumer Advocate and the industrial customer group and remanded the case to the PSC to determine an overall rate of return for Pipeline Corporation. The Circuit Court also issued a second order which ruled against Pipeline Corporation and affirmed the PSC's decision that the cap should not be increased. Several motions and appeals were filed subsequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corporation from the first order without prejudice until the PSC completes proceedings on remand and has held Pipeline Corporation's appeal of the second order in abeyance until the PSC completes proceedings on remand. The Company expects the remanded case to be heard at the PSC in May 1998. The impact, if any, on the Company's results of operations, cash flows and financial position is not presently determinable.
3. LONG-TERM DEBT:
The annual amounts of long-term debt maturities, including the amounts due under the nuclear and fossil fuel agreements (see Note 4), and sinking fund requirements for the years 1998 through 2002 are summarized as follows:
Year Amount Year Amount (Millions of Dollars)
1998 $ 73.0 2001 $ 26.2 1999 105.2 2002 56.2 2000 226.5
Approximately $17.2 million of the portion of long-term debt payable in 1998 may be satisfied by either deposit and cancellation of bonds issued upon the basis of property additions or bond retirement credits, or by deposit of cash with the Trustee.
On January 13, 1998 the Company issued $60 million of medium-term notes due January 13, 2003 at an interest rate of 6.05%. Proceeds from the notes were used to repay unsecured bank loans totaling $60 million due January 9, 1998 which were classified as long-term debt at December 31, 1997.
On August 7, 1996 the City of Charleston executed 30-year electric and gas franchise agreements with SCE&G. In consideration for the electric franchise agreement, SCE&G is paying the City $25 million over seven years (1996-2002) and has donated to the City the existing transit assets in Charleston. The $25 million is included in electric plant-in-service. In settlement of environmental claims the City may have had against SCE&G involving the Calhoun Park area, where SCE&G and its predecessor companies operated a manufactured gas plant until the 1960's, SCE&G is paying the City $26 million over a four-year period (1996-1999). Such amount is deferred (see Note 1L). The unpaid balances of these amounts are included in "Long-Term Debt."
SCE&G has three-year revolving lines of credit totaling $75 million, in addition to other lines of credit, that provide liquidity for issuance of commercial paper. The three-year lines of credit provide back-up liquidity when commercial paper outstanding is in excess of $175 million. The long-term nature of the lines of credit allow commercial paper in excess of $175 million to be classified as long-term debt. SCE&G's commercial paper outstanding totaled $13.3 million and $90 million at December 31, 1997 and 1996 at weighted average interest rates of 5.90% and 5.53%, respectively.
Substantially all utility plant and fuel inventories are pledged as collateral in connection with long-term debt.
4. FUEL FINANCINGS:
Nuclear and fossil fuel inventories and sulfur dioxide emission allowances are financed through the issuance by Fuel Company of short-term commercial paper. These short-term borrowings are supported by an irrevocable revolving credit agreement which expires December 19, 2000. Accordingly, the amounts outstanding have been included in long-term debt. The credit agreement provides for a maximum amount of $125 million that may be outstanding at any time.
Commercial paper outstanding totaled $80.3 million and $66.1 million at December 31, 1997 and 1996 at weighted average interest rates of 5.87% and 5.62%, respectively.
5. COMMON EQUITY:
The changes in "Common Stock," without par value, during 1997, 1996 and 1995 are summarized as follows:
Number Millions of Shares of Dollars Balance December 31, 1994 96,035,020 $ 886.8 Issuance of common stock 7,588,843 169.9 Balance December 31, 1995 103,623,863 1,056.7 Issuance of common stock 2,551,410 68.6 Balance December 31, 1996 106,175,273 1,125.3 Issuance of common stock 1,145,840 27.6 Balance December 31, 1997 107,321,113 $1,152.9
The Restated Articles of Incorporation of the Company do not limit the dividends that may be payable on its common stock. However, the Restated Articles of Incorporation of SCE&G and the Indenture underlying its First and Refunding Mortgage Bonds contain provisions that, under certain circumstances, could limit the payment of cash dividends on its common stock. In addition, with respect to hydroelectric projects, the Federal Power Act requires the appropriation of a portion of certain earnings therefrom. At December 31, 1997 approximately $21.5 million of retained earnings were restricted by this requirement as to payment of cash dividends on SCE&G's common stock.
Cash dividends on common stock were declared at an annual rate per share of $1.51, $1.47 and $1.44 for 1997, 1996 and 1995, respectively.
6. PREFERRED STOCK:
The call premium of the respective series of preferred stock in no case exceeds the amount of the annual dividend. Retirements under sinking fund requirements are at par values.
The aggregate annual amount of purchase fund or sinking fund requirements for preferred stock for the years 1998 through 2002 is $0.6 million.
The changes in "Total Preferred Stock (Subject to purchase or sinking funds)" during 1997, 1996 and 1995 are summarized as follows:
Number Millions of Shares of Dollars Balance December 31, 1994 822,094 $51.9 Shares Redeemed: $100 par value (6,809) (0.7) $50 par value (51,666) (2.5) Balance December 31, 1995 763,619 48.7 Shares Redeemed: $100 par value (7,198) (0.7) $50 par value (50,319) (2.6) Balance December 31, 1996 706,102 45.4 Shares Redeemed: $100 par value (202,812) (20.3) $50 par value (252,196) (12.6) Balance December 31, 1997 251,094 $12.5
On October 28, 1997, SCE&G Trust I (the "Trust"), a wholly- owned subsidiary of SCE&G, issued $50 million (2,000,000 shares) of 7.55% Trust Preferred Securities, Series A (the "Preferred Securities"). SCE&G owns all of the Common Securities of the Trust (the "Common Securities"). The Preferred Securities and the Common Securities (the "Trust Securities") represent undivided beneficial ownership interests in the assets of the Trust. The Trust exists for the sole purpose of issuing the Trust Securities and using the proceeds thereof to purchase from SCE&G its 7.55% Junior Subordinated Debentures due September 30, 2027. The sole asset of the Trust is $50.0 million of Junior Subordinated Debentures of SCE&G. Accordingly, no financial statements of the Trust are presented. SCE&G's obligations under the Guarantee Agreement entered into in connection with the Preferred Securities, when taken together with SCE&G's obligation to make interest and other payments on the Junior Subordinated Debentures issued to the Trust and SCE&G's obligations under the Indenture pursuant to which the Junior Subordinated Debentures were issued, provides a full and unconditional guarantee by SCE&G of the Trust's obligations under the Preferred Securities. Proceeds were used to redeem preferred stock of SCE&G.
The preferred securities of SCE&G Trust I are redeemable only in conjunction with the redemption of the related 7.55% Junior Subordinated Debentures. The Junior Subordinated Debentures will mature on September 30, 2027 and may be redeemed, in whole or in part, at any time on or after September 30, 2002 or upon the occurrence of a Tax Event. A Tax Event occurs if an opinion is received from counsel experienced in such matters that there is more than an insubstantial risk that: (1) the Trust is or will be subject to Federal income tax, with respect to income received or accrued on the Junior Subordinated Debentures, (2) interest payable by SCE&G on the Junior Subordinated Debentures will not be deductible, in whole or in part, by SCE&G for Federal income tax purposes, or (3) the Trust will be subject to more than a de minimis amount of other taxes, duties, or other governmental charges.
Upon the redemption of the Junior Subordinated Debentures, payment will simultaneously be applied to redeem Preferred Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures. The Preferred Securities are redeemable at $25 per preferred security plus accrued dividends. 7. INCOME TAXES:
Total income tax expense for 1997, 1996 and 1995 is as follows:
1997 1996 1995 (Millions of Dollars) Current taxes: Federal $101.3 $ 98.3 $101.6 State (5.4) 14.1 16.2 Total current taxes 95.9 112.4 117.8 Deferred taxes, net: Federal 3.5 8.6 (13.9) State 0.3 1.7 (1.2) Total deferred taxes 3.8 10.3 (15.1) Investment tax credits: Deferred - State 19.0 - - Amortization of amounts deferred - State (1.5) - - Amortization of amounts deferred - Federal (3.6) (3.6) (3.6) Total investment tax credit 13.9 (3.6) (3.6) Total income tax expense $113.6 $119.1 $ 99.1
The difference in total income tax expense and the amount calculated from the application of the statutory Federal income tax rate (35% for 1997, 1996 and 1995) to pre-tax income is reconciled as follows:
1997 1996 1995 (Millions of Dollars) Net income $220.7 $215.3 $168.3 Total income tax expense: Charged to operating expenses 105.4 118.0 109.9 Charged (credited) to other items 8.2 1.1 (10.8) Preferred stock dividends 9.2 5.4 5.7 Total pre-tax income $343.5 $339.8 $273.1
Income taxes on above at statutory Federal income tax rate $120.2 $118.9 $ 95.6 Increases (decreases) attributable to: State income taxes (less Federal income tax effect) 8.1 10.2 9.8 Deferred income tax reversal at higher than statutory rates (4.2) (4.1) (3.9) Amortization of Federal investment tax credits (3.6) (3.6) (3.6) Allowance for equity funds used during construction (2.5) (2.5) (3.5) Other differences, net (4.4) 0.2 4.7 Total income tax expense $113.6 $119.1 $ 99.1
The tax effects of significant temporary differences comprising the Company's net deferred tax liability of $587.5 million at December 31, 1997 and $556.7 million at December 31, 1996 are as follows:
1997 1996 (Millions of Dollars) Deferred tax assets: Unamortized investment tax credits $ 60.7 $ 52.1 Cycle billing 20.5 19.8 Nuclear operations expenses 3.1 4.7 Oil and gas properties - 8.3 Deferred compensation 6.9 6.7 Other postretirement benefits 14.6 10.8 Other 11.2 12.9 Total deferred tax assets 117.0 115.3
Deferred tax liabilities: Property, plant and equipment 634.3 611.0 Pension expense 27.5 21.8 Research and experimentation 19.5 12.5 Reacquired debt 7.5 8.3 Deferred fuel 3.6 3.7 Other 12.1 14.7 Total deferred tax liabilities 704.5 672.0 Net deferred tax liability $587.5 $556.7
The Internal Revenue Service has examined and closed consolidated Federal income tax returns of the Company through 1989, and has examined and proposed adjustments to the Company's Federal returns for 1990 through 1995. The Company does not anticipate that any adjustments which might result from these examinations will have a significant impact on the results of operations, cash flows or financial position of the Company.
8. FINANCIAL INSTRUMENTS:
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
1997 1996 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (Millions of Dollars) Assets: Cash and temporary cash investments $ 59.7 $ 59.7 $ 17.3 $ 17.3 Investments 290.5 341.9 176.4 167.7 Liabilities: Short-term borrowings 58.5 58.5 144.6 144.6 Long-term debt 1,639.5 1,722.4 1,632.8 1,673.1 Preferred stock (subject to purchase or sinking funds) 12.5 11.3 45.4 44.3
The information presented herein is based on pertinent information available to the Company as of December 31, 1997 and 1996. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such financial instruments have not been comprehensively revalued since December 31, 1997, and the current estimated fair value may differ significantly from the estimated fair value at that date.
The following methods and assumptions were used to estimate the fair value of the above classes of financial instruments:
Cash and temporary cash investments, including commercial paper, repurchase agreements, treasury bills and notes, are valued at their carrying amount.
Fair values of investments and long-term debt are based on quoted market prices of the instruments or similar instruments, or for those instruments for which there are no quoted market prices available, fair values are based on net present value calculations. Investments which are not considered to be financial instruments have been excluded from the carrying amount and estimated fair value. Settlement of long-term debt may not be possible or may not be a prudent management decision.
Short-term borrowings are valued at their carrying amount.
The fair value of preferred stock (subject to purchase or sinking funds) is estimated on the basis of market prices.
Potential taxes and other expenses that would be incurred in an actual sale or settlement have not been taken into consideration.
SCANA Communications, Inc. (SCI) owns approximately 4.5 million common shares and 100,000 non-voting series B and 50,000 non-voting series D convertible preferred shares of Powertel, Inc. (Powertel), formerly InterCel, Inc., a publicly traded telecommunications company which owns and operates personal communications services (PCS) systems in several major markets in the Southeast. The cost of such investments were approximately $66.7 million, $75.1 million and $22.5 million, respectively. Common shares were initially recorded at $14.85 per share. Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Powertel common stock, which trades on NASDAQ, closed at $16 3/4 on December 31, 1997, resulting in a pre-tax unrealized holding gain of $8.5 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $105.7 million at December 31, 1997, resulting in an unrecorded pre-tax holding gain of $8.1 million.
In March 1997 SCI sold its interest in GulfStates Fibernet, a Georgia general partnership (constituting SCI's remaining interests in the GulfStates Fibernet joint venture), and certain fiber optic assets of SCI located within the State of Georgia, to ITC Holding Company Inc. (Old ITC), a Georgia-based telecommunications company and an affiliate of Powertel, in exchange for 588,411 shares of series A convertible preferred stock of Old ITC (Old ITC Preferred) and a subordinated note of Old ITC. As part of an earnout provision related to the GulfStates Fibernet transaction and the receipt of Old ITC Preferred through the earnout provision, SCI received in October 1997 56,742 additional shares of Old ITC Preferred, resulting in a pre-tax gain of $2.2 million which was recorded in "Other Income."
On October 20, 1997, as part of a reorganization involving ITC, its subsidiary, ITC West Point, Inc., and ITC^DeltaCom, Inc. (ITCD), a Georgia-based telecommunications company and an affiliate of Powertel, Old ITC merged with ITCD, and each of Old ITC's common shareholders (including SCI) received one share of common stock of ITC West Point, Inc. for each whole share of Old ITC common stock owned by such shareholders. In addition, SCI received one share of series A convertible preferred stock of ITC West Point, Inc. for each share of Old ITC Preferred owned by SCI. ITC West Point, Inc. changed its name to ITC Holding Company, Inc. subsequent to the ITC merger.
Through the merger, SCI received approximately 1,777,919 shares, representing approximately 7.2%, of ITCD common stock, and 1,480,771 shares of series A preferred stock of ITCD convertible in March 2002 into 1,480,771 shares of ITCD common stock. ITCD common stock, which began trading on NASDAQ on October 24, 1997, closed at $16 1/2 per share on December 31, 1997, resulting in a pre-tax unrealized holding gain of $20.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $24.4 million at December 31, 1997 resulting in an unrecorded pre-tax holding gain of $13.2 million.
Knology Holdings, Inc. (Knology), also an affiliate of Powertel, is developing a system designed to provide interactive video, voice and data services for broadband systems in certain southeastern markets. SCI on October 22, 1997 purchased from Knology 71,050 units, each consisting of one 11.875% Senior Discount Note (Note) due 2007 and one Warrant to purchase preferred stock of Knology. The purchase price of the units was approximately $40 million. In addition to the acquisition of the Knology units, SCI has invested $5.3 million to purchase 3,639 shares of preferred stock of Knology and Knology has agreed to issue to SCI warrants to purchase 753 shares of preferred stock at $1,500 per share.
9. SHORT-TERM BORROWINGS:
The Company pays fees to banks as compensation for its committed lines of credit. Commercial paper borrowings are for 270 days or less. Details of lines of credit (including uncommitted lines of credit) and short-term borrowings, excluding amounts classified as long-term (Notes 3 and 4), at December 31, 1997 and 1996 and for the years then ended are as follows:
1997 1996 (Millions of Dollars)
Authorized lines of credit at year-end $564.0 $525.1 Unused lines of credit at year-end $518.8 $470.4
Short-term borrowings outstanding at year-end: Bank loans $45.2 $54.6 Weighted average interest rate 6.43% 5.81% Commercial paper $13.3 $90.0 Weighted average interest rate 5.90% 5.53%
10. COMMITMENTS AND CONTINGENCIES:
A. Construction
The Company and Westvaco Corporation have formed a limited liability company, Cogen South LLC, to build and operate a $170 million cogeneration facility at Westvaco's Kraft Division Paper Mill in North Charleston, South Carolina. The Company and Westvaco each own a 50% interest in the LLC. The facility will provide industrial process steam for the Westvaco paper mill and shaft horsepower to enable SCE&G to generate up to 99 megawatts of electricity. Construction financing is being provided to Cogen South LLC by banks. A $15 million capital contribution to the LLC by each partner is expected prior to operation of the facility. In addition to the cogeneration LLC, Westvaco has entered into a 20-year contract with SCE&G for all its electricity requirements at the North Charleston mill at SCE&G's standard industrial rate. Construction of the plant began in September 1996 and it is expected to be operational in the fall of 1998.
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 $8.9 billion. Each reactor licensee is currently liable for up to $79.3 million per reactor owned for each nuclear incident occurring at any reactor in the United States, provided that not more than $10 million of the liability per reactor would be assessed per year. SCE&G's maximum assessment, based on its two-thirds ownership of Summer Station, would be approximately $52.9 million per incident, but not more than $6.7 million per year.
SCE&G currently maintains policies (for itself and on behalf of the PSA) with Nuclear Electric Insurance Limited (NEIL) and American Nuclear Insurers (ANI) providing combined property and decontamination insurance coverage of $2.0 billion for any losses at Summer Station. SCE&G pays annual premiums and, in addition, could be assessed a retroactive premium not to exceed five times its annual premium in the event of property damage loss to any nuclear generating facilities covered under the NEIL program. Based on the current annual premium, this retroactive premium would not exceed $5.1 million.
To the extent that insurable claims for property damage, decontamination, repair and replacement and other costs and expenses arising from a nuclear incident at Summer Station exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, and to the extent that SCE&G's rates would not recover the cost of any purchased replacement power, SCE&G will retain the risk of loss as a self-insurer. SCE&G has no reason to anticipate a serious nuclear incident at Summer Station. If such an incident were to occur, it could have a material adverse impact on the Company's results of operations, cash flows and financial position.
C. Environmental
In September 1992, the EPA notified SCE&G, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were the locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G's decommissioned manufactured gas plants, properties owned by the National Park Service and the City of Charleston and private properties. The site has not been placed on the National Priorities List, but may be added before cleanup is initiated. The PRPs have agreed with the EPA to participate in an innovative approach to site investigation and cleanup called "Superfund Accelerated Cleanup Model," allowing the pre-cleanup site investigation process to be compressed significantly. The PRPs have negotiated an administrative order by consent for the conduct of a Remedial Investigation/Feasibility Study and a corresponding Scope of Work. Field work began in November 1993 and the EPA conditionally approved a Remedial Investigation Report in March 1997. Although SCE&G is continuing to investigate cost-effective clean-up methodologies, further work is pending EPA approval of the final draft of the Remedial Investigation Report. See Note 1L. In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996-1999) by SCE&G to the City. SCE&G is recovering the amount of the settlement, which does not encompass site assessment and cleanup costs, through rates in the same manner as other amounts accrued for site assessments and cleanup as discussed above. See Note 1L. As part of the environmental settlement, SCE&G has agreed to construct an 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. Construction is expected to begin in 1998. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. SCE&G is investigating the sites to monitor the nature and extent of the residual contamination.
D. Franchise Agreement
See Note 3 for a discussion of an electric franchise agreement between SCE&G and the City of Charleston.
E. SCI Matters
SCI, as a result of an internal audit, informed the Federal Communications Commission (FCC) that it violated certain licensing requirements in establishing and operating an 800 Mhz radio system in South Carolina for public safety and utility use. As a result, SCI has returned to the FCC several licenses obtained in violation of FCC rules and the FCC is conducting an investigation of the system. The Company does not believe that the resolution of this issue will have a material impact on results of operations, cash flows or financial position.
F. Claims and Litigation
The Company is engaged in various claims and litigation incidental to its business operations which management anticipates will be resolved without material loss to the Company. No estimate of the range of loss from these matters can currently be determined.
11. SEGMENT OF BUSINESS INFORMATION:
Segment information at December 31, 1997, 1996 and 1995 and for the years then ended is as follows:
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,103 $419 $ 1 $1,523 Operating expenses, excluding depreciation and amortization 692 359 5 1,056 Depreciation and amortization 136 17 - 153
Total operating expenses 828 376 5 1,209
Operating income (loss) $ 275 $ 43 $(4) 314
Add - Other income, net 38 Less - Interest charges, net 122 Less - Preferred Dividend Requirements, including SCE&G - Obligated Mandatorily Redeemable Preferred Securities 9 Net income $ 221
Capital expenditures: Identifiable $ 220 $ 32 $ - $ 252
Utilized for overall Company operations 24 Total $ 276
Identifiable assets at December 31, 1996: Utility plant, net $3,125 $387 $ 2 $3,514 Inventories 75 20 - 95 Total $3,200 $407 $ 2 3,609
Other assets 1,323 Total assets $4,932
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,107 $403 $ 3 $ 1,513 Operating expenses, excluding depreciation and amortization 692 350 9 1,051 Depreciation and amortization 130 18 - 148
Total operating expenses 822 368 9 1,199
Operating income (loss) $ 285 $ 35 $(6) 314
Add - Other income, net 29 Less - Interest charges, net 122 Less - Preferred stock dividends 6 Net income $ 215
Capital expenditures: Identifiable $ 199 $ 48 $ - $ 247
Utilized for overall Company operations 24 Total $ 271
Identifiable assets at December 31, 1996: Utility plant, net $3,047 $371 $ 2 $3,420 Inventories 84 26 - 110 Total $3,131 $397 $ 2 3,530
Other assets 1,229 Total assets $4,759
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,006 $ 343 $ 4 $1,353 Operating expenses, excluding depreciation and amortization 638 287 10 935 Depreciation and amortization 111 18 1 130
Total operating expenses 749 305 11 1,065
Operating income (loss) $ 257 38 $ (7) 288
Add - Other income, net 8 Less - Interest charges, net 122 Less - Preferred stock dividends 6 Net income $ 168
Capital expenditures: Identifiable $ 253 $ 39 $ - $ 292
Utilized for overall Company operations 28 Total $ 320
Identifiable assets at December 31, 1995: Utility plant, net $3,034 $ 338 $ 2 $3,374 Inventories 87 16 - 103 Total $3,121 $ 354 $ 2 3,477
Other assets 1,057 Total assets $4,534
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third Fourth Quarter Quarter Quarter Quarter Annual (Millions of Dollars, except per share amounts) Total operating revenues $385 $332 $418 $388 $1,523 Operating income 81 61 100 72 314 Net income 57 30 75 59 221 Earnings per weighted average share of common stock as reported .54 .28 .69 .55 2.06
First Second Third Fourth Quarter Quarter Quarter Quarter Annual (Millions of Dollars, except per share amounts) Total operating revenues $395 $351 $402 $365 $1,513 Operating income 85 67 98 64 314 Net income 69 38 70 38 215 Earnings per weighted average share of common stock as reported .66 .37 .66 .36 2.05
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
The information required by Item 10, "Directors and Executive Officers of the Registrant," with respect to executive officers is, pursuant to General Instruction G(3) to Form 10-K, set forth in Part I of this Form 10-K under the heading "Executive Officers of the Registrant" on page 28 herein. The other information required by Item 10 is incorporated herein by reference to the captions "Election of Directors - Proposals 1 and 2" and "Other Information - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 1998 annual meeting of shareholders which will be filed with the SEC pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934.
The information called for by Item 11, "Executive Compensation", is incorporated herein by reference to the captions "Director Information - Compensation" and "Compensation Committee Interlocks and Insider Participation," and "Executive Compensation" in the Company's definitive proxy statement for the 1998 annual meeting of shareholders.
The information called for by Item 12, "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference to the caption "Security Ownership Information" in the Company's definitive proxy statement for the 1998 annual meeting of shareholders.
The information called for by Item 13, "Certain Relationships and Related Transactions" is incorporated herein by reference to the caption "Director Information - Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement for the 1998 annual meeting of stockholders.
Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference future filings, including this Annual Report on Form 10-K, in whole or in part, the "Report on Executive Compensation" and the "Performance Graph" included in the Company's definitive proxy statement for the 1998 annual meeting of shareholders shall not be incorporated by reference into any such filings.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements and Schedules: See Table of Contents of Consolidated Financial Statements and Supplementary Financial Data on page 40.
2. Exhibits:
Exhibits required to be filed with this Annual Report on Form 10-K are listed in the Exhibit Index following the signature page. Certain of such exhibits which have heretofore been filed with the SEC and which are designated by reference to their exhibit numbers in prior filings are incorporated herein by reference and made a part hereof.
Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, the annual report for the Company's employee stock purchase plan will be furnished under cover of Form 10-K/A to the Commission when the information becomes available.
As permitted under Item 601(b)(4)(iii), instruments defining the rights of holders of long-term debt of less than 10 percent of the total consolidated assets of the Company and its subsidiaries, have been omitted and the Company agrees to furnish a copy of such instruments to the Commission upon request.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(REGISTRANT) SCANA CORPORATION
BY (SIGNATURE) s/W. B. Timmerman (NAME AND TITLE) W. B. Timmerman, Chairman of the Board, President, Chief Executive Officer and Director DATE February 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (i) Principal executive officer:
BY (SIGNATURE) s/W. B. Timmerman (NAME AND TITLE) W. B. Timmerman, Chairman of the Board, President, Chief Executive Officer and Director DATE February 17, 1998
(ii) Principal financial and accounting officer:
BY (SIGNATURE) s/K. B. Marsh (NAME AND TITLE) K. B. Marsh, Vice President - Finance, Chief Financial Officer and Controller DATE February 17, 1998
BY (SIGNATURE) s/B. L. Amick (NAME AND TITLE) B. L. Amick, Director DATE February 17, 1998
BY (SIGNATURE) s/J. A. Bennett (NAME AND TITLE) J. A. Bennett, Director DATE February 17, 1998
BY (SIGNATURE) s/W. B. Bookhart, Jr. (NAME AND TITLE) W. B. Bookhart, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/W. T. Cassels, Jr. (NAME AND TITLE) W. T. Cassels, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/H. M. Chapman (NAME AND TITLE) H. M. Chapman, Director DATE February 17, 1998
BY (SIGNATURE) s/E. T. Freeman (NAME AND TITLE) E. T. Freeman, Director DATE February 17, 1998
BY (SIGNATURE) s/L. M. Gressette, Jr. (NAME AND TITLE) L. M. Gressette, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/W. Hayne Hipp (NAME AND TITLE) W. Hayne Hipp, Director DATE February 17, 1998
BY (SIGNATURE) s/F. C. McMaster (NAME AND TITLE) F. C. McMaster, Director DATE February 17, 1998
BY (SIGNATURE) s/L. M. Miller (NAME AND TITLE) L. M. Miller, Director DATE February 17, 1998
BY (SIGNATURE) s/J. B. Rhodes (NAME AND TITLE) J. B. Rhodes, Director DATE February 17, 1998
BY (SIGNATURE) s/M. K. Sloan (NAME AND TITLE) M. K. Sloan, Director DATE February 17, 1998
SCANA CORPORATION EXHIBIT INDEX Sequentially Numbered Pages Number
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession Not applicable
3. Articles of Incorporation and By-Laws
A. Restated Articles of Incorporation of SCANA Corporation as adopted on April 26, 1989 (Exhibit 3-A to Registration Statement No. 33-49145)................................................. # B. Articles of Amendment dated April 27, 1995 (Exhibit 4-B to Registration Statement No. 33-62421)............................................. # C. Copy of By-Laws of SCANA Corporation as revised and amended on December 17, 1997 (Filed herewith).......................................... 84
4. Instruments Defining the Rights of Security Holders, Including Indentures
A. Articles of Exchange of South Carolina Electric & Gas Company and SCANA Corporation (Exhibit 4-A to Post-Effective Amendment No. 1 to Registration Statement No. 2-90438).................... # B. Indenture dated as of November 1, 1989 to The Bank of New York, Trustee (Exhibit 4-A to Registration No. 33-32107)............................. # C. Indenture dated as of January 1, 1945, from the South Carolina Power Company (the "Power Company") to Central Hanover Bank and Trust Company, as Trustee, as supplemented by three Supplemental Indentures dated respectively as of May 1, 1946, May 1, 1947 and July 1, 1949 (Exhibit 2-B to Registration No. 2-26459)................. # D. Fourth Supplemental Indenture dates as of April 1, 1950, to Indenture referred to in Exhibit 4C, pursuant to which the Company assumed said Indenture (Exhibit 2-C to Registration No. 2-26459)................................. # E. Fifth through Fifty-second Supplemental Indenture referred to in Exhibit 4C dated as of the dates indicated below and filed as exhibits to the Registration Statements and 1934 Act reports whose file numbers are set forth below........................................... #
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
# Incorporated herein by reference as indicated.
SCANA CORPORATION EXHIBIT INDEX Sequentially Numbered Pages Number June 1, 1966 Exhibit 2-M to Registration No. 2-26459 June 1, 1967 Exhibit 2-N to Registration No. 2-29693 September 1, 1968 Exhibit 4-O to Registration No. 2-31569 June 1, 1969 Exhibit 4-C to Registration No. 33-38580 December 1, 1969 Exhibit 4-Q to Registration No. 2-35388 June 1, 1970 Exhibit 4-R to Registration No. 2-37363 March 1, 1971 Exhibit 2-B-17 to Registration No. 2-40324 January 1, 1972 Exhibit 4-C to Registration No. 33-38580 July 1, 1974 Exhibit 2-A-19 to Registration No. 2-51291 May 1, 1975 Exhibit 4-C to Registration No. 33-38580 July 1, 1975 Exhibit 2-B-21 to Registration No. 2-53908 February 1, 1976 Exhibit 2-B-22 to Registration No. 2-55304 December 1, 1976 Exhibit 2-B-23 to Registration No. 2-57936 March 1, 1977 Exhibit 2-B-24 to Registration No. 2-58662 May 1, 1977 Exhibit 4-C to Registration No. 33-38580 February 1, 1978 Exhibit 4-C to Registration No. 33-38580 June 1, 1978 Exhibit 2-A-3 to Registration No. 2-61653 April 1, 1979 Exhibit 4-C to Registration No. 33-38580 June 1, 1979 Exhibit 4-C to Registration No. 33-38580 April 1, 1980 Exhibit 4-C to Registration No. 33-38580 June 1, 1980 Exhibit 4-C to Registration No. 33-38580 December 1, 1980 Exhibit 4-C to Registration No. 33-38580 April 1, 1981 Exhibit 4-D to Registration No. 33-49421 June 1, 1981 Exhibit 4-D to Registration No. 2-73321 March 1, 1982 Exhibit 4-D to Registration No. 33-49421 April 15, 1982 Exhibit 4-D to Registration No. 33-49421 May 1, 1982 Exhibit 4-D to Registration No. 33-49421 December 1, 1984 Exhibit 4-D to Registration No. 33-49421 December 1, 1985 Exhibit 4-D to Registration No. 33-49421 June 1, 1986 Exhibit 4-D to Registration No. 33-49421 February 1, 1987 Exhibit 4-D to Registration No. 33-49421 September 1, 1987 Exhibit 4-D to Registration No. 33-49421 January 1, 1989 Exhibit 4-D to Registration No. 33-49421 January 1, 1991 Exhibit 4-D to Registration No. 33-49421 February 1, 1991 Exhibit 4-D to Registration No. 33-49421 July 15, 1991 Exhibit 4-D to Registration No. 33-49421 August 15, 1991 Exhibit 4-D to Registration No. 33-49421 April 1, 1993 Exhibit 4-E to Registration No. 33-49421 July 1, 1993 Exhibit 4-D to Registration No. 33-57955 F. 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)............................................. # G. First Supplemental Indenture to Indenture referred to in Exhibit 4-F dated as of June 1, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-49421)............................................. # H. Second Supplemental Indenture to Indenture referred to in Exhibit 4-F dated as of June 15, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-57955)............................................. # I. Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-G to Registration Statement No. 33-37787 and 333-37787-01)............................................. #
# Incorporated herein by reference as indicated.
SCANA CORPORATION EXHIBIT INDEX
Sequentially Numbered Pages
Number J. Certificate of Trust for SCE&G Trust I (Filed as Exhibit 4-B to Registration Statement No. 333-37787 and 333-37787-01)......................................... # K. Form of Junior Subordinated Indenture for SCE&G Trust I (Filed as Exhibit 4-A to Registration Statement No. 333-37787 and 333-37787-01)............................... # L. Form of Guarantee Agreement for SCE&G Trust I (Filed as Exhibit 4-F to Registration Statement No. 333-37787 and 333-37787-01)......................................... # M. Form of Amended & Restated Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-D to Registration Statement No. 333-37787 and 333-37787-01)........................... #
9. Voting Trust Agreement Not Applicable
10. Material Contracts
A. Copy of Voluntary Deferral Plan as amended through October 26, 1988 (Exhibit 10-A to Form 10-K for the year ended December 31, 1988 under cover of Form SE, File No. 1-8809)................................. # B. Copy of Supplementary Voluntary Deferral Plan as amended and restated through October 21, 1997 (Filed herewith........................................... 104 C. Copy of Key Executive Severance Benefit Plan as amended and restated effective as of October 21, 1997 (Filed herewith).......................................... 127 D. Copy of SCANA Corporation Performance Share Plan as amended and restated effective February 16, 1993 (Exhibit 10-D to Form 10-K for the year ended December 31, 1992, File No. 1-8809)....................... # E. Form of Agreement under SCANA Corporation Key Employee Retention Program as amended and restated effective as of October 21, 1997 (Filed herewith)......... 169 F. Description of SCANA Corporation Whole Life Option (Exhibit 10-F to Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809)............................................... # G. Description of SCANA Corporation Performance Incentive Plan (Exhibit 10-G to Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809).............................. #
11. Statement Re Computation of Per Share Earnings Not Applicable
12. Statements Re Computation of Ratios (Filed herewith)......... 169
SCANA CORPORATION EXHIBIT INDEX
Number 13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders Not Applicable
16. Letter Re Change in Certifying Accountant Not Applicable
18. Letter Re Change in Accounting Principles Not Applicable
21. Subsidiaries of the Registrant Included herein on Page 28
22. Published Report Regarding Matters Submitted to Vote of Security Holders Not Applicable
23. Consents of Experts and Counsel Consent of Deloitte & Touche LLP (Filed herewith)............ 173
24. Power of Attorney Not Applicable
27. Financial Data Schedule Filed herewith
99. Additional Exhibits Not Applicable
# Incorporated herein by reference as indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in this discussion and analysis (or elsewhere in this annual report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward- looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: (1) that the information is of a preliminary nature and may be subject to further and/or continuing review and adjustment, (2) changes in the utility regulatory environment, (3) changes in the economy in areas served by the Company's subsidiaries, (4) the impact of competition from other energy suppliers, (5) the management of the Company's operations (6) growth opportunities for the Company's regulated and diversified subsidiaries, (7) the results of financing efforts, (8) changes in the Company's accounting policies, (9) weather conditions in areas served by the Company's utility subsidiaries, (10) performance of the telecommunications companies in which the Company has made significant investments, (11) inflation, (12) changes in environmental regulations and (13) the other risks and uncertainties described from time to time in the Company's periodic reports filed with the SEC. The Company disclaims any obligation to update any forward-looking statements.
COMPETITION
The electric utility industry has begun a major transition that could lead to expanded market competition and less regulation. Deregulation of electric wholesale and retail markets is creating opportunities to compete for new and existing customers and markets. As a result, profit margins and asset values of some utilities could be adversely affected. Legislative initiatives at the Federal and state levels are being considered and, if enacted, could mandate market deregulation. The pace of deregulation, future prices of electricity, and the regulatory actions which may be taken by the PSC and the FERC in response to the changing environment cannot be predicted. However, the FERC, in issuing Order 888 in April 1996, has accelerated competition among electric utilities by providing for open access to wholesale transmission service. Order 888 requires utilities under FERC jurisdiction that own, control or operate transmission lines to file nondiscriminatory open access tariffs that offer to others the same transmission service they provide themselves. The FERC has also permitted utilities to seek recovery of wholesale stranded costs from departing customers by direct assignment. Approximately two percent of the Company's electric revenues is under FERC jurisdiction for the purpose of setting rates for wholesale service. Legislation is pending in South Carolina that would deregulate the state's retail electric market and enable customers to choose their supplier of electricity. The Company is not able to predict whether the legislation will be enacted and, if it is, the conditions it will impose on utilities that currently operate in the state and future market participants.
The Company is aggressively pursuing actions to position itself strategically for the transformed environment. To enhance its flexibility and responsiveness to change, the Company's electric and gas utility, SCE&G, operates Strategic Business Units. Maintaining a competitive cost structure is of paramount importance in the utility's strategic plan. SCE&G has undertaken a variety of initiatives, including reductions in operation and maintenance costs and in staffing levels, the accelerated recovery of SCE&G's electric regulatory assets and the shift, for retail ratemaking purposes only, of depreciation reserves from transmission and distribution assets to nuclear production assets. SCE&G has also established open access transmission tariffs and is selling bulk power to wholesale customers at market-based rates. Significant new customer and management information systems will be implemented in 1998. Marketing of services to commercial and industrial customers has been increased significantly. SCE&G has obtained long term power supply contracts with a significant portion of its industrial customers. The Company believes that these actions as well as numerous others that have been and will be taken demonstrate its ability and commitment to succeed in the new operating environment to come.
Regulated public utilities are allowed to record as assets some costs that would be expensed by other enterprises. If deregulation or other changes in the regulatory environment occur, the Company may no longer be eligible to apply this accounting treatment and may be required to eliminate such regulatory assets from its balance sheet. Although the potential effects of deregulation cannot be determined at present, discontinuation of the accounting treatment could have a material adverse effect on the Company's results of operations in the period the write-off is recorded. It is expected that cash flows and the financial position of the Company would not be materially affected by the discontinuation of the accounting treatment. The Company reported approximately $241 million and $68 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $58 million, respectively, on its balance sheet at December 31, 1997.
The Company's generation assets are exposed to considerable financial risks in a deregulated electric market. If market prices for electric generation do not produce adequate revenue streams and the enabling legislation or regulatory actions do not provide for recovery of the resulting stranded costs, the Company could be required to write down its investment in these assets. The Company cannot predict whether any write-downs will be necessary and, if they are, the extent to which they would adversely affect the Company's results of operations in the period in which they are recorded. As of December 31, 1997, the Company's net investment in fossil/hydroelectric generation and nuclear generation assets was $1,150.6 million and $659.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The cash requirements of the Company arise primarily from SCE&G's operational needs, the Company's construction program and the need to fund the activities or investments of the Company's nonregulated subsidiaries. The ability of the Company's regulated subsidiaries to replace existing plant investment, as well as to expand to meet future demand for electricity and gas, will depend upon their ability to attract the necessary financial capital on reasonable terms. The Company's 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 the regulated subsidiaries continue their ongoing construction programs, it is necessary to seek increases in rates. As a result, the Company's future financial position and results of operations will be affected by the regulated subsidiaries' ability to obtain adequate and timely rate and other regulatory relief.
The Company and Westvaco Corporation have formed a limited liability company, Cogen South LLC, to build and operate a $170 million cogeneration facility at Westvaco's Kraft Division Paper Mill in North Charleston, South Carolina. The Company and Westvaco each own a 50% interest in the LLC. The facility will provide industrial process steam for the Westvaco paper mill and shaft horsepower to enable SCE&G to generate up to 99 megawatts of electricity. Construction financing is being provided to Cogen South LLC by banks. A $15 million capital contribution to the LLC by each partner is expected prior to operation of the facility. In addition to the cogeneration LLC, Westvaco has entered into a 20-year contract with SCE&G for all its electricity requirements at the North Charleston mill at SCE&G's standard industrial rate. Construction of the plant began in September 1996 and it is expected to be operational in the fall of 1998.
On August 7, 1996 the City of Charleston executed 30-year electric and gas franchise agreements with SCE&G. In consideration for the electric franchise agreement, SCE&G is paying the City $25 million over seven years (1996 through 2002) and has donated to the City the existing transit assets in Charleston. The $25 million is included in electric plant-in-service. In settlement of environmental claims the City may have had against SCE&G involving the Calhoun Park area, where SCE&G and its predecessor companies operated a manufactured gas plant until the 1960's, SCE&G is paying the City $26 million over a four-year period (1996 through 1999). As part of the environmental settlement, SCE&G has agreed to construct an 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
The revised estimated primary cash requirements for 1998, excluding requirements for fuel liabilities and short-term borrowings, and the actual primary cash requirements for 1997 are as follows:
1998 1997 (Millions of Dollars)
Property additions and construction expenditures, net of allowance for funds used during construction $250 $258 Nuclear fuel expenditures 23 31 Maturing obligations, redemptions and sinking and purchase fund requirements 117 146 Total $390 $435
Approximately 62% of total cash requirements (after payment of dividends) was provided from internal sources in 1997 as compared to 55% in 1996.
The Company has in effect a medium-term note program for the issuance from time to time of unsecured medium-term debt securities. The proceeds from the sales of these securities may be used to fund additional business activities in nonutility subsidiaries, to reduce short-term debt incurred in connection therewith or for general corporate purposes. Subsequent to the issuance of $60 million on January 13, 1998, the Company had available for issuance $190.0 million under this program.
SCE&G's First and Refunding Mortgage Bond Indenture, dated April 1, 1945 (Old Mortgage), contains provisions prohibiting the issuance of additional bonds thereunder (Class A Bonds) unless net earnings (as therein defined) for twelve consecutive months out of the fifteen months prior to the month of issuance are at least twice the annual interest requirements on all Class A Bonds to be outstanding (Bond Ratio). For the year ended December 31, 1997 the Bond Ratio was 4.32. The issuance of additional Class A Bonds also is restricted to an additional principal amount equal to (i) 60% of unfunded net property additions (which unfunded net property additions totaled approximately $579 million at December 31, 1997), (ii) retirements of Class A Bonds (which retirement credits totaled $67.5 million at December 31, 1997), and (iii) cash on deposit with the Trustee. SCE&G has a bond indenture dated April 1, 1993 (New Mortgage) covering substantially all of its electric properties under which its future mortgage-backed debt (New Bonds) will be issued. New Bonds are issued under the New Mortgage on the basis of a like principal amount of Class A Bonds issued under the Old Mortgage which have been deposited with the Trustee of the New Mortgage (of which $185 million were available for such purpose as of December 31, 1997), until such time as all presently outstanding Class A Bonds are retired. Thereafter, New Bonds will be issuable on the basis of property additions in a principal amount equal to 70% of the original cost of electric and common plant properties (compared to 60% of value for Class A Bonds under the Old Mortgage), cash deposited with the Trustee, and retirement of New Bonds. New Bonds will be issuable under the New Mortgage only if adjusted net earnings (as therein defined) for twelve consecutive months out of the eighteen months immediately preceding the month of issuance are at least twice the annual interest requirements on all outstanding bonds (including Class A Bonds) and New Bonds to be outstanding (New Bond Ratio). For the year ended December 31, 1997 the New Bond Ratio was 5.87.
The following additional financing transactions have occurred since December 31, 1996:
, On January 10, 1997 SCANA closed on unsecured bank loans totaling $60 million due January 9, 1998 and used the proceeds to pay off a loan in a like total amount. On January 13, 1998 SCANA refinanced the loans with $60 million of medium-term notes due January 13, 2003 at an interest rate of 6.05%.
, On February 12, 1997 SCANA closed on the sale of $25 million of medium-term notes having an annual interest rate of 6.9% and maturing February 15, 2007. These funds were used to reduce short-term borrowings at SCANA.
, On April 24, 1997, SCE&G sold $100 million of 6.52% cumulative preferred stock, par value $100 per share. Proceeds from the sale were used to reduce short-term indebtedness incurred for SCE&G's construction program, to refinance senior securities and for general corporate purposes.
, On October 28, 1997 SCE&G Trust I (the "Trust"), a Delaware statutory business trust and a subsidiary of SCE&G, issued $50 million of 7.55% Trust Preferred Securities, Series A. The Trust used the proceeds from the sale to purchase unsecured 7.55% Junior Subordinated Debentures of SCE&G. SCE&G used the funds to redeem certain series of its preferred stock. The financial statements of the Trust are consolidated with those of SCE&G.
Without the consent of at least a majority of the total voting power of SCE&G's preferred stock, SCE&G may not issue or assume any unsecured indebtedness if, after such issue or assumption, the total principal amount of all such unsecured indebtedness would exceed 10% of the aggregate principal amount of all of SCE&G's secured indebtedness and capital and surplus; however, no such consent is required to enter into agreements for payment of principal, interest and premium for securities issued for pollution control purposes.
Pursuant to Section 204 of the Federal Power Act, SCE&G and GENCO must obtain FERC authority to issue short-term debt. The FERC has authorized SCE&G to issue up to $250 million of unsecured promissory notes or commercial paper with maturity dates of twelve months or less, but not later than December 31, 1999. GENCO has not sought such authorization.
At December 31, 1997 SCE&G had $315 million of authorized lines of credit which includes a credit agreement for a maximum of $250 million to support the issuance of commercial paper. Unused lines of credit at December 31, 1997 totaled $315 million. SCE&G commercial paper outstanding at December 31, 1997 and December 31, 1996 was $13.3 million and $90 million, respectively. In addition, Fuel Company had a credit agreement for a maximum of $125 million with the full amount available at December 31, 1997. The credit agreement supports the issuance of short-term commercial paper for the financing of nuclear and fossil fuels and sulfur dioxide emission allowances. Fuel Company commercial paper outstanding at December 31, 1997 was $80.3 million.
SCE&G's Restated Articles of Incorporation prohibit issuance of additional shares of preferred stock without consent of the preferred stockholders unless net earnings (as defined therein) for the twelve consecutive months immediately preceding the month of issuance are at least one and one-half times the aggregate of all interest charges and preferred stock dividend requirements (Preferred Stock Ratio). For the year ended December 31, 1997 the Preferred Stock Ratio was 2.69.
On January 14, 1997 an additional 2,500,000 shares of SCANA common stock were registered for sale under the Investor Plus Plan. During 1997, prior to its conversion to a market purchase plan from an original issue plan on February 1, 1997, SCANA issued 184,743 shares of the Company's common stock under its Investor Plus Plan. In addition, pursuant to its SPSP, SCANA issued 961,097 shares of its common stock during 1997, prior to the plan's conversion from an original issue plan to a market purchase plan on July 1, 1997. On January 26, 1998 an additional 3,000,000 shares of SCANA common stock were registered for sale under the SPSP.
The Company anticipates that its 1998 cash requirements of $389.6 million will be met through internally generated funds (approximately 59%, after payment of dividends), and the incurrence of additional short-term and long-term indebtedness. Sales of additional equity securities may also be made.
The Company expects that it has or can obtain adequate sources of financing to meet its projected cash requirements for the next twelve months and for the foreseeable future.
Environmental Matters
The Clean Air Act requires electric utilities to reduce emissions of sulfur dioxide and nitrogen oxide substantially by the year 2000. These requirements are being phased in over two periods. The first phase had a compliance date of January 1, 1995 and the second, January 1, 2000. The Company's facilities did not require modifications to meet the requirements of Phase I. The Company will most likely meet the Phase II requirements through the burning of natural gas and/or lower sulfur coal in its generating units and the purchase and use of sulfur dioxide emission allowances. Low nitrogen oxide burners are being installed to reduce nitrogen oxide emissions to the levels required by Phase II. Air toxicity regulations for the electric generating industry are likely to be promulgated around the year 2000.
SCE&G and GENCO filed with DHEC compliance plans related to Phase II sulfur dioxide requirements in 1995 and Phase II nitrogen oxide requirements in December, 1997. The Company currently estimates that air emissions control equipment will require capital expenditures of $102 million over the 1998-2002 period to retrofit existing facilities, with increased operation and maintenance cost of approximately $1 million per year. To meet compliance requirements through the year 2007, the Company anticipates total capital expenditures of approximately $209 million.
The Federal Clean Water Act, as amended, provides for the imposition of effluent limitations that require various levels of treatment for each wastewater discharge. Under this Act, compliance with applicable limitations is achieved under a national permit program. Discharge permits have been issued for all and renewed for nearly all of SCE&G's and GENCO's generating units. Concurrent with renewal of these permits, the permitting agency has implemented a more rigorous program in monitoring and controlling thermal discharges and strategies for toxicity reduction in wastewater streams. The Company has been developing compliance plans for these initiatives. Amendments to the Clean Water Act proposed in Congress include several provisions which, if passed, could prove costly to SCE&G. These include, but are not limited to, limitations to mixing zones and the implementation of technology-based standards.
The South Carolina Solid Waste Policy and Management Act of 1991 directed DHEC to promulgate regulations for the disposal of industrial solid waste. DHEC has promulgated a proposed regulation, which, if adopted as a final regulation in its present form, would significantly increase SCE&G's and GENCO's costs of construction and operation of existing and future ash management facilities.
The Company has an environmental assessment program to identify and assess current and former operations sites that could require environmental cleanup. As site assessments are initiated, an estimate is made of the amount of expenditures, if any, necessary to investigate and clean up each site. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Amounts estimated, accrued and actually expended to date for site assessments and cleanup relate primarily to regulated operations; such amounts are deferred and are being amortized and recovered through rates over a five-year period for electric operations and an eight- year period for gas operations. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $32.4 million and $41.4 million at December 31, 1997 and 1996, respectively. The deferral includes the estimated costs associated with the matters discussed below.
, In September 1992, the EPA notified SCE&G, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were the locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G's decommissioned manufactured gas plants, properties owned by the National Park Service and the City of Charleston and private properties. The site has not been placed on the National Priorities List, but may be added before cleanup is initiated. The PRPs have agreed with the EPA to participate in an innovative approach to site investigation and cleanup called "Superfund Accelerated Cleanup Model," allowing the pre-cleanup site investigation process to be compressed significantly. The PRPs have negotiated an administrative order by consent for the conduct of a Remedial Investigation/Feasibility Study and a corresponding Scope of Work. Field work began in November 1993 and the EPA conditionally approved a Remedial Investigation Report in March 1997. Although SCE&G is continuing to investigate cost effective clean-up methodologies, further work is pending EPA approval of the final draft of the Remedial Investigation Report.
In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996-1999) by SCE&G to the City. SCE&G is recovering the amount of the settlement, which does not encompass site assessment and cleanup costs, through rates in the same manner as other amounts accrued for site assessments and cleanup as discussed above. As part of the environmental settlement, SCE&G agreed to construct a 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. Construction is expected to begin in 1998. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
, SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. SCE&G is investigating the sites to monitor the nature and extent of the residual contamination.
Regulatory Matters
On August 8, 1990 the PSC issued an order approving changes in Pipeline Corporation's gas rate design for sales for resale service and upholding the "value-of-service" method of regulation for its direct industrial service. After appeals to the Circuit Court initiated by direct industrial customers and a subsequent appeal to the Supreme Court initiated by Pipeline Corporation, the PSC order was reinstated. The Supreme Court held that the industrial customer group's appeal was premature and failed to exhaust administrative remedies. Additionally, the Supreme Court interpreted the rate-making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in setting rates for natural gas service. The PSC held another hearing and issued its order dated December 12, 1995 maintaining the present level of the maximum markup on industrial sales ("cap"). This Order was appealed to the Circuit Court by Pipeline Corporation and the industrial customer group with several other parties intervening, including the Consumer Advocate of South Carolina. On October 10, 1997, the Circuit Court issued an order in favor of the Consumer Advocate and the industrial customer group which remanded the case to the PSC to determine an overall rate of return for Pipeline Corporation and a second order which ruled against Pipeline Corporation and affirmed the PSC's decision that the caps should not be increased. Several motions and appeals were filed subsequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corporation from the first order without prejudice until the PSC completes proceedings on remand and held Pipeline Corporation's appeal of the second order in abeyance until the PSC completes proceedings on remand. The Company expects the remanded case to be heard at the PSC in May 1998. The impact, if any, on the Company's results of operations, cash flows and financial position is not presently determinable.
On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
The Company's regulated business operations were impacted by the NEPA and FERC Orders No. 636 and 888. NEPA was designed to create a more competitive wholesale power supply market by creating "exempt wholesale generators" and by potentially requiring utilities owning transmission facilities to provide transmission access to wholesalers. See "Competition" for a discussion of FERC Order 888. Order No. 636 was intended to deregulate the markets for interstate sales of natural gas by requiring that pipelines provide transportation services that are equal in quality for all gas suppliers whether the customer purchases gas from the pipeline or another supplier. In the opinion of the Company, it continues to be able to meet successfully the challenges of these altered business climates and does not anticipate there to be any material adverse impact on the results of operations, cash flows, financial position or business prospects.
Other
On December 1, 1997, Petroleum Resources sold substantially all of its assets for $110 million. Proceeds from the sale are expected to be used to repurchase up to $110 million of SCANA's outstanding common stock from time to time through open market purchases and through privately negotiated transactions. The Company may also use the proceeds from the sale to pay down debt or for other corporate activities. All of the shares repurchased under this program will be retired, reducing the number of shares issued and outstanding. The common stock repurchase program was authorized by the Company's board of directors on October 21, 1997.
SCI owns approximately 4.5 million common shares and 100,000 non-voting series B and 50,000 non-voting series D convertible preferred shares of Powertel, Inc. (Powertel), formerly InterCel, Inc., a publicly traded telecommunications company which owns and operates personal communications services (PCS) systems in several major markets in the Southeast. The costs of such investments were approximately $66.7 million, $75.1 million and $22.5 million, respectively. Common shares were initially recorded at $14.85 per share. Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Powertel common stock, which trades on NASDAQ, closed at $16 3/4 on December 31, 1997, resulting in a pre-tax unrealized holding gain of $8.5 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $105.7 million at December 31, 1997, resulting in an unrecorded pre-tax holding gain of $8.1 million.
In March 1997 SCI sold its interest in GulfStates Fibernet, a Georgia general partnership (constituting SCI's remaining interests in the GulfStates Fibernet joint venture), and certain fiber optic assets of SCI located within the State of Georgia, to ITC Holding Company, Inc. (Old ITC), a Georgia-based telecommunications company and an affiliate of Powertel, in exchange for 588,411 shares of series A convertible preferred stock of Old ITC (Old ITC Preferred) and a subordinated note of Old ITC. As part of an earnout provision related to the GulfStates Fibernet transaction and the receipt of Old ITC Preferred through the earnout provision, SCI received in October 1997, 56,742 additional shares of Old ITC Preferred resulting in a pre-tax gain of $2.2 million which was recorded in "Other Income."
On October 20, 1997, as part of a reorganization involving Old ITC, its subsidiary, ITC West Point, Inc., and ITC^DeltaCom, Inc. (ITCD), a Georgia-based telecommunications company and an affiliate of Powertel, Old ITC merged with ITCD, and each of Old ITC's common shareholders (including SCI) received one share of common stock of ITC West Point, Inc. for each whole share of Old ITC common stock owned by such shareholders. In addition, SCI received one share of series A convertible preferred stock of ITC West Point, Inc. for each share of Old ITC Preferred owned by SCI. ITC West Point, Inc. changed its name to ITC Holding Company, Inc. subsequent to the Old ITC merger.
Through the merger, SCI received approximately 1,777,919 shares, representing approximately 7.2%, of ITCD common stock, and 1,480,771 shares of series A preferred stock of ITCD convertible in March 2002 into 1,480,771 shares of ITCD common stock. ITCD common stock, which began trading on NASDAQ on October 24, 1997, closed at $16 1/2 per share on December 31, 1997, resulting in a pre-tax unrealized holding gain of $20.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $24.4 million at December 31, 1997 resulting in an unrecorded pre-tax holding gain of $13.2 million.
Knology Holdings, Inc. (Knology), also an affiliate of Powertel, is developing a system which will provide interactive video, voice and data services for broadband systems in certain southeastern markets. SCI on October 22, 1997 purchased from Knology 71,050 units, each consisting of one 11.875% Senior Discount Note (Note) due 2007 and one Warrant to purchase preferred stock of Knology. The purchase price of the units was approximately $40 million. In addition to the acquisition of the Knology units, SCI has invested $5.3 million to purchase 3,639 shares of preferred stock of Knology and Knology has agreed to issue to SCI warrants to purchase 753 shares of preferred stock at $1,500 per share.
In September 1996 SCI, as a result of an internal audit, informed the FCC that it violated certain licensing requirements in establishing and operating an 800 Mhz radio system in South Carolina for public safety and utility use. As a result, SCI has returned to the FCC several licenses obtained in violation of FCC rules and the FCC is conducting an investigation of the system. The Company does not believe that the resolution of this issue will have a material impact on its results of operations, cash flows or financial position.
The year 2000 issue could have a material impact on the operations of the Company if required modifications and conversions are not made to ensure that all system software is date code compliant. The Company has formed a steering committee to direct the resolution of this major issue. The steering committee, which reports to the senior officers of the Company and to the board of directors, is chaired by the chief financial officer of the Company and is comprised of officers representing all operational areas. Reporting to the committee are the technical personnel responsible for the evaluation and remediation of system software.
The Company has evaluated the impact of the year 2000 on its information systems applications and operating software and is implementing a plan of remediation expected to be completed during the first quarter of 1999. The present estimated cost of the plan of remediation is not material to results of operations, financial position or cash flows.
The Company also has begun evaluating embedded processors located in field operations areas for the purpose of identifying those that will have to be modified or replaced. The initial inventory has been completed and impact assessment is expected to be completed by mid-1998. At that time the Company will prepare and implement a plan designed to complete all substantive required modifications and replacements in time to prevent problems with operational systems related to date codes. An estimate of the cost of the required changes is not available.
In particular, with regard to the evaluation and remediation of the year 2000 issue at SCE&G's Summer Station, SCE&G is closely cooperating with other utility companies, including utilities in the southeast, that own nuclear power plants. The utilities are sharing technical nuclear plant operating and monitoring systems information to ensure the prompt and effective resolution of the year 2000 issue.
The Company is communicating with all of its significant suppliers to determine the extent to which the Company is vulnerable to those suppliers' failure to remediate their own year 2000 issue. The extent to which significant customers have resolved the year 2000 issue, and the resulting impact on the demand for the Company's products, is not determinable. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted. A failure to convert by another company, or a conversion that is incompatible with the Company's systems, could have material adverse effect on the results of operations, financial position or cash flows of the Company.
RESULTS OF OPERATIONS
Earnings and Dividends
Earnings per share of common stock, the percent increase (decrease) from the previous year and the rate of return earned on common equity for the years 1995 through 1997 were as follows:
1997 1996 1995 Earnings per weighted average share $2.06 $2.05 $1.70 Percent increase in earnings per share 0.5% 20.6% 39.3% Return earned on common equity 12.3% 12.8% 10.8%
, 1997 Earnings per share and return on common equity increased primarily as a result of the $17.6 million after-tax gain on the sale of the oil and gas properties of Petroleum Resources and higher gas sales margins which more than offset increases in operating expenses and a reduction to other income from the 1996 after-tax gain reported by SCI, discussed below.
, 1996 Earnings per share and return on common equity increased primarily as a result of higher electric sales margins at SCE&G and improved earnings at Petroleum Resources which more than offset increases in operating expenses. Additionally, SCI reported a nonrecurring after-tax gain of $5.7 million as a result of the business combination of Powertel PCS Partners and Powertel (formerly InterCel) in February 1996.
The Company's financial statements include 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. An equity portion of AFC is included in nonoperating income and a debt portion of AFC is included in interest charges (credits) as noncash items, both of which have the effect of increasing reported net income. AFC represented approximately 4.0% of income before income taxes in 1997, 3.9% in 1996 and 8.0% in 1995.
In 1997 SCANA's Board of Directors raised the quarterly cash dividend on common stock to 37 3/4 cents per share from 36 3/4 cents per share. The increase, effective with the dividend payable on April 1, 1997, raised the indicated annual dividend rate to $1.51 per share from $1.47. SCANA has increased the dividend rate on its common stock in 44 of the last 45 years.
On December 1, 1997, Petroleum Resources sold substantially all of its assets for $110 million. The resulting after-tax gain of $17.6 million is recorded in "Other Income."
Electric Operations
Electric sales margins for 1997, 1996 and 1995 were as follows:
1997 1996 1995 (Millions of Dollars)
Electric operating revenues $1,103.0 $1,106.5 $1,006.4 Less: Fuel used in electric generation 248.4 250.5 227.4 Purchased power 9.4 11.4 14.7 Margin $ 845.2 $ 844.6 $ 764.3
, 1997 The electric sales margin increased slightly due to the favorable impact of the rate increase placed into effect in January 1997 and economic growth factors which were offset by the effect of milder weather.
, 1996 The electric sales margin increased primarily as a result of the rate increase received by SCE&G in January 1996. Economic growth factors also contributed to the increase.
Increases (decreases) from the prior year in megawatt-hour (MWH) sales volume by classes were as follows:
Classification 1997 1996
Residential (292,518) 212,888 Commercial 100,324 144,536 Industrial 113,717 110,147 Sales for Resale (excluding interchange) (538,005) (39,853) Other 15 (1,013) Total territorial (616,467) 426,705 Negotiated Market Sales Tariff 564,081 699,425 Total (52,386) 1,126,130
The electric sales volume for residential sales decreased for 1997 as a result of milder weather. The decrease in sales for resale and the increase of sales under the Negotiated Market Sales Tariff from 1996 to 1997 were the result of a municipality terminating its wholesale power contract and transferring to a negotiated market sales tariff.
Gas Operations
Gas sales margins for 1997, 1996 and 1995 were as follows:
1997 1996 1995 (Millions of Dollars)
Gas operating revenues $418.7 $403.2 $342.7 Less: Gas purchased for resale 286.5 276.8 212.4 Margin $132.2 $126.4 $130.3
, 1997 The gas sales margin increased primarily as a result of higher margins on sales to industrial interruptible customers. The higher margins were attributable to fewer curtailments and higher system capacity from a pipeline expansion completed in 1996.
, 1996 The gas sales margin decreased primarily as a result of higher gas costs and curtailments imposed on interruptible industrial customers during abnormally cold weather. Also, contributing to the decline in the gas sales margin from 1995 to 1996 were lower gas prices in 1995 which allowed Pipeline Corporation to compete more successfully in that year with alternate fuel suppliers in industrial markets.
Increases (decreases) from the prior year in dekatherm (DT) sales volume by classes, including transportation gas, were as follows:
Classification 1997 1996
Residential (2,188,215) 1,774,289 Commercial (119,324) 585,669 Industrial 7,427,503 (1,564,759) Sales for resale 160,658 583,040 Transportation gas (953,901) (1,219,903) Total 4,326,721 158,336
The gas sales volume increased for 1997 as a result of fewer curtailments to industrial interruptible customers and higher demand.
Other Operating Expenses and Taxes
Increases (decreases) in other operating expenses, including taxes, were as follows:
Classification 1997 1996 (Millions of Dollars)
Other operation and maintenance $ 3.1 $20.1 Depreciation and amortization 5.5 17.7 Income taxes (12.5) 8.1 Other taxes 8.6 3.3 Total $ 4.7 $49.2
, 1997 Other operation and maintenance expenses increased somewhat from 1996 levels. A decrease in transit operating costs resulting from the Company's transfer of the ownership of the Charleston transit system to the City of Charleston in October 1996 largely offset increases in costs at electric generating plants and other operating costs. The increase in depreciation and amortization expenses for 1997 reflects the additions to plant-in-service. The change in income tax expense is primarily due to changes in pre-tax operating income and difference between estimated income taxes accrued and actual income tax expense per the tax returns as filed. The increase in other taxes results primarily from the accrual of additional property taxes, beginning in January 1997, related to the Cope plant and other property additions which was partially offset by a reduction in the 1997 property tax assessment. Recovery of the Cope Plant property taxes is provided for in a retail electric rate increase that became effective January 1997.
, 1996 Other operation and maintenance expenses increased primarily as a result of higher production costs attributable to the Cope plant which became operational in January 1996. The increase in depreciation and amortization expenses reflects the addition of the Cope plant and other additions to plant-in-service. The increase in income tax expense corresponds to the increase in operating income. The increase in other taxes reflects higher property taxes resulting from property additions and higher millages and assessments.
Other Income
, 1997 Other income, net of taxes, increased approximately $8.5 million. The primary factors accounting for the change in other income were the Petroleum Resources gain on the sale of oil and gas properties in 1997, offset by the gain reported by SCI in 1996 as discussed under "Earnings and Dividends" and which is included in other income reported for 1996.
, 1996 Other income, net of taxes, increased approximately $23.9 million in 1996 primarily due to the improved earnings performance of Petroleum Resources attributable to a noncash reserve adjustment recorded in the second quarter of 1995 and to higher gas prices and lower production costs. The gain reported by SCI, discussed under "Earnings and Dividends" is also included in other income reported for 1996.
Interest Expense
Increases (decreases) in interest expense, excluding the debt component of AFC, were as follows:
Classification 1997 1996 (Millions of Dollars)
Interest on long-term debt, net $ 1.1 $(1.4) Other interest expense (1.5) (3.8) Total $(0.4) $(5.2)
There was no material change in interest expense from 1996 to 1997. The decrease in interest expense from 1995 to 1996 was due primarily to reductions in outstanding debt throughout most of the year.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial instruments held by the Company described below are held for purposes other than trading.
Interest rate risk - The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
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 addition, the Company has invested in a telecommunications company approximately $40 million for 11.875% senior discount notes due 2007. The fair value of these notes approximates cost. An increase in market interest rates would result in a decrease in fair value of these notes and a corresponding adjustment, net of tax, to net income.
Equity price risk - Investments in telecommunications companies' equity securities are carried at their market value of $237.7 million, in accordance with Statement of Financial Accounting Standards No. 115. A ten percent decline in market value would result in a $23.8 million reduction in fair value and a corresponding adjustment, net of tax effect, to the related equity account for unrealized gains.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
Page
Independent Auditors' Report....................................... 47
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996... 48
Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995............. 50
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................. 51
Consolidated Statements of Capitalization as of December 31, 1997 and 1996................................... 52
Notes to Consolidated Financial Statements..................... 54
Supplemental financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
INDEPENDENT AUDITORS' REPORT
SCANA CORPORATION:
We have audited the accompanying Consolidated Balance Sheets and Consolidated Statements of Capitalization of SCANA Corporation and subsidiaries (Company) as of December 31, 1997 and 1996 and the related Consolidated Statements of Income and Retained Earnings and of Cash Flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbia, South Carolina February 9, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Organization and Principles of Consolidation
SCANA Corporation (Company), a South Carolina corporation, is a public utility holding company within the meaning of the Public Utility Holding Company Act of 1935 but is exempt from registration under such Act. The Company, through wholly owned subsidiaries, is engaged predominately in the generation and sale of electricity to wholesale and retail customers in South Carolina and in the purchase, sale and transportation of natural gas to wholesale and retail customers in South Carolina. The Company is also engaged in other energy-related businesses, such as natural gas marketing. The Company has investments in telecommunications companies and provides fiber optic communications in South Carolina.
The accompanying Consolidated Financial Statements reflect the accounts of the Company and its wholly owned subsidiaries:
Regulated utilities South Carolina Electric & Gas Company (SCE&G) South Carolina Fuel Company, Inc. (Fuel Company) South Carolina Generating Company, Inc. (GENCO) South Carolina Pipeline Corporation (Pipeline Corporation)
Nonregulated businesses SCANA Energy Marketing, Inc. SCANA Propane Gas, Inc. SCANA Propane Services, Inc. SCANA Communications, Inc. (SCI) Primesouth, Inc. ServiceCare, Inc. SCANA Resources, Inc. SCANA Petroleum Resources, Inc. (Petroleum Resources) (in liquidation) SCANA Development Corporation (in liquidation)
Certain investments are reported using the cost or equity method of accounting, as appropriate. Significant intercompany balances and transactions have been eliminated in consolidation in compliance with Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" which provides that profit on intercompany sales to regulated affiliates are not eliminated if the sales price is reasonable and the future recovery of the sales price through the rate-making process is probable.
B. Basis of Accounting
The Company accounts for its regulated utility operations, assets and liabilities in accordance with the provisions of SFAS 71. The accounting standard requires cost-based rate-regulated utilities, to recognize in their financial statements revenues and expenses in different time periods than do enterprises that are not rate-regulated. As a result the Company has recorded, as of December 31, 1997, approximately $241 million and $68 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax assets and liabilities of approximately $123 million and $58 million, respectively. The electric and gas regulatory assets of approximately $71 million and $44 million, respectively (excluding deferred income tax assets) are being recovered through rates and, as discussed in Note 2A, the Public Service Commission of South Carolina (PSC) has approved accelerated recovery of approximately $45 million of the electric regulatory assets. In the future, as a result of deregulation or other changes in the regulatory environment, the Company may no longer meet the criteria for continued application of SFAS 71 and would be required to write off its regulatory assets and liabilities. Such an event could have a material adverse effect on the Company's results of operations in the period the write-off is recorded, but it is not expected that cash flows or financial position would be materially affected.
C. System of Accounts
The accounting records of the Company's regulated subsidiaries are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and as adopted by the PSC.
D. Utility Plant
Utility plant is stated substantially at original cost. The costs of additions, renewals and betterments to utility plant, including direct labor, material and indirect charges for engineering, supervision and an allowance for funds used during construction, are added to utility plant accounts. The original cost of utility property retired or otherwise disposed of is removed from utility plant accounts and generally charged, along with the cost of removal, less salvage, to accumulated depreciation. The costs of repairs, replacements and renewals of items of property determined to be less than a unit of property are charged to maintenance expense.
SCE&G, operator of the V. C. Summer Nuclear Station (Summer Station), and the South Carolina Public Service Authority (PSA) are joint owners of Summer Station in the proportions of two- thirds and one-third, respectively. The parties share the op- erating costs and energy output of the plant in these proportions. Each party, however, provides its own financing. Plant-in-service related to SCE&G's portion of Summer Station was approximately $978.2 million and $937.2 million as of December 31, 1997 and 1996, respectively. Accumulated depreciation associated with SCE&G's share of Summer Station was approximately $323.6 million and $313.2 million as of December 31, 1997 and 1996, respectively. SCE&G's share of the direct expenses associated with operating Summer Station is included in "Other operation" and "Maintenance" expenses.
E. Allowance for Funds Used During Construction
AFC, a noncash item, reflects the period cost of capital devoted to plant under construction. This accounting practice results in the inclusion of, as a component of construction cost, the costs of debt and equity capital dedicated to construction investment. AFC is included in rate base investment and depreciated as a component of plant cost in establishing rates for utility services. The Company's regulated subsidiaries calculated AFC using composite rates of 9.1%, 9.1% and 8.6% for 1997, 1996 and 1995, respectively. These rates do not exceed the maximum allowable rate as calculated under FERC Order No. 561. Interest on nuclear fuel in process and sulfur dioxide emission allowances is capitalized at the actual interest amount.
F. Revenue Recognition
Customers' meters are read and bills are rendered on a monthly cycle basis. Base revenue is recorded during the accounting period in which the meters are read.
Fuel costs for electric generation are collected through the fuel cost component in retail electric rates. The fuel cost component contained in electric rates is established by the PSC during annual fuel cost hearings. Any difference between actual fuel costs and that contained in the fuel cost component is deferred and included when determining the fuel cost component during the next annual fuel cost hearing. SCE&G had undercollected through the electric fuel cost component approximately $1.3 million at December 31, 1997 and overcollected approximately $1.9 million at December 31, 1996 which are included in "Deferred Debits - Other" and "Deferred Credits - Other," respectively.
Customers subject to the gas cost adjustment clause are billed based on a fixed cost of gas determined by the PSC during annual gas cost recovery hearings. Any difference between actual gas costs and that contained in rates is deferred and included when establishing gas costs during the next annual gas cost recovery hearing. At December 31, 1997 and 1996 the Company had undercollected through the gas cost recovery procedure approximately $7.6 million and $10.9 million, respectively, which are included in "Deferred Debits - Other."
SCE&G's gas rate schedules for residential, small commercial and small industrial customers include a weather normalization adjustment, which minimizes fluctuations in gas revenues due to abnormal weather conditions.
G. Depreciation and Amortization
Provisions for depreciation are recorded using the straight- line method for financial reporting purposes and are based on the estimated service lives of the various classes of property. The composite weighted average depreciation rates were as follows:
1997 1996 1995 SCE&G 3.09% 3.13% 3.02% GENCO 2.63% 2.68% 2.67% Pipeline Corporation 2.62% 2.56% 2.78% Aggregate of Above 3.05% 3.08% 2.98%
Nuclear fuel amortization, which is included in "Fuel used in electric generation" and is recovered through the fuel cost component of SCE&G's rates, is recorded using the units-of- production method. Provisions for amortization of nuclear fuel include amounts necessary to satisfy obligations to the Department Of Energy (DOE) under a contract for disposal of spent nuclear fuel.
The acquisition adjustment relating to the purchase of certain gas properties in 1982 is being amortized over a 40-year period using the straight-line method.
H. Nuclear Decommissioning
Decommissioning of Summer Station is presently scheduled to commence when the operating license expires in the year 2022. Based on a 1991 study, the expenditures (on a before-tax basis) related to SCE&G's share of decommissioning activities are estimated, in 2022 dollars assuming a 4.5% annual rate of inflation, to be $545.3 million including partial reclamation costs. SCE&G is providing for its share of estimated decommissioning costs of Summer Station over the life of Summer Station. SCE&G's method of funding decommissioning costs is referred to as COMReP (Cost of Money Reduction Plan). Under this plan, funds collected through rates ($3.2 million in 1997 and 1996) are used to pay premiums on insurance policies on the lives of certain Company personnel. SCE&G is the beneficiary of these policies. Through these insurance contracts, SCE&G is able to take advantage of income tax benefits and accrue earnings on the fund on a tax-deferred basis at a rate higher than can be achieved using more traditional funding approaches. Amounts for decommissioning collected through electric rates, insurance proceeds, and interest on proceeds less expenses are transferred by SCE&G to an external trust fund in compliance with the financial assurance requirements of the Nuclear Regulatory Commission. Management intends for the fund, including earnings thereon, to provide for all eventual decommissioning expenditures on an after-tax basis. The trust's sources of decommissioning funds under the COMReP program include investment components of life insurance policy proceeds, return on investment and the cash transfers from SCE&G described above. SCE&G records its liability for decommissioning costs in deferred credits.
Pursuant to the National Energy Policy Act passed by Congress in 1992 and the requirements of the Department of Energy (DOE), SCE&G has recorded a liability for its estimated share of the DOE's decontamination and decommissioning obligation. The liability, approximately $4.0 million at December 31, 1997, has been included in "Long-Term Debt, Net." SCE&G is recovering the cost associated with this liability through the fuel cost component of its rates; accordingly, this amount has been deferred and is included in "Deferred Debits - Other."
I. Income Taxes
Deferred tax assets and liabilities are recorded for the tax effects of temporary differences between the book basis and tax basis of assets and liabilities at currently enacted tax rates. Deferred tax assets and liabilities are adjusted for changes in such rates through charges or credits to regulatory assets or liabilities if they are expected to be recovered from, or passed through to, customers of the Company's regulated subsidiaries; otherwise, they are charged or credited to income tax expense.
J. Pension Expense
The Company has a noncontributory defined benefit pension plan, which covers all permanent employees. Benefits are based on years of accredited service and the employee's average annual base earnings received during the last three years of employment. The Company's policy has been to fund the plan to the extent permitted by the applicable Federal income tax regulations as determined by an independent actuary.
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995 included the following components:
1997 1996 1995 (Millions of Dollars) Service cost--benefits earned during the period $ 6.8 $ 6.5 $ 5.2 Interest cost on projected benefit obligation 23.5 22.0 19.5 Adjustments: Return on plan assets (119.5) (78.6) (103.9) Net amortization and deferral 72.8 40.1 74.8 Net periodic pension (income) expense $ (16.4) $(10.0) $ (4.4)
The determination of net periodic pension cost is based upon the following assumptions:
1997 1996 1995 Annual discount rate 7.5% 7.5% 8.0% Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% Annual rate of salary increases 3.0% 3.0% 2.5%
The following table sets forth the funded status of the plan at December 31, 1997 and 1996:
1997 1996 (Millions of Dollars)
Actuarial present value of benefit obligations: Vested benefit obligation $259.7 $243.9 Nonvested benefit obligation 25.4 23.7 Accumulated benefit obligation $285.1 $267.6
Plan assets at fair value (invested primarily in equity and debt securities) $632.9 $523.5 Projected benefit obligation 344.4 306.9 Plan assets greater than projected benefit obligation 288.5 216.6 Unrecognized net transition liability 7.4 8.2 Unrecognized prior service costs 13.4 8.2 Unrecognized net gain (227.1) (175.1) Pension asset recognized in Consolidated Balance Sheets $ 82.2 $ 57.9
The accumulated benefit obligation is based on the plan's benefit formulas without considering expected future salary increases. The following table sets forth the assumptions used in determining the amounts shown above for the years 1997 and 1996.
1997 1996
Annual discount rate used to determine benefit obligations 7.5% 7.5% Assumed annual rate of future salary increases for projected benefit obligation 4.0% 3.0%
In addition to pension benefits, the Company provides certain health care and life insurance benefits to active and retired employees. The costs of postretirement benefits other than pensions are accrued during the years the employees render the service necessary to be eligible for the applicable benefits. The Company expensed approximately $8.1 million, $9.8 million and $8.5 million, net of payments to current retirees, for the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, to accelerate the amortization of the remaining transition obligation for postretirement benefits other than pensions, as authorized by the PSC, the Company expensed approximately $15.6 million and $6.2 million for the years ended December 31, 1997 and 1996, respectively. (See Note 2A.)
Net periodic postretirement benefit cost for the years ended December 31, 1997, 1996 and 1995, included the following components:
1997 1996 1995 (Millions of Dollars)
Service cost--benefits earned during the period $ 2.5 $ 2.6 $ 2.1 Interest cost on accumulated postretirement benefit obligation 7.8 7.8 7.2 Adjustments: Return on plan assets - - - Amortization of unrecognized transition obligation 18.9 9.5 3.3 Other net amortization and deferral 0.8 1.2 0.7 Net periodic postretirement benefit cost $30.0 $21.1 $13.3
The determination of net periodic postretirement benefit cost is based upon the following assumptions:
1997 1996 1995
Annual discount rate 7.5% 7.5% 8.0% Health care cost trend rate 9.0% 9.5% 11.0% Ultimate health care cost trend rate (to be achieved in 2004) 5.5% 5.5% 6.0%
The following table sets forth the funded status of the plan at December 31, 1997 and 1996:
1997 1996 (Millions of Dollars)
Accumulated postretirement benefit obligations for: Retirees $ 76.7 $ 74.2 Other fully eligible participants 5.9 6.6 Other active participants 26.2 29.3 Accumulated postretirement benefit obligation 108.8 110.1 Plan assets at fair value - - Accumulated postretirement benefit obligation 108.8 110.1
Plan assets less than accumulated postretirement benefit obligation (108.8) (110.1) Unrecognized net transition liability 29.8 48.7 Unrecognized prior service costs 5.8 6.2 Unrecognized net loss 12.2 17.8 Postretirement benefit liability recognized in Consolidated Balance Sheets $(61.0) $(37.4)
The accumulated postretirement benefit obligation is based upon the plan's benefit provisions and the following assumptions:
1997 1996 Assumed health care cost trend rate used to measure expected costs 9.0% 9.5% Ultimate health care cost trend rate (to be achieved in 2004) 5.5% 5.5% Annual discount rate 7.5% 7.5% Annual rate of salary increases 4.0% 3.0%
The effect of a one percentage-point increase in the assumed health care cost trend rate for each future year on the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 and the accumulated postretirement benefit obligation as of December 31, 1997 would be to increase such amounts by $0.2 million and $3.2 million, respectively.
K. Debt Premium, Discount and Expense, Unamortized Loss on Reacquired Debt
For regulatory purposes, long-term debt premium, discount and expense are being amortized as components of "Interest on long-term debt, net" over the terms of the respective debt issues. Gains or losses on reacquired debt that is refinanced are deferred and amortized over the term of the replacement debt.
L. Environmental
The Company has an environmental assessment program to identify and assess current and former operations sites that could require environmental cleanup. As site assessments are initiated an estimate is made of the amount of expenditures, if any, necessary to investigate and clean up each site. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Amounts estimated, accrued and actually expended to date for site assessments and cleanup relate primarily to regulated operations; such amounts are deferred and are being amortized and recovered through rates over a five-year period for electric operations and an eight-year period for gas operations. The Company has also recovered portions of its environmental liabilities through settlements with various insurance carriers. Deferred amounts, net of amounts recovered through rates and insurance settlements, totaled $32.4 million and $41.4 million at December 31, 1997 and 1996, respectively. The deferral includes the estimated costs to be associated with the matters discussed in Note 10C.
M. Oil and Gas On December 1, 1997 substantially all of the assets of the Company's oil and gas exploration and production subsidiary, Petroleum Resources were sold for $110 million, resulting in an after-tax gain of $17.6 million. The Company followed the full cost method of accounting for its oil and gas operations and, accordingly, capitalized all costs it incurred in the acquisition, exploration and development of interests in oil and gas properties. In addition, the capitalized costs were subject to a "ceiling test". Non-cash write-downs resulting from the application of the ceiling test were $24.2 million for the year ended December 31, 1995.
N. Temporary Cash Investments
The Company considers temporary cash investments having original maturities of three months or less to be cash equivalents. Temporary cash investments are generally in the form of commercial paper, certificates of deposit and repurchase agreements.
O. Reclassifications
Certain amounts from prior periods have been reclassified to conform with the 1997 presentation.
P. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. RATE MATTERS:
A. On January 9, 1996 the PSC issued an order granting SCE&G an increase in retail electric rates of 7.34%, which was designed to produce additional revenues, based on a test year, of approximately $67.5 million annually. The increase was implemented in two phases. The first phase, an increase in revenues of approximately $59.5 million annually or 6.47%, commenced in January 1996. The second phase, an increase in revenues of approximately $8.0 million annually, or .87%, was implemented in January 1997. The PSC authorized a return on common equity of 12.0%. The PSC also approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through rates over a ten-year period. Additionally, the PSC approved accelerated recovery of a significant portion of SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation for postretirement benefits other than pensions, changing the amortization periods to allow recovery by the end of the year 2000. SCE&G's request to shift, for ratemaking purposes, approximately $257 million of depreciation reserves from transmission and distribution assets to nuclear production assets was also approved. The Consumer Advocate appealed certain issues in the order to the South Carolina Circuit Court, which affirmed the PSC's decisions, and subsequently to the South Carolina Supreme Court, which is expected to hear the case and issue a ruling prior to the end of 1998. While the outcome of this proceeding is uncertain, the Company does not believe that any significant adverse change in the rate order is likely. The PSC's order does not apply to wholesale electric revenues under the FERC's jurisdiction, which constitute approximately two percent of the Company's electric revenues. The FERC rejected the transfer of depreciation reserves for rates subject to its jurisdiction.
B. In 1994 the PSC issued an order approving SCE&G's request to recover through a billing surcharge to its gas customers the costs of environmental cleanup at the sites of former manufactured gas plants. 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 deferred. In October 1997, as a result of the annual review, the PSC approved SCE&G's request to increase the billing surcharge from $.006 per therm to $.011 per therm which should enable SCE&G to recover the remaining balance of $29.6 million by December 2002.
C. In September 1992 the PSC issued an order granting SCE&G a $.25 increase in transit fares from $.50 to $.75 in both Columbia and Charleston, South Carolina; however, the PSC also required $.40 fares for low income customers and denied SCE&G's request to reduce the number of routes and frequency of service. The new rates were placed into effect in October 1992. SCE&G appealed the PSC's order to the Circuit Court, which in May 1995 ordered the case back to the PSC for reconsideration of several issues including the low income rider program, routing changes, and the $.75 fare. The Supreme Court declined to review an appeal of the Circuit Court decision and dismissed the case. The PSC and other intervenors filed another Petition for Reconsideration, which the Supreme Court denied. The PSC and other intervenors filed another appeal to the Circuit Court which the Circuit Court denied in an order dated May 9, 1996. In this order, the Circuit Court upheld its previous orders and remanded them to the PSC. During August 1996, the PSC heard oral arguments on the orders on remand from the Circuit Court. On September 30, 1996, the PSC issued an order affirming its previous orders and denied SCE&G's request for reconsideration. SCE&G has appealed these two PSC orders to the Circuit Court where they are awaiting action.
D. On August 8, 1990, the PSC issued an order approving changes in Pipeline Corporation's gas rate design for sales for resale service and upholding the "value-of-service" method of regulation for its direct industrial service. Direct industrial customers seeking "cost-of-service" based rates appealed to the Circuit Court, which reversed and remanded to the PSC its August 8, 1990 order. Pipeline Corporation appealed that decision to the Supreme Court, which on January 10, 1994 reversed the Circuit Court decision and reinstated the PSC order. Additionally, the Supreme Court interpreted the rate-making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in setting rates for natural gas service. The PSC then held another hearing and issued its order dated December 12, 1995 maintaining the present level of the maximum markup on industrial sales ("cap"). This Order was appealed to the Circuit Court by Pipeline Corporation and the industrial customer group with several other parties intervening, including the Consumer Advocate of South Carolina. On October 10, 1997, the Circuit Court issued an order in favor of the Consumer Advocate and the industrial customer group and remanded the case to the PSC to determine an overall rate of return for Pipeline Corporation. The Circuit Court also issued a second order which ruled against Pipeline Corporation and affirmed the PSC's decision that the cap should not be increased. Several motions and appeals were filed subsequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corporation from the first order without prejudice until the PSC completes proceedings on remand and has held Pipeline Corporation's appeal of the second order in abeyance until the PSC completes proceedings on remand. The Company expects the remanded case to be heard at the PSC in May 1998. The impact, if any, on the Company's results of operations, cash flows and financial position is not presently determinable.
3. LONG-TERM DEBT:
The annual amounts of long-term debt maturities, including the amounts due under the nuclear and fossil fuel agreements (see Note 4), and sinking fund requirements for the years 1998 through 2002 are summarized as follows:
Year Amount Year Amount (Millions of Dollars)
1998 $ 73.0 2001 $ 26.2 1999 105.2 2002 56.2 2000 226.5
Approximately $17.2 million of the portion of long-term debt payable in 1998 may be satisfied by either deposit and cancellation of bonds issued upon the basis of property additions or bond retirement credits, or by deposit of cash with the Trustee.
On January 13, 1998 the Company issued $60 million of medium-term notes due January 13, 2003 at an interest rate of 6.05%. Proceeds from the notes were used to repay unsecured bank loans totaling $60 million due January 9, 1998 which were classified as long-term debt at December 31, 1997.
On August 7, 1996 the City of Charleston executed 30-year electric and gas franchise agreements with SCE&G. In consideration for the electric franchise agreement, SCE&G is paying the City $25 million over seven years (1996-2002) and has donated to the City the existing transit assets in Charleston. The $25 million is included in electric plant-in-service. In settlement of environmental claims the City may have had against SCE&G involving the Calhoun Park area, where SCE&G and its predecessor companies operated a manufactured gas plant until the 1960's, SCE&G is paying the City $26 million over a four-year period (1996-1999). Such amount is deferred (see Note 1L). The unpaid balances of these amounts are included in "Long-Term Debt."
SCE&G has three-year revolving lines of credit totaling $75 million, in addition to other lines of credit, that provide liquidity for issuance of commercial paper. The three-year lines of credit provide back-up liquidity when commercial paper outstanding is in excess of $175 million. The long-term nature of the lines of credit allow commercial paper in excess of $175 million to be classified as long-term debt. SCE&G's commercial paper outstanding totaled $13.3 million and $90 million at December 31, 1997 and 1996 at weighted average interest rates of 5.90% and 5.53%, respectively.
Substantially all utility plant and fuel inventories are pledged as collateral in connection with long-term debt.
4. FUEL FINANCINGS:
Nuclear and fossil fuel inventories and sulfur dioxide emission allowances are financed through the issuance by Fuel Company of short-term commercial paper. These short-term borrowings are supported by an irrevocable revolving credit agreement which expires December 19, 2000. Accordingly, the amounts outstanding have been included in long-term debt. The credit agreement provides for a maximum amount of $125 million that may be outstanding at any time.
Commercial paper outstanding totaled $80.3 million and $66.1 million at December 31, 1997 and 1996 at weighted average interest rates of 5.87% and 5.62%, respectively.
5. COMMON EQUITY:
The changes in "Common Stock," without par value, during 1997, 1996 and 1995 are summarized as follows:
Number Millions of Shares of Dollars Balance December 31, 1994 96,035,020 $ 886.8 Issuance of common stock 7,588,843 169.9 Balance December 31, 1995 103,623,863 1,056.7 Issuance of common stock 2,551,410 68.6 Balance December 31, 1996 106,175,273 1,125.3 Issuance of common stock 1,145,840 27.6 Balance December 31, 1997 107,321,113 $1,152.9
The Restated Articles of Incorporation of the Company do not limit the dividends that may be payable on its common stock. However, the Restated Articles of Incorporation of SCE&G and the Indenture underlying its First and Refunding Mortgage Bonds contain provisions that, under certain circumstances, could limit the payment of cash dividends on its common stock. In addition, with respect to hydroelectric projects, the Federal Power Act requires the appropriation of a portion of certain earnings therefrom. At December 31, 1997 approximately $21.5 million of retained earnings were restricted by this requirement as to payment of cash dividends on SCE&G's common stock.
Cash dividends on common stock were declared at an annual rate per share of $1.51, $1.47 and $1.44 for 1997, 1996 and 1995, respectively.
6. PREFERRED STOCK:
The call premium of the respective series of preferred stock in no case exceeds the amount of the annual dividend. Retirements under sinking fund requirements are at par values.
The aggregate annual amount of purchase fund or sinking fund requirements for preferred stock for the years 1998 through 2002 is $0.6 million.
The changes in "Total Preferred Stock (Subject to purchase or sinking funds)" during 1997, 1996 and 1995 are summarized as follows:
Number Millions of Shares of Dollars Balance December 31, 1994 822,094 $51.9 Shares Redeemed: $100 par value (6,809) (0.7) $50 par value (51,666) (2.5) Balance December 31, 1995 763,619 48.7 Shares Redeemed: $100 par value (7,198) (0.7) $50 par value (50,319) (2.6) Balance December 31, 1996 706,102 45.4 Shares Redeemed: $100 par value (202,812) (20.3) $50 par value (252,196) (12.6) Balance December 31, 1997 251,094 $12.5
On October 28, 1997, SCE&G Trust I (the "Trust"), a wholly- owned subsidiary of SCE&G, issued $50 million (2,000,000 shares) of 7.55% Trust Preferred Securities, Series A (the "Preferred Securities"). SCE&G owns all of the Common Securities of the Trust (the "Common Securities"). The Preferred Securities and the Common Securities (the "Trust Securities") represent undivided beneficial ownership interests in the assets of the Trust. The Trust exists for the sole purpose of issuing the Trust Securities and using the proceeds thereof to purchase from SCE&G its 7.55% Junior Subordinated Debentures due September 30, 2027. The sole asset of the Trust is $50.0 million of Junior Subordinated Debentures of SCE&G. Accordingly, no financial statements of the Trust are presented. SCE&G's obligations under the Guarantee Agreement entered into in connection with the Preferred Securities, when taken together with SCE&G's obligation to make interest and other payments on the Junior Subordinated Debentures issued to the Trust and SCE&G's obligations under the Indenture pursuant to which the Junior Subordinated Debentures were issued, provides a full and unconditional guarantee by SCE&G of the Trust's obligations under the Preferred Securities. Proceeds were used to redeem preferred stock of SCE&G.
The preferred securities of SCE&G Trust I are redeemable only in conjunction with the redemption of the related 7.55% Junior Subordinated Debentures. The Junior Subordinated Debentures will mature on September 30, 2027 and may be redeemed, in whole or in part, at any time on or after September 30, 2002 or upon the occurrence of a Tax Event. A Tax Event occurs if an opinion is received from counsel experienced in such matters that there is more than an insubstantial risk that: (1) the Trust is or will be subject to Federal income tax, with respect to income received or accrued on the Junior Subordinated Debentures, (2) interest payable by SCE&G on the Junior Subordinated Debentures will not be deductible, in whole or in part, by SCE&G for Federal income tax purposes, or (3) the Trust will be subject to more than a de minimis amount of other taxes, duties, or other governmental charges.
Upon the redemption of the Junior Subordinated Debentures, payment will simultaneously be applied to redeem Preferred Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures. The Preferred Securities are redeemable at $25 per preferred security plus accrued dividends. 7. INCOME TAXES:
Total income tax expense for 1997, 1996 and 1995 is as follows:
1997 1996 1995 (Millions of Dollars) Current taxes: Federal $101.3 $ 98.3 $101.6 State (5.4) 14.1 16.2 Total current taxes 95.9 112.4 117.8 Deferred taxes, net: Federal 3.5 8.6 (13.9) State 0.3 1.7 (1.2) Total deferred taxes 3.8 10.3 (15.1) Investment tax credits: Deferred - State 19.0 - - Amortization of amounts deferred - State (1.5) - - Amortization of amounts deferred - Federal (3.6) (3.6) (3.6) Total investment tax credit 13.9 (3.6) (3.6) Total income tax expense $113.6 $119.1 $ 99.1
The difference in total income tax expense and the amount calculated from the application of the statutory Federal income tax rate (35% for 1997, 1996 and 1995) to pre-tax income is reconciled as follows:
1997 1996 1995 (Millions of Dollars) Net income $220.7 $215.3 $168.3 Total income tax expense: Charged to operating expenses 105.4 118.0 109.9 Charged (credited) to other items 8.2 1.1 (10.8) Preferred stock dividends 9.2 5.4 5.7 Total pre-tax income $343.5 $339.8 $273.1
Income taxes on above at statutory Federal income tax rate $120.2 $118.9 $ 95.6 Increases (decreases) attributable to: State income taxes (less Federal income tax effect) 8.1 10.2 9.8 Deferred income tax reversal at higher than statutory rates (4.2) (4.1) (3.9) Amortization of Federal investment tax credits (3.6) (3.6) (3.6) Allowance for equity funds used during construction (2.5) (2.5) (3.5) Other differences, net (4.4) 0.2 4.7 Total income tax expense $113.6 $119.1 $ 99.1
The tax effects of significant temporary differences comprising the Company's net deferred tax liability of $587.5 million at December 31, 1997 and $556.7 million at December 31, 1996 are as follows:
1997 1996 (Millions of Dollars) Deferred tax assets: Unamortized investment tax credits $ 60.7 $ 52.1 Cycle billing 20.5 19.8 Nuclear operations expenses 3.1 4.7 Oil and gas properties - 8.3 Deferred compensation 6.9 6.7 Other postretirement benefits 14.6 10.8 Other 11.2 12.9 Total deferred tax assets 117.0 115.3
Deferred tax liabilities: Property, plant and equipment 634.3 611.0 Pension expense 27.5 21.8 Research and experimentation 19.5 12.5 Reacquired debt 7.5 8.3 Deferred fuel 3.6 3.7 Other 12.1 14.7 Total deferred tax liabilities 704.5 672.0 Net deferred tax liability $587.5 $556.7
The Internal Revenue Service has examined and closed consolidated Federal income tax returns of the Company through 1989, and has examined and proposed adjustments to the Company's Federal returns for 1990 through 1995. The Company does not anticipate that any adjustments which might result from these examinations will have a significant impact on the results of operations, cash flows or financial position of the Company.
8. FINANCIAL INSTRUMENTS:
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
1997 1996 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (Millions of Dollars) Assets: Cash and temporary cash investments $ 59.7 $ 59.7 $ 17.3 $ 17.3 Investments 290.5 341.9 176.4 167.7 Liabilities: Short-term borrowings 58.5 58.5 144.6 144.6 Long-term debt 1,639.5 1,722.4 1,632.8 1,673.1 Preferred stock (subject to purchase or sinking funds) 12.5 11.3 45.4 44.3
The information presented herein is based on pertinent information available to the Company as of December 31, 1997 and 1996. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such financial instruments have not been comprehensively revalued since December 31, 1997, and the current estimated fair value may differ significantly from the estimated fair value at that date.
The following methods and assumptions were used to estimate the fair value of the above classes of financial instruments:
Cash and temporary cash investments, including commercial paper, repurchase agreements, treasury bills and notes, are valued at their carrying amount.
Fair values of investments and long-term debt are based on quoted market prices of the instruments or similar instruments, or for those instruments for which there are no quoted market prices available, fair values are based on net present value calculations. Investments which are not considered to be financial instruments have been excluded from the carrying amount and estimated fair value. Settlement of long-term debt may not be possible or may not be a prudent management decision.
Short-term borrowings are valued at their carrying amount.
The fair value of preferred stock (subject to purchase or sinking funds) is estimated on the basis of market prices.
Potential taxes and other expenses that would be incurred in an actual sale or settlement have not been taken into consideration.
SCANA Communications, Inc. (SCI) owns approximately 4.5 million common shares and 100,000 non-voting series B and 50,000 non-voting series D convertible preferred shares of Powertel, Inc. (Powertel), formerly InterCel, Inc., a publicly traded telecommunications company which owns and operates personal communications services (PCS) systems in several major markets in the Southeast. The cost of such investments were approximately $66.7 million, $75.1 million and $22.5 million, respectively. Common shares were initially recorded at $14.85 per share. Preferred series B shares are convertible in March 2002 at a conversion price of $16.50 per common share or approximately 4.5 million common shares. Preferred series D shares are convertible in March 2002 at a conversion price of $12.75 per common share or approximately 1.7 million common shares. Powertel common stock, which trades on NASDAQ, closed at $16 3/4 on December 31, 1997, resulting in a pre-tax unrealized holding gain of $8.5 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of the convertible preferred shares of Powertel is not readily determinable. However, on an as converted basis, the market value of the underlying common shares for the preferred shares was approximately $105.7 million at December 31, 1997, resulting in an unrecorded pre-tax holding gain of $8.1 million.
In March 1997 SCI sold its interest in GulfStates Fibernet, a Georgia general partnership (constituting SCI's remaining interests in the GulfStates Fibernet joint venture), and certain fiber optic assets of SCI located within the State of Georgia, to ITC Holding Company Inc. (Old ITC), a Georgia-based telecommunications company and an affiliate of Powertel, in exchange for 588,411 shares of series A convertible preferred stock of Old ITC (Old ITC Preferred) and a subordinated note of Old ITC. As part of an earnout provision related to the GulfStates Fibernet transaction and the receipt of Old ITC Preferred through the earnout provision, SCI received in October 1997 56,742 additional shares of Old ITC Preferred, resulting in a pre-tax gain of $2.2 million which was recorded in "Other Income."
On October 20, 1997, as part of a reorganization involving ITC, its subsidiary, ITC West Point, Inc., and ITC^DeltaCom, Inc. (ITCD), a Georgia-based telecommunications company and an affiliate of Powertel, Old ITC merged with ITCD, and each of Old ITC's common shareholders (including SCI) received one share of common stock of ITC West Point, Inc. for each whole share of Old ITC common stock owned by such shareholders. In addition, SCI received one share of series A convertible preferred stock of ITC West Point, Inc. for each share of Old ITC Preferred owned by SCI. ITC West Point, Inc. changed its name to ITC Holding Company, Inc. subsequent to the ITC merger.
Through the merger, SCI received approximately 1,777,919 shares, representing approximately 7.2%, of ITCD common stock, and 1,480,771 shares of series A preferred stock of ITCD convertible in March 2002 into 1,480,771 shares of ITCD common stock. ITCD common stock, which began trading on NASDAQ on October 24, 1997, closed at $16 1/2 per share on December 31, 1997, resulting in a pre-tax unrealized holding gain of $20.3 million. The after-tax amount of such gain is included in the balance sheet as a component of "Common Equity." The market value of series A preferred stock of ITCD is not readily determinable. However, on an as converted basis the market value of the underlying common stock for the series A preferred stock was approximately $24.4 million at December 31, 1997 resulting in an unrecorded pre-tax holding gain of $13.2 million.
Knology Holdings, Inc. (Knology), also an affiliate of Powertel, is developing a system designed to provide interactive video, voice and data services for broadband systems in certain southeastern markets. SCI on October 22, 1997 purchased from Knology 71,050 units, each consisting of one 11.875% Senior Discount Note (Note) due 2007 and one Warrant to purchase preferred stock of Knology. The purchase price of the units was approximately $40 million. In addition to the acquisition of the Knology units, SCI has invested $5.3 million to purchase 3,639 shares of preferred stock of Knology and Knology has agreed to issue to SCI warrants to purchase 753 shares of preferred stock at $1,500 per share.
9. SHORT-TERM BORROWINGS:
The Company pays fees to banks as compensation for its committed lines of credit. Commercial paper borrowings are for 270 days or less. Details of lines of credit (including uncommitted lines of credit) and short-term borrowings, excluding amounts classified as long-term (Notes 3 and 4), at December 31, 1997 and 1996 and for the years then ended are as follows:
1997 1996 (Millions of Dollars)
Authorized lines of credit at year-end $564.0 $525.1 Unused lines of credit at year-end $518.8 $470.4
Short-term borrowings outstanding at year-end: Bank loans $45.2 $54.6 Weighted average interest rate 6.43% 5.81% Commercial paper $13.3 $90.0 Weighted average interest rate 5.90% 5.53%
10. COMMITMENTS AND CONTINGENCIES:
A. Construction
The Company and Westvaco Corporation have formed a limited liability company, Cogen South LLC, to build and operate a $170 million cogeneration facility at Westvaco's Kraft Division Paper Mill in North Charleston, South Carolina. The Company and Westvaco each own a 50% interest in the LLC. The facility will provide industrial process steam for the Westvaco paper mill and shaft horsepower to enable SCE&G to generate up to 99 megawatts of electricity. Construction financing is being provided to Cogen South LLC by banks. A $15 million capital contribution to the LLC by each partner is expected prior to operation of the facility. In addition to the cogeneration LLC, Westvaco has entered into a 20-year contract with SCE&G for all its electricity requirements at the North Charleston mill at SCE&G's standard industrial rate. Construction of the plant began in September 1996 and it is expected to be operational in the fall of 1998.
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 $8.9 billion. Each reactor licensee is currently liable for up to $79.3 million per reactor owned for each nuclear incident occurring at any reactor in the United States, provided that not more than $10 million of the liability per reactor would be assessed per year. SCE&G's maximum assessment, based on its two-thirds ownership of Summer Station, would be approximately $52.9 million per incident, but not more than $6.7 million per year.
SCE&G currently maintains policies (for itself and on behalf of the PSA) with Nuclear Electric Insurance Limited (NEIL) and American Nuclear Insurers (ANI) providing combined property and decontamination insurance coverage of $2.0 billion for any losses at Summer Station. SCE&G pays annual premiums and, in addition, could be assessed a retroactive premium not to exceed five times its annual premium in the event of property damage loss to any nuclear generating facilities covered under the NEIL program. Based on the current annual premium, this retroactive premium would not exceed $5.1 million.
To the extent that insurable claims for property damage, decontamination, repair and replacement and other costs and expenses arising from a nuclear incident at Summer Station exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, and to the extent that SCE&G's rates would not recover the cost of any purchased replacement power, SCE&G will retain the risk of loss as a self-insurer. SCE&G has no reason to anticipate a serious nuclear incident at Summer Station. If such an incident were to occur, it could have a material adverse impact on the Company's results of operations, cash flows and financial position.
C. Environmental
In September 1992, the EPA notified SCE&G, the City of Charleston and the Charleston Housing Authority of their potential liability for the investigation and cleanup of the Calhoun Park area site in Charleston, South Carolina. This site encompasses approximately 30 acres and includes properties which were the locations for industrial operations, including a wood preserving (creosote) plant, one of SCE&G's decommissioned manufactured gas plants, properties owned by the National Park Service and the City of Charleston and private properties. The site has not been placed on the National Priorities List, but may be added before cleanup is initiated. The PRPs have agreed with the EPA to participate in an innovative approach to site investigation and cleanup called "Superfund Accelerated Cleanup Model," allowing the pre-cleanup site investigation process to be compressed significantly. The PRPs have negotiated an administrative order by consent for the conduct of a Remedial Investigation/Feasibility Study and a corresponding Scope of Work. Field work began in November 1993 and the EPA conditionally approved a Remedial Investigation Report in March 1997. Although SCE&G is continuing to investigate cost-effective clean-up methodologies, further work is pending EPA approval of the final draft of the Remedial Investigation Report. See Note 1L. In October 1996 the City of Charleston and SCE&G settled all environmental claims the City may have had against SCE&G involving the Calhoun Park area for a payment of $26 million over four years (1996-1999) by SCE&G to the City. SCE&G is recovering the amount of the settlement, which does not encompass site assessment and cleanup costs, through rates in the same manner as other amounts accrued for site assessments and cleanup as discussed above. See Note 1L. As part of the environmental settlement, SCE&G has agreed to construct an 1,100 space parking garage on the Calhoun Park site and to transfer the facility to the City in exchange for a 20-year municipal bond backed by revenues from the parking garage and a mortgage on the parking garage. Construction is expected to begin in 1998. The total amount of the bond is not to exceed $16.9 million, the maximum expected project cost.
SCE&G owns three other decommissioned manufactured gas plant sites which contain residues of by-product chemicals. SCE&G is investigating the sites to monitor the nature and extent of the residual contamination.
D. Franchise Agreement
See Note 3 for a discussion of an electric franchise agreement between SCE&G and the City of Charleston.
E. SCI Matters
SCI, as a result of an internal audit, informed the Federal Communications Commission (FCC) that it violated certain licensing requirements in establishing and operating an 800 Mhz radio system in South Carolina for public safety and utility use. As a result, SCI has returned to the FCC several licenses obtained in violation of FCC rules and the FCC is conducting an investigation of the system. The Company does not believe that the resolution of this issue will have a material impact on results of operations, cash flows or financial position.
F. Claims and Litigation
The Company is engaged in various claims and litigation incidental to its business operations which management anticipates will be resolved without material loss to the Company. No estimate of the range of loss from these matters can currently be determined.
11. SEGMENT OF BUSINESS INFORMATION:
Segment information at December 31, 1997, 1996 and 1995 and for the years then ended is as follows:
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,103 $419 $ 1 $1,523 Operating expenses, excluding depreciation and amortization 692 359 5 1,056 Depreciation and amortization 136 17 - 153
Total operating expenses 828 376 5 1,209
Operating income (loss) $ 275 $ 43 $(4) 314
Add - Other income, net 38 Less - Interest charges, net 122 Less - Preferred Dividend Requirements, including SCE&G - Obligated Mandatorily Redeemable Preferred Securities 9 Net income $ 221
Capital expenditures: Identifiable $ 220 $ 32 $ - $ 252
Utilized for overall Company operations 24 Total $ 276
Identifiable assets at December 31, 1996: Utility plant, net $3,125 $387 $ 2 $3,514 Inventories 75 20 - 95 Total $3,200 $407 $ 2 3,609
Other assets 1,323 Total assets $4,932
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,107 $403 $ 3 $ 1,513 Operating expenses, excluding depreciation and amortization 692 350 9 1,051 Depreciation and amortization 130 18 - 148
Total operating expenses 822 368 9 1,199
Operating income (loss) $ 285 $ 35 $(6) 314
Add - Other income, net 29 Less - Interest charges, net 122 Less - Preferred stock dividends 6 Net income $ 215
Capital expenditures: Identifiable $ 199 $ 48 $ - $ 247
Utilized for overall Company operations 24 Total $ 271
Identifiable assets at December 31, 1996: Utility plant, net $3,047 $371 $ 2 $3,420 Inventories 84 26 - 110 Total $3,131 $397 $ 2 3,530
Other assets 1,229 Total assets $4,759
Electric Gas Transit Total (Millions of Dollars) Operating revenues $1,006 $ 343 $ 4 $1,353 Operating expenses, excluding depreciation and amortization 638 287 10 935 Depreciation and amortization 111 18 1 130
Total operating expenses 749 305 11 1,065
Operating income (loss) $ 257 38 $ (7) 288
Add - Other income, net 8 Less - Interest charges, net 122 Less - Preferred stock dividends 6 Net income $ 168
Capital expenditures: Identifiable $ 253 $ 39 $ - $ 292
Utilized for overall Company operations 28 Total $ 320
Identifiable assets at December 31, 1995: Utility plant, net $3,034 $ 338 $ 2 $3,374 Inventories 87 16 - 103 Total $3,121 $ 354 $ 2 3,477
Other assets 1,057 Total assets $4,534
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third Fourth Quarter Quarter Quarter Quarter Annual (Millions of Dollars, except per share amounts) Total operating revenues $385 $332 $418 $388 $1,523 Operating income 81 61 100 72 314 Net income 57 30 75 59 221 Earnings per weighted average share of common stock as reported .54 .28 .69 .55 2.06
First Second Third Fourth Quarter Quarter Quarter Quarter Annual (Millions of Dollars, except per share amounts) Total operating revenues $395 $351 $402 $365 $1,513 Operating income 85 67 98 64 314 Net income 69 38 70 38 215 Earnings per weighted average share of common stock as reported .66 .37 .66 .36 2.05
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
The information required by Item 10, "Directors and Executive Officers of the Registrant," with respect to executive officers is, pursuant to General Instruction G(3) to Form 10-K, set forth in Part I of this Form 10-K under the heading "Executive Officers of the Registrant" on page 28 herein. The other information required by Item 10
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements and Schedules: See Table of Contents of Consolidated Financial Statements and Supplementary Financial Data on page 40.
2. Exhibits:
Exhibits required to be filed with this Annual Report on Form 10-K are listed in the Exhibit Index following the signature page. Certain of such exhibits which have heretofore been filed with the SEC and which are designated by reference to their exhibit numbers in prior filings are incorporated herein by reference and made a part hereof.
Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, the annual report for the Company's employee stock purchase plan will be furnished under cover of Form 10-K/A to the Commission when the information becomes available.
As permitted under Item 601(b)(4)(iii), instruments defining the rights of holders of long-term debt of less than 10 percent of the total consolidated assets of the Company and its subsidiaries, have been omitted and the Company agrees to furnish a copy of such instruments to the Commission upon request.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(REGISTRANT) SCANA CORPORATION
BY (SIGNATURE) s/W. B. Timmerman (NAME AND TITLE) W. B. Timmerman, Chairman of the Board, President, Chief Executive Officer and Director DATE February 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (i) Principal executive officer:
BY (SIGNATURE) s/W. B. Timmerman (NAME AND TITLE) W. B. Timmerman, Chairman of the Board, President, Chief Executive Officer and Director DATE February 17, 1998
(ii) Principal financial and accounting officer:
BY (SIGNATURE) s/K. B. Marsh (NAME AND TITLE) K. B. Marsh, Vice President - Finance, Chief Financial Officer and Controller DATE February 17, 1998
BY (SIGNATURE) s/B. L. Amick (NAME AND TITLE) B. L. Amick, Director DATE February 17, 1998
BY (SIGNATURE) s/J. A. Bennett (NAME AND TITLE) J. A. Bennett, Director DATE February 17, 1998
BY (SIGNATURE) s/W. B. Bookhart, Jr. (NAME AND TITLE) W. B. Bookhart, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/W. T. Cassels, Jr. (NAME AND TITLE) W. T. Cassels, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/H. M. Chapman (NAME AND TITLE) H. M. Chapman, Director DATE February 17, 1998
BY (SIGNATURE) s/E. T. Freeman (NAME AND TITLE) E. T. Freeman, Director DATE February 17, 1998
BY (SIGNATURE) s/L. M. Gressette, Jr. (NAME AND TITLE) L. M. Gressette, Jr., Director DATE February 17, 1998
BY (SIGNATURE) s/W. Hayne Hipp (NAME AND TITLE) W. Hayne Hipp, Director DATE February 17, 1998
BY (SIGNATURE) s/F. C. McMaster (NAME AND TITLE) F. C. McMaster, Director DATE February 17, 1998
BY (SIGNATURE) s/L. M. Miller (NAME AND TITLE) L. M. Miller, Director DATE February 17, 1998
BY (SIGNATURE) s/J. B. Rhodes (NAME AND TITLE) J. B. Rhodes, Director DATE February 17, 1998
BY (SIGNATURE) s/M. K. Sloan (NAME AND TITLE) M. K. Sloan, Director DATE February 17, 1998
SCANA CORPORATION EXHIBIT INDEX Sequentially Numbered Pages Number
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession Not applicable
3. Articles of Incorporation and By-Laws
A. Restated Articles of Incorporation of SCANA Corporation as adopted on April 26, 1989 (Exhibit 3-A to Registration Statement No. 33-49145)................................................. # B. Articles of Amendment dated April 27, 1995 (Exhibit 4-B to Registration Statement No. 33-62421)............................................. # C. Copy of By-Laws of SCANA Corporation as revised and amended on December 17, 1997 (Filed herewith).......................................... 84
4. Instruments Defining the Rights of Security Holders, Including Indentures
A. Articles of Exchange of South Carolina Electric & Gas Company and SCANA Corporation (Exhibit 4-A to Post-Effective Amendment No. 1 to Registration Statement No. 2-90438).................... # B. Indenture dated as of November 1, 1989 to The Bank of New York, Trustee (Exhibit 4-A to Registration No. 33-32107)............................. # C. Indenture dated as of January 1, 1945, from the South Carolina Power Company (the "Power Company") to Central Hanover Bank and Trust Company, as Trustee, as supplemented by three Supplemental Indentures dated respectively as of May 1, 1946, May 1, 1947 and July 1, 1949 (Exhibit 2-B to Registration No. 2-26459)................. # D. Fourth Supplemental Indenture dates as of April 1, 1950, to Indenture referred to in Exhibit 4C, pursuant to which the Company assumed said Indenture (Exhibit 2-C to Registration No. 2-26459)................................. # E. Fifth through Fifty-second Supplemental Indenture referred to in Exhibit 4C dated as of the dates indicated below and filed as exhibits to the Registration Statements and 1934 Act reports whose file numbers are set forth below........................................... #
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
# Incorporated herein by reference as indicated.
SCANA CORPORATION EXHIBIT INDEX Sequentially Numbered Pages Number June 1, 1966 Exhibit 2-M to Registration No. 2-26459 June 1, 1967 Exhibit 2-N to Registration No. 2-29693 September 1, 1968 Exhibit 4-O to Registration No. 2-31569 June 1, 1969 Exhibit 4-C to Registration No. 33-38580 December 1, 1969 Exhibit 4-Q to Registration No. 2-35388 June 1, 1970 Exhibit 4-R to Registration No. 2-37363 March 1, 1971 Exhibit 2-B-17 to Registration No. 2-40324 January 1, 1972 Exhibit 4-C to Registration No. 33-38580 July 1, 1974 Exhibit 2-A-19 to Registration No. 2-51291 May 1, 1975 Exhibit 4-C to Registration No. 33-38580 July 1, 1975 Exhibit 2-B-21 to Registration No. 2-53908 February 1, 1976 Exhibit 2-B-22 to Registration No. 2-55304 December 1, 1976 Exhibit 2-B-23 to Registration No. 2-57936 March 1, 1977 Exhibit 2-B-24 to Registration No. 2-58662 May 1, 1977 Exhibit 4-C to Registration No. 33-38580 February 1, 1978 Exhibit 4-C to Registration No. 33-38580 June 1, 1978 Exhibit 2-A-3 to Registration No. 2-61653 April 1, 1979 Exhibit 4-C to Registration No. 33-38580 June 1, 1979 Exhibit 4-C to Registration No. 33-38580 April 1, 1980 Exhibit 4-C to Registration No. 33-38580 June 1, 1980 Exhibit 4-C to Registration No. 33-38580 December 1, 1980 Exhibit 4-C to Registration No. 33-38580 April 1, 1981 Exhibit 4-D to Registration No. 33-49421 June 1, 1981 Exhibit 4-D to Registration No. 2-73321 March 1, 1982 Exhibit 4-D to Registration No. 33-49421 April 15, 1982 Exhibit 4-D to Registration No. 33-49421 May 1, 1982 Exhibit 4-D to Registration No. 33-49421 December 1, 1984 Exhibit 4-D to Registration No. 33-49421 December 1, 1985 Exhibit 4-D to Registration No. 33-49421 June 1, 1986 Exhibit 4-D to Registration No. 33-49421 February 1, 1987 Exhibit 4-D to Registration No. 33-49421 September 1, 1987 Exhibit 4-D to Registration No. 33-49421 January 1, 1989 Exhibit 4-D to Registration No. 33-49421 January 1, 1991 Exhibit 4-D to Registration No. 33-49421 February 1, 1991 Exhibit 4-D to Registration No. 33-49421 July 15, 1991 Exhibit 4-D to Registration No. 33-49421 August 15, 1991 Exhibit 4-D to Registration No. 33-49421 April 1, 1993 Exhibit 4-E to Registration No. 33-49421 July 1, 1993 Exhibit 4-D to Registration No. 33-57955 F. 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)............................................. # G. First Supplemental Indenture to Indenture referred to in Exhibit 4-F dated as of June 1, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-49421)............................................. # H. Second Supplemental Indenture to Indenture referred to in Exhibit 4-F dated as of June 15, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-57955)............................................. # I. Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-G to Registration Statement No. 33-37787 and 333-37787-01)............................................. #
# Incorporated herein by reference as indicated.
SCANA CORPORATION EXHIBIT INDEX
Sequentially Numbered Pages
Number J. Certificate of Trust for SCE&G Trust I (Filed as Exhibit 4-B to Registration Statement No. 333-37787 and 333-37787-01)......................................... # K. Form of Junior Subordinated Indenture for SCE&G Trust I (Filed as Exhibit 4-A to Registration Statement No. 333-37787 and 333-37787-01)............................... # L. Form of Guarantee Agreement for SCE&G Trust I (Filed as Exhibit 4-F to Registration Statement No. 333-37787 and 333-37787-01)......................................... # M. Form of Amended & Restated Trust Agreement for SCE&G Trust I (Filed as Exhibit 4-D to Registration Statement No. 333-37787 and 333-37787-01)........................... #
9. Voting Trust Agreement Not Applicable
10. Material Contracts
A. Copy of Voluntary Deferral Plan as amended through October 26, 1988 (Exhibit 10-A to Form 10-K for the year ended December 31, 1988 under cover of Form SE, File No. 1-8809)................................. # B. Copy of Supplementary Voluntary Deferral Plan as amended and restated through October 21, 1997 (Filed herewith........................................... 104 C. Copy of Key Executive Severance Benefit Plan as amended and restated effective as of October 21, 1997 (Filed herewith).......................................... 127 D. Copy of SCANA Corporation Performance Share Plan as amended and restated effective February 16, 1993 (Exhibit 10-D to Form 10-K for the year ended December 31, 1992, File No. 1-8809)....................... # E. Form of Agreement under SCANA Corporation Key Employee Retention Program as amended and restated effective as of October 21, 1997 (Filed herewith)......... 169 F. Description of SCANA Corporation Whole Life Option (Exhibit 10-F to Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809)............................................... # G. Description of SCANA Corporation Performance Incentive Plan (Exhibit 10-G to Form 10-K for the year ended December 31, 1991, under cover of Form SE, File No. 1-8809).............................. #
11. Statement Re Computation of Per Share Earnings Not Applicable
12. Statements Re Computation of Ratios (Filed herewith)......... 169
SCANA CORPORATION EXHIBIT INDEX
Number 13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders Not Applicable
16. Letter Re Change in Certifying Accountant Not Applicable
18. Letter Re Change in Accounting Principles Not Applicable
21. Subsidiaries of the Registrant Included herein on Page 28
22. Published Report Regarding Matters Submitted to Vote of Security Holders Not Applicable
23. Consents of Experts and Counsel Consent of Deloitte & Touche LLP (Filed herewith)............ 173
24. Power of Attorney Not Applicable
27. Financial Data Schedule Filed herewith
99. Additional Exhibits Not Applicable
# Incorporated herein by reference as indicated.