SCANA Corporation Q3 2009 Earnings Call Transcript

Executives

Betty Best - Director of Financial Planning and Investor Relations

Jimmy Addison - Senior Vice President and Chief Financial Officer

Kevin B. Marsh - President and Chief Operating Officer, SCE&G

Stephen A. Byrne - Senior Vice President Nuclear Operations

Analysts

Christopher Bassett - Decade Capital Management, LLC

Michel Lapides - Goldman Sachs

Jonathan Reeder - Wells Fargo

Tim Winter - Gabelli & Company

Dan Jenkins - State of Wisconsin Investments

Michael Lapides - Goldman Sachs

SCANA Corporation (SCG) Q3 2009 Earnings Call October 27, 2009 11:00 AM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. My name is Ken and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the SCANA Corporation Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, this conference is being recorded on Tuesday October 27, 2009. Anyone who does not consent the taping may drop off the line at this time.

I would now like to turn the call over to Betty Best, Director of Financial Planning and Investor Relations.

Betty Best

Thanks, Ken and good morning. I like to welcome everyone to our earnings conference call including those who are joining us on the webcast. Earlier today, we announced financial results for the third quarter of 2009. In just a minute, Jimmy Addison, Senior Vice President and Chief Financial Officer will review those results and respond to questions.

Also on the call today will be Kevin Marsh, President of SCE&G and Steve Byrne SCANA's Chief Nuclear Officer giving updates on certain operational issues and our new nuclear program. The earnings press release that we refer to in this conference call is available on our website at scana.com. I would to like to remind everyone that certain statements that may be made during today's call, which are not statements such historical fact are considered as forward-looking statements and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking statements. Including the risks and uncertainties discussed in the Company's SEC filings. The Company does not recognize an obligation to update any forward-looking statements.

I will now turn the call over to Jimmy Addison.

Jimmy Addison

Thanks Betty and good morning. I would also like to welcome each of you to our call. This morning, we reported third quarter earnings of $0.84 per share, up from $0.80 per share in the same quarter of 2008. The $0.04 per share improvement was primarily a result of the resolution of the state income tax issue that more than offset lower electric and natural gas margins, slightly higher operations and maintenance expenses and expected dilution for the quarter.

A brief comment about the $3 million or $0.02 per share O&M increase. As you know we have made costs control a central focus during this recession in order to maintain earnings and mitigate the impact on customers of a potential rate increase. Although O&M has increased compared to the third quarter of last year, its result at an abnormally low level of incentive compensation costs in the prior year due to the performance of our stock during that period. This low level of cost was substantially reversed in the fourth quarter when the stock performed much better relative to our peers. This difference in incentive compensation accruals resulted in about $5 million or $0.03 per share additional O&M costs this quarter compared to third quarter of 2008.

For the quarter, we continue to see the impact of the recessionary economy on electric margins resulting in reduced commercial consumption and lower industrial and off-system sales compared to last year. However, we've seen a fairly consistent trend in recent months as opposed to further degradation and don't expect to see further declines as we head into 2010.

For the first nine months of 2009, we reported earnings of $2.23 per share compared to $2.22 per share for the same period in 2008. This $0.01 per share increase in earnings was driven primarily by lower O&M expenses and the favorable resolution of the state income tax issue offset by dilution and lower consumption.

Based on year-to-date results and our expectations of the results for the fourth quarter, we are narrowing our 2009 guidance to the upper half of our previously stated range. Specifically, we now expect to earn between $2.80 and $2.95 per share.

Keep in mind our earnings guidance assumes normal weather in our electric and natural gas service areas for the remainder of 2009 and excludes any potential impact from changes in accounting principles and certain gains or losses from investing activities, litigation and sales of assets. Other factors that may impact future earnings are discussed in our SEC filings.

As it relates to next year, due to the continuing economic uncertainty, we are not yet providing earnings guidance for 2010. We do expect to provide guidance when we report our full year 2009 earnings in February.

Now I would like to review the third quarter results of our principle lines of business. South Carolina Electric & Gas Company, our largest subsidiary reported earnings of $109 million or $0.89 per share compared to $100 million or $0.85 per share in the same quarter last year. The $0.04 increase is attributable to the resolution of the state tax issue which more than offset lower electric margins and dilution. As of September 30, SCE&G was serving approximately 654,000 electric customers which represents a 0.8% increase over the past year. Over that same period SCE&G's natural gas customer base increased 1.2% to approximately 306,000 customers.

With regard to state income tax issue, in 1996 based on construction activity at our coke plant we are in an Economic Impact Zone or EIZ tax credit from the state of South Carolina. This EIG credit far exceeded SCANA's state tax liability for the 1996 tax year leaving approximately $15 million of the credit unused. SCANA carry forward the unused EIZ credit earned to its 1997 and 1998 tax returns; but the South Carolina Department of Revenue contested that carry forward application. We pursued the issue and ultimately won an appeal with the South Carolina Supreme Court link that the EIZ credit earned, but not used by SCANA in 1996 may indeed be applied to its tax liability for 1997 and 1998.

Prior to this favorable Supreme Court decision and pursuant to the relevant accounting literature, concerning income tax uncertainties, the value of the contested credit had not been reflected in our income statement. This decision resolves the issue in our favor and resulted in $0.11 per share impact in the third quarter which includes a portion of the tax refund as well as the related interest income. This benefit is reflected in the income statement inline items for income taxes, for the tax benefit and other income for the interest income.

Considering the impact of this tax benefit, we estimate SCANA's effective tax rate for 2009 to be approximately 31%. Although we have received the tax refund of $15 million in cash along with the related interest income, the rest of the credit itself will be recognized for accounting purposes, over the remaining line for the plant that gave rise to the credit. The multiyear catch-up for the life of the plant today results in the tax reduction recognized this quarter. The recognition of the remaining tax benefit in future years will not materially impact our effective tax rate.

PSNC Energy a retail natural gas company in North Carolina reported their seasonal loss of $4 million or $0.04 per share in the third quarter of 2009, unchanged compared to the third quarter of 2008. Reduced margins have been mitigated by excellent cost control. At September 30, 2009 PSNC Energy was serving approximately 460,000 customers an increase of 1.2% over the last 12 months.

Carolina Gas Transmission, our interstate natural gas transmission subsidiary reported earnings of $0.03 per share compared to $0.02 per share in the same quarter last year. This increase is attributable to slightly higher transportation revenues and lower O&M expenses.

SCANA Energy, our retail natural gas marketing business in Georgia, reported a loss of $3 million or $0.02 per share, compared to breakeven results in the same quarter of 2008. This decline is due primarily to a shift in this marketplace as more customers have opted for fixed rate pricing plans to lock in recent lower natural gas prices. These fixed rate plans generally result in lower margins, as their terms are known and the gas costs can be hedged. I should also note one benefit of lower natural gas prices is reduced bad debt expenses as customers are better able to pay their substantially reduced gas bills.

Based upon current gas prices, we expect this shift in customer preference to continue and we prospectively forecast this business to earn approximately $0.20 to $0.22 per share annually, assuming normal weather. SCANA Energy continues to be a well-run business with very little hedge and it has responded well to this market shift as evidenced by a continued strong market position and profitability. One potential positive for this business is the $175 million pipeline infrastructure improvement program requested by Atlanta Gas Light Company and recently approved by the Georgia PSC.

In addition, the commission is considering a new economic development program proposed by SCANA Energy and Atlanta Gas Light which would help to expand pipelines to new areas throughout Georgia. As many of you are aware, the cost of the light pipeline system expansion this market has only grown at approximately 1.5 of 1% per year since it was open to competition in the late 99, contrasting to do to the 2 to 4 plus percent customer growth rates we have seen in our Carolina's that will be seize. At September 30, 2009, SCANA Energy was serving more than 440,000 customers in Georgia maintaining its position as a second largest natural gas marketer in the state.

SCANA's Corporate and other businesses reported a combined loss of $2 million or $0.02 per share compared to a loss of $4 million or $0.03 per share in the same quarter last year. This $0.1 per share improvement was driven primarily by lower net interest expense related to the reduction of long-term debt and its maturity in late 2008.

I'll now turn the call over to Kevin Marsh, President of SCE&G for an update on several operational and regulatory issues.

Kevin B. Marsh

Thanks Jimmy. I want to take a few minutes to update you on several important items taking place in SCE&G. Recently, we're calling our recent Natural Gas Rate Stabilization Act filing and decision the South Carolina Commission approved a $13 million increase in SCE&G's retail gas base rates. This action was in response to our June 15th annual filing made under the Rate Stabilization Act in which the company reported as for total common equity for the 12 month period in March 31, 2009 was 6.36%.

Since our actual return on equity was more than 50 basis points below the allowed return of 10.25%, SCE&G requested a 2.5% increase and it's rates in order to restore the oil lead to the authorized level as provided under the law. The new rates will be effective for bills rendered only after the first billing cycle in November.

From an operating perspective, V.C. Summer Nuclear Station recently completed its most successful 18 month operating cycle in its 25 year history. The plant set a continuous run record of 475 days and employees at the site surpassed 5.5 million consecutive safe work hours. Although the plant set a new record for continuous run, it did experience an automotive shutdown on October 2nd due to a fall on a generator output breaker on the non-nuclear side of the plant. Repair and testing of the breaker was completed in 10 days allowing the plant to restart on the evening of October, 12th. On October 16, Summer Station began its 18th regular schedule refilling outage; bringing the outage approximately one-third of the plant's uranium fuel centers will be replaced and normal preventative maintenance work will be performed.

Earlier this year, we initiated a proceeding before the Public Service Commission of South Carolina which would allow SCE&G to provide the Commission with an update of the progress in the licensing infrastructure of our two new nuclear units to be located at the V.C. Summer Nuclear Station at Jenkinsville, South Carolina.

In addition, we requested an owner approving updated construction and capital cost schedules for the construction of the new units. Updated construction schedule is a site specific schedule for our particular project and will replace the generic AP100 Westinghouse construction milestone schedule included in the initial 2008 Base Load Review Act filing.

The V.C. Summer site specific construction schedule for Westinghouse (inaudible) realized a significant milestones and better outlast the details of the construction and capital costs schedules beyond those approved by the Commission earlier this year. This refined schedule does not change our commitment to construct and complete the two units by 2016 and 2019.

Moreover, it does not change the previously approved costs of 4.53 billion in 2007 dollars, but rather it better matches the cost of the years' and what it is that expected to be incurred. The Commission has scheduled a hearing beginning November 4th to consider our request to approve the updated schedules for regulatory monitoring purposes. Under the Base Load Review Act the Commission must issue its decision of this request by January 20, 2010. We'll keep you updated as this process continues and we will continue to provide updated project milestones under the existing schedule in our quarterly SCANA's reports filed with the Office of Regulatory Staff.

Our third quarter status report will be filed November, 16th and will provide an update of our capital cost incurred through September, 2009. A copy of the SCE&G report is available on our website at scana.com.

Also according to E&I procedures on September, 30th the Commission approved our annual revised rate adjustment request for 22.5 million or 1.1% for the annual recovery of financing costs related to new CWIP. This requested rate adjustment was based on the incremental projects we'll uptake incurring from July, 2008 through June 30, 2009 and the updated project capital structure with the return on equity sit at 11%. These new rates will be effective on October 30th of this year. This represents the second increase under the Base Load Review Act.

With regards to our new nuclear project, pre-construction activities continue on budget and on schedule. We have recently completed inspections related to the manufacturing of several key all new equipment items and are very encouraged by the quality and progress of the work. We are also continuing with additional site work and hiring and training of critical skilled workers.

And finally, I am pleased to report the company personnel including our CEO, Bill Timmerman and Chief Nuclear Officer Steve Byrne recently completed our second trip this year to China to tour and inspect the Westinghouse AP1000 nuclear units already under construction. During this visit our delegation met with the Chairman of China's State Nuclear Power Technology Corporation as well as toured the module fabrication facility constructed in the Hainan site.

As we said before, we believe the valuable insight gained from observing these ongoing construction sites will help us complete our projects more efficiently and approve our overall contraction process. In exchange for this access, we have agreed to train certain Chinese operations and maintenance personnel at our existing V.C. Summer unit. The first of these training sessions will begin in September 2010 is expected to last approximately 60 days. Steve Byrne will joining us on the call shortly to answer any questions you may have about his recent trip or any other nuclear related issues.

Turning now to SCE&G's newly nuclear licensing process, on October 15th, the Nuclear Regulatory Commission issued a news release addressing the Westinghouse AP1000 Design Certification Document 17 revisions related to shield building design issues associated with potential aircraft impacts, hurricanes and major storm events. This release provides an open and transparent look at the NRC review process. These issues are not new and have been under review for appropriate design modifications for several years.

Discussions between Westinghouse and the NRC are ongoing and the NRC formal letter which outlines all of the NRC concerns on this issue gets all the technical issues on the table. Westinghouse is confident that they can satisfy the NRC concerns related to this matter. SCE&G anticipates that the NRC will adhere to their current published review schedule for DCD 17 with completion by August of 2011; although, Westinghouse is still hopeful to complete the process sooner. We do not believe this will impact our first unit commercial operation day in 2016 and we still expect to receive our COL in the second half of 2011.

That concludes our prepared marks. Jimmy, Steve and I will now be glad to respond to any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Chris Bassett with Decade Capital. Please proceed.

Christopher Bassett - Decade Capital Management, LLC

Good morning guys.

Jimmy Addison

Good morning.

Christopher Bassett - Decade Capital Management, LLC

Just had a question about the tax credit that realized this quarter; is that embedded in the newly updated 2009 earnings guidance?

Jimmy Addison

It is.

Christopher Bassett - Decade Capital Management, LLC

Okay, great. And on the SCANA Energy side of things, I understand you've lowered the ongoing sort of earnings there. So I think about that has been down a nickel and what were you guys expecting before hand?

Jimmy Addison

Its about or close or about $0.25 per share.

Christopher Bassett - Decade Capital Management, LLC

And can you provide some more color on sort of what happen there on the margin side?

Jimmy Addison

Yeah it's really, its not unique to SCANA Energy, it's the entire marketplace has really changed. And if you think that to post hurricanes Katrina and Rita and 12 to $15 natural gas prices with a majority of the market then on variable rates, a lot of folks had to pay some steep gas bills because of the cost of gas not the margins for that upcoming winner. And as gas prices have come down to fairly incredible lows recently more have elected to go with fixed rate plans. So for competitive reasons I am not going to give you our exact portfolio mix, but I will tell you that the market as a whole has moved from substantially variable to more of balanced portfolio between the two. Now when you've got the fixed rate plans, they're just not the repricing every month, there is not the volatility, et cetera and the margins were just naturally lower.

Christopher Bassett - Decade Capital Management, LLC

Okay, great. Thank you.

Jimmy Addison

You're welcome.

Operator

Our next question comes from the line of Michel Lapides. Please proceed.

Michel Lapides - Goldman Sachs

Hey guys, I a hand full of questions, I apologise for taking a little bit of time here. One, can you walk me through the various rate actions that will go into place either in the fourth quarter of 09 or during the course of 2010, so kind of items that have already been approved or items that you have filed for or will likely filed for? I am just trying to think about the master list of potential rate changes across your regulated stuff?

Jimmy Addison

Right. Well, Michael the first thing, each year you're familiar with the RSA at SCE&G's natural gas business. So that's each on each November 1st. And Kevin just discussed that a few minutes ago that will go into effect next week. Then we have the nuclear related increases so we've got the new rates that are filed each year that goes into effect each fall as well. So we've got those, we file those in May; they go into affect five months later.

So basically end of this week those will be affected and we expect to stay on that annual schedule for the foreseeable future; we seen no reason to bury from that. The other increase -- of course in North Carolina we've got the usage track where there is a deferral of mechanism. So if there is a reduced consumption or an increased consumption per customer that is adjusted for every six months.

So that means the electric business, non-nuclear, and we're at the point now where we're evaluating what we're going to do with that business; we've talked a great deal over the last few quarters about the $500 million of environmental expenditures we made to comply with federal law to support clean air. We do not have that yet in rates; we need to do that at some point very soon. And we expect to tell you more about within the next 90 days or certainly by our year-end earnings release in early February. So that's kind the lay of the land from rate increase perspective; Kevin, anything else to add.

Kevin Marsh

I think that covers it.

Michel Lapides - Goldman Sachs

Yeah, and Jimmy thank you and Kevin thank you. Can you on the RSA can you repeat the amount and can you just kind of walk me though the mechanics again, I just want to refresh my understanding?

Kevin Marsh

Yeah, our RSA is filed early in the year and the adjustment we are going to have this time is $13 million that will be effective in bills starting in November. And as you recall the way that works is we have an established amount return of 10.25% and the Commission allows us to take the snapshot of that each March 31 and if we fall more than 50 basis points below, we file the necessary schedules to bring it back up to the old last amount which is exactly what we did this year. So you'll see $13 million on an annual basis and that was about a 2.5% increase in rates.

Michel Lapides - Goldman Sachs

Got it. And Jimmy or Kevin, one other item, are there other -- are you contemplating filing at South Carolina Electric Gas Utility gas utility rate case or also a PSC&C rate case over the next 12 to 18 months?

Kevin Marsh

From SCE&G perspective the RSA is designed to take care of that on an annual basis. Unlike the electric side when you have large major components that go in with major plant construction; certain case what we are looking that now the scrubbers, the gas is more normal trend, regular increases so we can pick those up on a smooth basis year-to-year. And that is the annual adjustment to make the filing to recover those investments. It's not something outside of that unless it will something would be very unusual.

Jimmy Addison

And Michael as I also noted North Carolina with the increase that was there last fall we're earning near our allowed return in North Carolina. So I don't see one there within that 12 to 18 month time period unless something really radical changed in the marketplace.

Michel Lapides - Goldman Sachs

Got it. Last item, I got pulled off the call for a second, so I want to make sure I understand. Can you revisit your comments regarding the nuclear CapEx schedule?

Jimmy Addison

We've provided those information in the filings that has gone before the Commission and fully updates, we've got all of the amounts that would show what we expect to spend. I think the important point there is to last schedule we filed with Commission, updated this shift about $400 million that we pushed out beyond the commercial operation dated 2011. So I am think the best source for that is pull that information from the website, we can give those details through Bryan Hatchell.

Michel Lapides - Goldman Sachs

Got it, okay. Thanks guys.

Jimmy Addison

Okay. Thanks Mike.

Operator

We have a follow-up question from the line of Chris Bassett with Decade Capital. Please proceed.

Christopher Bassett - Decade Capital Management, LLC

Hey just wanted a follow-up on rates on for 2010; do you have any comments on load next year and anything around sort of event rotations for economic recovery?

Jimmy Addison

Chris that is the question of the day anywhere I guess, but certainly here as well -- and all we can tell you at this point is that we've seen things really moving sideways the last couple of quarters. We have not seen it go down further, there are some possibilities of potential industrial announcements in and around our area that could be significant and we expect some of those within the next week or two specifically related to Boeing that's been out in the press a large potential 787 Dreamliner assembly line in Charleston, South Carolina in our territory, several hundred jobs maybe over 750. But, more broadly we just we really see things more flat from second quarter to third quarter as it relates to consumption.

Christopher Bassett - Decade Capital Management, LLC

And then also with regards 2010 on the pension side of things, any idea whether there are any incremental expense next year? I guess part of that, I missed it, with Michael questions, but any additional clarity on timing for recovery in rates of some the expenses in new plant and service?

Jimmy Addison

Yeah. As it relates to pension you may or may not be familiar with the deferral order we have from the South Carolina Commission, it relates to both the electric and gas business in South California. But they have allowed us to defer the incremental cost as a result of the investment decline in South California -- investment in place now I am estimating here, maybe about 18 months. So we have not had any affect from the order and the regulated business in South California because of the reduction.

During that period, we've also had a substantial recovery of the assets and we're now back at the point where we start off before the investments really declined a year ago; we had a about $1.30 in assets for every dollar in liability. So we were in very good shape as it relates to our pension assets related to the liabilities. We are now back above water, so I think the low point we got down it was in the 80% range, but we're now back with the assets exceeding the liabilities.

So we feel good about where we are we are. We don't expect any incremental pension expense until we go in for a base rate proceeding at the time the Commission would take up to prior deferral and than I expect, what they would do what we will proposed is to take this deferred expense that is accumulated on the balance sheet in the end row, and select some amortization period of three years or so and spread that over it, or over at the time where we get additional revenue to offset that. So I don't see any incremental expense next year one way to answer your question.

Christopher Bassett - Decade Capital Management, LLC

Okay, thank you. And then finally on timing for new rates in effect would it be fair for me to assume the middle of next year?

Jimmy Addison

Well, we got it basically a seven month window. We've got 30 day notice period and then six months from the date of the filing and typically what we do is give the 30 day notice, file the case 30 days later, six months from that date they are in effect. So all I am prepared to tell you today is that we will let you know more about that within the next 90 days. So you guys make your own assumption around that, I am sorry, can't be more specific.

Christopher Bassett - Decade Capital Management, LLC

Okay. Thanks.

Jimmy Addison

Yeah.

Operator

Our next question comes from the line of Jonathan Reeder with Wells Fargo. Please proceed.

Jonathan Reeder - Wells Fargo

Good morning, Jimmy.

Jimmy Addison

Good morning.

Jonathan Reeder - Wells Fargo

Could you over any impacts on weather this quarter and kind of the impact on sales margin?

Jimmy Addison

Yeah, weather was $0.02 positive compared to last year's third quarter and it was just slightly negative versus normal weather. So it was not a large driver for the quarter.

Jonathan Reeder - Wells Fargo

Okay. All right, that's all I have. Thanks.

Operator

Our next question comes from the line Tim Winter with Gabelli. Please proceed.

Tim Winter - Gabelli & Company

Hi Jimmy just two quick questions. One is, do you know what the earned ROE is at the electric business at SCE&G for the trailing 12 months?

Jimmy Addison

Yeah Tim, just a second; I think we're about 935 -- 9.35.

Tim Winter - Gabelli & Company

Okay. And then, can you just update us on the interim financing plans for 2010, the program equity; what the dollar amount is?

Jimmy Addison

Yeah. Tim, we don't have a great deal to do over the next 14 months or so. Really, it really ramps up more consistent with the nuclear CapEx in 2011 and afterwards. But to specifically answer your question, let me just finish up on 2009, here we got a small bond deal to do. In the past quarter, I think I suggested to you that would be in the 175 range with the cash we received from this tax resolution we now estimate that to be in the 150 range.

So that's a little bit of incremental help for the balance of this year, but for the next 30 years as we expect to do 30 year deal. And then for next year our plan is to do equity in the 130 to 150 range. We have not been more specific about when we might do that; I want to tell you well repeat what I have said in the past which is the way the Base Load Review law is constructed. When you take that snapshot at the end of May when we make our annual filing, you adjust your, we re-measure your cap structure.

So if you were going to do it in the middle of the year, it would make more sense to it before that filing than afterwards. If we don't need the equity to later in the year then it's a different issue. But generally in that 130 to 150 range next year. And of course that's incremental to the 80 to 90 million we expect to raise from our 401(k) and our dividend reinvestment plans.

Tim Winter - Gabelli & Company

And then one follow-up on that; when is the last day that you can get equity included in the rate filing; in another words would you need to issue equity before making a rate filing or that is included in the...?

Jimmy Addison

For the nuclear?

Tim Winter - Gabelli & Company

No, for the general rate case.

Jimmy Addison

Now you can reach out for any non-measurable increase up through really the hearing.

Tim Winter - Gabelli & Company

Okay, great. Thanks.

Jimmy Addison

You're welcome.

Operator

(Operator Instructions). Our next question comes from the line of Dan Jenkins. Please proceed.