Executives
Byron Hinson – Director, Financial Planning & IR
Jimmy Addison – SVP and CFO
Kevin Marsh – President of SCE&G
Steve Byrne – EVP, Generation of SCE&G
Analysts
Dan Jenkins – State of Wisconsin Investment Board
Michael Lapides – Goldman Sachs
Paul Patterson – Glenrock Associates
Jonathan Reeder – Wells Fargo
SCANA Corp. (SCG) Q1 2010 Earnings Call Transcript May 6, 2010 2:00 PM ET
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. My name is Kwanda and I will 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. (Operator Instructions) As a reminder, this conference call is being recorded on Thursday, May 6th, 2010. Anyone who does not consent to the taping may drop off the line at this time.
I would now like to turn the call over to Byron Hinson, Director of Financial Planning and Investor Relations. Please proceed, sir.
Byron Hinson
Thanks. I'd like to welcome everyone to our earnings conference call, including those who are joining us on the webcast. For those of you following on the web, there are accompanying slides we'll refer to throughout the call today. You can manually advance the slides, or you can print a hard copy and print along with each speaker's prompts.
Early today we announced financial results for the first quarter of 2010. In just a moment, Jimmy Addison, Senior Vice-President and Chief Financial Officer and Kevin Marsh, President of SCE&G will review those results and respond to questions. The earnings press release that we will refer to in this conference call is available on our website at SCANA.com.
Beginning on slide two, I would like to remind everyone that certain statements that may be made during today's call, which are not statements of historical fact, are considered 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 would now like to turn the call over to Jimmy.
Jimmy Addison
Thanks, Byron. I would like to start on slide three, which reflects SCANA's first quarter earnings on a GAAP basis of $1.02 per share compared to $0.94 per share in the first quarter of 2009.
These results were driven by several positive factors, including higher consumption due to weather and other factors, increased revenues associated with the Base Load Review Act and Natural Gas Rate Stabilization Act and customer growth on our system. These factors more than offset the negative impact of higher operating and maintenance expenses, incremental interest expense, increased property tax and share dilution.
During this recession, we've been very diligent with our cost control. The majority of the $13 million increase in O&M expense is due to recorded bad debt expense related to substantially increased sales and some increase in incentive compensation accruals due in part to the recent performance of our sock.
O&M, net of these two components, is only up about $6 million or $0.03 per share. Principal factors for this increase are outage costs at our Jasper plant, the performance of more tree trimming earlier in the year and growth in labor at PSNC to support new customer adds.
As shown in the graph on slide four, kilowatt hour sales of electricity to our retail customers in 2010 were up 10% over 2009. Residential sales increased 18.6%. Commercial sales were up 3.4% and industrial sales rose 6.9%. Overall, total kilowatt hour sales of electricity, which includes sales to other utilities were up just under 9%. We estimate sales exclusive of weather were up approximately 3.7%. We're encouraged by these results.
Consolidated therm sales of natural gas in 2010 were up 11.9%. Residential sales increased 24.6%, commercial sales rose 11.8% and industrial sales were up 3.8%. Additionally, this quarter we deferred for potential refund $25 million of estimated incremental electric revenues earned during the quarter due to the unusually cold weather.
This deferral is part of a proposed pilot weather normalization or WNA mechanism we made to the office of regulatory staff or ROS in rate case settlement negotiations. Kevin Marsh will talk more about the rate case including this provision in a few minutes.
Now, I'd like to review first quarter results for our principal lines of business on slide five. As you know, the majority of SCANA's operations are regulated. Our regulated utility businesses, South Carolina Electric & Gas, PSNC Energy and Carolina Gas Transmission collectively represent more than 90% of the company's total assets and annual earnings per share.
SCE&G, our largest subsidiary reported earnings of $0.51 per share, unchanged compared to the same quarter last year. These results are net of the $25 million WNA revenue deferral previously discussed and are attributable to higher non-weather related consumption, customer growth and the impact of increases in rates under the base load review act and the national gas rates stabilization act. These increases were offset by higher O&M and interest expenses and share dilution.
On slide six, as of March 31 of this year, SCE&G was serving approximately 659,000 electric customers, which represents a 1.1% increase during the year. Over the same period, SCE&G's natural gas customer base increased 1.2% to approximately 313,000. PSNC Energy, our retail natural gas distribution company in North Carolina, reported earnings for the first quarter of $0.25 per share, unchanged compared to the same quarter in 2009.
These results are due primarily to improved margins, offset by slightly higher operating expenses and depreciation. At March 31, 2010 PSNC Energy was serving approximately 475,000 natural gas customers, an increase of 1.3% over the last 12 months. We're very encouraged to see improving customer growth in our system and increased non-weather related consumption.
SCANA Energy, our retail natural gas marketing business in Georgia, reported earnings of $0.24 per share in the first quarter of 2010 compared to $0.18 per share in the comparable period of 2009. This improvement is due primarily to unusually cold weather, which drove higher volumes and resulted in improved margins.
At March 31, 2010 SCANA Energy was serving approximately 465,000 customers in Georgia, maintaining its position as the second largest natural gas marketer in the state. SCANA's corporate and other businesses, which include Carolina Gas Transmission, SCANA Communications, ServiceCare, SCANA Energy Marketing and the holding company reported earnings of $2 million or $0.02 per share compared to breakeven results in the first quarter of 2009. This improvement is due primarily to a lower effective tax rate.
I'd now like to turn the call over to Kevin for a regulatory update on SCE&G.
Kevin Marsh
Thanks, Jimmy and good afternoon. Before I discuss the rate case, I would like to take a minute to address a few other regulatory items at SCE&G and we'll start on slide seven.
On May 17th, we will file our quarterly status report with the PSC and office of regulatory staff, as required under our recent base load review order associated with our new nuclear activities. This report will provide a detailed update of our capital costs incurred and updated milestones for our new nuclear project and will be available on our website.
As information, the updated project costs, through December 31st, 2009 is outlined on slide eight. As you can see, the only changes between the approved costs and our latest estimate relate to the fluctuations in projected escalation.
On May 28th, we also expect to submit our annual revised rate adjustment filing with the PSC for the annual recover of financing costs related to CWIP. The requested rate adjustment will be based on the incremental CWIP incurred, since the June 2009 filing and an updated capital structure. The ROE is set at 11%. New rates under this filing will go into effect October 30th of this year after a review by the ORS and approval by the PSC.
On a related note, I am pleased to report that the South Carolina Supreme Court in a 5/0 decision has affirmed the base load review order issued by the PSC and the appeal initiated by Friends of the Earth. In upholding the PSC decision, the court ruled that SCE&G's application, as well as the PSC's thorough and well reasoned order adequately addressed all of the concerns raised by Friends of the Earth.
There is one additional base load review appeal regarding the appropriateness of contingency costs, pending before the South Carolina Supreme Court. While we were unsure of the timing of a final decision, we are confident in our position in that case as well and we'll update you once we have an outcome.
Turning now to our 2010 retail electric rate case. All of our direct testimony, along with testimony from interveners has been filed and settlement discussions are ongoing. On Monday, SCE&G signed a stipulation with the Office of the Regulatory Staff that would lower SCE&G's proposed 9.52% requested increase to 6.55% and provide a $25 million weather related credit to its electric customers.
This stipulation is subject to approval by the PSC, which is scheduled to begin a public hearing on the rate request May 24th. The key stipulations include a 10.7% return on equity and the introduction of a 12-month pilot weather normalization adjustment mechanism or WNA to SCE&G's billing structure for electric rates.
Once implemented, the pilot WNA program would result in adjustments to customers monthly electric bills to reflect normal weather. Similar to a mechanism SCE&G applies to natural gas bills, this program would reduce the occurrence of large monthly swings on electric bills resulting from extreme winter or summer weather.
Under the program, forecasts with normal temperatures would be based on a 15 year average. We are pleased to have entered into a stipulation with the ORS on these key items and we'll continue to work over the next few weeks with ORS and other interested interveners to address remaining issues. You can see a full schedule for the rate case on slide nine of the presentation. We will be sure to keep you informed if there are any additional announcements related to this case.
I'll now turn the call back over to Jimmy.
Jimmy Addison
Thanks, Kevin. As you can see on slide ten, despite the $25 million revenue deferral previously discussed, we still had strong first quarter results, primarily due to our Georgia operations and we're reaffirming our 2010 earnings guidance of $2.85 to $3.05 per share.
Additionally, we continue to target the long-term average annual earnings growth rate of 4% to 6%. Keep in mind, our guidance assumes reasonable outcome to the pending retail electric rate case, normal weather in our SCANA Energy Georgia natural gas service areas for the year and our electric service until and if the WNA is implemented 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.
And finally, I'd like to thank everyone who participated in our Analyst Day event at V. C Summer on April 8th. We had a tremendous response with over 100 analysts participating either in person or via the web. A replay of the webcast, the detailed presentations and a transcript of the event are available at SCANA.com.
If you've not had a chance to review this material, I would strongly encourage you to do so, as we provided a detailed update on our new nuclear strategy and preconstruction process, as well as recent and upcoming regulatory activities. Speakers included SCANA management, the CEO of Westinghouse and our Shaw Project Manager.
That concludes our prepared remarks. We'll now be glad to respond to any questions you might have.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board. Please proceed, sir.
Dan Jenkins – State of Wisconsin Investment Board
Hi, good afternoon.
Jimmy Addison
Good afternoon.
Dan Jenkins – State of Wisconsin Investment Board
First, I was just wondering, on the rate case stipulation, if you could – does that basically settle all the issues between the company and the staff or are there still some other open issues?
Jimmy Addison
Dan, that really only addresses three points, it addresses – and it's between obviously the company and the ORS, there are other interveners in the case as well, but it addresses the return on equity at 10.7%, same level our rates are set at today. It addresses a WNA pilot mechanism prospectively and it addresses a $25 million refund for the weather-related earnings in Q1.
Dan Jenkins – State of Wisconsin Investment Board
Okay. So just taking those into account takes your rate increase request down to 6.55?
Jimmy Addison
That's right.
Dan Jenkins – State of Wisconsin Investment Board
Does the staff have further adjustments in to that?
Jimmy Addison
They do the staff has filed their testimony earlier this week, on Monday evening and it's all available publicly on their website and they do have other adjustments that they've proposed. Generally, if you look at all of their adjustments, they would take the overall increase down to about 51% of our original ask, so about 4.8% to 4.9% overall increase.
And there would be amortization of the weather for the first year and of some tax credits we have over a two-year period. So it would step in over three years, but our revenues would be at the 51% level from day one. It's just the customers' impact would be substantially less year one and year two. But all of that is available publicly on their website and I presume on the PSC's website as well.
Dan Jenkins – State of Wisconsin Investment Board
So related to the three-phase increase, how is it being proposed if, say, it goes down from 9.5 to 6.5, or to 4.5, or wherever it ends up, would the three phases be equally adjusted, or would you get more in phase 1 and then just less in phases 2 or 3?
Jimmy Addison
Well, what I've just described is the staff's recommendation, and the staff's recommendation is for a single increase. There would just a be, if you will, a rate rider that would be a detriment for years one and years two for those two items, to phase in the weather for the first year and to phase in the tax credits for two years. So from the customer's perspective, they would see, based on the staff's recommendation, about 26% of our original request year one, about 39% year two and then ultimately 51% year three, based on, again, staff's recommendation But of course as we would be amortizing back the weather deferral and the tax credits, we would be advertising those back into income to get back to the total 51% from day one.
Dan Jenkins – State of Wisconsin Investment Board
Okay. And then related to the pilot mechanism for, you know, weather adjusted weather normalized, that would just impact the additional volumes related to base rates, right? The fuel clause would still flow through as it incurred? Is that correct?
Jimmy Addison
Yes, that's correct.
Dan Jenkins – State of Wisconsin Investment Board
And I was wondering, the last thing I have, if you could kind of update us on what you're seeing related to the industrial customer demand and your service territory?
Jimmy Addison
It's been encouraging and fairly consistent with the releases of our neighbors over the last few days. Overall, industrials were up about 7%. Some of our larger – the larger industrials were up more than that but overall the category was up about 7% and I would say 75%, 80% plus of the customers each – of each – of the customers as a whole were up. So 7 to 8 out of 10 used more, and on average, about 7% more.
Dan Jenkins – State of Wisconsin Investment Board
How about by sector?
Jimmy Addison
Really, don't have a sector analysis with me, but we don't have any huge concentration in any one sector. I think our largest sector is related to chemicals, and related, and that's in the teens, maybe 15% or so. So we don't have any huge skewing to any one sector. Most of the others are single digits, 7% to 8% of the overall industrials.
Dan Jenkins – State of Wisconsin Investment Board
Okay. Thank you.
Jimmy Addison
You're welcome.
Operator
Your next question comes from line of Michael Lapides with Goldman Sachs. Please proceed, sir.
Michael Lapides – Goldman Sachs
Hey, guys, can you just provide an update, I know you did at your analyst day, regarding some of the milestones for the nuclear development and Westinghouse's next steps regarding the shield design?
Jimmy Addison
Michael, I have Steve Byrne with me. I'm going to let Steve respond to that.
Steve Byrne
Good afternoon, Michael. The next steps for Westinghouse, they turned into the nuclear regulatory commission in March, the first phase of a detailed designer port for the new shield building design. They are scheduled to turn in the second and final phase of that tomorrow, May the 7th, and, at the same time, the testing program that they're doing at Purdue University is continuing. All of the tests there so far on the new design have passed with significant margin and so those test results will be submitted to the NRC sometime in June, just as a confirmatory test but the information they need on the shield building will have been provided in the March submittal and tomorrow's submittal. So after tomorrow they should have everything they need. We would anticipate also that after the NRC has had some time to digest the submittal from tomorrow, they will be issuing a new schedule for the DCD review. And we anticipate that sometime in late May or early June.
Michael Lapides – Goldman Sachs
Got it some I went back and looked at ORS' review of your fourth quarterly filing on the BLRA and it's the first time, they expressed what I think sounds like a pretty big level of concern regarding the timeline being tied to this. Just curious for any feedback and how any potential delays would be dealt with at the ORS and the PSC level?
Steve Byrne
Well, first of all, we don't see that the – that the current timeline, unless – unless there are any significant changes to it, will impact our in-service states for the unit. So we're looking at the in service states in 2016 and 2019 as being unaffected. Relative to what we would have to do under BLRA, we have some margin both on costs and on schedule. And we anticipate now that all of our milestones will still come in within that margin on cost and on schedule.
Michael Lapides – Goldman Sachs
Okay. Thank you, guys. Much appreciated.
Jimmy Addison
You're welcome.
Operator
(Operator Instructions) Your next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.
Paul Patterson – Glenrock Associates
Hi, how are you doing?
Jimmy Addison
Good, Paul.
Paul Patterson – Glenrock Associates
Really pretty much everything has been asked and answered, but just on the economy, just what's your – what's your sense? I mean you mentioned the industrial sales, which looked pretty good and you said the sense is that sort of a restocking or what have you or what is your outlook, I guess, in your crystal ball?
Jimmy Addison
Well, we certainly don't have a crystal ball but I think there was some restocking going on. I mean, we've seen here, just like we've seen around the country and the world, where there was a drain of inventories in the second half of ‘09, but there has to be replenishment now. But we've seen a lot of industrial announcements, too. I think we've talked at our year-end release about Boeing's announcement to locate the 787 Dreamliner second assembly line here in our territory in Charleston. Just this week, they announced that they have selected South Carolina to locate the plant that will manufacture all the interior parts for that aircraft. The parts you and I would see as we go inside the aircraft. So that's another encouraging sign.
And there's, I don't know, half a dozen other announcements like that in the industrial area of, 100, 200, 300 jobs around the territory and in other areas outside of our territory in the state. So that's encouraging. The other think I would point to is, is in our core retail customer growth, we added about 4200 electric customers in the first quarter and that's more than we added in the first quarter of ‘09, more than we added in the first quarter of ‘08. You have to go back to the first quarter of ‘07 to find a quarter that exceeded that number of adds.
Same thing on the gas business in South Carolina, they added 2,900 customers in the first quarter, more than either of the first quarters of the last two years and very close to Q1 of ‘07. At North Carolina, where the growth has remained a little higher, it has not bounced back quite as quick, but it's still higher in a raw percentage and we added more than we did in ‘09, not as strong as ‘ 08. So, you know, we see it in core retail, we see it in the industrials, so we're fairly encouraged. Obviously, a quarter doesn't make a trend, but it's certainly better than the last half dozen quarters.
Paul Patterson – Glenrock Associates
Okay. Great. Thanks a lot.
Operator
Yes. Your next question comes from the line of Jonathan Reeder with Wells Fargo. Please proceed.
Jonathan Reeder – Wells Fargo
Good afternoon, gentlemen. Do you have weather adjusted sales data available?
Jimmy Addison
Jonathan, what we got is an overall aggregate of – we estimate about 3.5 to 4% increase in sales if you remove the effect of weather in the electric business. Now, the only caution I would offer with that is that is always some art involved in that. It's not completely mathematical. We have regression models that we base it on, but it's difficult to estimate. When you have a quarters that has as much extreme weather as this quarter had, it makes it difficult to estimate as well. But it looks to us like 3.5% to 4% non-weather related consumption growth and you couple that with the growth of number of customers attached to the system and that's encouraging.
Jonathan Reeder – Wells Fargo
Sure. You didn't happen to have it, too, by like residential and commercial and particular commercial. Was that – was it still negative on the commercial side if you strip out the weather?
Jimmy Addison
No. It was positive.
Jonathan Reeder – Wells Fargo
Okay. What about residential? Do you have, you know, rough ballpark?
Jimmy Addison
Yes, I don't have the breakdown, but do I know they were positive.
Jonathan Reeder – Wells Fargo
Okay. And then second question, just how should we think about, I guess, SCANA Energy and the weather sensitivity there? Obviously, first quarter came in above, you know, what you're even talking about for full-year contribution. You know, is that just pretty abnormal, you were, purely weather, anything happen, as far as the underlying margin expectations of the business?
Jimmy Addison
No, it was weather. It was about $0.06 ahead of last year and I would say that's a reasonable benchmark to compare it to what we would expect for the – if we had a normal remaining three quarters, I would expect it to earn $0.05 to $0.07 more than we had originally forecasted just due to weather in Q1.
Jonathan Reeder – Wells Fargo
Okay. And then as far as just weather sensitivity going forward, I mean is this business generally that sensitive or is it just when it's really extreme?
Jimmy Addison
No. I mean, it is sensitive for sure, but this is an incredibly extreme quarter. I mean, this is the most extreme winter quarter any of us remember and the data supports that, too. So this is a really unusual quarter. Now, the business, your comment earlier about it being earned more than the whole year forecast of $0.20 to $0.22, I think is where we guided you originally. Of course, it's a cyclical business. So in these gas businesses, in the summer months, you're actually going to have a small cyclical loss.
Jonathan Reeder – Wells Fargo
Right. Okay. I appreciate the additional information, and congrats on a good quarter.
Jimmy Addison
Thanks, Jonathan.
Operator
And with no further questions in the queue, I would now like to turn the call over to Mr. Jimmy Addison for closing remarks.
Jimmy Addison
Thank you very much. We appreciate all of your interest today. In summary, we're off to a positive start in 2010. We're very pleased to see some signs of economic recovery beginning to materialize in our territories and I'm confident for our prospects for a solid year. If you've got any additional questions about these materials or our earnings results discussed here today, please feel free to contact our investor relations department. Thanks, again and have a great afternoon.
Operator
Thanks for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.
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