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SCANA Corporation. (NYSE:SCG)

Q2 2014 Results Earnings Conference Call

July 31, 2014, 03:00 PM ET

Executives

Susan Wright - Director of Investor Relations

Jimmy E. Addison - Chief Financial Officer

Stephen A. Byrne - Executive Vice President, President of Generation & Transmission

Analysts

Mike Weinstein - UBS

Andy Levi - Avon Capital

Jim von Riesemann - CRT Capital

Andrew Weisel - Macquarie Capital

Dan Jenkins - State of Wisconsin Investment Board

Michael Lapides - Goldman Sachs

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. I will be your conference facilitator today. At this time, I would like to welcome everyone to the SCANA Corporation Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on Thursday, July 31, 2014. Anyone who does not consent to the taping may drop off the line.

At this time, I would like to turn the call over to Susan Wright, Director of Financial Planning and Investor Relations. Please go ahead.

Susan Wright

Thank you, and welcome to our earnings conference call. As you know, earlier today, we announced financial results for the second quarter of 2014.

Joining us on the call today are Jimmy Addison, SCANA's Chief Financial Officer; and Steve Byrne, Chief Operating Officer for SCE&G. During the call, Jimmy will provide an overview of our financial results and economic update and information regarding customer growth and usage as well as regulatory activity. Steve will provide an update on our new nuclear project. After our comments, we will respond to your questions.

The slides and the earnings release referenced to in this call are available at scana.com. Additionally, we post information related to our new nuclear project directly to our website at scana.com. On SCANA's home page, there is a yellow box containing a link to the new nuclear section of the website that contains a further link to project news and updates. In connection with this process we had discontinued our practice of furnishing on Form 8-K, the quarterly reports that SCE&G submits to the Public Service Commission of South Carolina and the South Carolina Office of Regulatory Staff. Instead, the company now posts copies of these reports on the SCANA website.

Please note that we have recently added another investor information link to the yellow box. The new other investor information section of the website contains a link to recent investor related information that cannot be found at other areas of the website. It is possible that some of the information that we will be posting from time to time maybe deemed material information that is not otherwise become public. In addition, I want to remind you that you can sign up under the Investor Relations section of scana.com for email alerts for financial reports and press releases. You can now sign up for email alerts when there is a new posting in the new nuclear and/or other investor information yellow box.

Finally, before I turn the call over to Jimmy, I would like to remind you that certain statements that may be made during today's call are considered forward-looking statements and are subject to a number of risks and uncertainties, as shown on Slide two. The company does not recognize an obligation to update any forward-looking statements. Additionally, we may disclose certain non-GAAP measures during this presentation, and the required Reg G information can be found on the Investor Relations section of our website.

I'll now turn the call over to Jimmy.

Jimmy E. Addison

Thanks, Susan, and thank you, all, for joining us today. I'll begin our earnings discussion on Slide three. Basic earnings in the second quarter of 2014 were $0.68 per share compared to $0.60 per share in the same quarter of 2013. Please note that the electric weather normalization pilot ended in December 2013, and the Company’s financials are now impacted by abnormal weather in our electric business.

Accordingly, the improved results in the second quarter are attributable to increases in electric margins due to abnormal weather, a Base Load Review Act rate increase, and customer growth along with higher gas margins. These increases were partially offset by expected increases in operations and maintenance expenses and CapEx related items including property taxes and share dilution.

Now please turn to Slide four. Basic earnings per share for the six months ended June 30, 2014, were $2.05 versus $1.73 in 2013. Increases in electric and gas margins were partially offset by higher expenses and dilution related to our capital program.

Now, I'd like to speak about our operation and maintenance expenses for the year. As we previously mentioned, a strategic goal going forward will be to manage our base retail electric business to prevent the need for base rate increases during the peak nuclear construction years. One of the instruments in achieving this goal is O&M cost control. We estimated O&M would grow approximately 3% in 2014, and we continue to have confidence in that estimate. Please note under provisions of a regulatory order related to our DSM programs, we reduced second quarter O&M by $5 million, so year-to-date we're very close to our plan.

Now on Slide five, I'd like to briefly review results for our principal lines of business. South Carolina Electric and Gas Company's second quarter 2014 earnings denoted in blue were up $0.07 compared to 2013, driven largely by increases in electric margins, which were due primarily to $0.06 of abnormal weather, a Base Load Review Act rate increase, and customer growth as well as higher gas margins. These increases were partially offset by increases in O&M expenses as well as expenses related to our capital program, including property taxes, depreciation, and share dilution. Year-to-date, basic earnings were higher by $0.28 due primarily to higher electric margins.

PSNC Energy’s earnings for the second quarter of 2014, shown in red, increased $0.01 per share over the second quarter of 2013 primarily due to increased margins from customer growth. For the six-months period ended June 30, shown in red, basic earnings were also up $0.01 per share consistent with the quarter.

SCANA Energy, our retail natural gas marketing business in Georgia, in green reported a seasonal loss for the second quarter of $0.02 per share consistent with the second quarter of 2013. Year-to-date earnings are $0.13 per share compared to $0.14 per share in the prior year. SCANA's corporate and other businesses reported a loss of $0.01 per share in the second quarter of 2014 consistent with the second quarter of the prior year. For the six-months period these businesses reported basic earnings per share of $0.08 in 2014 compared to $0.04 in 2013.

I would like to touch on economic trends in our service territory on Slide six. We continue to see new business growth and expansion of existing businesses. So far in 2014, companies have announced plans to invest approximately $400 million with expectations of creating over 4,000 jobs in our Carolinas territories. The Port of Charleston continues to see increased traffic and finished its June 2014 fiscal year with container volume up 8% over 2013. As I've mentioned in the past, it's estimated that one in every five jobs in South Carolina is related to port volume. This increased traffic is a very good sign for the local economy.

At the bottom of the slide you can see the national unemployment rate along with the rates for the three states where SCANA has a presence and the SCE&G electric territory. South Carolina's unemployment rate is now 5.3%, and the rate in SCE&G's electric territory is estimated at 4.8%.

Slide seven presents customer growth in electric sales. On top of the slide are the customer growth rates for each of our regulated businesses. We continue to see strong customer growth in our businesses and in the region. SCE&G's electric and gas growth rates as of the end of June are 1.4% and 2.3%, respectively. Our regulated gas business in North Carolina also added customers at a 2.3% rate.

The bottom table outlines our actual and weather normalized kilowatt-hour sales for the 12 months ended June 30, 2014. Overall, weather normalized total retail sales were up 0.5% on a 12 month ended basis. Now please turn to slide eight which recaps our regulatory rate base and returns. The pie chart on the left presents the components of a regulated rate base of approximately $8.3 billion. As denoted in the two shades of blue, approximately 85% of this rate base is related to the electric business.

In the block on the right, you will see SCE&G's base electric business in which we're allowed a 10.25% return on equity. The non-GAAP earned return for the 12 months ended June 30 in the electric business is approximately 10%, meeting our stated goal of earning a return of 9% for higher to prevent the need for non-BLRA related base rate increases during the peak nuclear construction years. We're very pleased with the execution of our strategy.

Continuing down the page on our new nuclear business, we're allowed an 11% return on equity. We have had incremental CWIP in the last year of approximately $595 million, and as Steve will discuss shortly, we filed our latest request for advised rates back in May. Our regulated gas businesses in the Carolinas continued to perform well. We are allowed a return on equity of 10.6% and 10.25% in North and South Carolina, respectively, and we continue to operate these businesses close to those returns. SCE&G's gas business returns are measured each year through the Rate Stabilization Act. We expect a small decrease effective November 1 to adjust the ROE to 10.25%. This decrease should be approximately $3 million on an annual basis.

Slide nine presents our CapEx forecast which has not changed from what was presented in Analyst Day. This forecast reflects new nuclear spending as reported in our latest BLRA quarterly report filed in May. At the bottom of the slide, is our anticipated incremental CWIP from July 1 through June 30 for each period on which the BLRA increase is calculated.

Now, please turn to slide 10 to review our estimated financing plan through 2018 which has also not changed since our presentation at Analyst Day. On May 27 of this year, SCE&G issued $300 million of 50-year bonds at 4.5%. On the equity side, we continue to target 52% to 54% equity levels that the operating company, SCE&G.

While we estimate incremental equity issuances of $425 million above the 401(k) DRIP proceeds, its unlikely that the issuances will occur exactly as presented in the slide. We have not decided how or when these additional equity financings will occur as they are subject to the changes in the funding needs for planned project expenses. However, based on cash flows to date, and planned construction payments, it is getting less likely that we will need to issue any equity in 2014 to meet our targeted cap structure.

Now on Slide 11, we are reaffirming our earnings guidance of $3.45 to $3.65 basic earnings per share along with our internal target of $3.55 per share. Weather has obviously contributed significantly to earnings year-to-date. We will reevaluate our guidance after the third quarter, our most significant quarter for electric earnings. Our long-term outlook remains unchanged as we plan to deliver 3% to 6% earnings growth over the next three to five year period. We continue to estimate that our effective tax rate for 2014 will be approximately 32%.

I'll now turn the call over to Steve to provide an update on our nuclear project.

Stephen A. Byrne

Thanks Jimmy. I’d like to begin by discussing some of the activities at the new nuclear construction site. Please turn to slide 12, which presents an aerial view of the new nuclear site that was taken back in May. In the middle you can see the Heavy Lift Derrick or HLD and the track that it uses to travel 360 degrees in a circle.

The Unit 2 and Unit 3 excavations can be seen to the left and the right of the HLD. In the upper right hand section of the slide you can see some of the cooling towers. Cooling towers 2 Alpha and 3 Alpha are structure complete and we are working on conduit power cables and other commodities now. Just where the cooling tower is you can see the Module Assembly Building or MAB where the Unit 2 module CA-20 was recently completed and moved out and where assembly of Module CA-01 is currently taking place. Since this photo was taken there have been some significant changes in the nuclear island for both of these units and as we discussed on our analyst day event and I will recap shortly.

On Slide 13, you can see pictures of the Unit 2 Nuclear Island. In the upper left hand corner, you can see the containment vessel lower bowl that was placed inside the CR-10 Module or support cradle. In early May, we placed CA-20, at roughly 2 million pound structural Module using the Heavy Lift Derrick.

On the right hand side of the slide, you can see it placed next to the containment vessel lower bowl. On the bottom left of the slide you can see where the first ring section of the containment vessel was set on the lower bowl. This ring section weighs approximately 900 tons and is made of 1.75-inch thick steel. Here, you can also see the large equipment hatch openings. The smaller openings are personal hatches.

On slide 14, you can see pictures of the Unit 3 nuclear island. On the left of the slide, you can see where the CR-10 module was built on the base mat. On the right side of the slide, you can see the containment vessel lower bowl has now been set. Slide 15 shows a schematic of the turbine building that illustrates how the various turbine building modules will look when completed. All of these modules have now been placed in their final locations.

Turning to slide 16, you can see a picture of the Unit 2 turbine building. Comparing the schematic from the previous slide you can see all the previously mentioned modules have been completed and placed on the turbine building base mat, as well as progress being made on the structural steel for the surrounding turbine building itself. On slide 17, you can see a Feedwater heater being placed inside the condenser. Slide 18 shows the turbine building basement. A condensate pumps, strain coolers, and circling water outlets from the cooling towers are clearly visible.

Slide 19, shows a few of the components that have arrived on site. On the top left, you'll see a picture of the Unit 2 generator stator [rotationary] component. The generator converts the mechanical energy from the turbine rotation into electrical energy. On the top right, you see the Unit 2 main transformer sometimes referred to as the generator step-up transformer, or GSU. This transformer increases the voltage from the main generator to the 230,000 volts that you find in the switch yard.

On the bottom left, you see the Unit 2 Core Makeup tank which is a part of the passive cooling system. On the bottom right, you see Unit 2 water boxes. Cooling water flows into these water boxes and then through the condenser tubes to cool exhaust steam from the turbine.

Slide 20, shows more components arriving on the site. Left hand side is the integrated reactor head package which allows for rapid removal during refueling. Top right shows auxiliary transformers, and bottom right are the non-safety related diesel generators. These diesel generators are supplied but are not needed to mitigate an accident.

On slide 21, you can see even more arrivals on-site by rail. These are the Unit 3 turbine casings. On slide 22, you can see a picture of the Sanmen plant in China from back in May. At this point they are approximately two years ahead of us in construction. Here you can see both of their AP1000 really starting to take shape.

On slide 23, you'll see the new nuclear CapEx actual and projected over the life of construction. This chart shows the CWIP during the years 2008 to 2018 as reflected in the May 2014 Base Load Review Act, or BLRA, quarterly report. As you can see the next several years are considered the peak nuclear construction period. The green line represents the related projected customer rate increases onto the BLRA and are associated with the right hand axis. As we stated during our last call, the incremental 5% future acquisition of the new nuclear project from Santee Cooper will not affect these projected BLRA increases.

Please now turn to Slide 24. As discussed at Analyst Day, we filed our BLRA quarterly status update for the first quarter of 2014 in May as well as our annual request for revised rates under the BLRA. The Office of Regulatory Staff has completed their review of our request and is recommending to the Commission a $66.2 million revenue increased, or a rate increase of about 2.82%. We concur with their recommendation and anticipate the request in increase in rates effective November 1.

On slide 25 you'll see a breakout of total new nuclear project costs. On the far right, you can see the project costs as filed in the May 2014 BLRA report. Project costs are currently under running the original approval received from the Public Service Commission in South Carolina. As you can see, this change is largely attributable to the lower escalation. 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). And our first question will come from Julien Dumoulin-Smith with UBS. Please go ahead.

Mike Weinstein - UBS

Hi, actually it's Mike Weinstein. How are you doing?

Steve Byrne

Hi, Mike good.

Mike Weinstein - UBS

Hey could you, I noticed that the slide that usually talks about the different modules, their expected [on-hook] dates is not in the slide deck. I'm just wondering if you can provide an update on that.

Stephen A. Byrne

Sure. This is Steve. As we've said before, we're awaiting a new integrated project schedule from the consortium. We anticipate that yet this quarter, and until we get that, I don't want to put out dates that I might have to revise once again. We're waiting for those dates to come back in before we start revising any of those charts.

Mike Weinstein – UBS

Got it. In terms of the equity, the equity needs and the fact that the possibility that you might not have to issue any equity this year, is that related more to the strong weather-related results this year? Or is it more because of delayed spending? What's the factor there?

Jimmy E. Addison

It's a combination of both, Michael. I'd say it's probably a slightly more related to the construction schedule than it is the weather, but certainly both are big contributors.

Mike Weinstein – UBS

Okay. Thank you very much.

Operator

The next question is from Travis Miller of Morningstar. Please go ahead.

Travis Miller – Morningstar

Good, afternoon. Thanks.

Jimmy E. Addison

Sure.

Travis Miller – Morningstar

This is really a follow on to that second question, somewhat, I was wondering if you could quantify the amount of cash that you've gotten from those weather benefits, and how that would play into those equity needs. Is it as simple as taking the incremental earnings there and multiplying it in shares outstanding, or is there some way to quantify the cash?

Jimmy E. Addison

No. It's pretty straightforward like that. It's basically the earnings per share times the shares outstanding, but I'll kind of make that easy for you. It's about $35 million or so year-to-date. And of course you'd have to net it of tax, given the slight difference in timing of when you pay the taxes, but that part of the loan is roughly $20 million.

Travis Miller – Morningstar

Okay. That is when you talk about the weather not being a complete reason for the delay in the equity issuance; it's a relatively small amount?

Jimmy E. Addison

That's right. I would say, I've been saying for quite a while, that if we didn't need equity in 2014 at the earliest it would be the end of the year. This is not a radical change in the message.

Travis Miller – Morningstar

Okay. Great. Then on the escalation cost, what's the big driver there that's been taking that down so much relative to the expectation?

Stephen A. Byrne

Our escalation is tied to an index, and when we had our Base Load Review Act hearings back in 2008 we had to specify the index. We picked a Handy-Whitman index, and it just continues to come back lower each six-month update.

Travis Miller – Morningstar

Is that an inflation type issue, or is there something else?

Stephen A. Byrne

It's low inflation, but it really looks at costs specifically by sector. Then one of the indices we use is specific to nuclear. It's just a reflection of the fact that the terrible economy or the rebound from that economy has not resulted in high inflation. Early on, it was the impact of the poor economy, and now we're not seeing a rebound in inflation. So far it's been a very positive impact on the project.

Travis Miller – Morningstar

Okay. Great. Thanks a lot.

Operator

And our next question is from Andy Levi of Avon Capital Advisors. Please go ahead.

Andy Levi - Avon Capital

Hey guys, how are you?

Jimmy E. Addison

Good, Andy.

Andy Levi - Avon Capital

Just two quick questions, one is fairly simple. In the first quarter, you had given like quarterly numbers as far as sales. In this quarter, you didn't. Is it possible to get this, on the weather normalized basis, residential, commercial, industrial sales, the actual growth?

Jimmy E. Addison

Yes. We have traditionally just offered the 12 month moving average because it tends to take some of that volatility out. We did provide that for the first quarter just for the quarter. I would say for just the residential, if we looked at it alone for the just for the quarter, it was down about twice of what the 12 month moving average is, just continuing to show that volatility. So we had a couple of quarters where it's been up. This quarter it's been down a little, and this just continues to show that volatility out there. Overall, it was down about 1% for the quarter, but we prefer and we pay attention internally to the 12 month moving average.

Andy Levi - Avon Capital

That's weather normalized that you're talking about?

Jimmy E. Addison

That's right. Yes.

Andy Levi - Avon Capital

I remember the first quarter you had the weather was so weird in the first quarter, it's hard to figure out what the real weather normalized number is.

Jimmy E. Addison

It's a little weird in the second quarter too. It was over 40% higher than the normal cooling degree days in the quarter. We had cold first quarter and a hot second quarter.

Andy Levi - Avon Capital

Okay. Here, we didn't experience that. You're not that far away.

Jimmy E. Addison

Right.

Andy Levi - Avon Capital

Then the second question, I don't know if Steve wants to answer it, and I asked certainly the same question. So I -- as I said, I apologize for the question, but just kind to need to ask anyway. With CBI, we've noticed stock has come down quite a bit on various research reports relative to their finances. And I'm just curious what your thoughts are on that, and not specifically on their finances but just whether we should be concerned, or you have any concerns on the financial health of CBIs. The stock's off like 35% in the last two months, and whether you've had any discussions relative to making sure everything's already, and whether it has affected operations at all.

Jimmy E. Addison

Let me understand, Andy. You're saying I have a choice as to whether or not answer the question?

Andy Levi - Avon Capital

I didn't say choice. You can always have a choice whether to answer the question. I feel bad about asking it, but just feel that I need to.

Stephen A. Byrne

I can only tell you what we see on the project level. I can't really speak to their financing, their stock price. What we see at the project level is a continued commitment to do whatever it is they need to do to rectify the situation that we've gotten into with modular deliveries and including outsourcing of some of those modules for the second unit to other places which obviously is going to increase their costs in those modules. So they're doing the right things from our perspective, and we haven't seen any impact at the site level.

Andy Levi - Avon Capital

So operationally, everything is good?

Stephen A. Byrne

That's correct.

Andy Levi - Avon Capital

Great. Thank you.

Operator

The next question is from Jim von Riesemann of CRT Capital. Please go ahead.

Jim von Riesemann - CRT Capital

Hey Jimmy.

Jimmy E. Addison

Hello Jim.

Jim von Riesemann - CRT Capital

How are you?

Jimmy E. Addison

Just fine.

Jim von Riesemann - CRT Capital

I have a couple of questions. First one is there are two softballs, okay? The first one is on this pension legislation that's weaving its way through Congress. For those who are fully funded, there's an ability to take out some cash. Does that affect you if it actually becomes law? Do you know?

Jimmy E. Addison

I do not know the answer to that, but I highly doubt that we would plan to take any cash related to that. We're in a situation where our plan is fully funded as you're alluding to. We've got a strategy to continue to derisk that plan over the next several years by moving more into the fixed over the next several years, so we're satisfied. We're pleased with where we are.

Jim von Riesemann - CRT Capital

Okay. And the second question relates to the whole schedule with the resolution of this construction consortium dispute. I thought originally you guys might come out with updated timing and how that resolution was on or around September 30. Is that still a good date?

Stephen A. Byrne

I think what we said is that we anticipate the consortium coming to us with the schedule this quarter, and that that would kick off for us a negotiation process, both on the duration of the schedule and their means and methods. So what I think they're going to be looking for from us is, here's how we see it going from here on, out based on all of the factors we've seen so far, modular deliveries, craft productivity, other supply chain issues, weather, whatever you want to factor in, and then say, does this look reasonable? And you know based on your experience, are there things that we could change in order to yet expedite the schedule? I haven't seen it yet. I anticipate seeing it soon, but again that's going to kick off a negotiation base for us, so I wouldn't call it final until we're finished with that negotiation.

Jim von Riesemann - CRT Capital

I'm a little confused. So negotiations have not started, right? Steve?

Stephen A. Byrne

That's correct.

Jim von Riesemann - CRT Capital

Okay. Then you're going to be silent until you have a final deal in hand with them? Or are you going to give us some metrics along the way that you're either entering negotiations, or here's what they're proposing and now we're entering negotiations? Just so we can book end this issue.

Stephen A. Byrne

Yes. I think, one, it's going to depend on what I see from them. Then we're going to be working on if they give me something I don't like, what could be the possible cost implications of that? Then what mitigation things could they propose, or we propose? That's what I mean by the negotiations, and again, I expect to get it this quarter. Will we go silent? I don't know that I'm going to be discussing it until I see it's going to be more final, but if we have any kind of disclosure issues that might crop out of this, obviously as soon as we think something is solid, even if we don't have something fully negotiated, we'll disclose it.

Jim von Riesemann - CRT Capital

I'm just thinking out loud here, but if they come back instead of being a $200 million dispute, pick a number, $400 million, does that change in terms of, is that disclosure issue right away for you guys, that you'd have to say the dispute number is now $400 million or something? Just so we can understand what's going on?

Stephen A. Byrne

From a disclosure perspective I think what we'd have to do is we'd have to evaluate whether we think that's a real number or not. Remember, we put the $200 million number out there, not that was a consortium number. That was just our estimate of the delay that they gave us on the commercial operation dates. I think it was just prior to our Analyst Day last year. That would have been about June on 2013.

So with this new fully integrated project schedule, they're factoring a lot more things in. They're even looking at engineering completion. They're factoring in assistance they might get from outside, parent company like Toshiba for Westinghouse, for example. That's what I anticipate they're going to give me, and when I first see it, I'm just not going to be in a position to say, here it is. I want to, one, digest it, and two, see if we agree. So what I anticipate is, what a contractor will typically do, is they'll give you something that's out of bounds, and anticipating that you'll negotiate something different. I don't think it's going to be any different than that.

Jim von Riesemann - CRT Capital

Okay, but do you think it will be, and I hate to use the term, kitchen sink meaning they'll give you everything at this time, instead of piecemeal? Is that what you're expecting, at least, that's your expectation?

Stephen A. Byrne

I think on the schedule, they'll give me everything. We may have some decisions to make at that point as to paths we may go down, mitigation paths we may go down. Any kind of a cost implication, one, it would have to be negotiated, and two, it might depend on which path we choose.

Jim von Riesemann - CRT Capital

Okay.

Stephen A. Byrne

I'm not trying to deliberately avoid answering the question, but it is a dynamic situation. I've got to see what I have to start with. I anticipate that before the end of the quarter, and then we'll have our team evaluate it along with their team, and we'll negotiate to something final. I'd love to be able to say, we'll have that on X date, but I just don't know what X date is.

Jim von Riesemann - CRT Capital

Okay. Then just – I guess the last question with all this, sorry to beat this to death, once you get that, what's the process mechanically? Going to the Commission for approval, the new costs, whatever they might be, how does all that work?

Stephen A. Byrne

Under the Base Load Review Act, we can go back in annually just with an update on the project, and that will be on ex [parte] fashion. If we have a change to the approved schedule or cash flows, then we would go in with a filing. We'd make a filing before the Commission, and it would be a full-fledged hearing before our Public Service Commission.

Jim von Riesemann - CRT Capital

Okay. Then an expected timeline, how long do you think that would take?

Stephen A. Byrne

Generally, from the time we file, it will be a few months before the hearing. Then I can't remember if, ordinarily let's say if it were a rate case, it's six months from the time we file to the time they have to render an opinion. I'm not certain as we sit here whether that's the case for the Base Load Review Act or not, but generally they don't deviate from that too much.

Jim von Riesemann - CRT Capital

Will that be a separate proceeding to the BLRA review with the annual cost, to be rolled into the 2015 recovery petition?

Stephen A. Byrne

Remember, that when you say annual cost, we just give an ex parte briefing to the Commission if we're not asking for anything additional.

Jim von Riesemann - CRT Capital

Okay.

Stephen A. Byrne

If we were to go in, we might roll our ex parte briefing into that case in which case we wouldn't go back again, but we will make an ex parte briefing at some point this year because we haven't done it yet. If we decide we need to make a filing, and that's this year, we could roll it in. If it rolls into next year, then we'll do the ex parte this year, and we'll do the filing next year.

Jimmy E. Addison

Jim, let me add, if you're asking if it's separate from our annual BLRA rate request and the increase each November, yes, it'd be separate from that.

Jim von Riesemann - CRT Capital

That's the question I was asking. Okay. Thanks, guys. I appreciate the time.

Jimmy E. Addison

Sure.

Operator

The next question is from Andrew Weisel of Macquarie Capital. Please go ahead.

Andrew Weisel - Macquarie Capital

Hey, good afternoon. Just a couple questions on the near-term trends, first of all, how has the weather in July been shaping up for you down there?

Jimmy E. Addison

It was rather warm the first part of the month, and then abnormally cool the latter part. Overall, just anecdotally, it's been fairly normal, but you wouldn't have thought that if you were here at any one point in time.

Andrew Weisel - Macquarie Capital

Okay. The reason I ask is because when I look at the year-to-date trend and the rolling 12 months, I'm a little surprised that you're still sticking with the internal target of $3.55 rather than moving that toward the higher end. Are there any specific items in the second half that might be a drag year-over-year, or is that just being conservative?

Jimmy E. Addison

The only thing is that the summer quarter, this third quarter, is the peaking quarter in the electric business. We get that quarter on our belt before we ever consider reevaluating those targets.

Andrew Weisel - Macquarie Capital

Sure. Okay. Then in terms of the equity of $100 million for this year, did the original guidance range assume that would be later in the year as you've described, or would it be the guidance range assuming more of a distribution throughout the year?

Jimmy E. Addison

No. It's the former. It presumed an end-of-year issuance, so it had very little effect if anything on the weighted average shares outstanding and therefore on the EPS.

Andrew Weisel - Macquarie Capital

Okay. Now, if that doesn't get pulled before the end of the calendar year, should we assume that would be an additional $100 million early next year? Or would that be lowered by the amount of this year benefiting from weather, and whatever else might be driving you towards the higher end of guidance?

Jimmy E. Addison

First, let me say it's all dependent upon all of these questions that have been asked of Steve earlier. So if there's an impact from the construction schedule and timing of construction payments, it will certainly impact the CapEx and therefore the financing. But if it's moved into 2015, and everything else were consistent, it would be probably in addition to $15 million.

Andrew Weisel - Macquarie Capital

Okay.

Jimmy E. Addison

Instead of $125 million in 2015, $225 million.

Andrew Weisel - Macquarie Capital

Got it. Okay. Then lastly just on the usage, it's been pretty consistent, the 12 months average of about 0.5% weather adjusted versus the account growth of more like 1.25%. Any change in your view about the drag from conservation of energy efficiency?

Jimmy E. Addison

No. Not really. There's a lot of efficiency going on across the board from HVAC to CFL bulbs, etcetera, and our best estimates are that we're past the midpoint on the saturation of the CFL from the latest information I've seen, but those are estimates. We don't have a precise inventory obviously. I'd say we're moving past that point.

Customer growth continues to slowly tick up on new customers added. All the indications are around the economy that it continues to pick up from the industrial recruitment side, continued announcements that translate ultimately into jobs, and 12 to 36 months that translate into customer residential growth. We continue to feel good about those, and I guess no real view change on the efficiency outside of the light bulb standards.

Andrew Weisel - Macquarie Capital

All right. Thanks a lot.

Jimmy E. Addison

You’re welcome.

Operator

The next question is from Dan Jenkins, State of Wisconsin Investment Board. Please go ahead.

Dan Jenkins - State of Wisconsin Investment Board

Good afternoon.

Jimmy E. Addison

Hello, Dan.

Dan Jenkins - State of Wisconsin Investment Board

So I wanted to just follow up on what you were just talking about a little bit, given that you showed year-over-year customer growth in the electric side of 1.4%, yet it looks like per residential commercial the weather adjusted volume was still down like 0.75% to 1%. Is that kind of -- how should we think about that going forward? Is that kind of a new steady state or how will customer growth translate into volume growth?

Jimmy E. Addison

I think difficult to project that. That's why we've spoken consistently the last several quarters that we don't get too hung up when we have a good quarter or two in a row like we did in Q4 and Q1. We don't get too concerned when we see a slight downtick here in Q2 in that residential category specifically.

One other thing I would say is the last couple of quarters in particular have been extreme weather, extreme cold in Q1, extreme warm, over 40% cooling degree days above normal in Q2. That makes it difficult to really determine exactly how much of the margin change is due to weather and how much is due to non-weather-related consumption. I know one of the earlier questions was about, let's get precisely into Q2 numbers, etcetera, as to the margins, non-weather. It's really difficult to get that precise. We can put a number down to the right side of the decimal, but if you start drawing any long-term conclusions about that, all you can assure is that you're probably not going to hit it.

I'd just caution you to step back from that a little bit and try not to project a whole lot around it. What I do know is you look at those unemployment rates, that's real, and that's what usually translates into people's confidence is their personal budgets. We're real encouraged by what's going on with industrial recruitment and ultimately with jobs.

Dan Jenkins - State of Wisconsin Investment Board

Okay. Related to the industrial, given the projects and activity you're seeing, do you expect the 3.7% area to be a reasonable growth rate for second half as well then?

Jimmy E. Addison

3.7%?

Dan Jenkins - State of Wisconsin Investment Board

Industrial.

Jimmy E. Addison

Yes, our industrial base is very diverse. We don't have anything at more than 25% in any one sector. There's a lot that goes into that. That's not something you can just model and project it linearly, but each customer is unique, and we put together a plan based upon working with each of those industrials. It's hard to predict that. I wouldn't get that precise, on the 3.7%.

Dan Jenkins - State of Wisconsin Investment Board

Okay. Going back to the nuclear build, so what are the key critical path items that you'll be working on in the third quarter here that we'll see, should anticipate talking about in October? Is it the CA-05 and CA-01, or what are the items we should be focused on?

Stephen A. Byrne

The modular construction of AP1000 units really has about six big, they call them the big six, structural modules, and that's the CA-01, 02, 03, 04, 05, and 20. So 20 was set, so the next big ones are going to be 05 and 01. 04 was set also. So 20 and 04 are behind us. So I think its 05, then 01, then 03. Those are the next things.

We're working on the ring sections for the containment vessel. We've placed one ring on top of the containment vessel, lower bowl for Unit 2, and we're working on ring sections for both Units 2 and 3. We will continue with those. We continue to receive parts and pieces from all over the world, received the Unit 3 and [wish] to separate re-heaters last week. Those parts continue to come in, and we're looking for where we're staging them, where we're storing them.

We continue to work the turbine building for Unit 2, and anticipate that at some point soon we'll pour the basemat for the turbine building for Unit 3. In general the Unit 3 stuff as you might expect is going a little bit better because we learned lessons on 2, and they get faster for 3, but the Unit 2 stuff is the critical modules that you talked about.

Dan Jenkins - State of Wisconsin Investment Board

Okay. Thank you.

Operator

The next question is from Michael Lapides of Goldman Sachs. Please go ahead.

Michael Lapides - Goldman Sachs

Hey guys, just a couple questions, in your earnings release you don't give a balance sheet or cash flow statement. I'm just curious. If I look at slide 9 and the CapEx forecast for 2014, where are you year-to-date relative to that forecast, meaning that $1.5 billion number? Are you, you've spent almost half of that in the first six months of the year? Are you running north of that, south of that? I'm just trying to think through uses and sources of cash for the year.

Jimmy E. Addison

Yes. Michael, I don't have the exact dollars in front of me, but we are slightly behind that CapEx budget. At this point I'd say probably about 10%. What I don't know right off hand is how it falls out in buckets by month or by quarter, but we're slightly behind that CapEx budget to date but not significantly.

Michael Lapides - Goldman Sachs

Got it. And that implies that on the nuclear component of it that $805 million, you're running it close to half of that level for the year-to-date?

Jimmy E. Addison

I just don't know that. We made the filing. You see down below, the 2014 number into the blue box at the bottom, says there's $595 million to occur by June 30 of that $805 million. We made our filing with the BLRA, and we ended up slightly less than that I think, so not a great deal of change there.

Michael Lapides - Goldman Sachs

Got it. Okay. Very helpful. And just I want to make sure I understand some of the rate changes that are happening, so $66 million revenue increased tied to the BLRA that starts November of this year. Then the $3 million, I think you were talking about on the gas business, that's the SCE&G gas business, and it's a $3 million annualized rate decreased that starts in November?

Jimmy E. Addison

That's right.

Michael Lapides - Goldman Sachs

Okay. Got it. Then last question, just trying to think about weather normalization, so second quarter I would assume all the uplift is on the electric side. The first quarter, is there a way to break apart how much of that weather benefit was North Carolina electric versus South Carolina electric versus maybe SCANA Energy and even South Carolina gas?

Jimmy E. Addison

We don't have a North Carolina electric company.

Michael Lapides - Goldman Sachs

I live in North Carolina. You know what I meant. North Carolina gas. My [bet].

Jimmy E. Addison

There's not a significant amount. The mechanisms that we have in South Carolina gas account for weather normalization as well as the utilization tracker in North Carolina accounts for weather. So the short answer is very, very little would relate unless those mechanisms aren't completely 100% picking it all up, but that's the intention in the formulas, so really all of it was related to electric.

Michael Lapides - Goldman Sachs

Got it. That makes sense. Jimmy, thank you. I appreciate you taking the time.

Jimmy E. Addison

You're welcome.

Operator

(Operator Instructions) And our next question is a follow up from Julien Dumoulin-Smith of UBS. Please go ahead.

Mike Weinstein - UBS

Hi, it's Mike again. One last question about the cost estimates and the dispute, the $200 million that you were talking about how it could possibly be increased as a result of other things that might come in. Is it your understanding, how much of that is target costs? I guess target costs would be stuff that could escalate and could be responsibility of the purchaser, you? How much of it is fixed and would be considered the responsibility of the consortium? The reason I ask is only because I know that regulators are expecting that most of these costs would be fixed.

Stephen A. Byrne

Michael, I don't know that we have a breakdown of that. Again, until I see it I won't know what it is exactly, but certainly there will be some in each of those buckets. Also, I would anticipate that some of it would be in escalation costs. The escalation could be spread over all of the buckets. Then obviously, we may dispute some of those as we indicated with the $200 million when we talked about that over a year ago.

Some of it will be in just increased onus costs, so if I have people there for extra periods of time, I'm not going to back off on the hiring because I really need to staff. Hiring is going pretty well, and we're able to get good quality people. I don't want turn to turn that -- off, so if those folks are there for a longer period of time that would be higher onus costs. If the consortium has folks there for longer, that would be in the target bucket. Otherwise, it's really looking like escalation. It's not per se the fixed pieces but it would only be that small amount of escalation on the fixed pieces that might change.

Mike Weinstein - UBS

Okay. Thank you very much.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Jimmy Addison for any closing remarks.

Jimmy E. Addison

Thank you. And to summarize we're very pleased with our results through midyear, and we remain on track to meet our earnings targets, and our new nuclear construction project continues to progress. We thank you all for joining us today, and we thank you for your interest in SCANA. Have a great day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Source: SCANA Corporation (SCG) Q2 2014 Results - Earnings Call Transcript

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