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SCANA Corp. (NYSE:SCG)

Q1 FY08 Earnings Call

April 25, 2008, 10:00 AM ET

Executives

Betty Best - Director of Financial Planning and IR

Jimmy Addison - Sr. VP and CFO

Kevin Marsh - President and COO-South Carolina Electric and GasCo

Analysts

Paul Patterson - Glenrock Associates

Dan Jenkins - State of Wisconsin Investment Board

Eric Beaumont - Copia Capital

Jonathan Reeder - Wachovia Securities

Travis Miller - Morningstar

Operator

Good morning ladies and gentlemen, thank you for standing by. My name is Lacy and I'll be your conference facilitator today. At this time I would like to welcome every one 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 remainder this conference is being recorded on Friday, April 25th, 2008. Any one who does not consent to the taping may drop the line -- 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 - Director of Financial Planning and Investor Relations

Thanks Lacy and good morning. I'd like to welcome everyone to our earnings conference call including those who are joining us on the webcast. Yesterday we announced financial results for the first quarter of 2008. In just a minute Jimmy Addison, Senior Vice President and Chief Financial Officer 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. I would like to remind everyone that certain statements that may be made during today's call which are not statements of historical facts 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 fillings. The company does not recognize an obligation to update any forward-looking statements. I will now turn the call over to Jimmy.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Thanks Betty, and good morning. I would also like to welcome each of you to our call.

SCANA reported first quarter earnings on a GAAP basis of $109 million or $0.94 per share compared to $86 million or $0.73 per share in the first quarter of 2007. The $0.21 per share increase in earnings was due to several factors, including sustained customer growth in both Carolinas, improved industrial and wholesale sales and the impact of the retail electric rate increase in South Carolina. We also had improved earnings in our non regulated retail, natural gas marketing business in Georgia. We are very pleased with these first quarter results, and although it is only one quarter it positions us well to archive our 2008 financial goals, as these three months represent nearly one-third of our annual forecast.

As we look ahead to the rest of 2008, we are confident that the underlying strength of our service territories and the continued implementation of our growth through investments strategic plan will position us to meet shareholders expectations.

Based on these first quarter results, we are reaffirming our 2008 earnings guidance of $2.90 to $3.05 per share. This guidance assumes normal weather in our electric and natural gas service areas for the remainder of the year 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 fillings.

We continue to target a long term average annual earnings growth rate of 4% to 6%. However as is obvious from our guidance we expect 2008 to yield earnings growth above this range. It's important to remember that this is an average annual target and accordingly in some years earnings may be above the range and some below.

Our management team takes a long-term perspective on earnings growth, so our strategic planning process is focused on generating earnings growth that, on average, will fall within our targeted range.

We were very pleased that our Board of Directors earlier this year approved a 4.5% increase in our common stock dividend to $1.84 per share, effective with the dividend that was paid on April 1st. SCANA has now raised the dividend on its common stock for nine consecutive years and in 54 of the last 56.

Our policy is to increase the annual dividend at a rate that is aligned with the growth in the company's earnings while maintaining a pay out ratio of approximately 55% to 60%. And now I would like to provide an update on several other important items.

As most of you already know, SCE&G and Santee Cooper, the state owned utility in South Carolina submitted a joint application with the Nuclear Regulatory Commission on March 31st for a combined construction and operating license or COL. If approved the COL would authorize the companies to build and operate up to two new nuclear units at our existing nuclear site.

Since this filing, SCE&G has also announced that an agreement has been reached with a consortium of Westinghouse Electric and the Shaw Group authorizing the purchase of long lead-time materials related to the construction of the Westinghouse AP1000 design.

While a final EPC contract has not yet been completed, it was important to initiate the purchase of these long lead-time materials to keep us on schedule for our 2016 service date.

Specific financial details of these purchases were not disclosed, however, we will provide you with our comprehension financing strategy for the new nuclear plant as soon as the EPC contract is finalized, which we anticipate by the end of the second quarter.

Our intention continues to be to gain authorization from the NRC and local regulators for two plants. We also plan to maintain our position on the schedule for long lead materials for two plants. However we will maintain flexibility as to the number of plants to build through contractual off ramps up until the actual final notice to proceed when construction is granted which we anticipate will be in 2011.

On a related note, on April 1st, SCE&G officially advised the South Carolina PSC and the South Carolina Office of Regulatory Staff that the company plans to file a combined application under the Base Load Review Act. The application will document the need for new generation as well as provide regulators with information they need to determine up front if the company's plan to construct the plant including the projected cost, schedule and signing decisions are prudent. While we have not set a specific date for filing the combined application, filing can be no sooner than May 1st or thirty days after the notification. From the application date the PFC would have 9 months to review and rule on the prudency of the decision to build.

If the decision is found to be prudent, that finding will be binding on all future proceedings so long as the project is constructed in accordance with the schedules, estimates and projections set forth in the commission's order. For those of you who may not be familiar with the Base Load Review Act or BRLA, this law is intended to allow for the recovery of prudently incurred capital an operating costs associated with new nuclear generating facilities.

After receiving a Base Load Review Order, the utility would be allowed to file revised rates with the commission for the annual recovery of financing cost related to CWIP.

In-service expenses such as plant, O&M, depreciation and property taxes will be recovered through rates once the plant goes it to commercial operation. Requested rate adjustments will be based on the utilities updated cost of debt and capital structures.

As for ROE, the utility can chose to file for a project specific return on equity or simply use the ROE from its most recent rates proceeding. SCE&G's current allowed ROE is 11%.

While we anticipate our initial filing, we will have a minimal impact on revenues due to the limited expenditures to date. It will establish the critical decision of prudence and the plan for future annual rate adjustments. We will certainly keep you updated on the status of both the Base Load Review application and the EPC contract process as work continues.

As to timing, I continue to anticipate that we would be able to fully communicate our plan by the end of second quarter. We are pleased that we have completed two significant financing in the first quarter of 2008 with the SCE&G first mortgage bond issue in January and the SCANA medium term notes in March. In aggregate these two financing reduced our short-term indebtedness by $500 million. While we will have additional financings issue related to the pollution control facilities we are installing on two fossil plants and for our new nuclear investments. It was important we accomplish these two transactions early in the year, to provide more flexibility as to when we execute the additional transactions.

Additionally we are planning to fulfill our needs for shares, for our 401K and Investor Plus plans through new shares issues effective July 1. This will provide an estimated $45 million of additional equity during 2008 and about twice that amount annually for 2009 and forward.

We anticipate keeping this strategy in place for the foreseeable future due to the anticipated construction. The minimally dilutive effect of these shares has been considered in our earnings guidance.

Turning now to our recent regulatory filing in North Carolina, on March 31, PSNC Energy filed an application with the North Carolina Utilities Commission requesting an increase in the company's retail and natural gas base rates of approximately $20 million or 2.99%. Since its last rate case filling in the 2006, PSNC has spent more then $188 million to upgrade and extend its gas delivery system.

Company has installed more then 900 miles of transmission and distribution mains and added nearly 32,000 customers to its system. Also in the application, PSNC Energy is requesting to implement a customer usage tracker also called a CUT, which is a rate decoupling mechanism that breaks the link between revenues and the amount of natural gas sold. If approved the CUT would apply to residential and commercial customers and would allow the company to periodically adjust its base rates, based on changes in customer consumption.

Hearings on the company's requests are expected to be held this fall, if approved the requested rates will go into effect in November of this year.

And finally, I would like to remind everyone, we will be meeting in analysts in New York on May 15. The meeting will be held at approximately 8:15 AM at the Michelangelo Hotel. During that meeting members of our senior management team lead by CEO, Bill Timmerman will discuss our business strategies, review the company's recent operating and financial performance and respond to questions.

An invitation to the meetings has been sent to each person on our financial community mailing list. If you have not already confirmed your attendance, please contact our Invertors Relations office. For those who are not able to attend, the company's presentation will be webcast both live and as a replay on our website.

That concludes my prepared remarks. And I'll now be glad to respond to any question you might have.

Question And Answer

Operator

[Operator Instructions]. And our first question will come from the line of Paul Patterson, Glenrock Associates. Please proceed.

Paul Patterson - Glenrock Associates

Good morning.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Good morning Paul.

Paul Patterson - Glenrock Associates

I wanted to ask you, what was the ROE at PSNC Energy for the last twelve months?

Jimmy Addison - Senior Vice President and Chief Financial Officer

The return through December 31st, Paul, which is the test year we were using was down slightly below 9%.

Paul Patterson - Glenrock Associates

Okay.

Jimmy Addison - Senior Vice President and Chief Financial Officer

And of course the last case from a couple of years ago, we actually had black box settlement, so there's not a specifically disclosed return, but it's generally in the range of our other regulated businesses.

Paul Patterson - Glenrock Associates

What did you file for on 31st?

Jimmy Addison - Senior Vice President and Chief Financial Officer

We filed for a 12% requested return.

Paul Patterson - Glenrock Associates

Okay. The second question I have is, what was the weather impact for the quarter, was there one?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Compared to last year, it was flat and it was slightly below plan, about $0.03 per shares, $0.025 to $0.03 per share below normal as computed over 15 years.

Paul Patterson - Glenrock Associates

Okay and then the wholesale electric sales?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Right.

Paul Patterson - Glenrock Associates

What's driving that?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Well primarily, it is a reflection of last year being abnormally low, we had a couple of plants out for maintenance last year including one out for a fire that occurred in a plant, one of our major fossil plants and it was offline several weeks. So -- other plants ran very well this year in the first quarter and was something close to normal whether we were able to sell that energy off system.

Paul Patterson - Glenrock Associates

And the industrial sales. Sounds like good news there, kind of a -- just a little more flavor on what you are seeing there, is that export driven? What's going on there?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Yeah Paul it's really an interesting pleasant surprise, we have looked at that a good deal over the last few days and its really spread across the board, the good news is it's not in any one major customer or plant expansion or things of that nature, we have had some of those but, for example, if you look at our top 20 industrial customers, two thirds of them used more energy this year then they did a year ago. And if you look at the customers below the top 20, their percentage increase is actually larger then the top twenty. So, it's kind of contradictory to everything we've been reading, but those are the facts of what's going on here in the quarter-over-quarter in South Carolina.

Paul Patterson - Glenrock Associates

And why do you think that is?

Jimmy Addison - Senior Vice President and Chief Financial Officer

I don't really have a solid answer to that, but it's not isolated into any one area, which is really why we dug in to it. I thought I would find it was due to a unique expansion here or there, but it's more across the board and it's kind of contradictory to what we have been seeing. The unemployment rates are have ticked up slightly here in the state like they have nationally, but nothing outrageous.

Paul Patterson - Glenrock Associates

Great. Okay, thanks a lot.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Welcome.

Operator

And our next question will come from the line of Dan Jenkins with State of Wisconsin Investment Board. Please proceed.

Dan Jenkins - State of Wisconsin Investment Board

Good morning.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Good morning Dan.

Dan Jenkins - State of Wisconsin Investment Board

Kind of following up on the questions, the industrial gas sales were also a big percent. Was that due to a particular customer or what was going on there?

Jimmy Addison - Senior Vice President and Chief Financial Officer

No, nothing in particular that we noted Dan.

Dan Jenkins - State of Wisconsin Investment Board

Okay, just was it a bit colder than normal or?

Jimmy Addison - Senior Vice President and Chief Financial Officer

No, it was really -- and of course that would normally not affect industrials very much, with a minor amount of space heating, but nothing in particular and it was not a factor of weather.

Dan Jenkins - State of Wisconsin Investment Board

Okay. And you talked about ROE and PSNC, what was of that South Carolina Electric?

Jimmy Addison - Senior Vice President and Chief Financial Officer

In South Carolina, of course we have new rates that were affective January 1. So the return was for the year at 12/31, it's the latest date I have, it was down you know probably in the 8% or so range, but the new rates effective January 1 on a pro forma basis returned that up in the upper ten and three quarter range. On a pro formal basis assuming you had those revenues for the full year.

Dan Jenkins - State of Wisconsin Investment Board

Right, right. You know you mentioned that the wholesale was lower than normal last year, so would you expect kind of the level you saw in the first quarter to you continue throughout the year then?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Well, of course, that's cyclical based upon the cyclical nature of the weather hear the south. I mean I think that's typical for a first quarter and of course the second quarter I would doubt it would be at that level just because it's a period of shoulder months here at the south, but it's also a period of a lot of the maintenance going on, so we will just have to wait and see.

Dan Jenkins - State of Wisconsin Investment Board

Of your wholesale sales, are most of those interchanged sales or do you have like some contracts with co-ops or you know what's that the composition of those sales?

Jimmy Addison - Senior Vice President and Chief Financial Officer

That's a combination of the two, we have some longer-term contracts with municipalities, three or four municipalities here in this state that we sell to and then we sell also just opportunity sales, spot sales, as the weather and the different systems of the utility around dictate.

Dan Jenkins - State of Wisconsin Investment Board

Okay and then, last thing I was wondering about is you know you talked a little bit about your nuclear construction plants. Are you ready yet, have you laid out yet kind of when you would hope to start construction or is it too early for that and what point would you -- your ready to start actually onsite work?

Dan Jenkins - State of Wisconsin Investment Board

Yeah Dan, it may be a little early for that but I tell you I have got Kevin Marsh here with me, the President SCE&G, who has been integrally involved with it and I think I'll let Kevin respond to your questions.

Dan Jenkins - State of Wisconsin Investment Board

Okay.

Kevin Marsh - President and Chief Operating Officer-South Carolina Electric and GasCo

Hey Dan. As Jimmy mentioned, we filed the combined operating license with NRC and that process is going to take probably some were between 36 and 42 months to give them time to review that application. There's not a significant amount of major plant construction that can take place during that time, they might authorize some pre-construction expenditures, but the majority of what we will be doing will be of course any payments that are due on the long-lead time items, we'll make those payments, but we will be doing side prep work to make sure when we do get the license from the commission we are ready to start work. And that will involve clearing the land and any railroad spurs that need to be in to make sure we can move equipment in an out as necessary, all that will began to take place, but there will be no actual point of concrete or a hard dollar construction till we get that license from the commission.

Dan Jenkins - State of Wisconsin Investment Board

Okay, thank you.

Operator

And our next question will come from the line of Eric Beaumont with Copia Capital. Please proceed.

Eric Beaumont - Copia Capital

Good morning, congratulations on the quarter.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Thank you.

Eric Beaumont - Copia Capital

Couple of quick questions, one; obviously the rate relief was important. Can you characterize how much of the additional margin in the first quarter was driven by the rate relief?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Eric at SCE&G, I think -- let me make sure, I think that number were about $0.16 in totals at the increase in SCE&G and about half of that was due to the rate increase and the balance, the other half was due to just customer growth on the system. Half of the other half or a quarter of the increase, if you will, was due to growth on the system and the other portion would be due to the wholesale, industrial sales up.

Eric Beaumont - Copia Capital

Okay. And if we think about how the rate relief is going to flow through the course of the year, is it more proportional to expected sales through the quarter or how it was it role in, it will?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Yes, it will be, very much trend our cyclical sales.

Eric Beaumont - Copia Capital

Okay, I guess next -- obviously the depreciation and amortization down, now you are not taking accelerated anymore for the backup at Murray Lake, what should we key in on where the depreciation and amortization was this quarter, is this kind of a benchmark going forward for the other quarters?

Jimmy Addison - Senior Vice President and Chief Financial Officer

That's a very good proxy for the balance of the year.

Eric Beaumont - Copia Capital

Okay, great and I think that's it, thank you guys.

Jimmy Addison - Senior Vice President and Chief Financial Officer

You're welcome.

Operator

[Operator Instructions]. Our next question will come from the line of Jonathan Reeder with Wachovia. Please proceed.

Jonathan Reeder - Wachovia Securities

Good morning gentlemen, can you talk a little bit on the Energy SCANA Energy, Georgia, what kind of drove the margins there, was it favorable hedging strategy on the gas side or what was it?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Yeah, Jon, I'll be glad too, really it was -- compared to the Carolinas, I mentioned earlier that weather was slightly below normal, the weather patterns in Georgia were just about normal. It's kind of odd between -- the difference between the states here that are obviously just next to each other, but that help us some, because last year's first quarter was a little below normal in Georgia, so we had volumes up as well as the market -- the pricing in the market just allowed for slightly wider margins during the 2008 year. Now that contribute a significant amount and of course when sales are up, we have commensurate level of reserves that we establish for bad debts that offset that slightly, but its about a 4:1 ratio of growth in margins compared to the additional reserves we established from the bad debt.

Jonathan Reeder - Wachovia Securities

Okay so, it was largely just a return to normal weather kind of in Georgia that has accounted for that $0.03

Jimmy Addison - Senior Vice President and Chief Financial Officer

It was you know plus the ability to price somewhat better for the margins. A combination of volume and price.

Jonathan Reeder - Wachovia Securities

Okay. Did wholesale from the electric business, did that benefited all from the drought? Were you able to sell it all over to some of the surrounding states that were may be short to little power?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Yeah I don't think that really impacted this first quarter we had thankfully a great deal of rain in the South East in the first quarter throughout Georgia and North Carolina which were both impact in much more severely than South Carolina. So I am not probably sure that impacted any. May have been more related to plant maintenance and other had down, things to that measure.

Jonathan Reeder - Wachovia Securities

Okay and then lastly just a clarification issue, the synfuel royalties? Thing that you had identified in the corporate and other that was way to reversed, is that included in the $0.73 of was the ongoing number for Q1 '07 was at really $0.71?

Jimmy Addison - Senior Vice President and Chief Financial Officer

The number was $0.73 for Q1 '07, and included $0.02 benefit from the royalties projected at that point and of course later in '07, as the price of oil rose we reversed those crude royalties that we had estimated in the first quarter. So the point, when you get at the end '08 that variances there quarter-over-quarter in the first quarter will not exist because we were first lighter in '07.

Jonathan Reeder - Wachovia Securities

Okay. So $0.73 was the actual end of the year including the -- or excluding the synfuel royalty, is that right?

Jimmy Addison - Senior Vice President and Chief Financial Officer

$0.73 was the first quarter's actual earnings including $0.02 of royalties.

Jonathan Reeder - Wachovia Securities

Okay, I got it, thank you gentlemen.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Welcome.

Operator

And our next question will come from the line of Travis Miller with Morningstar. Please proceed.

Travis Miller - Morningstar

I have a question about the nuclear spend and the build out. How much of that is going to be accounted for as O&M especially in this early stage and how much of that will be capitalized through I'd say the next couple of years at least until you get that NRC approval?

Jimmy Addison - Senior Vice President and Chief Financial Officer

It will all be capital up until the point we got the plan online.

Travis Miller - Morningstar

Okay, does that include the application the cost?

Jimmy Addison - Senior Vice President and Chief Financial Officer

Yes.

Travis Miller - Morningstar

Okay, thank you.

Jimmy Addison - Senior Vice President and Chief Financial Officer

You are welcome.

Operator

[Operator Instructions]. And at this time we have no questions in the queue. I would like to turn the call back over to Jimmy Addision for closing remark.

Jimmy Addison - Senior Vice President and Chief Financial Officer

Thank you, I want to again thank every one for your attention and questions today on the call we appreciate your interest in our company. We've had a good start here to the first quarter and we are off to what we think will be a healthy 2008. Hope you have a great weakened.

Operator

Thank you for your participation in today's conference. This conclude your presentation, you may now disconnect. Good day.

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