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SCANA Corporation (NYSE:SCG)

Q2 2012 Earnings Call

August 2, 2012 2:00 pm ET

Executives

Byron Hinson - IR

Jimmy Addison - CFO

Steve Byrne - COO, SCE&G

Analysts

Travis Miller - Morningstar Securities

Jay Dobson - Wunderlich Securities

Michael Lapides - Goldman Sachs

David Paltz - Bank of America Merrill Lynch

John Hanson - Presidus

Ashar Khan - Visium

Operator

At this time, I would like to welcome everyone to the SCANA Corporation conference call. (Operator Instructions) At this time, I would like to turn the call over to Byron Hinson, Director of Financial Planning and Investor Relations.

Byron Hinson

Thank you. I'd like to welcome everyone to our earnings conference call, including those who are joining us on the webcast. As you know, earlier today, we announced financial results for the second quarter of 2012. Joining us on the call today are Jimmy Addison, SCANA's Chief Financial Officer, and Steve Byrne, Chief Operating Officer of SCE&G.

During the call, Jimmy will provide an overview of our financial results, economic development on our service territory and regulatory activity, including our recently filed base rate case for our electric business. Additionally, Steve will provide an update on our nuclear project, after which we'll respond to your questions. Slides and the earnings release that we'll refer to in this call are available at SCANA.com.

Before I turn the call over to Jimmy, I would like to remind you that certain statements that maybe 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 which are shown on Slide 2 and discussed in the company's SEC filings. The company does not recognize an obligation to update any forward-looking statements.

Finally, as noted on Slide 2, we will disclose certain non-GAAP measures during this presentation, and the required Reg G information can be found in or not used in conjunction with this call.

I'll now turn the call over to Jimmy.

Jimmy Addison

Thanks, Byron, and thank you all for joining us today. We're pleased with the financial results for the second quarter and the progress of our new nuclear efforts. Steve and I plan to thoroughly update you on both of these matters today.

As shown on Slide 3, basic earnings per share were $0.55 for the second quarter of 2012 versus $0.44 in 2011. Higher electric margin from increased consumption and rate increases under the Base Load Review Act was partially offset by the cost of our capital program, interest expense, depreciation, property taxes and share dilution.

Gas margins were also higher due to the rate increase under the Rate Stabilization Act. Operating and maintenance expenses grew slightly over the second quarter of 2011, largely due to the timing of plant expenses, healthcare cost and incentive compensation.

Please turn to Slide 4. As you can see, basic earnings per share for the six months ended June 30, 2012 were $1.48 versus $1.44 in 2011. Increases in electric margin were partially offset by lower gas margins in Georgia, due to the mild weather in the first quarter along with higher operating and maintenance expenses and higher expenses related to our capital program, specifically depreciation, property taxes, interest and share dilution.

Now on Slide 5, I'd like to review results for our principal lines of business. Healthcare, and electric and gas companies 2012 second quarter basic earnings per share denoted in blue, were $0.59, an increase of $0.11 over the second quarter of 2011. Electric margin was higher due primarily to increases under the Base Load Review Act.

Additionally, we experienced increased non-weather related consumption during the quarter. This increase in margin was offset by higher operating and maintenance expenses, interest expense and depreciation as well as share dilution. Year-to-date basic earnings were higher by $0.11 due primarily to higher electric margin.

PSNC energy shown in red, reported flat earnings per share for the second quarter of 2012 versus the seasonal loss of $0.01 per share in the second quarter of 2011, increases in margin due to customer growth contributed to the improvement. For the six-month period ended June 30, 2012, basic earnings were $0.24 per share in line with the prior year.

SCANA energy in green reported the seasonal loss of $0.02 per share for the second quarter of 2012, consistent with last year. Year-to-date earnings are down $0.08 due to the impact of mild winter weather in the first quarter.

Our corporate and other businesses reported their loss for the quarter of $0.02 per share compared to a loss of $0.01 per share in 2011. For the six-month period, these businesses reported earnings per share of $0.04 compared to $0.03 in the same period last year.

Next, I'd like to touch on economic trends in our service area, as shown on Slide 6. We continue to see new business growth and expansion of existing businesses. In the second quarter, company's announced plans to invest $289 million with expectations of creating over 350 jobs in our South Carolina territory.

Our gas businesses in North Carolina also saw a promising quarter of economic announcements, with companies projecting investment of $325 million and over 1,400 jobs. We are pleased that this year is shaping out to be another solid year in terms of economic development in our territories.

On the heels of these major economic announcements, unemployment rates remain stable. Major businesses such as Boeing and Amazon that have located in our territory hiring employees quickly, and we're pleased to see these recent industrial expansions translating into jobs.

We're also pleased with two recent developments related to the project to deepen the Port of Charleston. The Army Corps of Engineers originally anticipated the project would take up to eight years to complete. But a year into the project, they have announced it could finish in five years.

In addition, President Obama chose the Charleston Harbor deepening project as one of seven priority infrastructure projects nationwide. This project will enable larger cargo ships to enter the harbor and is expected to faster economic growth. This is key once the Panama Canal is deepened in 2014.

For the 12-month period ended June 30, 2012, total weather normalized electric sales to residential customer were up approximately 0.6%. Our commercial sales were relatively flat. Industrial sales were down 1.4%, primarily due to reduced production at one of our largest customers as a result of the fire, we discussed last quarter.

We understand this customer's production will likely be limited for the majority of the year. Were this customer's operations consistent with 2011, we estimate industrial sales would have increased approximately 3%.

As you can see on Slide 7, we continue to see improvement in customer growth at our major regulated subsidiaries. For the last three quarters, customer growth has trended higher in our electric businesses as well as our regulating gas businesses in South and North Carolina. For June, those rates were 0.8%, 1.5% and 1.9% respectively. We're encouraged by this trend.

Please turn to Slide 8, which sort our regulated rate base, returns in South Carolina regulatory calendar. The data on this slide represents information as of the date of our most recent regulatory filings.

The pie chart on the upper left represents the components of regulated rate base of $7.1 billion. This is composed largely of SCE&G electric with close to $6 billion in total electric investment, as denoted in blue.

The chart to the right shows our actual and allowed regulatory returns for the period. Our regulated gas business in North Carolina continues to earn a steady return due to customer growth in their territory and stable margins under the customer utilization tracker.

Return on our regularly gas business in South Carolina dropped slightly after the winter season. In June, we requested an increase of $8.8 million under the Annual Rate Stabilization Act adjustment. This increase would bring the earned ROE for that business more closely in line with the allowed return of 10.25%.

As you are aware, we recently found an application for our rate increase for our retail electric business, which I will discuss more fully on the next slide. That application reflected an earned return of 7.26%. This reflects the full pro forma return considering all known and measurable adjustments as required when the case is filed.

Accordingly, it is lower than our actual return to reflect annualized costs, which aren't fully incorporated yet in the financials. For example, in the case, we propose an adjustment to annualized depreciation expense. As we've begun depreciating property at various points of the year, our test year must be adjusted to capture a full year depreciation expense for those items.

The bottom of the slide includes the two timelines depicting our regulatory filing schedule for 2012. As you can see in the first timeline we've completed all but one of our planned regulatory filings outside of the new nuclear project. In November, we will undergo the annual review of our gas, fuel cost and SCE&G.

The second timeline provides you with scheduled planned filings related to the new nuclear project. In May, we filed our quarterly status report and annual revised rates request related to the project. The Regulatory Staff has audited our request for revised rates and we expect an order from the commission around the end of September.

When we make our filing for revised rates, we do so on May 30. But the period under review requires us to project our construction expenditures through the end of June. So we have a portion of the filing that is actually a forecast.

When ORS does their audit, they look at actual expenditures and the actual capital structure at June 30. Generally that true-up result in a minor adjustment to our request to reflect the actual cost. ORS submitted their report this week and recommended a final revenue increase of approximately $52 million.

In addition to these regular BLRA filings, we filed a petition to update our nuclear budget and schedule, which Steve will discuss in a few minutes. We will file our next quarterly status report in mid-August.

Please now turn to Slide 9. On June 29, we filed an application with the South Carolina PSC requesting an increase in our retail electric rates. In this application, we requested an allowed ROE of 10.95% and additional revenue of $151.5 million. A significant portion of this increase is simply an extension of the previous rate case.

Out of this additional revenue, we anticipate approximately $50 million would impact net income as the balance offsets new cost that will also be reflected in the financials. For example, in the last case we agreed not to include in rates. Operating expenses is associated with the scrubber at Wateree station, as it was not yet in service. Instead, those costs were deferred. A portion of this case seeks recovery of that deferral prospectively.

Additionally, we deferred increase pension cost related to the decline in market value of the related assets after the financial crises. The remainder of the increase will offset expenses such as depreciation and property taxes.

In our application, we asked that the new rates become effective on January 1, 2013. A hearing is scheduled for November, and we anticipate receiving an order from the commission by the end of December.

Slide 10, presents our CapEx forecast. This forecast is identical to the one we shared with you at our June Analyst Day events and reflects new nuclear spending, as reported in our latest BLRA filing in May.

Please turn to Slide 11. We have successfully completed all of our planned debt financings for 2012. The remainder of this slide presents our estimated financing plan through 2017, and has not changed since our Analyst Day event. We continue to anticipate drawing the remaining funds from our equity forward during the first quarter of 2013.

Now, please turn to Slide 12. We are affirming our earnings guidance of $3.05 to $3.25 per share. The long-term outlook is unchanged as we plan to deliver 3% to 5% earnings growth over the three to five year period, based on the 2010 weather normalized base of $2.92 per share.

Our guidance encompasses the impact of whether on our Georgia operations during the first quarter, the impact of higher operating and maintenance expenses, and base rate increases for our new nuclear filings under the BLRA and Gas RSA adjustments. Our effective tax rate for 2011 was just over 30%, and we estimate the rate for 2012 will be approximately 31%.

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

Steve Byrne

Thanks Jimmy. I'd now like to direct your attention to Slide 13. We are pleased that our construction continues to move forward on our nuclear project. The schedule continues to support commercial operation dates of March of 2017 for Unit 2 and May of 2018 for Unit 3.

We have made progress on several areas during the past quarter. We continue to pour concrete in the Unit 2 excavation site. Making progress on the switchyard and cooling towers. The heavy lift derrick has been assembled, tested and is ready for use. Large component manufacture is progressing at sites around the world. And Slide 14 shows two of those components at a facility in South Korea.

Parts continue to arrive at the Port Charleston, before being transported to the site. We have made extensive progress on the turbine island for Unit 2, the first new unit, as you can see it on Slide number 15.

You can also see a portion of the heavy lift derrick, which is the blue arm across the top of the picture. The derrick is located between the excavation sites for the two new units. This will allow it to be used to lift assembled modules and other heavy components, and place them in the excavation site for either unit.

Circulating water pipe is in place, as shown in the center of the page. Slide also shows the containment vessel lower bowl. Chicago Bridge & Iron has completed welding of the lower bowl, and is now welding the first ring section for that containment vessel, which is shown on Slide number 16.

Slide 17, shows 230,000 volt transmission lines being connected to the switchyard, which is nearing completion. The construction is on scheduled to allow the switchyard to be energized in the first half of 2013. This will allow us to back feed the project with power from the grid.

A final hearing for signing of transmission lines related to the new nuclear project will be held on August 22. We were fortunate to be able to use existing rights-of-way for the vast majority of transmission lines from the new units.

Please turn now to Slide 18, which shows the nuclear island for Unit 2. Over the last few months, we have poured dental and leveling concrete using our on-site concrete batch plants. This process has done well even while incurring record high temperatures. We had anticipated the challenge of high temperatures and we're able to ship to schedules to allow the pours to be done in the evening, when temperatures are not as extreme.

We have also begun installation of the waterproof membrane in the nuclear island. After that is complete, more high-strength concrete called mud mat is poured prior to installing the nuclear island rebar cage. As of yesterday, we installed the waterproof membrane and mud mat for about 75% of the nuclear island and placed about 40% of the rebar cage.

I know many of you have been interested on our rebar cage. I will let you know that we are constructing our rebar cage to conform to the applicable concrete code and design certification document requirements. And do not anticipate any additional delays to the rebar cage.

Once the rebar cage is fully in place, we'll pour the six-foot thick nuclear island base mat and then set module CR10 on the base mat. The CR10 module is currently being fabricated on site, so that it will be ready when needed.

CR10 is a steel-frame support used to hold the lower bowl above the base mat until the foundation concrete is completed. We anticipate setting the lower containment bowl later this year. In summary, the construction is progressing well and on track to achieve the amended completion dates.

Please turn now to Slide 19. As you may remember, in May we filed an application with the South Carolina Public Service Commission seeking to update our budget and schedule. A new schedule sets the substantial completion dates for the units at March of 2017 and May of 2018.

The updated costs totaled $283 million and were primarily the result of delays in receipt of our license and agreement with Shawn Westinghouse related to challenge cost for the construction of our new nuclear units, and additional owners cost or non-EPC costs for which we were responsible, such as staffing, information technology and facilities.

The hearing on our updated cost filing will be held in September. We anticipate receiving an order from the commission on these items in mid-November.

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 Travis Miller of Morningstar Securities.

Travis Miller - Morningstar Securities

Just wondering what the SCE&G rate case, what do you think the risk is there of a potential ROE cut given or interest rates have moved obviously? Any indications from anywhere either other utilities or other comments from the regulatory staff that could possibly lead to an ROE cut?

Jimmy Addison

Well, let me first kind of define where we are. Of course, we filed the case as we say here at 10.95. Our current rates are based on 10.7. The only other benchmark that we really have is the most recent case from Duke Energy, which I believe was completed last fall that was at 10.5.

So that's kind of the range of the numbers that we have today. And just to give you some perspective on the 10.95 compared to the 10.7, that's obviously 25 basis points. That's about $10 million per 25 basis points.

Travis Miller - Morningstar Securities

And one follow-up. Do you think there is any risk of rate fatigue in there? You've gotten obviously the nuclear rate increases now this is for the second time in a couple of years and you've had a pretty sizeable base rate increase. Did you get any indications of potential customer rate?

Jimmy Addison

Well, a couple of comments on that. First of all, we've taken a fairly unusual step of offering a field decrease simultaneous with this rate increase that would offset roughly a third or more of the cost of it to the customer. So we're trying to create a situation where we earn a reasonable return for investors to continue to attract the capital that we need to continue the development of the nuclear, while at the same time appreciating the condition of customers and trying to keep their bill down.

After that reduction you've got an overall average increase of 3.5%, 3.75%, and that's after two years. So that's pretty close to the rate of inflation we experienced over the last couple of years. And having said that, we're very aware that we continue to have the increases under the Base Load Review Act for the nuclear development and we have worked very hard to mitigate this increase and will work very hard to stay away as long as we can in the future.

Operator

Our next question will come from Jay Dobson of Wunderlich Securities.

Jay Dobson - Wunderlich Securities

Steve, just a question on the agreement between and Shawn and Chicago Bridge & Iron to merge, just sort of practical implications from your roles perspective?

Steve Byrne

We don't see any implications to our project from the proposed merger. So if it goes forward, we're aware of the fact that CB&I management team will take over. And we understand Jim Bernhard will be retiring. We have experience with Chicago Bridge & Iron.

As you probably heard a few minutes ago, they are doing welding on our site for the containment vessel. They are going to be on the site for another couple of years, while they complete the ring sections.

And if you go back in time, they actually manufactured the reactor vessel for our V.C. Summer Unit number 1. So we've got a long history with CB&I. So we think that it would be a good move. We don't see any implications at the site to the merger.

Jay Dobson - Wunderlich Securities

And then, Jimmy, on retail sales, if you can just give us a little more clarity. I sensed a bit of optimism may be too strong of a word, but a little bit of glimmer of hope that maybe things could be improving. And I'm really thinking to start out into 2013 and I think a lot of us have thought maybe it would be flat. Is there any hope with what you are seeing right now that trends are improving, that we could see things start to improve from a retail sales perspective out in '13?

Jimmy Addison

Yes, I think that's a real fair characterization. And that's why we offered this additional chart on Page 7 in the slides to show the kind of consistent trend over the last three quarters in customer growth. So I am encouraged by this, it's just been so erratic over the last couple of years and it has continued even into the first six months.

To be more specific, out of the six months this year, three months sales have increased on a weather normal basis and three months they've been slightly lower. Now, net overall the increases have been larger, but there has just been some variability and that is just too early to say there is a real definitive linear trend.

One thing that we have noticed lately though is that, go back to a year ago and our overall growth rate in the electric business was about 0.5%. And the growth in commercial customers was less than half of that, which wouldn't surprise you in the recession.

The industrials led the way out, residentials have started to follow behind. And I have commented for a few quarters now that the commercials have lagged. So they were about half the growth of residential. But if you look at the same numbers today, where our overall growth rate is about 0.8% on Page 7, the commercials are well in excess of that over 1%. So that's a really interesting sign.

Now, you'll notice in our overall commercial sales were relatively flat to last year. So the analysis of that I'd take is that, all the commercial customers are being very frugal in this difficult economy. But more coming online and I'm encouraged by that, continue to be encouragement by the industrial announcements we've focused on over the past year. But I really liked it, the middle market starting to come back some.

Operator

Our next question will comes from Michael Lapides of Goldman Sachs.

Michael Lapides - Goldman Sachs

Can you just give an update from the BLRA increase that you agreeing at last November or that readiness in the rates last November? How much of it have you taken to date? What's left to be taken between now and the next BLRA increase?

Jimmy Addison

On a dollar basis?

Michael Lapides - Goldman Sachs

Yes, please?

Jimmy Addison

Michael, I don't know if I have that at my figure tips. The increase overall was about, let's say about $52 million. And then to effect in November, of course we've got six months of that under our belt. I just don't pro rate know how to tell you how much of that is in there because of the cyclical nature of the business. I haven't given enough like that.

Michael Lapides - Goldman Sachs

Can I just kind of use back, for 52 million and it is mid-November to mid-November kind of assume $7 million, $7.5 million, $8 million a month and then kind of pro rate at that way or is it much more seasonal and cyclical based on the demand cycle?

Jimmy Addison

It is definitely based on the unit sales. So it definitely varies based upon unit sales. That's certainly something we can provide you in the future. I've just not been asked it in the past, so I don't have it at my finger tips.

Michael Lapides - Goldman Sachs

And finally, O&M. One of things you mentioned when talking about guidance, the slight increase in O&M. You guys have been one of the better utilities about keeping O&M really low. Just curious are you seeing O&M pressures that you haven't seen in the last couple of years or is this a little bit of O&M catch-up going on?

Jimmy Addison

Not really broadly, Michael. It is really been isolated to kind of three categories. And I have mentioned those in my comments a few minutes ago, but just to expand upon it a little bit. We had some small increase in planned expenses at some of the generating plants.

Healthcare has trended up. We've been very effective the last four or five years through the end of 2011, in holding healthcare cost much lower than national averages, but we've seen a bump this year. We're hopeful that that's going to moderate for the balance of the year based upon some of the very recent data.

And then finally, the main driver is really more of, last year was lower than a normal period would have been. And let me explain that, and that's really driven by coming out of Fukushima issue last year and thus lowering our long-term earnings guidance from 4% to 6% to 3% to 5%. Our stock took quite a hit. And as a result, all of our incentive comp plans that are equity based, we didn't hit any of those targets.

So those two actions I just described happened in or near the end of the Q1, and all of that impact was in those plans by the end of Q2. So we were hitting none of those targets and accruing none of that cost related to those benefit plans.

On the contrary, this year you're well aware our stocks performed very well compared to the peers, and we're getting some of that bounce back effect. So last year we were accruing none of that cost. This year we're slightly above our 100% targets, because of the bounce back. So it's kind of going in opposite directions.

Michael Lapides; Goldman Sachs

Last question, just when I look at the slide about the rate case. Which of those items in that box had about $151 million? You mentioned the environmental deferral around the OpEx for the scrubber, you mentioned the pension. Which are the other ones are more forward-looking, they weren't part of the historical test here?

Jimmy Addison

Well, I think most of the others are forward-looking. In other words, I think you nailed it too that were really part of the prior case. So the others really are things that have occurred, since then property taxes have increased.

We've got the announcement of the retirement of the generating plants. We've made additional investments into for reliability some of it mandated, some of it our judgment that needed to be made, and then depreciations increased. So those other categories are all after the last case.

Michael Lapides; Goldman Sachs

But these are as of the test year. These aren't looking forward as a forecast to 2013?

Jimmy Addison

No, exactly right. These are all historical test year. Only thing we do is just annualize everything up. As of the end of the test year, we annualize it at that point.

Operator

Our next question will come from David Paltz of Bank of America Merrill Lynch.

David Paltz - Bank of America Merrill Lynch

I just had a few questions on, first, can you just remind me the kilowatt sales growth that is embedded in your long-term EPS growth?

Jimmy Addison

Actually I might hand that off to Steve, because that's really driven by IRP. Do you have in memory, Steve, what the long-term growth is there?

Steve Byrne

I don't have the kilowatt hour growth, but we're looking somewhere in the 1% range.

David Paltz - Bank of America Merrill Lynch

So that net customer and usage growth?

Steve Byrne

That would be the net kilowatt hour sales growth.

David Paltz - Bank of America Merrill Lynch

And then, Jimmy, regarding your comments on the expected rate relief assuming you got what you requested, did you say the $50 million would be margin improvement or net income?

Steve Byrne

Net income. I'm sorry, David, that's pre-tax.

David Paltz - Bank of America Merrill Lynch

And then just taking a bigger picture, I know you just filed this current electric rate case, but do you expect to continue your historic rate case cycle, I guess is what two to three years?

Jimmy Addison

It has been typically two to three years and that's been really something that in direction we received from the commission several years ago, about coming more frequently for smaller cases. Having said that, we've got three significant years of construction in front of us with the nuclear plant, and we're going to do everything within management's control to try to mitigate increases during that period.

We're hopeful that we get a reasonable return out of this case, it doesn't push us back in there in the near term. And that we can stay out longer because our goal would be able to stay out in the majority of that three year peak period, while we go through the heavy construction.

David Paltz - Bank of America Merrill Lynch

And just one last question, when do you plan to introduce 2013 guidance and address your long-term growth rate?

Jimmy Addison

Possibly at the Q3 call, David. But we'll kind of wait and see how the economy is going as well as obviously the other big if is what we were just discussing in this rate case. So if we're well along the way or have something in a settlement around the rate case even though it would not be approved by the commissions at that point, that would give us more confidence and we would lean towards announcing then. If not, we may hold off until the yearend call.

And back to your earlier question, one other thought is, I think really part of the solution and that all of us hope for I am sure, and really being able to stay out longer is if the economy really starts coming back. If some of these early trends really do develop, that can help fund part of the need for additional capital for new services, new lines etcetera. And we're hopeful that will help to extend that period before we would have to go out and contribute additional return.

Operator

Our next question will come from John Hanson of Presidus.

John Hanson - Presidus

How about an update as to situation with Santee and their options, and how that's all going with some of the folks there in the regions as we say?

Jimmy Addison

Santee, as you're aware is looking to divest itself with some of their ownership percentage. Currently, they are 45% owner in the project. They still are committed to nuclear and want to be an owner. They just want to own a little less than 45%.

They currently are, as we understand it, in negotiations with three entities, the one that gets most of the headlines in this area is Duke. So they are in negotiations with Duke to sell a portion of it, and as you're aware they've signed some letters of intent that should lead to ownership percentages. But they're also still pursuing a deal with AMP and with South Mississippi.

John Hanson - Presidus

The AMP is in Ohio, right?

Jimmy Addison

That's correct.

John Hanson - Presidus

And then they did have one with one of the Florida munis and something that that didn't has evolved or didn't pan out. I didn't see them on your list that you had at your Analyst Day, Steve?

Steve Byrne

I think if you go back to a couple of years, they did have two entities in Florida, and I believe they are both public power entities in Florida, that have since dropped off their list, and that's when they picked up the new public power entities of South Mississippi and AMP.

John Hanson - Presidus

What do you feel for the new Duke in terms of what they may think about this?

Jimmy Addison

So far SCE&G has not been involved in any negotiations with the new Duke. So I don't know how the new Duke will feel about it, but we don't have any reason to believe they're going to feel any differently about it than the folks who we were dealing with before.

And our understanding is that the people that we will be dealing with are the same folks that we had dealt with previously in these discussions. So since Santee has not let us known any changes in negotiation strategy, because of course the merger is not complete.

John Hanson - Presidus

Do they have any deadlines at all or not?

Jimmy Addison

I think in some of their letters of intent, they do have some deadlines. But, again this Santee's sale and it's there to piece to unload. So I am not aware of what those deadlines are at the top of my head.

Operator

Our next question will come from Ashar Khan of Visium.

Ashar Khan - Visium

Jimmy, I'm just trying to give some assumptions based on the data that you've provided and some based on the results, so if you can just bear with me.

First of all, is the earnings improvement coming this year, is all because of the electric nuclear stuff, and are you losing ROE on the non-nuclear stuff. Is that a fair point or no?

Jimmy Addison

Well, I think certainly there is margin from the new nuclear, but there is margin from the Rate Stabilization Act at the LDC in South Carolina. There is increased margin from growth in the North Carolina customer base. So I don't think you can say it's all from nuclear. But I'd say in the second quarter a substantial amount was driven by this bump in the economy that we discussed a few questions ago and that contributed to this Q2 growth.

Ashar Khan - Visium

Well, what I referring to was this chart that you have, I guess, on Page 8, which gives the 7.26% ROE, if I'm right? It is based as of March 31, 2012.

Jimmy Addison

Right.

Ashar Khan - Visium

Based on your objective of the $3.17, which is your internal target for the year. We expect that nuclear is going to be at 11% because that's what's granted and everything. Where will you end up this year based on that target on the non-nuclear with the 7.26? Where should we be looking for that number for 2012 based on the $3.17 guidance internal target?

Jimmy Addison

First of all, let me try to clear something up. First, the 7.26 is not our actual earned return, as I have attempted to really give some examples in my prepared comments earlier.

7.26 is the pro forma return at the end of the test year. So what we've done at the end of the test year is take all known and measurable cost that are there at the end of the year. For example, if we began depreciating a large piece of equipment in the twelfth month, we only have one-twelfth of the cost in that test year, so when the pro forma at end we will include the other 11 months, and that will drop the return down.

Ashar Khan - Visium

But what would this number be if you had all this year's earnings, and even if this was like pro forma for 12/31/2012?

Steve Byrne

Well, that's where I would say that the number we gave you at the end of Q1 was 8.86%, that's not changed a great deal as of today. And I don't know of anything that's going to change it to great deal between now and the end of the year.

So we're earning in that 8.75% to 9% range at this point, unless you pro forma in this full year cost. So eventually it's going to drift all the way down to the 7.26, once you get full years of those additional pro forma costs. But I would say now it's somewhere in the 8.5 range.

So the process in South Carolina requires that you don't file the interim surveillance reports after you file the rate case, you simply file the rate case with all of your pro formas and you don't file any interim reports in the meantime, until the case is resolved.

Ashar Khan - Visium

Jimmy, what I was trying to do and I don't know if you can help me assume and these are all assumptions. So just wanted to see how I'm trying to do next year's earnings. If say you get a 10% and you're able to earn a 10% ROE, this is my assumption, theoretically for a conversation basis. If you are able to earn a 10% ROE in 2013, the next year, will the delta be from the 7.26 to going to go into 10 or will the delta be from the 8.75 going to 10?

Jimmy Addison

Depends upon when you measure that. If you measured it at the end of the first quarter it'd be 8.86. If you measured it at the end of the year and the commission agreed with all of our pro formas, it would be 7.26.

So I understand what you're trying to accomplish. I think the only way I can really respond is to say that we've provided our guidance. We reaffirmed that today. So we've given you our internal target and our long term growth rates. And we think those are all reasonable, and if you want to make some sensitivity adjustments off that that's also why I provided the 100 basis points of ROE is about $40 million. So if you wanted to make some adjustments.

Ashar Khan - Visium

So if I am using that next year you should be able to improve like 200 basis points that would be that you are earning more like 9.26 next year on an ROE basis, on a pro forma basis in '13, right? So that's really one should use as a base, is the 7.26 for 2012?

Jimmy Addison

Yes, but it's not that simple, because it really depends upon on what conclusion the ORS and the commission comes to as it relates to the various pro formas we've included.

So for example, we have proposed certain amortization periods on this pension costs. Well, they may decide on different amortization periods. And so that would change the expense and maybe stretch it out over a longer period of time. So I'm not trying to be evasive, but it's just almost impossible for me to answer.

Ashar Khan - Visium

But that would of course not allow you to run from your allowed ROE of 10% rate if you drag things down, right? Whatever they don't do or whatever the number you get, you've asked for a higher number, and whatever that give you. And then there could be other stuff, which might not allow you to earn the allowed ROE as part of it right? That's what you are saying, right?

Jimmy Addison

Well, yes and no. As it relates to ROE, if there is a lower number that's going to impact our earnings for sure. If it relates to an expense item and they determine that it should be amortized over a longer period, and the expense will go down and the requested income will go down by a commensurate amount. So we would have no impact on net income or earned return.

Ashar Khan - Visium

But just to end up, Jimmy, because as you said, you won't be filing rate cases every year. I guess the year where you get a rate case decision, earnings should be much higher and then they leveragize, because you're not filing any increases for a year or so. Right? So there would like bumps in earnings, and I know you're going to offset it somewhat with the share increase coming in, but one can assume that earnings should be increasing on in a more percentage basis in a year where there is a rate increase. Is that that fair to assume?

Jimmy Addison

Yes, there is always a lumpiness in our business, because of the need for rate increases in just certain periods, but there are contributors. A lot of our growth is driven off, the BLRA is driven off of the contribution from the other gas businesses, and that's going to come back to how well the economy grows there too.

Operator

I am showing no additional questions in the queue. I would like to turn the call back to Jimmy Addison for his closing remarks.

Jimmy Addison

Thank you. To summarize, we are pleased with our results for the second quarter. Weather normalized mechanisms continue to mitigate the impacts of weather on our margins, and construction of our nuclear project continues to move forward.

We'll certainly be focused on our regulatory proceedings during the balance of the year, and we'll update you as these matters progress. We thank you for joining us today, and for your interest in SCANA.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.

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