ML19340E115
| ML19340E115 | |
| Person / Time | |
|---|---|
| Site: | Summer  |
| Issue date: | 08/31/1979 |
| From: | Sherwin S FOSTER ASSOCIATES, INC., SOUTH CAROLINA ELECTRIC & GAS CO. |
| To: | |
| Shared Package | |
| ML19340E107 | List: |
| References | |
| NUDOCS 8101060445 | |
| Download: ML19340E115 (195) | |
Text
__
O o
tj Before the Public Service Commission of South Carolina South Carolina Electric & Gas Company Docket Nos.
79-196-E 79-197-G 1
9 Rate of Return Testimony of Stephen F.
Sherwin D
Foster Associates, Inc.
.A, Washington, D..C.
20036
(/
August 1979 810106094 3 1
~-
.. n.n.,,
i Table of Contents Page Preface i
I.
Summary of Guiding Principles and Factual Bases for Conclusion 1
II.
Economic Trends Bearing on Return t-i' Requirements III.
Bust.ress and Financial Risks 15 IV.
The Cost of Common Equity Capital 22 a.
The comparable earnings approach 23
( ')
~)
b.
The financial integrity test 37 c.
The capital attraction standard 48 Appendix A:
Summary of Qualifications 0
s 7
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Preface
- 1. Q.
Please state your name and address.
2.
4 *g 3.
A.
My name is Stephen F.
Sherwin; my business address is 4
4.
1101 Seventeenth Street Northwest, Washington, D. C.
5.
20036.
4.
I l
7 Q.
What is your profession and by whom are you employed?
9.
9.
A.
I am an economist and Executive Vice President of 10.
Foster Associates, Inc., an economic consulting firm.
11.
A summary of my qualifications appears in Anpendix A.
12.
.t 4
i l
13.
Q.
Have you previously given evidence before this Commission?
l 14.
l 13.
A.
Yes, on behalf of South Carolina Electric & Gas in 16.
1977.
.!Q 17 l) 19.
Q.
What is the purpose of your testimony?
l 19.
l 20.
A.
I have been asked to exeress an opinion on the equity 21.
portion of the fair rate of return, applied to a March 31, 22.
1979 net investment - original cost rate base for 23.
South Carolina Electric & Gas Company's properties 24.
subject to the jurisdiction of this Commission.
25.
26.
Q.
Have you prepared an exhibit?
j l
27 f
l 28.
A.
Yes.
The statistical support. for my opinion is set 29.
forth in an exhibit, can'sisting of 23 schedules, pre-1 30.
pared by me or under my supervision.
I I
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l 1.
I.
Summary of Guiding Principles and Factual Bases for
()
i 2.
Codelusion 3.
4.
Q.
What are your criteria for measuring the fair return?
5 I.
6, A.
k'or. legal criteria'.1 have been guided by the decisions 7
of'the United States Supreme Court in the 1923 Blue-9.
fiel,d,, the 1944 Hooe, and the 1968 Permian Basin cases, 9.
as'well as prior decisions of this' Commission.
I 10.
understand these decisions to define a fair return in 11.
teims of the triple standards of permitting a company 12.
to achieve a level of earnings comparable to those 13.
ear'ned by other enterprises of corresponding risk and I
14, uncertainty, maintain its financial integrity, and 15.
at6ract capital on reasohable terms.
16.
17.
These thre&" standards are alsorthececonomic guidelines 18-for a fait return encompassed in the opoortunity cost
[}
)
19.
Principle.
t:L 20.
i 21.
Q.
What are the principal conclusions of your study?
22.
23.
A.
Tnere has been a significant increase during the last 24.
two years in the cost of common equity capital.
The 25.
principal causes stem from a rise in interest rates, 26.
an accentuation of inflationary forces, investors' 27, increased awareness of the inherent risks of utility 28.
operations-and the higher returns on equity achievied E
29.
by' industrials, Hence, the-return.. requirement-for 30.
Sooth Carolina.EIoctric & Gas has risen, irrespective 31.
of whether the measurement is made.by reference to the 32.
comearable earnings test, or the return required to 33.
maintain financial integrity, or the cost of attract-34.
ing capital.
9
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l 1.
An equity return of 13 percent is now insufficient to 0
maintain the company's financial integrity in terms of
)
3.
being able to sell new equity at book value.
It is, 4.
therefore, of utmost importance that the applied-for 5.
ret.ura not become an allowab'le ceiling but that it be 5.
translated into achievable earnings.
7 3.
My conclusion is that the cost of attracting capital, 9.
excluding an allowance for market pressure, for South 10.
Carolina Electric & Gas is in the range of 13.85 to 11.
l'4'10 percent, and that the fair return is in the 12.
r'ange of 14.50 to 15.00 percent at a 33 percent common 13.
equity ratio.
I 14.
15.
My' conclusions with respect to the cost of attracting 16.
capital, as well as the. fair: return, rest on.an anti-17 c'ioation of some decline in interest rates, a reduc-()
18, ti n in dividend. yield of: S.CE&G f rom the present level
}
19.
as well as some decline in the profit rates of indus-20.
trials, resulting partly from the Administration's 21.
guidelines and partly from the on-going recession.
22.
23.
Q.
Please summarize the conceptual approach underlying 24.
your return recommendation.
25.
26.
A.
My} recommendation rests on the application of the 27 opportunity cost theory.
The measurement of the cost
}
28.
of; equity capital is essentially a process of, sifting 29.
multiple facets of factual evidence, which' serve as.
30.
constraints on the exercise of judgment.
Reliance on 31.
ju'dgment constrained by facts is to be distinguished 32.
from judgments based on predilections.
O 3
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1.
The.different techniques for estimating the equity
,(,)
2.
return requirement -- the comparable earninos test,
)
3.
financial integrity approach and the capital attrac-4.
tion (or discounted cash flow) techniques -- provide 5.
useful evidence but no single measure constitutes an 6.
exclusive basis for estimating reasonable return requirements.
i 9.
9.
In applying the different techniques for measuring the 10.
cost of common equity capital, one needs to bear in 11.
mind the distinction between the cost of attracting 12.
capital and a fair return.
The former reflects the 13.
opportunity cost derived from stock market data; the i
14.
latter reflects the opportunity cost in relation to 13.
t.he original cost-related book equity.
16.
17 The cost of attracting capital is the current cost per 13-(^}
dollar of new capital expressed.in today's dollars of
'j 19.
purchasing power.
Aftcr periods of prolonged infla-20.
tion, the cost of capital typically lies below the 21.
fair return, which is a far broader concept.
The fair 22-return encompasses both the current cost of attracting 23.
capital and equitable treatment of past investments, 24-by providing to utility investors an earnings oppor-25.
tunity that maintains the value of their capital to 26.
the same extent as that achieved by investors in indus-27.
trial companies of similar risk.
28.
29 Regulation of public utilitias is generally viewed as 30, a substitute for competition.
Under competition, the 31.
level of profits will vary with the btsiness cycle, 32' but will in the long run be equal to the cost of attract-33' ing or retaining physical resources whose earning 34.
is related to dollars of current purchasing power 9
=
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- c g.
1.
power as distinguished from nominal dollar values.
O
2.
Under competitive conditions, however, investors are 3.
not always able to achieve the preservation of real 4.
capital values and protect their assets against the 5.
ravages of inflat. ion.
The competitive principle re-6.
quires that utility investors should be given an
?.
opportunity -- not a guarantee -- to preserve the real 3.
value of their capital to no greater, but also to no 9.
lesser, a degree than that to which investors in indus-i 10.
trial companies (of similar risk to utilities) can 11.
achieve a preservation of real capital values.
12.
- 13. Q.
In applying these tests, what assumptions have you made 14.
with respect to prospective economic conditions?
15.
16.
A.
My ret' urn recommendation rests on the following pre-17 mises with respect to economic conditions:
no growth
()
18.
in real GNP in 1979-1980; an inflation rate of 10.5
])
19.
percent in 1979 and 8.5 percent in 1980; interest rates 20.
on "A"
rated long-term bonds in the range of 9.0 to 21.
10.0 percent through 1980; and corporate profits to 22.
suffer some decline from the 1978 level.
23.
24.
Q.
What is.your analysis of the risks faced by South Caro-25.
lina Electric & Gas?
26.
27.
A.
The most significant risks of electric operations arise t
28.
in connection with:
~
29.
30.
a.
Growth in the service area, requiring large capi-31.
tal expenditures.
Expansion in a period of in-32.
flation enhances the risks of attrition and lowers 33.
the quality of earnings due to a high proportion 34.
of income in the form of AFUDC.
O.
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-5 1.
b..
The prospective operation of a nuclear olant.
The ggg
)
2.
-. accident of Three Mile Island has heightened inves-3.
-. tor awareness of the interrelation between physi-cal and economic risks resulting from the high 5.
~
concentration of capital in a.few. plants.
O.
Ths. risks of gas operations have declined during the
~
3.
last two years, largely due to an improvement in gas 9.
supply.
While investors still regard gas distributors 10.
as more risky than electric utilities, combination 11.
gas-electric utilities are no more risky than electric 12.
utilities.
Hence, the same return should be applied to 33.
both the company's gas and electric properties.
14.
13.
Q.
In applying the comoarable earnings test, what oeriod 16.
di5 you selec t ' for measurir.g the return?
17.
llk 1S.
A.
C reviewed: data'for the last 14 years, but gave the 19.
greatest weight to the earnings experience of indus-20.
trials in 1977-1978 as being most likely to be repre-21.
sentative of future conditions.
For industrials, the 22.
average earnings level of 1977-1978 lies below the 23.
current level.
24, 25.
Q.
Plsase summarize your application of the comparable 26.
earnings test.
27.
~
28.
A.
The' comparable earnings test may be applied by refer--
29.
ence to industrials or utilities, but application to 30.
either group provides useful measurements only in con-31.
junction with a determination that the end result is 32' sufficient to maintain a reasonable degree of financial 33*
Integrity.
' l 1.
Focusing first on the earnings of industrials, I have 2.
applied the comparable earnings test by reference to 3.
three groups.
4.
5.
The.first group consists of Standard & Poor's 400 com-6.
pany composite, whose earnings averaged 15 percent in 7
1977-1978.
However, this average is not representative 3.
of companies whose investment risks are similar to 9.
those of-South Carolina Electric & Gas.
10.
11.
Whsn the comparable earnings test is applied to indus-12.
trials, the critical operative concept is the deter-13.
mination of similarity of risk.
The relevant risks are 14.
those that are perceived by investors.
While utilities 15.
have quite different operating, market, and financial 16.
characteristics from those of industrials, it is pos-17.
sible to achieve a reasonable degree of balance and 18.
comparability by reference to investment risks.
9 19.
Security analysts-have traditionally ranked common 20.
equities of utilities as relatively high-grade invest-21.
ments, essentially because they are characterized by 22.
stability of returns.
23.
24.
In selecting samples of industrials of comparable in-25.
vestment risks to utilities, I therefore focused pri-26-marily on stability of equity returns.
However, to 27.
avoid inclusion of both " highly profitable enterprises",
D 28.
viewed askance by the Court in Bluefield, and companies 29.
whose earnings are chronically depressed (and thereby 30.
not meeting the capital attraction test), I nave selected 31-only those companies whose earnings fall within plus or 32-minus one standard deviation of the average return.
33-Additional criteria for selection were the size of the 34.
company, as measured by sales, and the quality of the 35.
company's common stock, as expressed by Standard &
36.
Poor's rankings.
.. _. _ ~ _ _...
7 t i 1.
The above criteria led me to select a second group of
)
2.
three samples of companies from nine industries which 3.
have experienced stable returns.
The average level of 4.
earnings achieved by these samples in 1977-1978 was in 5.
the range of 15.3 to 15.65 percent.
6.
7.
. My third group of companies comprises another three 9.
samples selected by the same criteria as previously 9.
described, except that the companies were selected from 10.
all manufacturing industries, rather than only from the 11.
nine industries with stable earnings.
The average 12..
level of earnings achieved by these samples in 1977-t 13.-
1978 was in the range of 14.5 to 15.6 percent.
14.
15.
The above data lead me to the conclusion that the pros-16. -
pective 1980 earnings level of industrials of generally 17.
comparable risk to SCE&G is approximately 14.5 to 15 ggg 18.
percent.
While this level corresponds to the range of
}
19.
my indicated fair return, my conclusion is dependent on 20.
a finding that the risks of SCE&G, as evaluated by in-21.
vestors, are equal to those of these groups of indus-22.
trials.
That finding is made in connection with the 23.
application of the financial integrity test.
24.
25.
Q.
What standard do you suggest for the maintenance.of fin-26.
ancial integrity?
27.
6 28.
A.
In the. context of the opportunity cost principle, the 29.
maintenance of financial integrity requires a level of 30-earnings that is not only sufficient to raise new equity 31.
capital without diluting stockholders' equity, but also 32.
to maintain the value of the investment at a level con-33.
sistent with that prevailing for stocks of similar in-34.
vestment risk.
In that context, attention to market-to-35.
book ratios becomes an important aspect of determining a
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fair return, not only as a measure of the degree to
)
2.
which financial integrity has been maintained, but also 3.
as an aid in gauging invester aporaisals of risk 4.
differences.
6.
The market price of South Carolina Electric & Gas has been below book value since the second quarter of 1478.
3.
Based on present market conditions, the net proceeds of 9.
a new sale of common stock would probably be less than 10, 85 percent of book value;, the Company's financial inte-11.
grity is therefore impaired.
12.
13.
An analysis of the relation between earnings and market-14.
to-book ratios indicates that the investors regard SCE5G 15.
as slightly riskier than the average electric or com-16.
bination electric gas utility, and the latter of approx-q 17 imately equal risk to my samples of industrials.
C' 18.
19.
Q.
What are your findings by reference to the discounted 20, cash flow approach?
21.
.22.
A.
Although the DCF technique gives the appearance of mathe-23.
matical precision, it rests to a considerable degree on 24.
the exercise of judgment, particularly with respect to 25.
the time period over which crowth rates are computed and 26.
the degree to which current dividend yields reflect 27 uncertainties that the future earnings growth will exceed 28.
or. fall short of past growth rates.
29.
30.
The dividend yield _of SCE&G was 10.4 percent in.the 31.
second quarter of 1979.
I estimate the prospective 32, dividend yield for 1980 to decline to 9.75 percent, on 33' the assumption that interest rates will decline slightly 34.
and the company will receive favorabl.e rate treatment.
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' f; 1.
With respect to growth rates, I estimate the prospective 9
2.
growth rate at 3.75 to 4.00 percent, based primarily on 3.
its.recent dividend policy, and the implicit growth re 4,
sulting from a 13 percent return and a payout ratio of 5.
70 percent.
6, 7.
The " bare bones" current cost of attracting capital is 9.
therefore 13.50 to 13.75 percent, excluding Tinancing 9.
and market pressure costs.
Applying 3.5 percent fin-
~
10.
ancing costs only to the dividend yield portion of the 11.
cost, and making no allowance for market pressure, re-12.
sults in a total cost of 13.85 to 14.10 percent.
13.
14.
15.
16.
17.
9 18.
19.,
20.
21.
22.
23.
24.
25.
26, 27 28.
29.
30.
31,,
32.
33.
34.
9
I,
1.
II.
Economic Trends Bearinc on Return Requirements 9
2.
3.
Q.
What is the relevance of economic trends in arriving at 4.
a fair return for South Carolina Electric & Gas?
5.
6.
A.
To place my equity return recommendation in perspective in'the light of alternative investment opportunities, 9.
which are influenced by trends in business activity, 9.
the prospective rate of inflation, and the demand for 10.
and. supply of capital.
11.
12.
Since the Company's proposed rate increase is prospec-13.
tive, the focus should be on prospective economic con-14.
ditions in 1980.
Of course, such projections can only 15.
be informed estimates of probabilities.
16.
17.
Q.
Please. summarize the salient economic trends which bear l
18.
on the opportunity cost of capital.
19.
20.
A.
The economic scene is dominated by the need to reduce 21.
the rate of inflation and avoid a severe recession.
22.
23.
The. Economic Reoort of the President of January 1979 24.
had estimated the prospective annual real growth in GNP 25.
in 1979 at a rate of 2-1/4 percent and forecast an 26, inflation rate of-7-1/4 to 7-1/2 percent.
These fore-27.
casts were revised in July 1979 to:
No growth in 1979, 28.
and a 2 percent growth in 1980; an inflation rate of 29.
10.5 percent for 1979 and 8.5 percent in 1980.
30.
31.
The success.ot-the Administr ation's policies to combat 32.
inflation remains-in doubt.
Although the wage / price 33.
guidelines have'had some success, and the rate of infla-r 34.-
tion of agriculture prices has slackened, the rise in i
l r
3, the price of oil has fanned inflationary expectations.
The.long anticipated slowdown appears to have commenced 3.
onl.y in the second quarter.
The necessity to forestall 4.
a renewed run on the dollar will preclude an expansion-L.
ary. monetary policy to combat the on-going recession.
6.
Continued relatively high interest rates appear vit-tu'elly certain.
7 9
5.
9.
The. severity of the ongoing recession is virtually 10.
unpredictable, partly because it is not clear which of 11.
se've r al (politichlly unpalatable) energy policy options 12.
will be embraced by the Congress and partly because 13.
thbre is no. basis for estimating the impact of the g
14.
gasoline shortages on consumer confidence and spending 15.
pa't-terns, which may result in more fundamental struc-16.
tdrel changes in..the economy.
Given these imponder-17.
ab'lec, projections of economic growth become suoject to 2 inore tnan usual: margin of error.
I expect the U.
S.
lb.
9 19-ecbnomy to expetionce only. minimal or no growth in 20.
1980, but concur with the. Administration's. forecast of 21, a r. educed inflation rate of 8.5 percent, which would be 22-eqbal to the level experienced in the six months ending 23.
Ma'r.ch 1979 (Schedule 1).
24.
25.
Q.
P1' ease discuss the trend in rates for fixed income 26.
se'ou r i ti e s. -
2 "/
b 28-A.
There has been a pronounced rise in interest rates 29.
d u' ring thc last two years.
In my opinione interest 30 rates have now peaked and may experience a modest de-33.
c l.i.no in the second half of 19'/9 and 1980, barring a 32-renewed confidence crisis in the foreign exchange 33-market.
9 l
1.
Long-term Government bond yields have risen from approx-b3/
2.
imately 7.6 percent in early 1977 to a peak of 9.2 3.
percent in May 1979, and declined to 8.9 percent in 4.
June 1979 (Schedule 2).
5.
6.
The. yield on outstanding Moody's "A"' rated utility 7
bonds -- the rating carried by South Carolina Electric 3.
& Gas --rose from 8.65 percent in the first quarter of 9.
1977 to a peak of 10.30 percent in May 1979, and stood 10.
at 10.14 percent in June 1979.
The yield on "A"
rated 11.
newly issued bonds has risen from about 8.5 percent in 12.
the first quarter of 1977 to 10.17 percent in the 13.
second quarter of 1979 (Schedule 3).
g 14.
15.
The trend in yields on "a" rated utility preferred 16.
stocks rose from 8.79 percent in the first quarter of 17 1977 to 9.72 percent in-the second quarter of 1979
(]'
- 18..
(Schedule 4).
19.
20.
At the present, the interest rate structure is charac-21.
terized by an " inverted yield pattern" (short-term 22.
higher than long-term).
The length of time for which 23.
this pattern will prevail is primarily a function of 24.
monetary policy; it will be dependent on the time re-l 25.
quired to break the inflation spiral and to restore-the 26.
dollar to its traditional function of serving both as a l
27.
medium of exchange and a store of value.
In my opinion, 28.
the difficulties of. achieving a rapid abatement of 29.
inflation will prompt.a continuation of a fairly re-30.
strictive monetary policy in the near future, and will 31.
keep interest rates on newly issued "A"
rated utility 32.
bonds in the range of 9.0 to 10.0 percent in 1980.
A 33.
substantial decline in interest rates can only be ex-34*
pected if inflationary expectations are reversed.
5 1.
Q.
Do.the present and prospective levels of high interest 2.
rates constitute evidence of a rise in the opportunity 3.
cos.t of equity capital?
4.
5.
B.
Yes..
'Since the opportunity cost of equity capital re-6.
fictcts a risk premium above that of debt capital, the i
twc. eend to -move-in tandem.
However, it does not fol-3.
low.that reasonahde utility equity returns should be 9.
set at either a constant absolute differential to in-10.
te re s t rates or as a fixed proportion of interest rates.
11.
The. defect of such an approach is that the required 12.
equity risk premium changes over the business cycle.
13.
14.
In.Phe early -1960!s, when interect rates were around 4.5 15.
per. cent, equity. return's.for high-grade utilities were 16.
typical]y about l'0.; 5 pe rcen t.
Thus, equity returns then 17.
provided for a ri'sk dif ferential of about 6 percentage is.S.
po i.n t s, or a lovr>1. of-twice. the prevailing interest 19 rates.
Does it follow that, when. interest rates rise to 20.
- 10. percent, the corresponding. equity returns should be 21.
- 16. percent, or over 20 perce.nt?
I think not.
22.
23.
In. periods of rising interest rates, the required risk 24.
premium tends to shrink and, in periods of declining 25.
interest rates, the risk premium rises.
The essential reason for the ch' irging risk. premium is that, in periods a
26.
27 of.high and ri sing. interest-rates, investors attach a 1
2 8~.
higher probabi]ity to a-prospectiv.e decline, leading to 29.
capital gains in fixed: income: securities and utility 30.
stocks, which are viewed as being interest-sensitive.
31.
The prospect of capital gains. leads investors to accept 32.
a lesser risk premium.
The tax laws providing differen-33.
tial treatment.for income and capital gains accentuate 34.
this tendency.
Conversely, when interest rates are low 9
. ~ - _. _..
f 1.
and investors expect a reversal, they face prospective
'y 2.
capital losses on fixed income securities and utility 3.
equities, which prompts investors to seek relatively 4.
higher risk premiums.
5.
6.
Q.
Are there any general. indicators which shed light on the 7
cost of equity capital?
~
3.
9.
A.
Yes.
I regard the level and trends in corporate profits 10.
as.providing a general indicator which also serves as an 11.
aid in the interpretation of the comparable earnings 12.
test.
13.
e 14.
Af ter-tax profits in relation to GNP averaged S.3 per-15.
cent in 1960-1964, rose to a peak of 6.4 percent in 16.
1965, declined sharply to below 4 percent in the reces-17.
sion of 1970-1971, rose to 5.4 percent in 1977, 5.6
(]
18.
percent in 1978, and continued to rise in the first 19.
quarter of 1979 (Schedule 5).
20.
21.
The above data indicate that, in terms of historical 22-perspective, the 1978 corporate profit level in relation 23.
to GNP still falls short of the level attained in the 24.
mid-1960's, which were years of relatively high growth 25.
and little inflation.
Although there is now a growing 26.
awareness that corporate profits may be inadequate in 27.
relation to the Nation's needs of capital formation and C
28.
the necessity to improve productivity, I believe corpor-29.
ate profits in 1980 will probably not reach the 1978 30.
levels.
I shall reflect'this projection in the appli-31.
cation of the comparable earnings test.
O
15-i 1.
III. Business and Financial Risks 2.
3.
Q.
What is your definition of risk?
4.
5.
A.
Risk is the probability.of failing to achieve the anti-ci~ ated return or suffering an impairment of capital.
6.
p 9
8.
Every util'ity is faced with two types of risks:
9.
10.
Business risks encompassing the risks of loss of 11.
capital or reduction of income below a reasonable 12.
return arising from the production and marketing of a
13.
the service, including all the economic, political, p
14.
technological, and physical hazards to which invest-15.
ment in the property is exposed.
Among these risks 16.
are that regulatory lag and attrition may prevent i
17 e the achievement of a reasonable return.
None of T
18.
these risks is dependent on capital structure ratios.
(^I
~
19.
20, Financial risks, reflecting the risks incurred by 21.
debt and equity investors as a result of management 22.
decisions to " trade on the equity" and to appeal to 23.
different classes of investors having different 24.
needs and preferences for risk-taking.
25.
26.
I know of no valid formula for-the. measurement of risks.
i 27 The relevant risks are those perceived by investors, as
~
28.
reflected in the valuation of a company's securities.
h 29.
However, since investors' appraisals of riskk can only 30.
be inferred -- even though the inference may be. drawn 31.
from a statistical measurement -- an analysis of the 32.
different facets comprising business and financial risks 33.
constitutes a useful point of departure.
i n
-*e, m
y
+ew-.
.y.
m 9
a--
,m r
--p.
s
-- 3 6 - -
i i
cx 1.
Q.
Please' discuss the various facets of business risks.
- j)
?.
3-A.
The. separate facets of risks are not identical for elec-tric and gas ocerations, although for some the impsct is 5
quite simi)ar.
i.
7 Fei.csing fir s tIolvma r ke t risks of SCE&G,- approximately.
S.
65# percent of; electric ~tevenues and 54 percent of gas 9.
revenues in 197.3 Were derived from residential and com-10 mercial sales, which may be viewed as having a highly 13 sthble cemand-over.the business cvcle.
The' industrial 12.
sales have a lesser stability.
However, in the aggre-11 gate the combination of an exclusive franchise to serve, v
14.
coupled with the more' stable nature of demand renders 1.5.
th6. market risks faced.by SCE&G less than those of the 16 typical i ndust r ial,
These. advantages are partly offset 17, by the indubtrials' faster capital turnover and hiaher g
18 eroent i i mW.f t.ott.t assets in the form of. current assets 19
.o,ich can Se : r,a pi-d 7.y ; liquida t ed, affording a. greater 20.
abil i t.y U.adjusi' their productive' capacity to changes 21, in market demands:
22 23.
The most significant; aspect of the company's risks arises 24.
from the necessity to meet rising service requirements 25.
of.its electr ic.-(not. gas) customers, which creates multi-26.
ple risks, uarticularly in: periods.ot inflation.
These 27.
riiks arise basical'ly from the. faut'that the. expansion 28.
ot eleci tic'uti.lities proceeds under conditions of increas-29-ins, costs (both Oominal and ren? costs), which enhances 30-t he* y:is k of.a t i' r i t'.io6.
n.
31.
32.
Between 1978'and 1983, kilowatt-hour sales-to. ultimate 33-consumers aronesi.imated to~ rise by 37 percent (from 34.
10,.226 to 14.042 million' kilowatt-hours), whereas gas m.
_/
1.
sa.les are expected to decline by 16 percent (from 48,586
()
2.
to 4 0,6 56 MMCF).
To meet these service requirements, 3.
total plant expenditures in the last three years aver-4.
aged $154.5 mill ion.
They are expected to remain at 5.
approximately that level in 1979 and 1980'(94-percent 5.
for electric), but decline in the following two years.
~
7 3.
The proportion of SCE&G's total chpital requirements 9.
financed from externally generated funds, net of retire-
~
10.
ments, average 71 percent in 1976-78 and will remain at 11.
approximately that level for 1979-1980.
12.
13.
Q.
Does the necessity to raise new common equity influence w
14 '-
the fair return on equity capital?
15.
16.
A.
It should not, in principle, but in practice the neces-I 17 sity of having to make repeated trips to the equity 13.
("~')
market renders it of paramount.importance that the 19.
achieved return-be at le'ast sufficient to permit the 20.
sale of new equity capital at book value.
If it is not, 21.
then there will be both an impairment of capital of 22.
existing stockholders, and a rise in the cost of capital 23.
above what it would be if the utility were allowed its 24.
cost of capital and provided with the revenues to 25.
achieve the allowable return..
26.
27 Q.
Please continue with your discussion of risks arising 28.
from a high rate of capital expenditures.
C 29.
30.
A..
There are two aspects to this risk:
31.
32.
First, a high rate of capital expenditures results in a 33.
high proportion'of AFUDC, which imoacts on the quality 34.
of earnings.
The company's AFUDC, as a percent of AC
-.~
> 1.
income available for common stock, has risen from an
()
2.
avexage of 30 percent in 1971-1975 to an average of 55 3.
per. cent in 1976-1978, a'leve1' considerably above the 4.
approximately 35 percent experienced by the electric 5.
in:d.us try (Schedule 6).
6.
3.
7 Second, a high rate of capital expenditures increases 9.
the. risk of attrition due to the need to finance capital 9.
ex'penditures above the embedded cost of debt and pre-10.
fer. red stock.
However, this risk has been significantly 11.
mitigated by the inclusion of.all CWIP in the rate base.
12.
13.
Q.
Would you now address the supply and physical risks?
t 14.
15.
A.
With respect to electric operations, coal is expected 16.
to -provide the fuel for about 73 percent of the com-17.
pany's generation of electric energy-in 1979, No. 6 18.
fuel oil about 22. percent and hydro and No. 2 fuel oil 19.
ab'out 5 percent.- With a--high p'roportion of fuel re-20.
quirements generated by coal, the' company is in a bet-21.
ter. position than utilities that rely heavily on fuel 22.
oil.
However, the interruption of' coal supplies, due 23.
to labor problems in the mines or on the railroads, 24.
al' ways constitutes a risk.
25.
26.
In 1980, the company's first nuclear power unit will 27.
become operational.
Although this further improves the 28.
company's reserve capacity, it creates considerable 6
~
29, physical and economic risks.
30.
31.
Physical risks of electric utilities had not received 32.
much attention until the receht accident at Three Mile 33.
Island.
The events in Pennsylvania have provided a Ff 34.
very forceful illustration of the interrelation between
i
. 19 e
),
physical and economic risks resulting from the high
.()
'2.
con. centration of capital-in relatively few plants.
3.
4.
From the point of view of the cost of capital, there 5.
are,several. aspects-to the. consequences of Three. Mile' G.
loland; 7
6,
- 1..
It hat. raised-the. cost haf' equity capital.of ccom :
').
panies that.are engaged in the construction or 10.
operation of nuclear power. units and it is un-11-likely that investors'. concerns can be allayed in 12, the foteseeable future.
IL 14.
2..
It will probably. raise the cost of. debt for those 1."
. companies that-are: operating or constructing- -
16.
nuclear plants. -1t'is not yet possible to quan-L 1).
tify that inhpac t.3.and:.thc adver se... impact may.be
({}
ly.
alleviated through. Area cr-nation-wide insurance j
10-schemes.
.- b. o 3.
20 2L 3.
It has created an-increased awareness that an 22 accident canding.the. outage of a plant may neces-23.
sitate the purchase of. power from neighboring 24.
utilities at.An increased level of costs that may 2Le not be automatically passed on to customers.
Even 26.
if the adverse:.effect of the recent. nuclear acci-27c dent on theicost of capital may be ultimately D
28.
overcome through.appr.opriate reg,ulatory and govern-29-mental actions,.the increased awareness of the 30.
3mpact of physii al 'rish s ov. financial viability --
31, resulting solely.from the concentration of capi-l 3 2. -
tal -- is likely to have a long lasting upward 33-p>: essure on-the. cost:of capital.
- I 1.
Turnina to SCE&G's cas operations, the adequacy of its
. l 2.
gas supply has improved during the last two years, due y
3.
to an improvement in the national picture, and the 4.
local availability of limited amounts of LNG.
5.
6.
Q.
What is your appraisal of the company's financial 7
Ifsks, as reflected in the capital structure?
9.
9.
A.
I' view SCE&G's financial risks, as reflected in its 10.
consolidated capital structure, as being virtually 11.
identical to that of the electric utility industry.
12.
Ho' wever, for regulatory purposes, the elimination of 13.
the investment in Energy Subsidiary, results in an t
14.
equity ratio slightly below the industry average.
15.
lth Comparative data on capital structure are shown for the 17 fol. lowing groups of electric utilities on Schedule 7,
(~T 1 11 Sh'eet 1.
. 1.
%y(
)
,19.
g 20.
The Department of Energy's data for 211 Class A 21.
and B electrics; 22, 86 electric and electric-gas distribution utili-23 ties, representing all such companies listed on the New York Stock Exchange'with revenues over S50 24.
million in 1977; 25, A subgrouo of 42 electric utilities (listed on the c
f 26, New York Stock Exchange) whose revenues from elec-l 27 tric operations' accounted for more than 90 percent of total revenues in 1977.
28, O
A subgroup of 24 electric-gas distribution utili-29.
l ties (listed on the New York Stock Exchange) whose 30.
electric revenues in 1977 accounted for between 70 l
3],
and 90 percent of total revenues.
h.-)
(
t l 1.
Since SCE&G's revenues from electric operations were 9
2.
78.7 percent of total revenues in 1978, the closest 3.
Limilarity is with the group of 24 electric-gas util-4.
ities.
As of 12/31/78, SCE&G's equity ratio was 35.0 5,
per. cent compared to 36.3 percent for 24 combination 6.
electric-gas companies, 35.5 percent for the 42 elec-trics and 3.6.1 percent.for the 86 utilities.
9.
9.
Consistent with the Commission's 1977 decision, the 10.
above computations are based on capital, including 11.
short-term debt.
In my opinion, short-term debt should 12e be excluded from the capital. structure.
Short-term 11 debt typically constitutes an interim means of financ-p 14.
ing, subject to wide annual fluctuations with respect 15<
to both amounts and rates paid.
Comparative data on 16<
capital structor.c excluding short-term debt are shown 17, in Schedule.7, Sheet 2.
(
18,.
)
l W.
For-purposes ot.this case., the company.is proposing a 20-capital structure as.of 3/31/79, with a 33 percent 21.
equity ratio (Schedule 8), reflecting the elimination 22.
eg.the investment in Energy Subsidiary, and giving 23-effect to both a bond and a common stock issue in April 24.
1979.
The latter should be treated as a "known change" 25.
that results in a capital structure which constitutes 26*
the best approximation of the actual capital structure 27 during the period the rates are expected to be in effect.
t 1
28.
29-Q.
What is your conclusion with respect to the Company's 30.
risks of its electric compared to gas operations?
31.
32' The business risks of gas distribution have historically 33-been regarded as exceeding those of electric utilities, 34, due to supply problems, physical risks, and the higher J
l l
f 7.2-1.
uroportion'of revenues derived from industrial customers.
()
2.
n earlier years, these. higher risks have been reflected 2.
in both higher debt and equity costs of gas distributors 4.
compared to electric utilities; and combination electric-5.
gas utilities experiencedahigher, costs;uf. equity espi.
6.
tal than straight electric utilities. 'However, in the-15st two yeath,:whilc*investois sti'1-regard gas distri-J 8.
botors as riskiet.than-electric utilities, there appears.
9.
to.be no difference between" investors evaluation of 10.
combination electric gas and straight electric utilities 11.
(See Section IV(b)].
Hence, it appears. reasonable to 12.
infer that the~ improvement of-gas supply has partially 13.
co'unterbalanced the increased risks of electric opera-
)
14.
tions arising from potential interruptions of fuel oil 15.
suuplies, the risks of nuclear-generation and attrition..
16.
17 I therefori concludoe that thsosame. rate of return should :
(}
18.
be applied to SCB&Gis; electric-rate base as to its gas
)
19.
rate base.'
' ~ ~ "
20.
21.
IV.
The Cost of Common _ Equity Ca_pital-22.
23.
Q.
How d6.you propose to measure the cost of equity capi-24.
tal to South Carolina' Electric & Gas?.
25.
26.
A.
I shal.l. firstcc6hsidertthe comparable earnings approach 27.
which, in my opinion, provides,a measure of the return k
28.
requirement only in conjunction with the financial in-29.
tegrity test.
'Thereafter I shal.1 examine the market 30.
value or capital attraction test /
I 1.
a '.. The comparable earnings approach r,.
ij
?.
3.
Q.
Please summarize the rationale of the comparable earn-4.
ings approach.
a.
O.
A.
T6e e60nomic-rationa).e is the opportunity cost of capi-Os1 concept, which holds that capital should not be 9.
committed to any venture unless it can earn a return c6mmensurate with that prospectively available in alter-10 native employments of similar risk.
m; with all equity 11, capital cost concepts, the comparable earnings test is 12.
a prospective cost concept.
~
13.
14.
While the prospective nature.of the cost of capital is 1%
always recognized-in connection with the discounted 16.
cash flow technique in estimating the cost of attract-l '/.
idg cauttal, it~should nct-be; but sometimes is, di s-14 regarded.in the application of the comparable earnings 9
16.
test.
Since prospective earnings cannot be precisely 20 ascertained, the. measurement of comparable earnings 21.
typically proceed's by reference to past experienced 22.
returns.
The method therefore rests on the implicit 23.
assumption that past earnings on book equity are a 24 measurc for reasonable expectations of future earr.ings.
^
2%
26-Q.
What period do you regard ~as an appropriate basis for 27, applying the comparable earnings standard?
29.
29 A.
The period seJected should be representative of the 30.
prospective earnings potential of companies whose in--
31.
vestment risks (combined business and financial risks) 3 2..
are comparable to those of South Carolina Electric &
33.
Gas.
No a priori selection of years will meet that r
34.
condition.
(
(
Y J
3 ;
2.
A* great deal of emphasis is frequently placed on five-(
-2, year averagqs.
However, since t'te last five years 3.
encompass at least one year in which earnings were 4.
significantly influenced by inventory profits and also 5.
the most severe postwar recession, it would be mere G.
coincidence if that average proved to be representative 7
of. prospective conditions.
8.
9.
The years of depressed corporate profits should be set 10.
aside for the purpose of estimating prospective earn-11.
ings capacity; the years of significant inventory pro-12.
fits need also to be largely, but not entirely, dis-13, counted.
If inventory profits constituted a one-time, 14.
nonrecurring phenomenon, they should be totally disre-
~
15 girded in estim& ting. future earnings capacity.
But 16.
since inflation is likely to continue indefinitely,
-[
17 although hopefully at a declining rate, it is reason-es 18.
able ta expect that-some inventory profits will be
(_j) 15.
recurring.'_Indeed,. inventory profits have become a 20.
significant part of compensation for inflation achieved 21, bv. investors in manufacturing concerns.
22.
23.
The preceding considerations. lead me to give the great-24.
est weight to the earnings experience of 1977-1978 as 25.
being most likely-to be representati~ve of prospective 26.
conditions.
In. support: of that-conclusion, it should 27.
be noted that the~1977 1978 level' of corporate profits 28.
does not constitute an unduly high rate of profit in p
29.
colation to GNP.(Schedu'le 5), and lies considerably 30-below the level of profits experienced in the second 31, half of 1978 and. first. quarter of 1979.
My reliance on 32.
the 1977-1978 experience, therefore, anticipates some 33.
reduction in profits from the current level as the re-34.
sult of the on-going recession and the Administration's
?
35e anti-infl ation-guidelines.
}
_m, t.
- l 1.
Q.
Do.you regard it as appropriate to apply the comparable gg 2.
earnings test to utilities or industrials?
)
3.
4.
A.
The pr.incipa.1 focus should be on the earnings. of invest-5.
ment-grade nonregulated industrials, with appropri. ate-6.
tecognition for relative risks.
7 8.
To. apply t'he comparable.estnings-test to utilities 9
would constitute circular reasoning, and be tantamount 10.
to. letting the earnings of each regulated company be lls guided by other. regulatory awards rathet than by alter:
12.
native opportunity returns.available to capital.
To 13.
Pierce this circul.ar reasoning, the earnings of utili-i 14, ties must be analyzed in terms of the degree-to which - -
13.
they permit utilities to maintain an adequate degree of 16 financial integrity.
17 o
T.,
18.
Q.
How do you p< opone. to; apply. the comparable earnings 1
19, test to industrials?
20.
21.
A.
The critical operative concept in the application of 22.
comparable earnings test by reference to industrials is -
23.
to find firms of similar investment. risk to utilities.
l 24, There are essentially.two approaches to the measurement 25.
of. similarity of risks:
One is to seek a sample of 26-ccmpanies of reasonably comparable risk; the other i c-27.
to infer differences in risks from investor appraisals 28 iw the market, I shall.tely on both. approaches.
l 29 30-No two companies are precisely alike in physical, opera-3L ting, and financi.a1 characteristics.
However., the com-l 32, parable earnings standard does not rest on finding a 33.
group of companies exactly alike, but instead requires 34.
that there be a reasonable degree of balance between s
3;.
i I -
(o) 1 different kinds of risk encountered by utilities and
[}
2.
the'. group of industrials with which utilities are com-3.
pared.
The differences in physical, operating, and 4.
tin'ancial characteristics do not preclude the formula-t j 6n of judgnient as to the impact of differences on the 5.
dejr.ee of risk borne by common stockholders.
Such jud'gmentF. are continuously made by.the investment i
6.
community.
4 10-Most industria]c incot greater business risks than 11.
South Carolina Electric & Gas.
However, managements of 12.
industrials seek to offset business risks by reducing 6
13.
Lin'ancial risks through thicker equity ratios.
The 14:
result of this policy is a tendency toward equality as 15.
between industrials and. utilities with respect to the m
15-combined business and-financial r isks-in' terias of the 17-investment tisks. borne.by common stockholders,
,~3 v'
p T) 14.
The problem.at'hnn t is to ' find criteria which wilj.
20.
cermit the translation of this general tendency toward 21.
equalit y of - investment risks into specific groups'of 22.
companies with a closer degree of comparability to the 23.
economic and. investment risk characteristics of SCE&G.
24.
I know of no single, all-encompassing formula for the 2 F+.
measurement of rinks.
While.the appraisal of risks 26.
varies widely.among different investors, the investors' 27.
composite appraisal tends to be reflected in market D
28-valuations..In that. sense,..the market constitutes an l
29-
" objective appralsal o.f risks and the adequacy of d
30' earnings levels. - This 13. one of the considerations 31' which warrant attention to market-to-book ratios, with 32*
due regard to the fact that the market is subject to 33.
erratic gyrations and that market values reflect fac-34.
gg tors other than experienced or allowable returns.
8
Y.T'" ~ T:
..., ~~KM7 -
- (,,)
- 1. Q.
Please explain your application of the comparable earn-
)
2.
inds test with reference to industrials.
3.
4.
Ai My application of the comparable earnings test is made-5.
by. reference to three groups of industrials.
6.
5.
~
The' first group comprises Standard & Poor's composite of 3.
406 industrials, as representative of a cross-section 9.
of-American industrials, widely followed by investors.
10.
2.
11 The second group comprises three samples of manufacturers 12.
sefected on the basis of perhaps the most important in-5 13 e vedtment characteristic associated with utilities,
~
14.
namely, stability of earnings.
All three samples are 15.
sel'ected from nine industries which have experienced 16.
stable returns on took equity.
Within those stable 17-ind'u s t r ie s, two of the samples are selected on the
,S 18 badis of common stouk rankings, and one sample on the 19.
bas'is of size of company.cahd stability of earni";3.
20.
21.
The third group drops the " stable industry" criterion, 22.
in recognition of the fact that the increasing diversi-23.
fication of many. industr-ials may render the classifica-24, tion of corporate entities into any single industry of 25.
questionable validity. -This. third group also comprises 26.
thr'ee samples of man'ufacturers, two of which are again 27-sel'ected on.the basis of common stock rankings, and one t
28' sample on the basin ob size of company and. stab.ility of 29.
earnings 30.
- 31. Q.
What Has been the; earnings experience of Standard &
32.
Poor's composite average?
33.
OJ
il [
- 1. A.
The earnings rate for Standard & Poor's 400 industrials 2.
averaged 13.0 percent for the five-year period ending 3.
1975, and rose to 14.3 percent for the -five-year per iod 4.
ending 1978.
-lhe average earnings level in 1977-1978 5.
was'15.0 percent (Schedule 9.).
6.
Whfle Standard & Poor's 400 series comprises companies 9.
of widely diverse risks, many of which are quite dis-9.
similar to South Carolina Electric 5 Gas, the S&P aver-10.
age is widely followed by the investment community, and 11.
is viewed as representative of the industrial sector.
12.
The fact that Standard & Poor's 400 index shows a cur-13.
ren't earnings rate of above 15.0 percent is therefcce D
14.
entitled to some weight.
15.
16-O.
Would you now explain your selection of samples of in a 17, dus' trial companies whose investment risks you regard'as 9
18.
similar to those.of eiectric utilities, focusing first 19.
on the conceptual approach?
20,
- 21. A.
My selection of samples of industrials was governed by 22-the desire to achieve a closer comparability with the 23-investment risk characteristics of electric utilities 24.
thdn that represented by the Standard &. Poor's 400 25.
average.
26.
27.
The three dominant economic characteristics of electric 28' ut ities are a.high capital-intensity, a franchise to 29.
ser've a particular territory, and.relatively stable de-30*
mand conditions over the course of the business cycle.
31.
32.
With respect to capital intensity, SCE&G's capital 33-turnover in 1977-1978 was 0.4, compared to about 2.0 e
34.
for the preponderance of industrials.
This constitutes k
3,5 an element of risk exceeding that of industrials, parti-36-cularly in perio.ds of inflation.
b 1.
With respect to the other two characteristics, indus-ll f trials do not generally have the. advantage of protected 4.
3.
market, and the-demand for their products fluctuates 4<
more widely over the business cycle than'the demand for 5.
utility servicev.
Primarily on the basis of these 6.
latter two characteristicsi security analysts have traditionally ranked'the common equities of electric a.
utilities as 'relatively high-grade investments, essen-9.
tielly because 'they are characterized by relatively 10.
high stability nf. equity returns.
J 1.
IL Instability ot returns is, of course, only one of sever-1L al: indicator s of. r isk.
Investments in companies which.
1).
experience stable but low. earnings are not as desirable 15.
asithose whose.. earnings-tluctuate 'around a higher level-15.
of earnings.
Thus. in selecting samples.of comparable 1 "/.
industrials,.it.is important to consider both the level 18.
and. stabi1ity of vi..nipgs g) sw
- 20. Q.
Please desdribe the selection process of the thr.ee - -
21.
samples selected f rom nine indust' ries with stable 22.
earnings.
23.
24.
A.
The. selection process' proceeded in several stages..
(A 25.
detailed descr.iption is contained in Appendix A to the 26-statistical exhi-bit. )
27 28.
The.first step was a selection of-stable indus tr.ie s I
29.
from the thirty. major. and sub-industry -classifi. cation 3 -
of Federal.. Trade: Ccimmission.1/
Nine of these ind us'- 1 31.
tries were.. selected on the basis of the dual criteria 32, of.(1) a level of earnings that was within plus or 3L 34'
~
lll
-1/
The 1974 Federal Trade-Commission's Quarterly Financi'al Report of Manufacturing Corporations lists 3U major and sub-industries.
Reliance or. the 1974 publication was viewed as preferable to the use of the present classifi-cation because an industry reclassi.fication, undertaken in 1974, reduced.che number of industr.ies from 30 to 21, excluding " miscellaneous".
-- 3 0 -
D D
b f
1.
minus one standard deviation of the average of the L,j
/.
group of thirty industries, and (2) a high degree of 3.
stability of earnings during the last fifteen yeaers, l.
i.'e.,
the lower 40 percent of the industries, arrayed by'their coefficients of variation..l_/
6
~
Second, within these.nine industries, companies were
's selected on the basis of stability of returns during S.
the last ten years, i.e.,
companies whose earnings 10.
exceeded or fell short of the average by more than one 11-standard deviation were eliminated.
This criterion was 12-de5igned to eliminate those companies whose earnings 13, arc chronically depressed and which do not meet the
~
14-capital attraction standard, as well as those companies 15.
viewed askance by the Court in Bluefield as " highly 16-pr5fitable enterprises.
11, 18-Third, the compani'es selected in the second step were
(']')
19-atEayed by their coefficie'nts of variation.
The first 20-two samples were selected from companies in the lower 21.
40 percent of this array and, within that array those 22.
companies were selected whose common stock may be viewed 23.
by investors as being of the.same quality as that of 24.
utilities.
Since investors are influenced by what they 25' regard as unbiased criteria used by rating agencies, 26.
the rankings given to stocks become an appropriate cri-27 terion for se l ec tion..
28.
P
- 9*
The' common stock of South Carolina Electric & Gas is 30-ranked "A " by Sta~ndard.& Poor's; comparision with "A "
31.
ranked industrials thus appears appropriate.
- However,
- 2*
sinde the rankings of stocks are partly a reflection of 33.
34*
9
~1/
The standard' deviation is a measure of the degree of dispersion of observations from the mean.
Mathematically, it is the square root of the average of the squared deviations from the mean of the observed data.
The coefficient of variation is the standard deviation divided by the average.
a
.q l
31-
-4c a A.
_ S
. N S m
vo Ju 1.
t.he level of e'arnings
- thereby introducing an element 2.
of. circularity -- and to avoid giving undue weight to a 3.
single ranking, I e::panded' the selection process to 4.
embrace companies with a Standard & Poor's ranking of 5.
"A".
(For an explanation of rankings, see Appendix B 6.
to the statistical exhibit-, p.
10.)
These criteria 7
risulted in th'e selection of 26 "A" and 30'"A " ranked B.
ihdustrials.
9.
10.
The third sample reflects companies with 1977 revenues lb in excess of $250 million and whose stability of equity 12.
returns, measured by the ten-year coefficient of varia-13.
t' ion, was the same as that of the group of 24 combina-14.
tion electric-gas utilities (1).6 percent).
The size i
15.
criterion was introduced because investors give some
~
16.
Weight to size.of operations, SCE&G's 1973 revenues 17 weie 5486 million.
~
18.
-j If,.
Thus, my thi:;d, sampir. represents companies within the 20-nine % table industries, whose ten-yeaa: average return 21.
fell within plus or minus one st.andard deviation of the 22.
average, and whose average coefficient of variation was
. 2 3.
i'dentical to that of the sample of 24 elec.tric-gas 24.
utilities.
These criteria resulted in the selection of 25.
Sb companies.
26.
27e g,
w' hat have been the experienced earnings of these three 28.
6 samples?
20, 30.
A.
The earnings of;the. 76
'.'A". ranked industrials av9 raged 31*
12.8 parcent in-196 5-19 69,. dropped to a low of 1 32.
percent in the 1970-19'll recession, and rose to an
- 3. 3 -
average of 15.35 percent in 1977-1978 (Schedule 9).
O
0 I
-32 D
1.
The. earnin'gs at -the 30 " A " ranked ihdustrials have
\\ -f 2.
been more. volatile than th~ose of the "A"
ranked com-3.
panies, fluctuating from a high of 18.1 percent in 4.
1965-1966.to a low of 12.3. percent in 1971, and aver-5.
aging 15.65, percent'iq. 1.977-19't8.-
6.
The earnings of.-the 50 stabl~e companies averaged 14.4 3.
percent in 1965-1969,. declined to a low of 13.2 percent 9.
in the 1971 recession, and averaged 15.45 percent in 10, 1977-1978 (Schedule 9).
11.
- 12. Q.
Since the sample of 50 industrials is based on stabil-13.
ity.of earnings, how does the average coefficient of 14.
variation for this sample compare with those of your 15.
other two industrial samples and with those of electric 16.
utilities?
17
(')
18.
A.
The. average coefficient of variation of return on book
'9 19.
equity (for the ten-year period ending 1977).fot the 50 20.
companies was 11.6 percent, for the.26 "A" ranked com-21.
panies it was 15.4 percent, and for the 30 "A " ranked 22.
industrials it was 17.1 percent.
23.
.24.
The. average coefficient for SCE&G was 16.8 percent, for 25.
the.42 electrics it was 12.6, for the 24 combination 26.
electric-gas utilities 11.6, and for the 86 electrics l
27 12.7 percent.
28.
L 29.
By this sta.ndard, SCE&G ~ is r.iskier'.than the average -
30.
electric utility and has. risk. characteristics between-31.
the."A" and "A "' ranked industrials..
32.
33.
Q.
Having used earnings stability as a criterion of invest-34.
ment risk,.would.it be correct to conclude that greater n
a>-
-r-
c
- 3 3-Ej earnings instability is always associated with higher J.
returns?
3.
4.
A.
Nor. Earnings ihstability.is only 'one of several indi-cators of risk., X i. lends itse3f-3A a criterion partly bedause it is t eadily quanti tiable,.and par tly because
~
iL uorresponds to the chatautoristic which-the invest-9.
medt community most frequently' identifies with electric 9.
uti'lities But it does not necessarily follow that 10 greater instability of earnings is associated with 1.1 higher returns, as illustrated by the fact that my 12.
sample of " A . ranked companies did not-always achieve 13.
higher returns than the'"A" ranked companies, p
14.
15.
To understand this apparent contradition, one-peed only 16.
recall that we are here looking at experienced rather 17-than,oropnectivr earning 0 The' economic proposition is g) 18-that t.hese nbic'1..have. bigbm - t i sk s should have the 15.
oppe rrunity. LG. ;4c.hieye:tigher returns IL.is not that 20.
those wn).ch have~ 'high r isks doh in' f act. 3chieve bigher 21.
- returnn, S t a t es:d i f f eren tly, if those.which h' ave high 22.
risks did in fact:~ achieve:high returns, then they prob -
23.
abiy would not be viewed as risky.
Thus,'it is not -
24.
surprising that.those with greater variability do not 25.
always achieve a level of earnings.that.is commensurate 2+ '
with thei t' risks.:.
27.
0 23.
Q.
Wou3d you~now describe your; third group.of companies?-
29.
30.
A.
The stilect' ion of. the. third group rests / conceptually on 31-the same criteri'acas.the previously-described groups,-
32, except that the companies are selected from all mano-33' f acturing industries, rathm. than only fr.om the nine 34.
stable industries.
J j
, J
, kI 3 D 3
g**D X d ',
j 34-1.
Thus, the first st-ep was'to eliminate companibs whose
({ )
2.
earnings exceeded or fell'short of the average by more' 3
than one standard deviation; next, the ccmpanies were arrayed by coefficients.of variation.
From companies 5.
in the' lower 40 percent of this array, two namples wer'e~.
3.
selected on the. basis of ~ common Ltock' t a'nk.ingst 4 6 ' A :' ' -
ranked companies and 58 "A " ranked companies.
The G.
third sample'compris'es companies wi'th 1977'revenuch
~
9.
above S250 millib'n, who'se. coefficient of variation, en 10.
the. average, was equal to that of the 24 combination
~
11.
electric-gas utilities (ll.6 percent).
70' companies 12.
satisfied these criteria.
13.
b 14.
Q.
What were the experienced earnings of these samples?
13.
16.
'A.
The 46 "A"-ranked'Wompanies exper'ienced an average 17.
return of 15.6 percent In' 19.77'- 1978; the 58 "A " ranked 18.
companics 14.5 percent, and the 70 stable companies O
15, 15 2 G pe r ce'rd. 7(Sy:hedu11a 9)..
" ' ^
20.
21.
The aver ag'c' coef ficient of variatioh of the 46 "A"
22.
ranked companies was 16.8 percent and of the 58 "A "
23.
ranked companies 18:.9 -percent, ~ or very close to the 24.
36.9 percent experienced by SCE&G.
25.
26.
Q.
What conclusions do.you draw from your analysis of the 27, '
eafnings experience.of yo~r six' samples of industrials?
u 23
[
29.
A,.
The.1978 e?rning's:. level of industrial companie's selected 30.
on,the basic of longrterm earnings stability and invest-31.
Ment rankings similar to'those of SCE&G.was above'lS per-32.
cent, and.is nnrrently probably close to 16.0 percent.
33.
However, in view of the Administration's wage / price guidelines., and.~hr'on-going recession,.I believe the 34.
t
(~s us) t
l
- 3 5-
- s 1.
prospective 1980 earnings. level lies below the current
(
?.
earnings level, namely at the approximately.14,50 to'.
3.
15.Q percent level experienced in 1977-1978.
4.
5.
Thy. acceptance *thiv resbit an mmeasure of the t e -
9 6.
turo requirement efer SCE&G is dG'pkndent on further comparative risk evaluat. ions, made in connection with 9.
tha. applica' tion: uf the. financial integrit'y tests.
9.
U.
10.
Q.
In selecting samples of industrials on the basis of 11.
stability, have you given consideration to the.use of 12.
the beta factor?
13.
t 14 A.
Yes.
The beta factor measures either the.~ relative 15.
price stab.ility of a stock or the relative stability of 16.
the. investor.'s return (change in price plus dividends).
17 Whether iricestors prefer stocks with a high or low T
IS dei ree of price sthbiJ ity depends on.whether the market 3
19.
Is rising or falling.
7 do not r egard the ~ beta f?ctor -
a 20.
ah: an appropr iate' criterion of selection, partly. bec.aure - -
21.
a market variabijity measure of risk is conceptually 22.
in' compatible with the comparable earnings standard, and 23.
paitly because. beta factors are frequently unreliable 24.
m'easures of risk.
25.
26.
Q.
Ca'n y6u provide some illustraticas? -
27 3
28.
A.
Yes Let 'nu assume an investor has. the. choice of pud-29.
ting his money in: a savings and lohn association or in 30.
i' bond whose pelneipal ic. ad: justed foi" the change in -
31.
thb value of dollar.M Since. there. will. be no fluctua-.
32.
ti'n in the nominal value of the savings certificate,-
o 33.
it?has a beta of zero.
In periods:of inflation, the 34.
price of the purchasing power parity bond will rise so
,l/
In 1952, the French Government, issued such a bondr. tied '
to the price ofea.20cfranc gold coin.-
- [n] Wf }\\
YW, M.
1.
th'at it will hav'e a b' eta greater than zero,'and would 2.
thias~ appear riskier than'the' savings account..
It-is
- )
3.
perh'aps obvious that the greater risk, in terms of 4.
ability to. maintain the' teal v'alue of the investment,'
S.
liies with thw sav4:ngs 'acconut?
4 5.
Value L'ine * (iiuly' p., 1979), a. wiifely. ut.e'd inves-tment 9.
adbisor y s'e.rviet /J comycte% the beta' (pt ice. var iabili ty)-
for.SCE&G at 1.70,: compare'd to O'.68~for the 24-electric-10.
gas. companies and 0.70 foi: the group of 42 electric
) 1, n'tbl ) t i e s..
12.
13.
My' reserva' tion' with' respect to the reliability 'of betas
, g 14 a'rlses, irt pa r t c from'the dispersion of betas for com-15 panies with essentially similar. risks,. and f rom similar 16.
betas for companies with quite'di:fferent risks.
To
~
3.7 Olustrate'.,*. the' average bel'or, and_.c.ortesponding stock' 18.
r'ankings, for the~ gr6up US 86 teIcottics
. broken down
\\ j l '!.
- b..y~ Moody ' Cbdi@ tabirfgh"i.3 tty- :.1971) N M areas follows:
20.
2 21.
Value Line Moody's 22"
'O. Moody's Nu'ber of Avera@c Bond Ratin~g Com?Mnie5.
Betw
- Stock Rankings.
m A
A-B+
2a,.
24.
.Aaa" 1
'0.65 1
"Aa" 32 0.70 9
21 2
25.
"' A "
38 0.67 4>
20 14
",Baa" 13 f 0,70 7
6 73,
?
N o.t rated' 2
0 6_5
.. ~.
2g, J,otal 86 0.69 13. '!
49 24 i
^
29.
30.
Ba' sed on bond ' rat'i ngs anC tWm coy'ckstondirq. stocki r"ank" 33-ings, it is prachapsi obvious that' tbv r' lit of the. 32 32.
"A'a" rated 'coinpanies is less and: the inve' tinent quality s
3L is'better than tha.t of the'13 "BaF"- r a.ted coYnpanies; 34<
yeh the average. betas suggest thdt: the.two groups are 35.
of. equal ri'sk.-
g e
,w
- --+--
,-w
-,--.e.--
.4--w-
...9.-
a y
,w.
,---,,my-
,e n,i--
.v+--y- - -
---r------*
.- D D
I5)
EI N
6w oUu.u
. A JU 1.
b.
.The financial integrity test
)
ug 3
0.
What is your defin.ition of financial in t eg r i t.y?.
4.
5.
A.
Therelat: two levais of financial integr.ity-6.
Fifet, there is a. minimum level which calls for earn -
3.
ings suf ficient not only t o achieve. an appropriate 9.
coverage of tixed charges, but also -- provided stock 10.
markets are reasonably stable and not unduly depressed --
11.
to petmit a company to raise new equity capital without 12.
diluting the existing stockholders' investment.
Nearly 13.
every fitm -- even one whose capital is impaired -- can t
14.
attract equi t y capi.tal.if the integr ity of the capital:
15.
previously.commitfed is disregarded and new equity is 16.
sold below book value.
17
( ')
18.
Second, ther.tc is a.. level. of financial integrity which-
~
)
19.
is consist.ent with the opportunity cost principle and 20.
satisfies both the comparable earnings and capital 21.
attractiai testsi-
-I t is a level of earnings that is 22.
sufficient..to: maintain. the. value of the properti at a -
23.
leve.l. consistent with the values prevailing for indus-24.
trial stocks.of similar investment grade.
~
25.
26.
Unde r eithe n --de fi ni tion, attention to market-to-book 27 ratios becomes an important aspect.of determining the 28.
required return.
29.
30.
u.
In.ths. con' text 09 your firbt'defini: tion'of financial :
31.
integrity,;please. discuss interest coverage.
32.
33.
A.
Intere.st coverages are a test for avoiding difficulties 34.
in financing debt rather than a standard of reasonable 9
Q D Th'l~ M A
~
.3b-
_ l --
I b IU 2.
I u.22 f
1 r e't u r n.
While'.the relevant interest coverage, a t; th e -
9 tixte of financing..is. computed on a projected pro-.torma j
1.
banis, for comparative purposes, only experienced inter-4 es.t. coverage. data.are available.
3.
5.
Th'e.. interest coverage of. SCE&G decl~ined from 4.04.~in.
19ES to a low of 2.32 in 197.4,.and.has.since recovered i c' 2. 71 i st - 197.8', on a be Cor e-tam Nisiw,. bu t.i rtcl.ud-ing i.-
.g r
9-AEUDC.
Excluding AFUDC, the int'erest coverage was 2.17 Jn in.1978 ( Sche'd tile 10 ),
11.
12.
It'..should.be noted that, in each oC the last three 13.
ye.ar s -- 19 7 6 tor -19 7 8 -- the ' inte r e s t coverage of SCE&G 14.
wa's below-the average of the 24. electric gas, the 42 I f..
~
electric utilities and the 86 titilities, -irrespective 1 *. <
og.whether.the computatiod includes or excludes AFUDC.
1..
(
lb.
Q.
Wo'ul d you ' non.e1.uborwi.e bri. tb<2 't-wo - leve1s. of.f inanc ial
)
.L ',.
ihtegrity?-
20.
21.
A.
Th's first ' relates -to the necessity of avoi. ding placing 2?.
s..util i ty. in a Mi.tplat i on where it. is faced with the 23-ne'ed to raise new. equity capital below book value.
The 24.
second relates to. permitting uti,lities to achieve a 25.
l'evel of financial integr.ity commensurate with.that of 2r.
eJomparable risk iadunttiw1x
)i.
~
.9 2h
'fhe r e i s how vir tually urranimcw. agreement among regu-29.
l'atory pr dcti-ti,onw rs-.the i.i;.:i s desi.r.ahle :.to grant
't 30, dt'il i t ie s, at.a minimtm, a.leve) of. earnings that.will 3.t dermit a company it<r raise equity. at no. less- _than book --
32-va-1ue.
To have reasonable assurarice of raising equity 33-at' a book value,.rhe market. price needs to be-about 6 34.
to' 7 cercent above book value, because.the sale of new
~
,j
.=
}D *]D'))g' - '
D
- o Ju eJu &!). A h 1.
stock entails underwr'iting costs, and typically pro -
h
'2 duces downward pressure on the stock.
It shou.1d also 3.
allow a leeway of at least 3 percent for unforeseen 4.
market fluctuations.
l 5.
6 To: set a nfarket-tosbook-ratio of 110 cercent as a sta~n-dard of regulation is unfair to investors and inconsis-i 9
teht with the al.tornative. opportunity cost. principle. -
1 9.
Investers do not buy the common stocks of utilities 10, with the expectation of having the value of their~ capi-11.
tal. limited to 10 pe'rcent above the nominal. dollar 12, value.
Instead, they buy the stock in the expectation 13.
of: maintain ~ing a dividend income stream, hopefully in e
14 do-11ars of'. c'onstara.~ purchasing' power, and achieving 15 soiae capital.gaius'.
14.
l 17.
The. invest 5s in. uti31 ties is. aware that the company's 18 earnings pctanti.al Silt.hm'limi-t'ed to that of other Dj 19.
enterprises-ot suwit hr investment risks.
If other 20, enterprises d-pirticulerly industr'i'als selected on the 21.
bas.is of risk characteristics similar to utilities --
22.
at able to achieve 'a level of earnings which produces 23.
market prices considerably above book value, then the 24.
alternative. opportunity. cost concept' calls for permit-25.
ting utilities an earnings opportunity that', if 26>
achieved, should produce'. bpproximately similar ' market-l 27.
to book ratios.
2 8.,
29.
I #ish to emphasi zo,.-hot.tcum t' hat" regulation has' neither~ :
30.
an oblication..te bai1 out investor.s.who'have committe-d
. ~. ',
31-funds in e' artier::per:1.ods"at highet prices nor should 'it 32.
strive to fix a return that wi'l1 maintain a particular 33.
market price'.
TherCommission.bes no control over the.
e 34.
factors that influenc"e broad segments.of the capital 35.
market.
Nevertheless, regulation should strive to 36, avoid an impairment..of financial integrity
~
1
~., - -,
e-
-c-.-
c r
.4
I D
- D
% D 'T
>40~
6 f
. S-m
~
es; 1.
Q.
Has South Carolina' Electric & Gas been able t.o maintain 2.
i.ts financial integrity?.
2.
4.
A.
Not since 'the beginning of T978',' and only barely i'n the 5.
two preceding '/ ears.
.In the..fi r kt quarter ~ of 1970 6.
SCE&G's markebMo-book ratio bas 102 percent, declini'ng -
to 94 percent in the'last quarter of 1978, and f ui;t.her 9.
declining to 87 percentin the: second. quat ter' ofJ 197L 9.
(Schedule 11).
10.
11.
1.9 each ort the years '1974" through' 1979 the com~phuy 12, issued new' common stock.
For the.1974 and: 1975 i ssues, 13.
the net proceeds were 54 and 91 p'rcent of book.value; e
y 14.
for the 1976 and 1971 issues, lhe not pro'ceeds were 104 15.
dud 108 percent'of: book va10e', 2nd f'r the-1978 and-o 16.
1979 issues' the ratios were 99 and 88 percent.
'The 17 flompany's Financi'al 'irrtegrit'j has therefore been ' impaired'.
18.
vi 19.
Q.
Despif.e th'ese - 1bw m% rkeG-To-toOX-rat los, have. not i'nves-20.
tors done gaite well o'ver'the.last twenty years in 21.
SCE & G's stock?
22.
23.
A.
No. I'have made'a study of investors' 'experien~ed re-c 24.
turns -- defined ss the sum of changes in market value 25.
dnd reinvestment of dividends
- for the period 1960-26.
1978.
The resn]ts are ser; forth in. Schedule 12-in.the 27.
form of a " mileage char't", showing'the experie'nced re~
j 28.
turns (before deduc. tion of' brokerage costs) from the
~'k 29.
purchase and's' ale: of 1004 sharks of SCE&G.(at annual 30.
average prices)* for" 17f di f fer' ht ' holding pc'riods range-e 31.
i.ng from one'to 18 year's. *'
L '\\g s
i
~.
l.
An analysis of the data for short holding periods shows 2.
that in o'rly-eight of the-18 one-year periods did the 3.
inyestor achieve a return of over 6 percent.
For three-4.
year perio.ds, the return exceeded.6 percent in only six 5.
of p possib'le s-ixtee.n periods, and. exceeded 10 percent 6.
in.only four instances.
B.
Since utilities are typ[cally viewed as a long-term 9.
investment, the results foi the longer periods are more 10.
meaningful.
For fi've-year holding periods the inves-11.
t.d s ' return. exceeded 6 p'ercent in only four out of a 12.
possible fouteen. periods, and for-ten-year holding 13.
periods the highest return achieved out of a possible 14.
nine instances was-5". 4 percent.
15.
16.
Q.
Yo6 stated earlies: :that you intended to infer differ-17 ences in r isks frorm investors' market-appraisals o_f 18.
utili.ty eg: lit'iis..yould.you please explain?
9 19.
20.
A.
A comparative analysis of market-to-book ratios pro-21.
vides, in my opinioni, significant insight, though not a 22, precise measure, into investors' appraisals of dif fer-23 ential' risk.
The. proposition stems from slementary 5
24.
financial theory, as observed iIn the bond' market.
Given 25.
identical coupon rates and dates of maturity, the riskier
~
26, bonds will sell at' higher yields than the higher grade 27, bonds.
Thus, dif fer ences in market to face value re-28.
flect dif ferences in risks.
Translated i6to the stock 29.
market, given identical earninus and exoectations as to 30.
growth, dif ferences in market-to-booE' ratios may be 31.
said to reflect investor appraisals of differences in 32.
risk.
9
fl D T l{f S
D**D Q
_ }
_ J \\fL l; J.
Tlie relationship between ' earnings on book and market f{
'2, tat. book ratios is, of course, equivalent to earni'ngs/
3, pri,ce ratios [E/B P/B'= E/Pl.
The distinction be-i 4
tween a comparative analysis of earnings / price ratios 5,
arki market-to-book: ratios is.that, while the former may t.
provida arf:indicatinn' ~ot dif fuYences in ri'sks, th:
litter provides both an indication of relative risks B.
(i't all oth'e'r factors are equal) and the level of earrP-9.
ings necessary to maintain an' adequate degree of fin-10.,
an'cial integrity.
11 12.
As with other tecimiques-of measurement, market to-book 1.5 ra'tios cannot be used as'a precise formula to determine p
14.
ei'ther risk differences.ii'r' reasonable earnings require-15.
ments, for'the reason that factors-ot.her than earnings
~
J 16<
iri51uence 'ma'rket' yr i'cv,
'Marketeto" book ratios are N
17 significantly in~f.Luen'c.ett.by the-state of in'vestor' confi. -
1G.
dence, whith fregenmtly:nncorporatesran element of 15; iirationali'ty.(but-is op.tiisistdican'd ' pessimistic) with 20, resoect to duture earnings-capac'ity; 21.
22.
v.
06es &n an'alysis of the 'rclation' bet' ween returns.~on - -
23.
equity and. market 'to-book ratio::r tear but the preceding 24.
hypothesis? -
25.
26 A.
Yes, as ilJ us.trated: by t.he' fol-1.cv.ing hhilysis: -
u 27.
28.
There. is a. potsitive c~or:re'lation' between :the level 29, of returns wral mar ket,bu -book rit'ioc.a. To illus 30.
trate by re-ference' to' the. samplesus61ect'ed f ro'm 31.
the nine stabhr. industr:ies:,'"the" h'igher'. returns. ors 32.
equity achieved by the sample' of 50. stable indus-33.
trials were cbnsistently accompanied by'hi'gher 34-market-to-budk ratids in colnpa'ri'sbn with the-J
D**D
- D'T i
WWd W
m -
r:
1.
sample of 26 "A" ranked industrials ^(Schedule 13),
2.
(A comparison between the "A"
and "A " ranked 3.
industrials does not'show a similar consistent 4.
pattern, since the probability of achieving the 5.
- 5. expected returnr is lessr for: the ?A."? r hnkedA :t 5mv 2
6.
4-panies.)
7 3.
I Given.appr6xtmately'.the~same.~1evel.ot' returns-land 9.
expectations as to growth)', differences in market-10.
. to-book ratios reflect investor evaluations of f
11.
differences in ticks.
To illustr' ate, in 1976-12.
1978, the 26'"A" ranked ' industrials achieved approx-13.
imately the same level of return as the 30 "A "
p 14.
ranked industrials ~(14.9 percent vs. 15.3 percent, r
15.
Schedule 13).
Howeve're the average market-to-book i
16.
ratios of the "A ".~ ranked companies were below 17.
those of the'"A": ranked companies (121 percent.vs-(
18.
128 percenl)', an.111uctration of the former's 19.
relatively. higher r'isk.
20.
21.
1.
Given.approximately the same market-to-book ratios, 22.
differences in returns (assuming similar expecta-23.
2.
tions as to growth). reflect differences in risks.
24.
To illustrace.by. reference to the samples selected 25.
i.
from all industries, in the period 1976-1978, the 26.
averaga market-to-book ratios of the 46 "A"' ranked 5
27.
industrials' were-virtually ' identical to those'. of I
28*
2 ' the 70 stable compan.ies (134.vsw.135 percent,-
29.
Schedule 14)nbut' the' returns.of the 46 companies
'S 30.
were consistently higher than those of the 70 31.
companies (15.4' percent.vs. 14.8 percent).
This
- 2*
suggests that the companies with a high degree of
' 3*
stability are viewed by investors as less risky i
34, than the "A" ranked companies.
Stated differently,
' ')
l (s.>
(
l
~.
l
- 4 4 --
1.
a lesser r~et' urn is required to achieve the same 2.
deg'ree of ~ financial integr,ity for the croup'of 70 v
3.
~
as for the 46 companies.
4.
S.
Ttir nine,s ne w.to :V comgar ison be'tvoe'rf.* ut il'itius End 6.
indu s t r ial's, the' ' data. indicate' that-in' 196Sk1966, !when
~
(
7 the 42 ele ~ctrics were earning at'a' rate'of 13.0.13.'3 1
9 percent, they wa+ nel.1ing ata ihi'gher market-to-book ' '
9.
ratio than' the tyc :samp16s' of '" A" ' Tanked li'ndustrials l
~-
10.
wh'ose earnings rates were at that time in the range of. -
lb 13,25 to 13.8 peredn't'(Schedules.ll, 13 'and'14).
'I l'L believe it. reasonable to'i'nfer that,'in the mid'19'60's 13.
in'vestors regarded elect):ic utiliti'es as-less risky 14.
tlian investment-grade industrial.s..
15,
'i.
16.
Q.
Has there been anf change 'in that appraisal?
17.
. ~.
16 A.
Yes.
There was 41.coaplete reveisat in t,he Marly 1970 's.
19 45 the ear'nings' cE rel'e'ctriifs ded.-ihed iri 't'he e'aily 20-19'70 's investior's.became increa' singly..awa're' tihat i the.
21.
fundamental economics 'of-'the indust.cy had 'citabged f rom ~
22.
a decreasing to an'increasi'ng cost industry.
The 23-c'easons for the shift arose..f rom an app ~arent di minu-24.
tion of economie's of scale, the ri.se in operating 25.
c5sts, rapidly escalating fuel ~ costs, 1-ncreasing cost
'~
2G, sf
- 91 ant pe'r $W an'd.hi'gher c'ostis.of. capi' tar'..
Tha.
2L
- f. rend toward 'trigher c'estst coincide'd wkth' the need toe'
~
28 dtSke large~ capi.tvrexpenditure.T both toy: g4oninguetts I
e-
- P 29 fAmer demand and wvifrenmental. proted-tfort':reedt:,.a:Tho;:~.
36.
c.3mbined unpact. c4 :rrisiirg cc'ost:s,. r.egulatory l'a aird 'a g
31.
reluctance.t'n grawt' rate -indreases c.brooght.about 32' increasingly severa ' erosion 'and attrition of.. ear.ning's.
33-Tliese f acfbrs caused. -investors to' v'tev ~elet:tt.ic util'ity.
.j 34-equities initially as riskier thaniinvestmentbgtade'
)
35.
ihdustrials and at the present ttme at about equal.
%J 36.
risk with these i-ndustr'ials.
pdpD,1AXL h
D
' T 3i 6
-4 5-i 1.
Q.
Is'.t.h&t change in investor evaluation of. risks of 2
utilities. confirmed by an analysis of the relationship J.
between equity return and market-to-book ratios in the 4.
1970's?
5.
5.
5.
A.
't r.6.
Un 197D.-1972, the average earnings of the.86 4,
eltu:trics and the.46 "A". ranked'lihdustrials were vi'r-9.
tu~a).ly identicali(12.2 vs. 12. 3 pe r ce'n't ; Schedules 11 9.
anJ.14).
ilowevcr., the market-to-book ratio of the i
10.
electrics avaraged 139 percent compared to 206 percent
]
11.
fot, the 4 6..industr'ials.. I bel'ie.ve'these data permit 12, the. inference that by'the beginning of the decade i
13.
investors. viewed electric' utilities as relatively g
)
14.
r.itkier tha'n the stable industr'ials.
1.%
16.
Sihce the. stock merket in 19.74-1975.for the electrics M
17, W,n. charactericted tb.yofearr'and er r.utic yyra tions.- it.
14 l at:k s th e pre r e qdh i4cs.12;r..ntr..a n a l y.s i s o f.. th.e t e l a--
19, tibn between earningsr. and anarke t:-tn-book' r-atios.
~
20 C.
21.
ItC.the per:itd.197.'A-1978,' tlie a'vWrage return of the 86 22.
c)hctrics was ll.M. percent 6 (Schestrle llt; fo: the :70' 23 sthble indust rial.sr. (select'ed from.all'. m'anuf act'uring 24.
industrles) the..re.t u'r n s'. ave r aged 15. 0..pe rcen t.
The 25.
mahket-to-book r-titios of.the. e-lectrics dver. aged 97 26, pe'rcen t compa red: +n"129'-gerann.t?.for.the 10.indus--
27.
tri.als.
Hence the fearnings of: these investment-grade
.s I
28.
ind.ustrials. excee ded. thcse. of thenelectr:ics by.3.1.
29, percent (15:.3 9. J h 65 ),, WE.ths mdr.kn t.-to-boob r atiod.
3G.
we're 3 3 percent.hi,gher. TJ 29' & 97) *.'. :
31.
32.
Alllowing fdr' the.fabt that small-difference's ih rela-33.
tive capitalizatierr. raten. may be caused by differences I
34, in. expectations,.-1n my'opin-ion the above data war raht.
i O
':0 _.=7-
' r if t
-4 6-I I
)
1.
the inference that investors now regard electric utili-
~}
?.
ties, on the average, as being as risky as investment ~
3.
grade industrials.
4.
5-Q.
Wbat does a sint%u <,naly.siv. show: for:. South Carolina 6.
P.2. ac i r !.e s ' G as ? :.
7.
3.
A.
SCE&G achieved" a t'eturn on average common equity of 3 3. 2 9.
percent in 1977-and 12.8 percent.in'1978, compared to a 10.
i.eturn of 11. 7; percent. bnd 11. 6. percent for the 86 ejec 11-
- trics, SCELG?s.12 percent'.bigher return for the two 12.
years (13.0 vu, 11. 63 perceht) was accompanied by only a 13.
- 7. percent highet average. market-to-book ratio-(104 vs. 9~/
14.
percent) assumihg that investors have apptoximately-15.
equal expectations,with respect..to future earnings of 16.
SCESG and the. Average: clectric utility, ; these-d.ata.
17.
suggect that SCEsG js t.eg'arded as.11ghtlycr.isk.ier.than 3
3
(
ig 18.
the av e. age.mlv 4.r-itr t/. i lity M The. investorn ' less
)
19.
favorable vaJeatino or the'Companyd.s earningh-is pro-20.
bably due to SCE&G's reistivelychigh proportion of AFUDC.
21.
22.
The above data:.a}so ind]Cate that an experienced re.
e 23.
turn of 13.0 percent.is insufficient to. maintain a 24.
minimum degree of financial integrity.
25.
a 26.
Q.
'the ptcceding comparisons have'.been between SCE6G and 27.
the NYSE uoiversAlof.86 electric utilitie.%
Wh o.h is.
28.
your.,naly9 -: ef t8e.. dif fe rencee. i n r i..<;ker between 9 as..
29.
distributorv andreleef rics and;between. elect.ric.and.
30 coinbina tion..elenJ rJ c :g.w.nti lition?.. -
31.
32, A.
tpvestors bavo.. c.onsistently regarded gau distributord 33.
a.s more risky than. electric utilities.
Throughout the 34.
last ten years,
- a. higher. return was required for gas
1.
dis.tributors to achieve the same market-to-book' ratio 2.
a.<..the return' required by electric ut'ilities 3.
(Schedule 11).
4.
5 In'.ths 1. tid'-1.960 'sn the hi'gher riskh' 'of' gas d.istiibbtiois- * ' *
- nei atively..i cit.1 tren'ced ih'vestor s 'relativt val uatPon o f 5.
J
~
7 combination electric-gas utilities.. However., t his was 9.
no'. longer.the'. case in recent years'; ' ' Th.urr '4 n li7'/.
'~
9.
1948, the 'avsrage' return of both'the*42 electric's 5's 10 w'e'11 as the 24 combination ~ elettric-ga's atF11 ties was lie li-.75 perc'ent; ' thec aver age. mar ke t#to-boek 1.atio o f. t.he' 12.
fo'rcier was ' 98 percent; and the latter:97 percent.
13.
Th'e-se data" together with the. quat terly data shown' on.
y 14.
S<,hed ule 11,.sup;estithst the.markbt'b5ews the average 15.
e-l'ectriu utlil.i tyies ha'ving approximatwly' then same r isk 16.
as'.the average combination. electric-gas utility.
I 17.
ther e for e c'oncibdea that" th4 sice'.. rate of" t e. turn should.
~
18.
bc. app) iedMo.tp.EtCJ Er klei-h;Un an'a 2 9an'. Properties.
- 3 19) 20 Q.
Wlia t i s your.touclusitm' ast to: a: reacowable" equity ~ <
~
21.
reburn allowane,u.for SCE&G based bn'.the comparable-22.
c.abnin'g s t-inanerial intectity tent.?.'
23-24, A.
w'ith a prospective 2quity. ratio.ot 33 percent', I con-25.
c]ble that a. reasonable-equity return allowance for' 26.
SCE&G in in. thi itnngr.- oD;14.50 tol15.0~ percent,.'
27.
28.
g/.,:oncludipn:12,Kea account. ofi.the Comp 5ny.t s busineMs
'+
29, an'.1 financial ri'skm ahdris. intended:tu~indichte the a.-..
30.
Itvel th.# Sculd: permit 'hhe -Company-td echitri,e: a den.
31-grcec of Linancia3 integr.ity commensniate with.:that ofr
^
t 32.
iddustrial s s ofs Lim.iler'ri sk.'.
P recognize, of; course,
' '~
33.
th'at the Company %s, ate application incorporates' au" 34.
eciuity retura c.t only 13 jere'ent: '
p%Y
n b
1.
c...
The capital attraction standard
~
2.
3.
Q.
P1'eas'e explain the capital' attraction test.
4.
5.
A.
Th'e. capital. attraction test seeks'. tc' infer ~ - M f rom 6.
stbck market datt'-
the tate of' teturn whic.h' induc'es~
"" ' ~
~
Since the investors to commit new equity capital.
6-price of a' security.is the discounted value of'the 9.
fu'ture stream'of dividends (or other recoveries of 10, va'ue),
the.inv'stor's capitalization rate may be com-l e
p' 'ted by the fol-1'owing formula:
~ current dividend 11.
u in dividends 12.
yield plus"the anticipated rate of growth 13.
or' earnings, usually referrbd to aw the discounted cash
.t 14-f jbw cost '(DCF).
'The' DCF. co'st r6flects'ths;opbottunity-15.
Joit by retetenc*o to market values; in principle 'it'is I
j 16
.t'h'e rate which equates' mar.kot value' to book value.
17 7
18.
I-tpproacht the Fsttimation ot' investors'* opportunity
~
O.
19, cost with considethbly ~-mof e' t'repidation than the esti-maison of.the oppos'onity,-cost by' reference to'a book 20e c
21.
eg'uity, essentially for; the reason that, no matter how 22.
p'r'ec i se the : mat.hematical formulation may be,"it rests-l 23.
on inierences with respect ~to motivations governing 24.
iEvestor expectations". "The fact that stock prices are'
^
25-subject to orratic-gyrations, which may overshadow 26 vahations'/ofr picrpective growth', 'consti tutes -a.. f ur ther 27-libi t a t ion',. The'DCF.fofmula'diso. rests on the proposi-28.
t.ibus that'- 01).. either. past. ra tes at ~. growth will: con -
I 29.
tihde tn in tinit 90 (or: that'. the capitalization rates 30.
wj11 not chanhe3 ? edi 12) changes 'in rates of'. growth 31 acIr of t.' set:lby utianges:"in' dividend ~ yield; Thuse' pro -
32.
po3.itions are onlytpartially valid..
(2) i I
.. ~ _.
r:
i i-m 1,
De' spite these limitations, the' cost:of capital formula' 22 has-gained widespread ~acceotance-among investment and i
3.
rate of return analysts, largely because it represents 4.
a theoretically ~accurats' formulation of.the current' 5.
cobt
- not:the-fatt: reborn'.' otiattracti6g'chpitAl',-
G.
anil, becauso71t satisficf. tha quest fot 16athematical ' '
- - [
precision which some helieve obviates ther nedd'f6r- ~
3.
reliance on'judgMnt.
The"e n cine r a ti on ' o f: : i t 4 1 imi tae ;- -
4 9.
ti'ons, however; should make it abundantly clear that it 10-cr.nnot be used without the exercise'of considerable 11.
judgment, particularly wit.h t espect ' to' the - t'.J-me pe riod.
12, over whi<;h growth ratec are computed add the degree to 13.
wh'ich current dividend yields refl'ect uncertai6 ties 14.
that the tuture :earninds : growth wfll ' exceed-or fall' 15.
short of tha' pasi:lgrowth; 16.
17-Q.
Should/.the.' cost :nthcapitial ;be rmeiscred'-solely by ref d.
)
16,
ence to thu".psrticolar.'regulaked comphny?'
1 lo -
20.
A.
In theory it-should, ibece.us ':th6 -compan9 + e CWn. cost.
21.
presumably' reflects'its unique risks.
Howeve r', reli-
~
2'.
an'ce on a particular company's indicated cost of capi -
4 2 ;'.
tal involves'.a degree of circularity,'describbd in a 24.
recent Staff memorandum of the Federal.EnergyJRegula-25.
tory Commission (Docket RM'78-2,'p. 7) r.
i 26.
l 27.
"Xn regulaf. 6 industrics futore dividend, growth depends largely on the' rates of-return that th e. '
-I 28.
reculator s allow i n iti4s t'o-come.
So estimat49 ot--
i 29, futur e growthcIn dividends dad -eardinon'larG* really:
M
'i "gueastimaf.ecB about:the reculators* futeto'b4havior 30,
' Thisimoans thit t.he' regulatory bodylis-
~.
patterns.
31.
nsing other poople's' hunches aboutzwh8t fttitselt
~
is likely tc doain"the fututo ijc Aeu rates eft :-
32.
return in the'present.
Some m&y see a certain
~
33, circularity here.a/a.
34.
af Bonbright, Principles of Public Utility Rates (19 61) -at
%n/
/
253, n, 12.
s
- -~
_ [
h f
I a
1.
Be~cause of the possibility of circularity, I believe it i
3.
u sa' f ul to test the DCP ' result derived from a company's 3.
own exoerience by reference to investor return require-4.
ments estimated from broad segments of the capital mar-5 kels, particularly: Industrials, -
d.
O.
Pl~ ease proceed'with an explanation of the cost of capi -
9.
tal. computed by'the DCF formula.'-
1
').
10.
A.
Focusing first on dividend yields, they are.signifi-l 11, cantly affected by investors' anticipahions'with re-12.
spect to growth and.the' company's payout. ratio, At a li gi'ven level of.e'rnings, lower payout ratios will per-3 a
14-mit greater growth'.in earnings, and thus produce lower 15.
di'vidend yields. "
16 SC5&G 's diviile6bc etds.wonet $1.56 in'1977 nd.~ SI 62 in 17 r
a
]
10.
1978.
The-p6yout"s'At WJ9dB SN H:*p'eteent.'i.n 1977 and'
')
lit.
-[-l'.O per ce6{. ing] 9JS:; wh'ich: wan vir toelly 'ident-ical to
~
20-that of the ot.htd gr6upsi of util'itieu,- but' twi' e the.
c 21.
le' vel of the industrials (Schedules 1S a6d'16).
22.
21 Turning to dividend yields, SCE&G 's-yid 1' Iose'. f rom 8. 2 d
24, percent in the second' 4uar ter "of.1977 to.9,1 percent in
~
25, the second quarter of 1978'to 10'.4 percent in-the sec-26-odd querter of 1979'.' By comparluoni-the. y~ield on indus--
27-trials has been in the range of 4.5 to 5 0 percent, 28' Duking each of the last'four vears', SCB&G'standsal 29-dividend yield'.was consistent 1ya abcve: th'e kvetage.for 30.
the 24 ej ectric-gam utilitles,; th' elec'tric's or the-e 31-86 utilities (Schedules' 17 andi 18).'
32.
33-In my opinion, SCE&G's current dividend yie'Id over-34.
states the prospec'tive dividend yield which may reason-(
35.
ably be expected, on the assumptions that interest-
5 3 --
0 r'ates will decline slightly and that the Commission 2,
will grant the Company's rate increase application.
4.
I, estimate SCE&G's prospective dividend yield for late 19'19 and 1980'at 9.75 percent,' which assumes that the' sloex will be selling. closer to b6ok value, andis thus-nbi:e consintent with the premise on which the DCF tor.~
6.
m11.la testsF.hamely, 'that' the capitalization rate:will - r 9.
elluate market and book value.
10.
13.
Q.
Turnin~.3 now to growth rates, what technique have you
[
l e.
used for the computation of. growth rates for SCE&G?
~
1.t g
s.
14.
A.
Iihave.comput.ed growth rates in per share earnings, 2 S.
di.vidends,.and book. values on tw6 bases:
First. annual 16.
p',rcentage.: changes and second, compound rates of growth e
17 by. reference to.:the."least.squh es" techniqu6 for a 20 s'e. ties of snecessisie'three,'five-; seven, and ten.
19e year perioda - In @ieu.of the sensitivity and variability s
20 o'f.the dato; -the -chances of. drawing a reasonab'le. infere-21.
e'nce es to investor expectations are improved by look-22 Thg to successi.ve; c,verlapping periods.
2.5.
3.-
24.
While investots are interested in dividends, growth in 25.
dtvidends is. dependent on managerial policies'with re-26.
doect to payoct ratius7.which.ere dependent dn earn-
.[
27.
incs.
I have als6 i:omputed growth. in book value. --
20 al.tnough investcch do. net.look'to that measure -- par tly 4
b'e<:auw growth. i n 6 cok%alue: usually :shows.a '. f ar greater 29-
/
30.
ch.abili t.y ona;:. time, ed mar.therefore pr. ovide a better -
31, i'ndication.of:.the.probible-futuri growth;in dividends 32.
o'r earnings, i--'.
O
9 p r> 9 99 -@
s bJ d
. b
_.b.
a l.
Q.
What i.s your analysis of the experienced growth rstes?
j 2.
3.
A.
A'r.eview of annual growth rates in earnings (Schedule 4.
19). shows such wide variati6ns from one.vear to the 5.
next as to permit no reasonable.1 aference as to inves--
6.
tor. expectatiorm. With respect to-dividenus, ' SCEW s,
i ';'
~
annual dividend rate increases averaged 5.75 percen:.
9.
between 1964 and-1974 and-sbowed no increase.in 1970
~
9.
In.1976 and 1977, the comoany increased the dividend 10.
rate by 4 cents /a share, and in 1978 and 1979 by 6.
11.
cents a share, or about.3.75 percent;; I believe in-12.
ve'stors may assume an increase of at least'6 cents, or 13.
possibly 7 cents fr6m the present rat.e of $1.68, which.
14.
uduld place the growth rate' int the : range of 3. 75 to. 4.2 6
15.
pe'r. cent.
16.
17.
Tu'rning nds t e the. compounri rates of. growth computed.on-
.-J 18; th'e bacis of"leact. sqdaretrior-seccessive periodsennW.
1 19' in'ry in 1976.to'-19'JB,C and to6using tirst on growth in 20.
ear.nings por share, the~ data show such :r wide dispersion!.
21.
as..to preclude an inference as to-investors' expecta -
22.
Licnc.
But: this does not. c onstit.ute an. insuperable 23.
harries.
24.
25.
Th'e. Company.!s recuested rate increase incorporates.the 26, cer.e 13 patenta.. return on equity as approved' hy' the-27, commis si oniinr 197 7.'-
In view.cf.the increas'e in-the 28.
cost of egnity capita). experienced:during the lastitwo-
- 3 29.
years, I believe invehtors may reasonably anticip' ate.
.. s-30.
ap' proval of tiint-~ rate. :I f th't Comusny is'able to; earn 31.
33'. percent.,.,and maintains a: dividend payout ratio.of..
32.
ab'out 70 percent,.then its growth in earnings'will-be.
33-3.9 percent.' : -.
3
!O
i m.-
m _ - -
i a
1.
Tt.tr.nir g to' growth in dividends per. sharey. the "least q
2.
squares" growth rhres do.not provide a more eeliable
{
3.
ba'ssis for estimation than ther.proviousJ review of the l
4-Company's div.idepd policy r.which.rsuggest ed a. growth'
.n 5
rate et 3.75 to 4.2. percent,! m r
'3.
v.
Tur.ning to growth in boox..vo ua. par sbar.an the fact, n
9.
tlht SCE&G sold.'M/ egn.i t y.hslog.bopk: valve'. tends ro' 9.
un'derstate.the groub mor e: for the. shorter-than the-10, lom3cr periodt.; Thus;.for T.bn three-year periods the 11.
giowth tates have. ranged from:a negative 1.3 percent.to 12-a ' positive 3. 3 perce nt,.' for-five-year perlogis f rom 0. 3 l 'n tci'.l.0 percent,.'for seven-year periods from 1.4 t6.3.3 5
14 peicent and-for. ten. year. periodt.f rom 3. 5 to. S. 2 per-15.
ceht.
These data'do net urovideis basis-.for estimat.ing l'i -
idve s tco. expectstions; e: --...
~
17.
O 18; o.
- rv veu>.:oo~3y.wr.c stn.a e.~pect.-to:2n:,cetors':.. --
)
19.
glewth rat.e ey.pectat iou: Acr : South Carolina Elect ~r.ii L -
20, Gis, end t.ht: cuid.ntreont ofn nt.tracti 69 eouitalh 21.
22.
A.
1 'ocneItidei that-luvessw s me.y reasonably: extaeut. a / net.7.~ ;
- n.
23.
te'r.m growth. rate. o f 5. 75. tcr 4. 0. cercen t.?
24.
A.
i 2L Wi%h a projec.ted dividend. yield..ofi'.ly 75. percent 4 andt a 2t, yfcwth r aty: uf' '). 9 5 tro d fl. per t:an t A. the; current. "trare:
27.
bo'nev' cos.1/,uf. capital? is.13 ; N 'ro. 3 % 75', percent ~ exc:t ud-28, ib.5 fin,mcing i: ore.v. ar.i5 narire i.:.picentt.;
>%e.L. n us t,.
- 29' h'dwever, i:so not: the: f a$. tit r e.tm.tv i: : : ;: n.
30, 3J.
Q.
Ilow do9s the " ban bones cost of.13:.50- to 13:i75 perm 32.
cir.ti for South CaroH na. Electric M. Gas compare to tha.t 33.
of. industrials?
c
,,gw c,
s v-s--,--,-r-,,--,.n-,-..,-----,-,-r--y.,,-~
-,-,,,--n, on-,,rv
..,,.,---...,-,-+.,-,.,--,---,---,r--..
e,..
,,.-,w w.
.. ~.
A.
The cdt rent dividend yield ~ t'or the'six groups of indus-2.
trials is in the range of 4.5 to 5.0 percent.
3.
(S.qhedule 18).
4.
i.
Ihe rate of-growth in earnings.per' share showc.a. gener-6.
ally t ising trend, typicelt y exp.odi hg 10 per cent (Schedule 21). the"gr owth in divi.dendt, po. shere shows 9.
a: sharp.1y risingstrend.fot the thene- : arid'.five-year 9.
peciods, and.a lesser, but distinctly upward trend for 10 the seven.and ten-year periods (Schedule 22).
An e
11 average of sevene and. ten-year' periods..ending in 1978-1/
rshows a groiath riste of:8. 7 ' percent.
The growth"in 13.
book value per share show.r a. generally tising' trend i
14.
for. three 'and ~five-year periodse:andra mixed. pattern 15.
ot'. rising trend for some' groups and;a declining trend it.
for other groups. tor.the seven-and ten year periods 17.
(Schedule 23)s An average..of.the+seven-and ten year
(")
1A, pdr.iods endino-ir. 0 9 hint.b6.W Tirowth raterof 3. 8 '
- x]
19, pe'rcent..
26 21-Based on the above datas I' conclude that-investors may 22.
reasonably expect.. k. growth of approximately 9.0. percent, 23.
so.that the. indicated "barc-bones". current cost of -
24, capital tor :these six groups of industrials is approxi-25-mately.13.5 to 14'.D.i;ercent,Jvery close to that of SCE&G.
26.
2/,
Q.
Retur rii.ng totSoutb.: Carolina Elect r it.&" Gas,"what is 28-your estimat<r otsthe cost of A1nancir,g, markettpres-
~s 29 snr e, and the :allissance to' ;marketivo]atility?
t 30.
3),
A.
SCE&G 75, financing costscfor i thilast. four common st ock-32.
issues ranged f rom 3.2. percent. in 1977: to 3.7 percent 33.
in.1979.
I shall use a 3.5 percent. estimate as repre-34.
sentative of prospective. conditions:
0 7]D *3'T
.g.,
UvM o N.
.n m
Mdrket pressure is the. impact of a.new stock issue on.
(
2.
tKe price of the stock.
Market pressure varies widely 3.
oVer the course of the business cycle.
Studies.made 4.
o%er the last. rf tve ye. ara by ref.ecende to numercur r
3.
utJ Aity common. stock issue's.'h.dicate that marker pres ~
d.
s'ir e is signi'ficJdtly.hi'gher 4ty dec)ining markets-than..
?.
in rising marketsi The rawge is: extremely wide > Erom 8-vsr.tually zero m 115 percent.
9.
9.
10.
do. statistically measurable market.jressuro was experi-3.1.
edoed by SCE&G in its'Jast.four issues; in the precede i
in'g issues'of l974 and 1975 the market pressure.was 8.4 12.
an'd 6.4 percen(,1/. Whether'the absence.of.marke't pres-13.
6 14 sdoe in recent issues.was fortuitous or.a reflection of IL ma'nagement's good tiding.js not possible to ascertain.
15.
I5.my opinion c.the cost.of sttrac ttng. capital. should 11 in~olude a market: prensnrro crrat least-3 -poicent. '
18
'I.
s 19.I I..ther eford estima'te :the:' sum.of.tinastinq costs an'd J.
?u, ma'rket ytessura at 6. %rtercent.
There shoulb also be -
21, a% allowance fod 'unpred tetable ' mar.ket swings of at 2 '..
l'esst 3 pe sceut, so.t:h'at.the ctoter cost i s about 9.5;
/
23.
pe'ec en t.
24 a.
2h Cdosiderable colitroversy has arisen.i.n recent. Years -
~
M-ober whethen: the 41naticing costs:and market pressure -
27.
sh'ould be appl.idd:to-the. tota) cost of.'cquity capital-
.}
28.
ot.on) y to 3he. dividend.' yield portion af the cust.
In 29-t'he interests oe'avoiditg?contrdu eny',MI:shal.W.auply S.
~'-
D-s51e I y the.-Einaiyeing dos.ts...of. 3,.S.parcant.tio the d Lv i.--
i 31' dEnd yield of 9.7.5'perdent -.
32.
- i..
33.
~
34.
1/
DI}ference between of fering pr fice and the : average of the market price of.the stock 7 to 12 weeks before and after the offering data, adjusted for trend, measured by reference to Ithe S&P Composite Electric Pdwer ~ Price Index.
__.a 0**D 3
b 56 o o
.[
o a
1.
Q.
What. is you'r' conclusion 'as to'th'd total current cost of 2.
attracting capital for SCE&G?
3.
4.
A.
The total current cost is 13.35 to'14.1 percent,'refle'ct-5 irig an investor nreturir tequirement of -13.:50 to 13,75 5,
p.e'r. cent, and an:allowancF for financi'ng. costs of 0.35 -
pelcentage points (9.75
.96S = 10.1 l 3.75 (or 4.00) 9.
- l.3. 8 5 (o r I4..If) 1.'.
9.
?.
10.
Q.
Wohld you pleas'e. explain the reaso'n for your statement 11.
that the currentJcost'.is not the fair return?
12.
13.
A.
Thb economic meaning of a currenti cost estimate is e
14 th'at, i f investoris' were. asked to provide f unds for a
~
15.
new electri~c util1ty lat ' cuirent pri' cess they.would 16.
require a net -return (sftet.. financing and market. pres.
17 udre costs)' of 175.;75 :parcent.
Tne.rair return,.appli ~
I lb.
c:a'ble in ait -ot. cq uahmst..r : fro baso,.di f fer s f rom 'this
/
19 cu'rrent cort ofonode.f bedauw.i~t 4.nclude5' partial' com.-
20-pensation Cor..arpenistced ' J if flat;iors (which is reflected 23, in the comparable earnincts test)'. -~
22 23, if.tbe r.esufts of rtho.: cost Jof capital :fformgla are applied 24.
tof book equi'ty and ' tM Compa'ny. is abTe.' to ' achieve that 25 ea'enings levol;.chc. market evalud.or SCE&Gos stock..would-26.
terid to be 'egtia1.tf tsooWia.bM ^ ^? hts,.to use the tcur- -
~
27 re'rtt cost of. money'aa-a: measure o.f;the fair.' return is a
t o put invastvcs cr.r.nv.!.m tha r.,:.ary clue '.they purchase 20.
e l
29, stock absve bc<tk vt:1ue,..they:sthb st.tf f'et: a.lcss':oi; a
30, j.
capital.
c 31, 32.
The histor feal originalicost. theory of regulation rested 33' on the proposition.that the-best yardst.ick for values l
34-wa'; obtained - through the process ot; arnt's J ength
' O,
---,---,=g,-,,,,e.~e,
,-w,,-,-
--,-..-,---,nnn--,,m-,n.,,--,ve.--..,-~
,,nn,,,n,,
nn.-
.-,.--c.-r-
.m 1.
bargaining'in a'. competitive naarket; ' Successive'incre.
e 2.
ments to plant ~and capital'9ere intended to'be on a
~
3.
comparable basis to those originally committed to the' public service.'
5.
6.
The advent of itiflhtiod has oogetted.'t'.bG underlpin19 pre.e J
T' 7
mises of the' original' cost'doctrif# because"it he ~ ' '
C, resulted thi the'.iflugical piocess of *.aoainig ddliar A cf '
9.
varying purchasing powet.
10.
11.
The necessity ot/having to recognize the impact.o1 ex--;.
~
12.
perienced ~ inflation becomes most readily apparent 'when 13, inflation has' reached the order of magnitude experi-14.
enced in post World' War 11. Frahce and It.ai'y,- ct in some::.'
15.
of t.he South Imedcan 'c60ntt 105. "It the price leve) 16.
doubles each year, the aggregation.of dollars of vastly i
l '/.
dif fet ing p6tcha str,g Jpower t enders 'the end result vir -
10.
tually meaninglest.s.It then.becomes clear that, i f :t hb' :,.
19.
reasoublene&s or.N,ompmsafion ds determined.'regardleus 20-of the valus cEsmency; theJproperty' contributed by.'.-
21.
investors can beivirtually contiscated th' rough the 22.
esiforcemene/ct purely nominal valuations'os inflation.. ".
23.
progresses..
24, 25.
The impact ~of inflation is reflected in the cost. of 26.
labor and mat.erials uhtch'utilitias purchase; i. t '. i s i
27.
7380 reflected in the uce.to.which utility capital is 28.
put.
It in /the.rsfos e 1]Iogical, if. not. di sciiminatory, h
29.
to refuse to rec'cgni ze the. impact-bf infl.atiori in' the.
30.
compensationito.the owners of equity capital.
The
'M 31.
current cost *rct-eapital'fherefore falls;short 6f.:thc~'t 9
32.
fair teturn...
33.
34.
u.
.I
1 i
Ih@
h
'D ] }
D o)
APPENDIX
-A-Summay y of" Qual:ificit'lowM.i: * - -' ' c.
of
'n Stephen F.6 Shew _rJ'.
":"r I hold the. degtses of Bachelor of? Bucintess' Administration (1949), Mast.er of Busi ness Aamin'istratiun 4MSJ ! y.ans-Ph; D.
in Economics :(1956), a)1 f rom. th'.;. Uni 9ersity' of *Wisc0nsi n.
My fields of study are Acc00ntino,.EconomicG Finance and Public Utilit.ies.
g Af ter completing. myi i raduate' studies,' I was: an. instrf1ctor
- 3 in Economics At New York.tinive'rsi'ty? 1 - have. also be'en a:
'Juest. lectusta at Perar. State.i Univ 4t sityCai@. DM'. Secctlie. War-hl'ngor O
tc;n Universi1.y-Mr..i.
wy In 1956 I join &B' FUster. Assos.::iater 0 iDur.1MO: the'l'astL twenty-three-years:.1. have been a ' consultant to' both indust.ry..
1 and governmeht.,
Ifr the coui se ' of. these: cobsd1 ting'Bctivi' vies F - '-
')
I have made numerous studies on the. cost of. capital. And :teason "-
able earningk requirements.for-airlinssr, el r+htric. and. gam.
L distr ibuti6n.: titilitie s,. natural g cs-pipe] ines," t~elephone companie.3,.:omd water coinpan'ico..?..X.- haves M sb hade stuairns:cf: '... '
the economibs and cost..cnaracteri st.ics:Of. the oi]. and'.gFr
.P industry, os: elected" asphetsu of. taxa!. ion; bn:: postal (et:oncmics flu.a and the sec.in itie.s.. industtyc
.n The results of many ocuhosv.'st6di'en havi.'han prer.ented ""
n d
as testimony before regulatory agencies in over forty proceed"!
'?
ings in the:. United. Staten. and Canada.- '.....
O v
j l
D9~3 P T'}X ebdu sJuikD-
_=
m.
In (11e United' States,. I submitted rate of return evidence
~
)
'-)
before t besCiv5.t AeroFiautics Board (Braniff, Continental, National, and Western. Airlines);.the Federal Energy Regulatory CoinmissionMSouth Caro.1-ina' Electric. & Gas. and Great Lakes Gas Tr ansmisdi'On)4 the Pub'licmer.vice Commissions of Flor ~ida (tampa Eleedr.ip. and. Genet alf Telephone of: Florida),, riot y1and-(Baltimore. Gas & Clectric).. Michigan.(Michigan Consolidated r.e s ), Mic.ssorb t.Laclede gam. New York. (St, Lawrence. Gas),
Nor th Carolina. (Duke - Power).. Ohio'-(Dayton. Power'& Light),
S'outh Ca r olina (Couth Caroli na..E16ctric- &. Gas) ', Texas (Houston Lighting.'Poher), and West.Viryi'nia'(Chesapeake'& Potomac V e]ephone Cohipany, an AT&T subsid.i al:y) ; before the Securitics and ExchangeJCommissionELlot.the. National'-Association of Securities)Duj ers) orr.the. subject of. roaschabj eJ sales. charges for mutual. funds.::bef6te the: Int 9rstate Commerce Commission.
A and the Postal-Fate: Comir.JMic.n-4for - ther.o S; Postdl. Ser vicE and two tui%. s - t r ad b> v.:soci ati ons) ca.> the/ costing; and pric?
(]
ibo of por tg e.n.c ut % Wr hf.<ne. ifn4 Pi Jeralc. Power. Commission I for Exxon Jt30) ?,..Mobu.. J!ex:ach.; hnd: ottia r o.i1 companien) - in twelve proceedingc. 4 i% nd.is a. the. Permi an '. Basin' and othe r I
s Area Rate proceeding.Gi concerped with the costing.and pricing of nature t sase.at: pbints of produc tions' -
- c. ;
In Canada, I have submitz.cd en.te Of-return evidence during the last fi've Years in more. than tweistysproceedings before t he Nati<. anal Eri:-rgy..FcruW J W abd ariad AJ t'.ipeLi nc r 'anCI We stcoa st Transmission), British CoJumbit Wncr.yy.Comihissicn (Pacific' P
Nor thern Gas $ ;;. the Ontar i tn CoNigr W rd::(Conkuws s : -Gas.; and.' '
Union Gas),ni hr, Pub.1ic;W i')ikk Josti& 0% Alberta (Albertn-r..
Power, Canadian Westo n Mafv 30 Gak and. No4 thw;m te rn Ut i-li ti es),.
Manitoba (Greater Winnipeg -Gas'r:,.~and Quebec.('iazi f ere d'e Holl).
,ey
\\
l v
.. s.
~ :.a. : 7 '.DC~~
av ~ -
- = ~
c h
Publications:
)
" Monetary Pol: icy in Continental Western Eu' rope (1946-1952)",
Universi t y of"Hisctfnsin Prow A19S6% n s? '.
" Cost of Nat, ora] 'ia's ". Jou r n a l of'Pettoleum Technoloav",. (Feb
a.
roary 1965).n. -
" Report on Principles ot Costing' and Rate Making' for thu 0.S..
. S.
Postal Ser vice y co author with H..
It e r z, P.r esidents Coinmissior.
on U.S. Postal.Orcanization (1968}
" Cost of Finding Hydrocucons!'., Bureau of Land Management, Teebni co Bullet.in ',- (Mbp 1 76) 3 "Feonomic Cr iteri;r for. Pos'c.wl RatEn Makin~ ", Washing ton and_
g Lee un ive s s iM..(Mar c!., '":7 T, ; - "
($
-3
)
7-O>
i
O 5.d.
Complete the enclosed form entitled, " Financial Statistics,"
for the calendar year 1979, and for the most recent 12-month period.
RESPONSE
See following page.
S G
J ATTACHMENT FOR ITEM NO. 5.d.
Financial Statistics 12 Months Ended 1979 Oct. 1980 I)
(dollars in millions)
LJ Earnings available to common equity
$44.7
$52.6 Average common equity 430.4 468.0 Rate of return on average common equity 10.4 11.2 Times total interest earned before FIT:
Gross income (both including and excluding AFDC) + current and deferred FIT ; total interest charges + amortization of debt Incl. AFDC 2.28 2.28 discount and expense.
Excl. AFDC 1.83 1.84 Times long-term interest earned before FIT:
Gross income (both including and excluding AFDC) + current and deferred FIT ; long-term interest charges + amortization of Incl. AFDC 2.49 2.54 debt discount and expense.
Excl. AFDC 2.00 2.05 Bond ratings (end of period)
Standard and Poor's A
A Moody's A
A Times interest and preferred dividends earned after FIT:
(~}
Gross income (both including and excluding
'v /
AFDC) ; total interest charges + amortization of debt discount and expense + preferred Incl. AFDC 1.47 1.49 dividends.
Excl. AFDC 1.11 1.14 AFUDC 29.5 32.9 Net income af ter preferred dividends 44.7 52.6 66.0 62.5 Market price of common
$14.75
$14.125 Book value of common
$18.48
$18.61 Market-book ratio (end of period)
- 80 76 Earnings available for common less AFDC +
depreciation and amortization, deferred taxes, and invest. tax credit adjust. -
deferred.
69.4 72.5 Common dividends 39.7 42.8 Ratio 57%
59%
Short-term debt Bank loans 1.3
.6 Commercial paper 34.5 12.6 Capitalization (amount & Percent) 1979 October 1980 S
<x Long-term debt 673.0 52.9 714.0 52.0
(,)
Preferred stock 152.6 12.0 171.0 12.5 Common equity 447.0 35.1 487.8 35.5
- If subsidiary campany, use parent's data.
{}
6.
With respect to the South Carolina Public Service Authority:
a.
Provide copies of the audited 1979 and the most recent 12-month financial statements, including the most recent audit report.
Continue to submit copies of the audited annual financial report for each year thereafter as required by 10 CFR 50.71(b).
RESP 0rlSE:
Copies follow in requested sequence.
O l
l l
l e
v L
9(V f
/^
a
(,
k i
i SOL,TH CAROLINA PubLIC SER VICE AUT HOR I T Y EAHIBIT 1 BALANCE SH EE T NOV E MBE R 30, 1980 L it4 E NO.
ASL1 TS THI S YE AR LAST YEAR LIABILITIES THIS YEAR LAST YEAR 01 U TI L I TY PLANT LO NG T ER M DE8T 02 E L E C TR I C P1, A T.T IN SU N CE 5 674.916.885
& 482,073,774 PRIOWITY ODLIGATIONS 03 CONS"RUCTIQ w 3RK INPRG; cab $i 484,369,512 430.234,996 BONDS OF 1950
& 10.635,000 5 10.880,000 04 BONOS OF 1967 50.575.000 50,725 700 05 TOTAL 1 159.286,3 %
912.308.773 BONDS OF 1973 REFUNO. SERIES 7.925.000 8.605,.00 06 L E SS ACCOM.DDEPRECI AIOrlu (121,604.468p Il03.Y16,8153 CONT R ACT OBL IG AT ION S 1,661,728 2.060. 3 2 07 ELEC. SYS. EXPAN. REVENUE BDS 08 E LE CTR IC Er.7X -NE,T T 1,037,681.928 808.591,955 BONDS OF 1973 99,175,000 100,000,000 09 NUC L E A R FUEL 16.909.540 18.096.028 BONDS OF 1974 108.900.000 109.000.000 10 BONOS OF 1977 115.000.000 115,000,000 11 U TI L I TY 4t. AM T-NET.
1,054.591,468 826.687.983 BONOS OF 1977 REFUND. SERIES 209.275,000 210.890.000 12 80NDS OF 1978 2J0.000.000 200.000,000 13 OTHER PHYSICAL PROPERTY, 627.998 622.838 BONDS OF 1979A 109,935.000 110,000.000 14 LE SS ACCUM. DEPRECI ATION (175.3CO3 1157.320)
BONOS OF 1980A 75.000.000 0
15 C APIT AL LE ASE O8LIGAT IONS 89.553,752 87.119.810 16 TOT AL OTP.. PHYSIC AL PROP.
452,699 465.518 LONG TERM PURCH ASE AGREEMENT 300.000 375.000 17 BANK CR ED IT AGRE E ME NT 50,000.000 25.000.000 18 EL EC. R EV ENUE NOTES OF 19 80 50,000.000 0
19 DEST SERV ICE ANW OTHER.
LESS. UNAMORT. DISCOUNT - NET I15.560.015) 113,926.916) 20 S P E C I A L FUN 25, - Ent1 BI.T 6 143,075.298 147.835,582 21 LONG TERM DEST - NET 1.162.375.465 1,015.728.756 22 UNE XPENDED BG40' FUNDS - ExH 6 101.834,902 152,568.248 23 INTEREST ON LONG TERM DEHT 27.337,716 22.301,063 24 C UR R ENT ASSETS CONS TR UC TION F UND LI AB ILIT IES 10,272,616 6.928.876 25 CASH AND SECURITIES 26 HELD BY TRUSTEES-EXHIBIT 6 12.462.174 7.546.739 CURRENT LIABILITIES 27 OTHER FUN 05-E xHIB IT 6 2.433.186 2,102.818 ACCOUNTS PAYABLE 13,871.493 9,242,032 28 ACCTS. REC. LESS ACC UM. PR O V.
CUSTOMER SECURITY DEPOSITS 2.045,737 1,822.940 29 FOR UNCOLLECTABLE ACCOUNTS 20.107.998 12,912.811 INTEREST ON CUST. DEPOSIT S 192.712 325,75I 30 INTERE ST RECEIVABLE 4.341,248 5.053,135 ACCRUED SUMS IN LIEU OF TAKES 545.511 37*,553 31 MATERI ALS & SUPPLIES 3.018.113 2,544.104 ACCRUED SALES C USE T AXES 150,911 71.9 71 32 FUEL STOCAS 26.601.816 23.564,923 OTHER 73,015 65.305 33 PRE P AI D I NSUR ANC E.
E TC.
635.824 375.660 34 TOT. CUR. & ACCRUE D LI AB.
17.079.339 11.903,352 35 TOT AL CURRENT ASSETS 69.600.359 54.100.191 36 DEFERRED CREDITS 37 DEF ERRED DEBITS UNAMORT. GAIN ON RE AC Q. DEST 1,291.704 1.566,046 38 UN AMOR TIZED DEST EXPENSE 3.713.181 3,455,748 NUCLE AR FUEL 9,030.155 0
39 UN AMOR T. LOSS ON REACQ. DE8T 9.815.428 10.195.436 40 OTHER 391.918 500.544 CAPITAL CONTRI8UTIONS 41 U.
S. GOV ERNMENT GR AttTS 34.438,264 34,438,264 42 TCT AL DEFERRED DEDITS 13,920.527 14.151.729 43 AC CUM. REINVESTED EARNINGS 121.649.994 102,940,692 44 45 45 TOTAL ASSETS s 1,383.475.253 s 1.195.809.250 TOTAL LIABILITIES
& 1.383.475.253 $ 1.195.809.250 47
= = = = = = = = = = = = ==============
============= = = = = - - = = = = =
ROUNDING TO DOLLARS MAY CAUSE SMALL VAR I ANC ES 5
0' O
(+3 y.
k 4
't SOUTH C AR OLIN A PU8LIC SERVICE AUT HORI T Y COMP AR ATIVE ST AT EPEN T UF REINVES TED EARNINGS EXHIBIT 2 FOR THE TWELVE MONTHS ENDED 11/10/80 C 11/30/19 cheet i or 2 1900 1979 V AR I ANC E E VAR E LECTRIC OPER ATIhG REVENUE 170,247.506 142.606.316 35.641.190 25.0 ELECTRIC OP ER ATING EXPENSES PRODUCTION PORCitASED power I4.292.379) 1.166,070 15.458.4491 FUEL BURNED 106.331,932 81,767.248 24.564.6 84 30.0 FUEL H ANDLING 918.840 699.352 219.489 31.4 OTHER 4.967.227 3,959.718 1.007.509 25.4 M AINTEN ANCE 10.634.223 8.425.977 2.208.246 26.2 TOT AL PRODUCTION 118.559.843 96.018.365 22.541.479 23.5 T R A NSMI S $ 10 N OPER AT I NG 1.371.840 1.349.179 22.661 1.7 M AINTEN ANCE 1.898.842 1.420,518 478,324 33.7 TOTAL TRANSMISSION 3.270.682 2.769.697 500.985 18.1 0ISTRIBUTION OPERATING 897.553 726.909 170.645 23.5 M AI NTEN ANC E 498,253 450.472 47.781 10.6 TOTAL DISTRIBUTION 1.395.806 1.177.381 218.426 18.6 CUSTOMER AC COUNT I NG 1,323,169 1.293,871 29.298 2.3 C US TOME R SVC L INFO 58,147 4.079 54.068 S AL ES PR O MOTI ON 236.978 213.926 23.0 52 10.8 GENERAL & ADMINISTRATIVE OPERATIh6 5.091.299 3.934.172 1,157.127 29.4 MAINTENANCE 435.897 301.588 134.309 44.5 TOT AL GENERAL & ADMIN 5.527,196 4.235.760 1.291.436 30.5 TOT AL OPER ATING & N AINTENANCE 130.371.821 105,713.079 24.658.744 23.3 DEPRECI ATION 17,991.133 12.762.559 5.228,574 41.0 SUMS IN LIEU OF TAXES 1.059.626 638.553 421.074 65.9 TOT AL ELECTRIC UPER ATING EXP 149.422.580 119.114.191 308.392 25.4 e
b e
(
l k
SOUTH CAROLINA PueLIC SERVICE AUTHORI TY COMPAR ATIVE ST ATEMENT OF RElhvESTED EARNINGS EXHIBIT 2 FOR THE ThELVE Po h THS ENDED 11/30/sc & 11/30/ T9 cteet 2 or 2 1980 19T9 V AR I ANC E 3 VAR NET OPER ATING INCOPE 26.824.926 23.492.125 5.332.198 22.T OTHER INCOM E INTEREST 5.915.522 5.281.986 633.536 12.0 INT EREST-BORROWED FUNOS 2 4. ti 3 4.3 0 2 23.665.773 1.1 TO.5 28 4.9 ALLOWANCE FOR FUN 05 USED DURING CCNSTRUCTION
$2.189 800.506 IT48.31T) 193.51 M I SC EL L AN EQUS (100.0641 204.255 1304.3191 1149.01 TOTAL OTHER INCCME 30.103,949 29.952.520 751.428 2.5 INTEREST CHARGES INTEREST ON LcNG-TERM DEBT 64.616,243 53.408.090 11.208.153 21.0 allow AhCE FOR BORROWE D FUN 05 USED DURING CONSTRUCTION (26.066.850) 118.407.1161 (T.659.T341 f41.61 INTEREST ON CUSTOMER DE PO SI T S 155.324 103.641 51.684 49.9 AMCRTIZ AT ION OF DE8T DI SCOUNT C EXPENSE-NET T11.088 583.859 127.229 21.8 LOSS ON R EACQUIRED DE BT-NE T 103.666 84.672 18.9 94 22.4 TOTAL INTEREST EXPENSES 39.519.4T1 35.773.146 3.746.326 10.5 R EINVESTE D EARNINGS 20.009.404 17.671.499 2.337.900 13.2
... _ =
O 6.b.
Describe the nature and amount of the most recent and pending rate relief action (s) and its anticipated effect of net margins.
RESP 0tlSE:
See following page.
4 I
t O
l l
6 O
DOCKET NO. 50-395 ITEM 6 (b)
O V
The Authority has adopted the following rates to be effective on May 1, 1981.
Adopted Total
% Increase 3/26/79
$22,912,000 12.7% (other than Central) 2/25/80 7,285,000 4.0% (other than Central) 330 7 97,000 16.7%
These rates are currently under final review and are subject to changes.
This review will be complete in January, 1981.
The above rates produce debt service coverages in FY 1981 of 1.89 and FY 1982 of 2.34 based on the latest financial projections which are also currently under review.
Historical debt service coverages for fiscal years 1975 thru 1979 were respectively 2.57, 2.45, 2.46,1.98 and 1.88.
nU
'N
[V
{
l 6.c.
Provide the most recent official statement on bond offerings.
1 l
RESPONSE
See following document.
t J
.l'
't, L
4 7.
wm.
4.N
- sewm
. - -. -.... -,.. -. - ~,.... - -. - -., - - -.,.,.. - - -,, - -. _.,.,
NEW ISSUE
)
$75,000,000 South Carolina Public Service Authority (Santee Cooper)
Electric System Expansion Revenue Bonds,1980 Series A Dated: April 1,1980 Due: July 1, as shown below Principal and interest, January 1 and July 1, beginning July 1,1980 (three months), payable at the principal office of First National Bank of South Carolina, in the City of Columbia, South Carolina, or, at the option of the holder, at the principal office of Morgan Guaranty Trust Company of New York,in the City and State of New York. Coupon Bonds in the denomination of $5,000, registrable as to principal only, or fully registered Bonds in the denomination of $5,000, or any integral multiple thereof. Coupon and registered Bonds interchangeable.
The 1980A Bonds will be subject to redemption prior to maturity, on or after July 1,1990, as set forth herein.
Interest exempt, in the opinion of Bond Counsel, from present Federalincome taxes under existing laws and regulations. Exempt, in the opinion of Bond Counsel, from present South Carolina property and income taxes. Eligible, in the opinion of the Chief Insurance Commissioner of the State of South Carolina, as investments ofinsurance companies doing business in South Carolina by reason of which said companies may obtain the reduction of the premium taxes permitted bylaw.
S14,055,000 Serial Bonds Due Amount Interest Due Arnount Interest July 1 Due Rate Price July 1 Due Rate Price 1981
$125,000 8.50 %
100%
1989 $1,035,000 9.10%
100 %
1982 135,000 8.50 100 1990 1,130,000 9.20 100 1983 145,000 8.60 100 1991 1,235,000 9.25 100 1984 680,000 8.60 100 1992 1,350,000 9.30 100 1985 740,000 8.70 100 1993 1,475,000 9.40 100 1986 800,000 8.80 100 1994 1,615,000 9.45 100 1987 875,000 8.90 100 1995 1,765,000 9.50 IOG 1988 920,000 9.00 100 S18,220,000 9.80% Tbrrn Bonds Due July 1,2002 Yield 10%
S42,725,000 10%%Tbrrn Bonds DueJuly 1,2010 Price 100%
(Plus accrued interest)
The 1980A Bonds are offered when, as and if issued and accepted by the Underwriters subject to the approval of legality by Bond Counsel, Wood & Dawson, New York, New York, and McNair Glenn Konduros Corley Singletary Porter & Dibble, Columbia, Sauth Carolina. Certain legal matters will be passed upon on behalf of the Underwriters by Simpson Thacher & Bartlett, New York, New York. It is expected that delivery of the 1980A Bonds to the Underwriters will be made in New York on or about April 17,1980.
Lehman Brothers Kuhn Loeb Incorporated Blyth Eastman Paine Webber Incorporated Merrill Lynch White Weld Capital Markets Group Merrill Lynch, Pierce, Fenner & Smith incorporated Smith Barney,IncorporatedHarris Upham &, Co.
The Robinson-Humphrey Company, Inc.
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SOUTII CAllOLINA PUBLIC SEllVICE AUTIIOIIITY g
223 North Live Oak Drive N1oncks Corner, South Carolina 29461 (803) 899-2121 ADVISORY BOARD Governor RICIIARD W. RILEY Attorney General DANIEL R. hICLCOD State Treasurer GRADY L. PATTERSON, JR.
Comptroller General EARLE E. AfORRIS, JR.
Secretary of State JOIIN T. CAMPBELL DIRECTORS ROBERT S. DAVIS, Chairman blARK C. GARNER VERNON E. SUMWALT, First Vice Chairman B. A. JORDAN, JR.
J. TIIOMAS GRIER, Second Vice Chairman E. J ARv1S h10RRIS B. G. ALDERMAN, JR.
HAROLD Af. ROBERTSON C.B.BOYNE hTARVIN hl. TliOMAS WALTER T. COx SIANAGE31ENT WILLIAM C. hlESCHER President HENRY N. CYRUS Senior Vice President CLARENCE S. GRAMLINO Senior Vice President KENNETil R. FORD Vice President joe C. NORMAN Vice President LUCAS C. PADGETT Vice President ROBERT E. RAINEAR Vice President ROBERT V. TANNER Vice President WILLIAM A. WILLIAMS, JR.
Vice President WALLACE S. A1URPHY Generai Counsel L.P.DORMAu Corpo ate Secretary hiRS. DENISE C. hlCWIIORTER Assistant Corporate Secretary TRUSTEES The South Carolina National Bank-Indenture Trustee Charleston, South Carolina The Citizens and Southern National Bank of South Carolina-Expansion Bond Fund Trustee Columbia, South Carolina PAYING AGENTS FOR 1980A BONDS First National Bank of South Carolina Columbia, South Carolina htorgan Guaranty Trust Company New York, New York of New York BOND COUNSEL Wood & Dawson New York, New York hfcNair Glenn Konduros Corley Singletary Porter & Dibble Columbia, South Carolina CONSULTING ENGINEER R. W. Beck and Associates Orlando, Florida FINANCIAL ADVISOR Lazard Frbres & Co.
No dealer, broker, salesman or other person has been authorised by the South Carolina Public Senice Authority or the Underwriters to gisc any information or to make any representations with respect to the 1980A Ilonds other than those contained in this Official Stat; ment, and, if gisen or made, such other information or representations may not he relied upon as hasing been authorised by any of the foregoing. This Ollicial State-ment does not constitute an offer to sell or the solicitation of an offer to buy nor shall there he any sale of the 1980A Ilonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, soli-citation or sale. The information set forth herein has been obtained from the South Carolina Public Senice Authority and other sources which are beliesed to be reliable but such information is not guaranteed as to accuracy or completeness. and is not to he construed as a representation, by the Underwriters. The information and esprewions of opinion herein are subject to change without notice and neither the delisery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the South Carolina Public Service Authority since the date hereof.
IN CONNEC'IION WITil TIIE OFFERING OF TIIE 1980A IlONDS, TIIE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS TIIAT STAlllLIZE OR MAINTAIN 111E MARKET PRICE OF TIIE 1980A HONDS AT A LEVEL AHOVE TIIAT WIIICII MIGIIT OTIIER.
MI5E PREVAll IN TIIF. OPEN MARKET. SCCII STAlllLIZING, IF CONDIENCED, MAY llE DISCONTINUED AT ANY TDIE.
TAllLE OF CONTENTS Page Page Summary Statement i
Fuel Supply 25 Coal 26 Purpose of the IWOA Bonds 1
Nuclear 27 Regulatory Statters.....
$s a
Autheraation of Bonds. I.unds and Accounts 1
Federal Energy Regulatory Commission 8
Ensironmental hiatters 29 Securit> for Espansion Bonds 2
Nuclear Ntatters 30 Pledge of Resenues 2
Department of Energy--Rate hiaking and Fuel Use 31 Resene Actoont Requirement 3
Rate Cosenant 3
Certain Prosisions of the Indenture and Resolution 32 Capital Improsement Requirement 3
Funds and Accounts 32 Effect of the Resolution 33 33 Decordon ei 1%n \\ Bonds 4
Investment of Funds.....
34 Redempnon Prosisions 4
Additional Expansion Bonds 5' nim; 1 und Installments 4
Amendments of the Resolution Effected by Supplemental Resolutions 35 Outstanding OHigations and Equity 5
Separate System 36 Junior Lien Obligations. - - -
36 Debt Senise Swhedule 6
Engineering Reports and Audits.
36 Insurance 37 The Authority 7
Sale. I case or Other Disposition of Properties 37 Organization and Af anagement 7
Esents of Default and Remedies under the Senice Area 8
Resolution..
37 theorical Operating Results..
9 Esents of Default and Remedies under the Ibto d Demand, S des and Resenues 9
Indenture 38 Cer. tral tentracts 11 htodifications of the Resolution.
39 4
Reudential Commercial and Small Industrial Sales 11 Defcasance.
39 lun pal. Stihtary and Large Industrial Contracts Payments to State and Local Governments 39 Power Supply 14 Pending Legal Proceedings.
40 i r ansmnsion 15 Interconnections 15 Tax Exemption 40 RahaNhty Agreement 15 Dntubution 15 Approval of Legal Proceedings 40
- "U Capital improsement Program-1980-1985 15 15 Underwriting 40 General 16 Summer Nuclear Station 18 Sfiscellaneous 40 M in> ah Generating Station-Unit 3 r$s\\ Site "f
htap---Principal Generating Stations n
and Transmission Lines of the Authority
. Centerfold General improserIents 20 I uture Power Supply Program-Cross Site 20 Appendices Estimated f inanc ng Requirements for Capital Report of R. W. Beck and Associa m......
1-1 Estimated Power Supply Resources and....
21 Accountants' Opinions and Finaneira Statements.111 Improvement Program..
Letter of Burns and Roe, Inc...
.111 1 R equirements 21 Form of Opinions of Wood & Dawson and hicNair Glenn Konduros Corley Singletary J
Projected Operatmg Results 23 Porter & Dibble
. IV.1 1
SUMMARY
STATE 31ENT I
Tlii, Sumniary Statement is onliject in all respects to inore complete information contained in tinis Ollicial Statement.
The Authority The Authority is a body corporate and politic of the State of South Carolina. Its management is vested in a lloard of Directors consisting of eleven members appointed by the Governor of the State of South Carolina with the advice and consent of the South Carolina State Senate.
The Authority operates an integrated electric utility system, including facilities for generation, trans-mission and distribution of electric power and energy at retail and wholesale. The Authority serves, either directly or indirectly, approximately 265,000 customers in the State of South Carolina.
Purpose of Issue The proceeds of the sale of the 1980A Bonds will be used to pay part of the estimated costs of comple-tion of Unit 4 of the Winyah Generating Station and part of the costs of the Authority's program of general improvements.
Security for the 1980A Ilonds So long as any Priority Obligations are outstanding ($72,270,862 principal amount were outstanding on December 31,1979), the 1980A Bonds will be payable from and secured by a pledge of the revenues of the Authority's System on a parity with the presently outstandag 5844,890,000 Expansion Bonds and any addi-tional Expansion Bonds issued pursuant to the Resolution, after the deduction only of (1) operation and maintenance expenses (exclusive of certain lease payments) and (2) amounts suflicient to pay the debt service on the Priority Obligations and to maintain a reserve therefor. The 1980A Bonds are also payable from other funds of the Authority available for such purpose.
After all Priority Obligations are no longer outstanding, the 1980A Bonds and all other Expansion Bonds will be, subject to the provisions of the Resolution, payable from, and secured by a first lien upon and pledge of, the gross revenues of the Authority's System.
As further security for the Expansion Bonds, there is established by the Resolution a Reserve Account, the requirement of which, with respect to each series of Expansion Bonds, including the 1980A Bonds, is a sum equal to the maximum amount required to be paid into the Interest Account in the Expansion Bond Fund to pay interest on such Bonds in any fiscal year.
The 1980A Bonds are not debts of the State of South Carolina or of any political subdivision thereof and are not payable from any funds other than those of the Authority.
Rate Covenant The Authority covenants in the Resolution to establish rates and charges adequate to provide revenues sufficient, among other things, to pay debt service when due on the Priority Obligations and Expansion Bonds, to make required payments when due into the Lease Fund and the Capital Improvement Fund, and to pay the costs of operation and maintenance of the Authority's System and all necessary repairs, replacements and renewals thereof.
There is no agency, other than the Authority, which has jurisdiction over the rates of the Authority.
Capital Improvement Requirement The Authority is now required to pay annually into its Capital Improvement Fund an amount which, together with the amounts deposited therein in the two preceding fiscal years, is at least equal to 8% of the Authority's gross revenues in the three preceding fiscal years. After certain Expansion Bonds are no longer
)
outstanding, the amount required to be paid into the Capital Improvement Fund will be changed. See caption
" Security for Expansion Bonds-Capital Improvement Requirement" i
FinancialInformation The following tab!c shows selected historical financial data for the fiscal years ended June 30, 1977 l
through 1979 and selected projected financial data for the fiscal years ending June 30,1980 through 1982 for the Authority as estimated by the Consulting Engineer:
Fiscal Year Ended June 30 llistorical Projected 1977 1978 1979 1980 1981 19M2
( Dollars in Thousando Total revenues
$97,641 5122.598 5140,612
$ 166,775 5256,234
$310,925 Revenues available for debt service 28,091 33,796 36,303 41,113 65,881 99,078 Debt service
- 11,427 17,081 19,343 21,876 34,794 42,370 Revenues after debt service 16,664 16,715 16,960 19,237 31.087 56,708 Debt service coverage
- 2.46 1.98 1.88 1.88 1.89 2.34
- Priority Obligations and Expansion Bonds only; does not include funded interest an t subordinated lease paments and notes peable to tanks.
Pow er Supply The Authority's total generating capability is 1,456 N1W. Of this amount, 1,050 51W is generated by coal-fueled units; 130 51W, by the Authority's hydroelectric stations; and 266 N1W and 10 51W, by oil-fueled and oil / gas fueled units, respectively, generally used for peaking purposes. In addition. the Authority presently receives a firm supply of 105 51W of hydroelectric power from the Southeastern Power Administration. The Authority has direct interconnections with four other entities with power supply facilities.
Capital Improsement Program-1980-1985 The Authority's capital improvement program includes completion of the Summer Nuclear Station, a 900 h1W nuclear generating unit which for financial planning purposes the Authority estimates will be avail-able for co.nmercial operation in December 1981, in which the Authority has a one-third interest (300 51W);
Winyah Unit 3, a 280 h1W coal-fueled generating unit scheduled for commercial operation in Stay 1980; and Winyah Unit 4, a similar 280 51W unit scheduled for commercial operation in N1ay 1982. The Authority's total capability from units now under construction is expected to be 860 51W.
i l
1 The Authority has also selected the site for its next major generating facility. the Cross site, and is l
engaged in advance planning and initial design work for the first two units to be constructed on this site.
l These units are 450 N1W coal-fueled generating units scheduled for commercial operation in November l
1983 and Alay 1985, respectively. The Authority plans additional units at this site.
The Authority's capital improsement program also includes major improvements to its transmission and distribution systems and general plant.
The estimated total expenditures for the Authority's capital improvement program for the fiscal years 1980-1985, excluding funded interest, reserves and financing costs, are projected at $228.9 million, 5196.8 million,5293.9 million,5357.2 million,5149.0 million and 584.2 million, respectively. 'I he Authority presently plans to finance such expenditures from resenues proceeds of Expansion Bonds previously issued, the 1980A Bonds, and Expansion Bonds to be subsequently issued.
Additional Bonds Under the Resolution, the Authority may issue additional parity Expansion Bonds if, among other things, the Consulting Engineer certifies that Net Revenues in each succeeding fiscrd year after the date on which such Additional Honds are sold to and including the later of f a) the third succeeding full fiscal year after such date or (b) the first full fiscal year after the estimated date of commercial operation of any Power Plant to pay the cost of construction of which additionai Expansion Honds have been, are being or are then authorized to be issued, shall be at least equal to the sum of the amounts required in such fiscal year for (i) debt service on the Priority Obligations and the Expansion Honds then outstanding, being issued, or authorized but not yet issued; (ii) payments into the Lease Fund; and (iii) payments into the Capital Improvement Fund.
{
ii
$75,000,000 South Carolina Public Service Authority (Santee Cooper)
Electric System Expansion Revenue Bonds,1980 Series A Dated: April 1,1980 Due: July 1, as shown below The purpose of this Official Statement, which includes the cover page, summary statement and appendices hereto, is to set forth information concerning the South Carolina Public Service Authority (the " Authority")
and the Authority's $75,000,000 Electric System Expansion Revenue Bonds,1980 Series A (the "1980A Bonds"), otTered hereby.
The Authority is a body corporate and politic created by Act No. 887 of the Acts of South Carolina for 1934 and acts supplemental thereto and amendatory thereof (Code of Laws of South Carolina,1976-Sections 58-31-10 through 58-31-390) (the "Act"), which, among other things, authorizes the Authority to produce, distribute and sell electric power. The Authority began electric power operations in 1942.
PURPOSE OF TIIE 1980A BONDS The 1980A Bonds will be issued for the purpose of providing funds to pay (1) part of the estimated costs of completing construction of Unit 4 of the Authority's Winyah Generating Station ("Winyah Unit 4"), a 280 MW coal-fueled generating t_ nit presently scheduled for commercial operation in May 1982, and (2) part of the costs of other additions, improvements and betterments tothe Authority's generation, transmission and distribu-
)
tion properties and general plant (" General Improvements").
The estimated disposition of the 1980A Bonds proceeds is as follows:
Winyah General Unit 4 Improvements Total (Thousand of Dollars)
Construction Costs (l) 531,720 521,048 552,768 Bond Reserves 5,032 2,368 7,400 Funded Interest (2) 13,008 13,008 Bond Discount (3) 1,240 584 1,824
~
Principal Amount of 1980A Bonds
$51.000
$24,000 575,000 (1) includes issuance expense (other than bond discount).
(2) Interest on the 1980A Bonds allocable to Winyah Unit 4 funded to November 1,1982. No interest funded with respect to 1980A Honds allocatle to General Improsements.
(3) Includes original issue discount on the 1980A Bonds maturing in 2002 of $327,960, of ubich $223,013 is allocable to Winyah Unit 4 and $104,947 to General Improvements.
AUTIIORIZATION OF BONDS, FUNDS AND ACCOUNTS Pursuant to the Act, the Authority has in the past incurred obligations under an indenture of trust between the Authority and The South Carolina National Bank of Charleston, to which the South Carolina National Bank is successor (the " Indenture Trustee"), dated as of July 1,1949, as amended and supple-mented (the " Indenture"). Such obligations are herein referred to as " Priority Obligations" See caption
" Outstanding Obligations and Equity" By amendment to the Indenture, consented to by the holders of more than 75% in principal amount of l
outstanding Priority Obligations, which became efTective on April 29,1971, the incurring of additional Priority I
Obligations for other than refunding purposes is prohibited. However, by such amendment, provisions are made with respect to bonds which are secured by a lien upon and pledge of resenues junior to the lien and
(
pledge provided by the Indenture for the Priority Obligations.
Pursuant to the Act and in accordance with the Indenture, the Authority, ori August 31, 1971, adopted a resolution providing for the issuance of Electric System Expansion Revenue llonds (" Expansion Honds")
sceured by such a junior lien upon and pledge of revenues of the Authority. Copies of such resolution and amendatory supplemental resolutions adopted September 27,1971, Nosember 8,1973, February 16,1977 and August 31,1977 (collectively, the " Resolution") may be obtained from the Authority or the Underwriters.
Under the Resolution, the Authority created the Expansion Hond Fund and within such Fund the Interest Acco.
the Principal Account, the Hond Retirement Account and the Reserve Account and appointed The Citizens and Southern National Bank of South Carolina, in Columbia, South Carolina, as the Expansion Hond Fund trustee (the "Hond Fund Trustee") to hold such Fund and Accounts.
Under the Eighth Suppitmente Hond Resolution adopted by the Authority on April 19, 1979, the Authority created the 1979 Construction Fund (the " Construction Fund") into which the proceeds of Expan-sion Honds alh cable to Winyah Unit 4 will be deposited. The Construction Fund is held by the Authority.
Under the Second Supplemental Bond Resolution adopted by the Authority on May 23, 1974, the Authority created the 1974 General Improsement Account (the " General Improsement Account") which is held by the Authority and to which proceeds of the 1980A Bonds allocable to General improvements will be credited. 'Ihe Authority may use moneys in the General Improvement Account for any corporate purpose including making transfers to the Construction Fund or any other fund or account.
Certain terms of the 1980A Bonds ucre estabushed by the Ninth Supplemental Bond Resolution, adopted on the date of this Ollicial Statement, copics of which may be obtained from the Authority or the Under-writers.
Section 11-9-350, Code of 1.aws of South Carolina 1976, presides that the rate of interest paid by discount or otherwise upon the obligations of the State or any agency or political subdisidon of the State, including the Authority, may equal, but shall not exceed, seven percent per annum, except that any such j
obligation may have a greater rate of interest when such rate is approsed by the State Budget and Control Board, the members of which are the Gosernor, State Treasurer Comptroller General, the Chairman of the Finance Committee of the State Senate and the Chairman of the Ways and Means Committee of the State House of Representatives.
SECURITY FOR ENPANSION HONDS Pledge of Resenues So long as any Priority Obligations are outstanding, the principal of and premium, if any, and interest on Expansion Honds, including the 1980A Honds, are payable from and secured by a lien upon and pledge of the revenues derived by the Authority from the ownership and operation of the Authority's System, as I
defined in the Resolution, after the deduction only of: (1) vpenses of operation and maintenance of the System t exclusise of ecrtain lease payments) and (2) amounts required for the payment and security of the l
Priority Obligations, sutheient to pay such principal, premium, if any, and interest thereon and to maintain a reserve therefor, all in the order of priority, in the manner and to the extent prosided in the Indenture and the Resolution. See caption "Certain Provisions of the Indenture and Resolution-Funds and Accounts"
'lhe Expansion Honds are also payable from Expansion Hond proceeds and other asailable funds to the extent provided in the Resolution.
1 l
After all Priority Obligations have been retired or provision has been made therefor (the date of their tinal maturity is July 1, 2006), the principal of and premium, if any, and interest on the Expansion Honds will be payable. subject to the prosisions of the Resolution, from and secured by a first lien upon and pledge of the gross revenues derived by the Authority from the ownership and operation of the Authority's System.
The Priority Obligations and the Expansion Honds are not debts of the State of South Carolina, nor l
of any political subdisision thereof, and neither said State nor any of its political subdivisions shall be liabic thereon, nor shall they be payable from any funds other than those of the Authority.
{
2 l
Reserve Account Requirement I
The Resolution provides that at the time of issuance of a series of Expansion Bonds there shall be deposited in the Reserve Account in the Expansion Bond Fund, from the proceeds of such Bonds or other sources, an amount such that the total thea to be in the Reserve Account shall be, with respect to each series of Expansion Bonds, an amount equal to the maximum amount required to be paid into the Interest Account in the Evan-sion Bond Fund to pay interest on such Bonds in any fiscal year (twelve months ending June 30) from the date of the Expansion Bonds to the final maturity date thereof (the " Reserve Account Requirement"),
Securities held as investments in the Reserve Account shall be valued at cost, but, in the event of any loss upon the sale of such securities and in the event of any withdrawal from the Reserve Account, the amount of any deficiency in the Reserve Account then resulting, unless restored from the proceeds of additional Expansion Bonds, shall be restored by payments from revenues, which payments shall, in each month, after the occurrence of such deficiency and until the amount of the deficiency has been restored, be not less than th of the amount of the deficiency. As of December 31,1979, an amount sufficient to meet the Reserve Account Requirement of $50,364,241 for the outstanding Expansion Bonds was on deposit in the Reserse Account in the Expansion Bond Fund. For the Reserve Account Requirement for the 1980A Bonds, see caption " Purpose of the 1980A Bonds" Rate Covenant The Resolution provides that the Authority shall establish, maintain and collect rates and charges for electric power and energy which shall be adequate to provide the Authority with revenues sullicient to pay the principal of and interest on the Priority Obligations and Expansion Bonds when due, to make when due all payments which the Authority is obligated to make into the Evansion Bond Fund, the Lease Fund, the Cat 3 ital Improvement Fund and the special funds created under the Indenture for the payment of principal of and interest on the Priority Obligations, to pay all costs and expenses of operation and maintenance of the System, and to make all necessary repairs, replacements and renewals thereof, and to pay all taxes, assess-I ments or other governmental charges lawfully imposed on the Authority or the revenues thereof, or payments in lieu thereof, and to pay any and all amounts which the Authority may now and hereafter become obligated to pay from the revenues of the System by law or contract.
There is no agency, other than the Authority, having jurisdiction over the rates of the Authority, Capital Improvement Requirement The Resolution provides that the Authority shall pay into its Capital Improvement Fund, as an annual Minimum Capital Improvement Requirement, an amount which, together with the amounts deposited therein in the two preceding fiscal years, is at least equal to 8G of the Authority's poss revenues in the three preceding fiscal years.
A supplemental resolution adopted February 16,1977, provides that, after the 1973 and 1974 Series of Expansion Bonds are no longer outstanding, the Authority shall pay into its Capital improvement Fund, as aa annual Minimum Capital Improvement Requirement, an amount which, together with the amounts deposited in the Capital Improvement Fund in the two immediately preceding taeal years, will be at least equal to 12%
of the Authority's gross revenues derived from the ownership and operation of the Authority's System in the three immediately preceding fiscal years, after deducting therefrom " fuel" expense (including " nuclear fuel expense") and the energy related component of " purchased power" expense, determined in accordance with the Uniform System of Accounts prescribed for Public Utilities and Licensees of the Federal Energy Regulatory Commission in cliect on January 1,1977.
Moneys in the Capital Improvement Fund shall be used to make good deficiencies in the Debt Service Reserve Fund for the Priority Obligations, to make senewals, replacements, extensiens, additions, betterments, and other capital additions to the System. and, after the Priority Obligations are retired, to make up any deficiency in the Interest Account, Principal Account and Bond Retirement Account in the Expansion Bond
)
Fund to the extent moneys in the Revenue Fund are not sufficient therefor.
3
DI SCRIPTION Ol' 1980A IlONDS The 1980 \\ Bonds will be dated April 1,1980 and will bear interest at the rates per annum and mature at times and in amounts as shown on the emer page hereof. Interest will be payable on January I and July 1, commencing July 1,1980 (three monthst Principal and interest will be payable at the principal otlice of I-irst National Bank of South Carolina in Columbia, South Carolina, or of Alorgan Guaranty 'Irust Company of New York in New Ycrk, New York. 'I he 19SOA Bonds will be issuable as coupon Bonds in the denomination of 55,000. registrable as to principal only, or as fully registered Bonds in the denomination of 55,000 or any integral mui'iple thereof. Coupon and registered Bonds will be interchangeabic. As a condition of any enhange the Authority may require the payment of a sum sullicient to reimburse it for any stamp tax or other gosernmental charge that may be imposed thereon.
Hedemption Prmisions 1he 1980A Bonds due in 1991 and thereafter shall be subject to redemption prior to maturity at the option of the Authority, on or after July 1,1990, upon not few than 30 days' notice, as a whole at any time, or in part in the inserse order of maturity on any interest payment date (and in the event that less than all of such Bonds of any maturity are called for redemption the particular Bonds of such maturity to be redeemed shall be selected by lot), at the redemption prices expressed in percentaces of principal amount set forth below, plus in each case, accrued interest to the date fixed for redemption.
Perind Durine M hith Redeemed Hedempion (lloth Dates Inclusisc)
Prices July 1,1990 to June 30,1991 103 G July 1,1991 to June 30,1992 102%
July 1,1992 to June 30,1993 102 July 1,1993 to June 30,1994 101 %
July 1,1994 to June 30.1995 101 l
July 1,1995 to June 30,1996 100 %
July 1,1996 and thereafter 100 The 19SOA Bonds due 2002 and 2010 shall also be subject to mandatory redemption prior to maturity, upon not less than 30 days' notice, on interest payment dates on and after January 1,1996 and January 1, 2003, respectisely, from sinking fund installments at 1000 of principal amount plus accrued interest to the date fixed for redemption in the years and principal amounts as set forth below under the subcaption " Sinking Fund Installments" Sinkin;: l'umi Installmenfs 1
The 1980A Bonds due 2002 and 2010 shall be retired by sinking fund installments which shall be paid 1
into the Bond Retirement Account in the Expansion Bond Fund in amounts suflicient to redeem by July 1 of each year the principal amount of 1980A Bonds due 2002 or 2010 specified for each of the years shown in the table below:
Principal Amount Principal Amount 1980 \\ Ilonds Due 2002 1980 A Ilonds Duc 2010 Yrar A mount Year Amount l95 S1,930,00:)
2003 53,720,000 1997 2,120,000 2004 4,095,0C0 199S 2,330,0C0 2005 4,510,000 1999 2,56'),030 2006 4,965,000 2000 2,810,000 2007 5,470,000 2001 3.0S5,000 2008 6,025,000 2002 3,385,000 2009 6,635,000 2010 7,305,000 g
4
OUTSTANDING OBLIGATIONS AND EQUITY The follewing table sets forth the outstanding obligations and equity of the Authority as of Deecmber 31, 1979 adjusted to reflect the issuance of the 1980A Bonds:
Long-Term Obligations (1)
Priority Obligations Eleet:ie Revenue Bonds, Series of 1950, bearing interest at 2.70%
and duc 1980 to 1993 S
10,880,000 Electric Revenue Bonds, Series of 1967, bearing interest at 49 and 4.10G and due 1980,1981 and 2006 50,725,000 Electric Revenue Bonds, Refundine Series of 1973, bearing interest from 5G to 5% G and duc 1980 to 1989 8,605,000 Contract Obligation, payable 1980 to 1985(2) 2,060,862 Total Priority Obligations S
72,270,862 Expansion Bonds Expansion Bonds,1973 Series, bearing interest from 5% to SM G and duc 1980 to 19' 3 and 2013
$ 100,000,000 Expansion Bonds,1974 Series, bearing interest from 6% to 6% %
and due 1980 to 1999 and 2014 109,000,000 Expansion Bonds,1977 Refunding Series, bearing interest from 3.70% to 67c and due 1980 to 19f.7 and 2002 and 2006 210,890,000 Expansion Bonds,1977 Series, bearing interest from 4% to 5% %
and due 1982 to 2002 and 2017.
I15,000,000 Expansion Bonds,1978 Series, bearing interest from 4.20% to 5% fc and due 1981 to 1998 and 2008 and 2018.
200,000,000 Expansion Bonds,1979 Series A, bearing interest from 5.40Tc to 674 % and duc 1980 to 2003 and 2009 and 2019.
I10,000,000 Expansion Bonds,1980 Series A, bearing interest from 8%9c to 10% % and due 1981 to 1995 and 2002 and 2010 75,000,000 Total Expansion Bonds S 919,890,000 h
Subordinated Lease Ccntracts, payable 1980 to approximately 2014(3) 87,119,810 Bank Credit Agreement (4)(5)
S 25,000,000 l
Bank Loan, bearing interest at 4.259c and due 1980 to 1984(4) 375,000 Total Long-Term Obligations S1,104,655,672 Accumulated Net Revenues
$ 103,754,401 Capital Contribution %U. S. Government Grants S
34,438,264 1
Total Equity 5 138,192,665 Total Long-Term Obligations and Equity
$ 1,242,848,337 (1) Includes $4.154.210 at December 31,1979 of lonc-term debt due within one year.
(2) Originally dated January 1,1950, and subsequently amended, requiring payments to Central Electric Cooperative, Inc.
("Cc tral") equal to interest on (at 2G per annum) and principal of certain mortgage notes (the "A.B Loan") of Central held by the United States of America through the Administrator of the Rural Electrification Administration (the "REA"), to which the payments by the Authority have been assigned.
(3) 'Ibe Authonty has entered ir.to lease contracts with Central (known as the C, D, E, F, G, H, K and L Lease Contracts) for the purpose of prosidin;; for the leasing and operating by the Authority of certain transmission lines and related facilities. the Grainger Generating Station at Conway, South Carolina and a combustion turbine at Hilton llead South Carolina. These facilities are financed by loans from REA to Central, or from REA to other cooperatives which loans were later assumed by Central, all of which are er will be esidcnced by Central's mortgage notes Under the lease contracts the Authority is required to make payments equal to interest (the C, D, E and F lease contracts at 29, the G. H, K and L lease contracts at 59 ) and principal of Central's mortgage notes. Payments assigned by Central to REA under such lease contracts with Central are subordmated to payments on the Priority Obligations and on the Expansion Honds. The lease contracts provide for an additional $4,000.000 to be advanced in the future by REA to Central.
(4) Payable from the reseques derived from the ownership and operation of the Authority's System, subordinate to the payments required to be made to the Operating Fund, the Interest Fund, the Hond Fund and the Debt Service Reserve Fund created by the Inderture and to the payments required to be made to the Espansion Hand Fund (and the accounts therein) and the Lease Fu1d created by the Resolution, but prior to the payments required to be made to the Contingency Fund. Capiti 'mproveme,t Fund and Special Reserve Fund created by the Indenture.
l l
(5) In May 19's
- Authori:y authorized the execution of a credit agreement with several banks which expires on April 30, 1982. The participatine banks agreed to loan to the Authority from time to time up to $50,000.000 at a fluctuatirg rate per annum equal to 40% of the prime commercial rate of one of the major lending banks, plus 2G per annum (8.6% at February 29, 1980). In accordance with the agreement, the Authority borrowed $25,000,000 on the date the agreement was executed, June 1,1979. T he proceeds from loans must be used solely for plant construction.
5
DEllT SERVICE SCIIEDULE l
(Thousands of Douars)
Annual Debt Senice on 1980A Bonds Debt Debt Senice Total Senice Charges Debt Charges on Serial Bonds Sinking Stnice Fhcal Year on outstanding on Fund on on Total Ending Priority Expansion following following 1980A D bt June 30 Obligations Bonds July 1 July 1 Internt Bonds Senice 1980 4,322 17,044(1) 591(1) 591(1) 21,957(1) 1981 4,319 27,185(1) 125 2,364(1) 2,489(1) 33,993(1) 1982 4,322 32,736(1) 135 2,354(1) 2,489(1) 39,547(1) 1983 4,319 53,934(1) 145 5,699(1) 5,844(1) 64,097(1) 1984 4,473 56,355 680 7,365 8,045 68,873 1985 4,337 56,490 740 7,306 8,046 68,873 1986 4,340 56,490 800 7,242 8,042 68,872 1987 4,339 56,490 875 7,172 8,047 68,876 1988 4,340 56,488 950 7,094 8,044 68,872 1989 4,328 56,499 1,035 7,008 8,043 68,870 1990 4,442 56,382 1,130 6,914 8,044 68,868 1991 4,444 56,374 1,235 6,810 8,045 68,863 1992 4,443 56,375 1,350 6,696 8,046 68,864 1993 4,448 56,369 1,475 6,570 8,045 68,862 1994 4,438 56,379 1,615 6,432 8,047 68,864 1995 4,446 56,365 1,765 6,279 8,044 68,855 1996 4,460 56,353 1,930 6,111 8,041 68,854 1997 4,473 56,341 2,120 5,922 8,042 68,856 1998 4,481 56,331 2,330 5,715 8,045 68,857 1999 4,494 56,317 2,560 5,486 8,046 68,857 2000 4,511 56,296 2,810 5,235 8,045 68,852 2001 4,521 56,288 3,085 4,960 8,045 68,854 2002 4,536 56,264 3,385 4,658 8,043 68,843 2003 4,549 56,253 3,720 4,326 8,046 68,848 l
2004 4,565 56,235 4,095 3,?49 8,044 68,844 2005 4,585 56,219 4,510 3,535 8,045 68,849 2006 4,601 56,202 4,965 3,078 8,043 68,846 2007 60,809 5,470 2,575 8,045 68,854 2008 60,811 6,025 2,021 8,046 68,858 2009 60,812 6,635 1,411 8,046 68,858 2010 60,814 7,305 740 8,045 68,859 2011 60,815 60,815 2012 60,819 60,819 2013 60,816 60,816 2014 60,814 60,814 2015 60,818 60,818 2016 60,818 60,818 2017 60,820 60,820 2018 60,817 60,817 2019 27,307 27,307 (1) Excludes portion of interest which has been or is to be funded from Expansion Bond proceeds.
l 6
TIIE AUTIIORITY
)
Organisation and 3fanagement The Authority's Board of Directors consists of eleven members appointed by the Governor with the advice and consent of the Senate as follows: one from each of the six congressional districts of the State, one from each of the counties of Berkeley, Georgetown and florry; and two from the State at large, one of whom shall be Chairman and the other shall have had experience with the operations of rural electric cooperatives. Appointments are for seven 3 cars.
Present directors are:
Term Name Eminew Residence Expires Robert S. Davis, Business Executive Columbia, SC 1983 Chairman Vernon E. Sumwalt, Attorney Rock liill, SC 1981 First Vice Chairman J. Thomas Grier, Insurance Spartanburg, SC 1986 Second Vice Chairman B. A. Jordan. Jr.
Construction Eastover, SC 1980 Marvin M. Thomas Business Executive Georgetown, SC 1980 Mark C. Garner Newspaper Executive Myrtle Beach, SC 1981 C. B. Boyne Retired Business Executive Eastover, SC 1984 Walter T. Cox University Executive Clemson, SC 1984 Ilarold M. Robertson Wholesale-Retail Executive Walterboro, SC 1985 B. G. Alderman, Jr.
Real Estate and Insurance Manning, SC 1985 h
E. Jar is Morris Real Estate and Insurance Pinopolis, SC 1986 The President and Chief Executive Otlicer of the Authority is appointed by the Board of Directors. The Authority's statiis appointed by the President with the approval of the Board of Directors.
Authority statI executises are:
Electric Utility Position Experience William C. Mescher President 29 years IIenry N. Cyrus Senior Vice President, System Planning 34 years Clarence S. Gramling Senior Vice President, System Operations 30 years Kenneth R. Ford Vice President, Finance and Treasurer 20 years Joe C. Norman Vice President, Commercial Operations 8 years Lucas C. Padgett Vice President, Industrial Development 23 years Robert E. Rainear Vice President, Engineering Design 18 years Robert V. Tanner Vice President, Production 20 years William A. Williams, Jr.
Vice President, Nuclear 7 years Wallace S. Murphy General Counsel 10 years L. P. Dorman Secretary 30 years John E. Bishop Controller 7 years The Authority had 910 employees as of December 31, 1979. Authority emplayecs are members of a I
contributory state pension plan administered by the South Carolina State Retirement System.
7
The Act establishes an Advisory Board composed of the following officials of the State of South Carolina: the Governor, the Attorney General, the State Treasurer, the Comptroller General and the Secretary of State.
The Authority has engaged R. W. Beck and Associates as Consulting Engineer. R. W. Beck and Asso-c;ates has prepared a report on the Authority's financing and capital improvement program (the " Beck Report"),
a copy of which is attached hereto as Appendix I.
The Authoritis Advisory Board for many years has designated J. W. Ilunt and Company, Certified Public Accountants, to prepare reports on audit. In adJition, the Authority's Board of Directors has retained the firm of Coopers & Lybrand. These firms have prepared a report on audit for the fiscal year ended June 30,1979, copies of which may be obtained from the Authority. The balance sheet, the statements of net earnings, certain exhibits and the notes to the financial statements contained in such report on audit, together with the opinions of J. W. Ilunt and Company and Coopers & Lybrand with respect thereto, are attached hereto as Appendix II.
The Authority has engaged Burns and Roe, Inc. to provide engineering, design and construction manage-ment senices for Unit 3 at the Winyah Generating Station ("Winyah Unit 3"), Winyah Unit 4 and Units 1 and 2 at a site near Cross, South Carolina (" Cross Units 1 and 2"). Burns and Roe, Inc. has prepared a letter describing Winyah Unit 4 and c3timating the cost of its construction (the "Be ns and Roe Letter"),
which is attached hereto as Appendix Ill.
The Authority has engaged, as Bond Counsel, Wood & Dawson, New York, New York, and McNair Glenn Konduros Corley Singletary Porter & Dibble, Columbia, South Carolina. The form of their proposed legal opinions with respect to the validity of the 1980A Bonds is attached hereto as Appendix IV.
Senice Area The Authority's service area consists of substantially all of the counties of Berkeley, Georgetown and florry. This service area is shared with rural electric coopera:ives but not with investor-owned utilities. The only municipal electric system in this service area is the City of Georgetown. The Authority also serves certain other customers, including Central, outside its service area and may supply the future load growth of such customers. Central is an association of 15 electric distribution cooperatives located in 35 of the 46 counties of South Carolina sening primarily residential, commercial and small industrial customers. In addition, the Authority may compete for and, at the request of the customer, serve any customer with a load of 750 kW or higher so long as the customer is located in an area assigned to a member of Central by the South Carolina Public Service Commission.
The Authority sells electric power and energy at wholesale to Central, the City of Georgeto,vn and the Town of Hamberg. Electric power and energy are sold directly to three military establishments, 23 large industrial accounts and approximately 47.500 residential, commercial and small industrial retail customers in the counties of Berkeley, Georgetown and florry. Through wholesale customers approximately another 217,500 customers are served.
8
IIistorical Operating Results A summary, condensed from the Beck Report, showing revenues available for debt service, lease payments and other purposes for the fiscal years endeo June 30. 1975 through 1979 and the 12 months ended December 31,1979 follows:
12 %Ionths
__._l'iscal Y_ ear Ended.Jun. e 30(I )
I'nded 1975 1976 1977 1978 1979 1979
( Dollars in 'I housands)
(l'naudited)
Operating Revenues
$77,806 582,239
$94,727 5118,980 5135,697
$ 144,593 Other Income 1,993 2,819 2,914 3,61S 4,915 5,384 Total
$79,799 585,05S
$97.641
$ 122,598 S140,612
$ 149,977 Operating Expense (except depreciation) 59,817 55,259 69,550 88,802 104.309 105,824 Revenue Available for Debt Service.
- l. case Pay ments and Other Purposes
$ 19,982 529,799 528,091
$ 33,796 5 36.303 5 44,153 Debt Sersiee:
Priority Obliga: ions S 4,318 S 4.324 5 4,317 5 4,319 5 4.319 5 4,320 Expansion llands 3,460 7,825 7,110 12.762 15,024 15.802 Total Debt Sersiee S 7.77S 512,149 S I 1.427 5 17,0S1 5 19.343 5 20.122 Italance Available for Pay-ments of
- 1. cases. Other Obligations, and Capital improsements 512.204
$ 17,650 516,664 S 16,715
$ 16.960 S 24,031
)
Lease Payments and Other Obligations ( 2 ) ( 3 )
2,252 4.103 4.348 4,757 3,969 4.207 Balance Available for Capital Improsements and Other Pt poses 5 9,952 513.547
$ 12.316 S 11,958 5 12,991 5 19.S24 Debt Service Coverage (Pri-ority Obligations and Ex-pansion llonds )(4 )
2.57 2.45 2.46 1.98 1.88 2.19 (I 1 See footnotes in I.shibit C to the licek Report..\\ppenJn 1.
(2) Cash basis. Such lease pa> nients are. under the Indenture and Resolution. subordinated to payments on the Prionty Obhga tions and the I spansion Honds. See capnon " Cert.un Prow. ions of the incentu:e and Resolution-i unds and
.\\ ceou n t s".
(3) includes bank loans.
(4) Coserage of debt senice, lease pay ments and other obligations was 1.9t 1.83; 1.78: 1.55; 1.56 and t.81, respectiscly.
Ilistorical Demand, Sales and Resenues The following table sets forth the peak demand on the Authority's system for the calendar years 1970-1979:
Calendar Peak Demand (I)
Increase Year TlW G
1970 600 1971 622 3.7%
1972 736 18.3 1973 829 12.6 1974 911 9.9 1975 943 3.5 1976 1,065 12.9 1977 1,161 9.0 1978 1,231 6.0 g
1979 1,352 9.8 (I) Annual peak demand normally occurs in August of each calendar year.
9
The following table sets forth the sales and revenues of the Authority for the fiscal years 1970-1979.
Sales Resenue l' rom Sales Annual Annual Stills Increaw Increase Per I'criod GWII(l)
Amount K WII Fiscal Year Ended June 30:
1970 2,808 S 22,358,271 8.0 1971 3,097 10.3 %
27,783,776 24.We 9.0 1972 3,189 3.0 30,966,273 11.5 9.7 1973 3,624 13.6 34,923,846 12.8 9.6 1974 3,967 9.5 41,525,532 18.9 10,5 1975 4.259 7.4 75,806,186 82.6 17.8 1976 4,4 S6 5.3 80,564,225 6.3 18.0 1977 5,104 13.8 92,533,095 14.9 18.1 1978 5,562 9.0 117,744,105 27.2 21.2 1979 5,953 7.0 134,296,072 14.I 22.6 12 months ended December 31, 1979 (Unaudited) 6.13S 6.3( 2 ) 5143,194,611 13.l(2) 23.3 (1) Stillion kWh.
(2) Inercase mer 12 months ended December 31,1978.
Sales and revenues by customer class for the fiscal years 1975 through 1979 and the twelve months ended December 31,1979 are set forth below:
Sales (GWil) 12 Stonths Ended December 31,
- 975 1976 1977 1978 1979 1979
%e Claw of G of
% of
% of
% of G of
% of Customers Total Total Total Total Total Total W holesale( l )
2,018 47.4 2,221 49.5 2,577 50.5 2,845 51.2 2.882 48.4 2,987 48.7 Stilitary 292 6.9 301 6.7 303 5.9 324 5.8 317 5.3 309 5.0 1.arge Industrial 1,241 29.1 1.202 26.8 1.356 26.6 1,441 25.9 1,788 30.0 1,881 30.7 Residential 320 7.5 343 7.6 403 7.9 446 8.0 443 7.5 449 7.3 tommercial. Small Industrial and Other 388 91 419 9.4 465 9.1 506 9.1 523 8.8 512 8.3 4.
100 0 4.486 100.0 5,104 100.0 5,562 100.0 5,453 100.0 6.138 100.0
. _259
'Io:al (1) includes Central. See subcaption " Central Contracts".
Revenues (Dollars in Thousands) 12 Stonths Ended December 31, 1975 1976 1977 1978 1979 1979 Claw of
% of G of
% of
% of
% of
% of Customers Total Total Total Total Total Total Wholesale ( l )
$32.038 42.3
$ 36.216 45.0 $42.265 45.7
$ 54,101 45.9
$ 59,975 44.6 $ 63,361 44.2 l
hiilitary 4.564 6.0 4.754 5.9 5 #49 5.4 6,329 5.4 6.567 4.9 6,766 4.7 Large Industrial 20.931 27.6 19,357 24.0 21.557 23.3 26.672 22.7 35,131 26.2 38,751 27.1 Residential 8.354 11.0 9,107 11.3 10.802 11.7 14.585 12.4 15.255 11.4 16,306 11.4 Commercial, Small Industrial and Other 9.919 13.1 11,130 13.R 12.860 13.9 16.057 13.6 17,368 12.9 18,010 12.6 Total
$75.bu6 100.0 $80.564 M $92,533 100.0 5117,744 100.0 $134.296 100.0 $143,194 100.0 (1) Includes Central. See subcaption " Central Contracts".
{
j 10
Central Contracts k
Existing power contracts entered into between the Authority and Central, the most recent such contract hasing become efTective on April 29,1971 (thu "F Power Contract '), require the Authority to furnish, and Central to purchase, until October 22, 1987, Central's total power and energy requirements, less amounts which Central purchases directly from the Southeastern Power Administration ("SEPA"). In the twelve months ended December 31,1979, sales to Central amounted to approximately 2,883 GWh. After October 22,1987, and for the remainder of the term of the F Power Contract (June 2005), the Authority is obligated to sell and deliver to Central, and Central :, obligated to purchase and receive annually from the Authority, 600 GWh.
The F Power Contract prescribes the rate schedule applicable to the power and enngy sold to Central. It also provides for an adjustment in the energy rate related to the cost of fossil fuel burned by the Authority and includes a provision for adjustment of the energy rate related to increases or decreases in the taxes or sums in lieu of taxes paid by the Authority. The F Power Contract also includes provisions for rate reviews and rate changes related to costs according to a certain formula.
Pursuant to the provisions of the F Power Contract, a rne review was conducted in the Fall of 1978. As a result, efTective January 1,1979, the monthly rates applicWie at each delivery point for power and energy under the F Power Contract are: (1) for demand charges $1.875 per kW of billing demand, and (2) for the energy charge 5.65 mills per kWh for the first 100,000 kWh of billing energy and 4.33 mills per kWh for all additional kWh of billing energy. The next review will take plaec in the Fall of 1980 to become effective January 1,1981.
R. W. Beck and Associates state in the Beck Report, Appendix I, that they hase projected the Authority's revenues to be derised from Central on the basis of the present contract terms. The Authority has advised Central of its intent to reconsider the fuel clause and rate provisions of the F Power Contract and to negotiate changes which would be equitable to both parties when nuclear power becomes available.
Revenues from sales to Central during the twelve months ended December 31, 1979, amounted to
$60,981,164, representing approximately 42.6G of resenues from firm sales, and averaged 21.15 mills per kWh.
Recent negotiations between the Authority and Central concerning the nature and extent of their future contractual arrangements base resulted in a number o. < roposed contracts containing the following major provisions: (1) the Authority and Central will share ownership of the generating units to be constructed at the Cross site; (2) each party will hase an option to share ownership of future generating facdities to be constructed by the other; (3) the combined Authority-Central 9 stem will be dispatched by the Authority on an economic dispatch basis; and (4) all powei ontracts existing between the Authority and Central will be superseded and Central will pay for its supplemental power and energy requirements on the basis of a cost of sersice methodology similar to that used by the Authority in determining its rates to its large industrial customers. The proposed contracts have been approsed by the Authority's Board of Directors and Central's Board of Trustees, but must be approsed by the REA Administrator prior to their becoming c!Iectise.
In the opinion of R. W. I eck and Associates, the proposed contractual arrangement will produce resenues from Central which wi!! be equal to or greater than revenues derived from Central under rate; determined pursuant to the F Power Contract for equivalent amounts of power.
R. W. Beck and Associates' projections of future sales to Central and of resenues and expenses attribut-able to Central have been based on the terms of the F Power Contract.
Residential, Commercial and Small Industrial Sales Sales to residential, commercial and small industrial customers are made pursuant to rate schedules established from time to time by the Authority. All of such rate schedules include a fuel adjustment clause.
Revenues from residential, commercial and small industrial sales during the twelve months ended December l
31,1979 represented approximately 23.6% of revenues from firm sales and averaged 35.74 mills per kWh.
11
31unicipal, Stilitary and Large Industrial Contracts Sales to municipal, military and large industrial customers are made pursuant to contracts. For large I
industrial customers which use in execss of 350,000 kWh per month, the Authority has a large power rate schedule and requires that such customers enter into contracts for pcriods of not less than five years. All contracts contain rate provisions of the demand and energy type, and include fuel adjustment clauses and other provisions generally used in large industrial power rate schedules. The average cost per LWh varies depending upon the customer's consumption and load factor.
Revenues from municipal, military and large industrial sales during the twelve months ended December 31,1979 represented approximately 33.4% of revenues from firm sales and averaged 20.88 mills per kWh.
The Authority's municipal customers are the City of Georgetown and the Town of Bamberg.
The Authority's five large2t industrial customers for the 12 months ended December 31,1979 and their contribution to revenues from firm sales of the Authority were as fol!ows: Georgetown Steel Corporation-
$10,196,617 (7.1G ), Niacalloy, Inc.-$10,050.242 (7.0G ), Amoco Chemicals Corporation-55,718,782 (4.0% ), Santee Portland Cement Company-$2,558,830 (l.8% ), and International Paper Company-
$2,002,290 (l.4G ).
Power Contract With Afumax Inc. The Authority has entered into a power contract with Alumax Inc.
("Alumax"), an integrated aluminum company, for the sale by the Authority of 301 N!W of firm power on a long-term basis. The power is to be used for a two potline primary reduction plant which Alumax is constructing in the Authority's sersice area.
Under the contract between the Authority and Alumax, as amended, senice to Alumax for the first potlir.e (building up to 166 51W) is expected to begin in April 1980, and ser ice for the second potline (building up to 135 N1W) is expected to begin in October 1980. Alumax has an option to purchase an additional 30 51W for these two potlines upon six months' notice te the Authority. The contract provides that Alumax will pay for power and energy according to the Authority's large industrial rate schedule, which is determined on a cost of senice basis, except that the minimum billing prosisions of the schedule will not bc l
applicable during a build-up period of I2 months for the first pottine and 8 months for the second p 'line.
The contract also grants certain options to Alumax, subject to specified periods of notification, for IL: pur-chase of up to an additional 320 N!W of power for up to two additional potlines.
Alumax has informed the Authority th t as of December 31,1979, the plant was approximately 57%
cumplete and was slightly ahead of schedule. For additional information concerning the Alumax contract, see the lleck Report, Appendix I.
Rates The Authority's lloard of Directors is empowered and required to set rates as necessary to provide for expenses, including debt service, of the Authority.
The rates presently in efTect were adopted on January 29, 1979, and became ellective with Nfay 1979 billings. Such rates are applicable to all residential, commercial, municipal pumping, street lighting and indus-trial customers. These rates reflect an oserall increase of approximately 10.0G over the rates previously in effect.
On Starch 26, 1979, the Authority adopted new rate schedules applicable to municipal, residential, commercial, municipal pumping, street lighting and industrial customers to become etTective with 51ay 1981 billings. These rates, based on projections for the fiscal 3 car ending June 30, 1982, and as compared with rates currently in effect, are estimated to produce an increase in revenues of $22.912.000, or an increase in overall revenues of 12.7% from customers other than Central. The average percentage increase on the basic rate schedules to major customer classes is estimated to be 8.9% and 10.2G for large and small industrial customers, respectively; 7.7G for monicipal customers; 26.1% for commercial customers; and 21.7% for residential customers.
On Alarch 26, 1979, the Authority adopted a program providing for a rate increase applicable to municipal, residential, commercial, municipal pumping, street lighting and industrial customers to become 12
effectise with hlay 1982 billings. Ilased on projections for the fiscal year ending June 30,1983, and as compared with rates to become etTectise in 51ay,1981, rates implemented pursuant to the program would produce an increase in resenues of approximately $21,828,000, or an increase in overall revenues of 10 3"c from customers other than Central. As.i result of changing the commercial operation date of Cross L' nit 2 from Stay 1,1983 to November 1,1983, the Authority's lloard of Directors may elect to defer the effectise date of the rate increase to November 1,1982. In anticipation of such a deferral, R. W. Ileck and Associates base assumed in the Ileck Report, Appendix I, that the additional revenues from the 1982 rate program would be realized beginning November 1,1982.
On February 25, 1980, the Authority adopted a program of additional rate increase: that includes the following rate adjustments: (1) an increase in rates to become effective Slay 1,1981 that is designed to produce $7,285,000 of additional resenues based on the projected fiscal year ending June 30, 1982; (2) an increase in rates to become effective not later than November 1,1982 that is designed to produce $11,800,000 of additional revenues based on the projected fiscal year ending June 30,1984; and (3) an increase in rates to become effective not later than htay 1,1984 that is designed to produce $25,628,000 additional revenues based en the projected fiscal year ending June 30,1985.
The Authority's rate schedules include fuel adjustment clauses which provide for increases or decreases to the basic rate schedules to cover increases or decreases in the cost of fuel to the extent such costs vary from a predeterr.iined base cost.
The Authority's rates compare favorably with those of other utilities in South Carolina. A comparison of the Authority's rates with those of three other utilities as of December 31,1979 is set forth below.
Hnidential Flectric Senice 300 500 700 1.000 kWh k%h k%h kWh Authority (l )
Summer $14.89
$22.13
$29.02
$39.35 Winter 14.14 20.58 26.37 35.05 I
Carolina Power & Light Company Summer 16.47 23.85 31.23 42.30 Winter 16.47 23.85 31.23 40.38 Duke Power Company 16.84 25.08 33.32 45.68 South Carciina Electric & Gas Company 19.38 28.30 37.21 50.59 Commercial SenIce (300 Iloun of kW Demand) 3.000 5.000 7,500 k%h k%h kWh Authority (l)
Summer
$120.45
$196.35
$291.23 Winter 102.25 166.15 246.03 Carolina Power & Light Company 116.42 190.71 269.83 Duke Power Company 151.93 243.96 344.78 South Carolina Electric & Gas Company 165.48 275.80 581.70 Indujtrial Senice 1.000 kW 2.000 kW 9.000 kW 40,000 kW 500.000 kWh I.000,000 k% h 5.000.000 k% h 25.000.000 k% h Authority (2 )
$ 12,283.00
$22,898.00
$104,768.00
$501,918.00 Carolina Power & Light Company 13,330.00 26,435.00 126,425.00 606,975.00 Duke Power Company 14,249.71 26,907.21 125,802.21 604,592.21 South Carolina Electric & Gas 15,600.00 30,550.00 144,900.00 695,650.00 (1) Includes fuel adjustment credit of 5.00405/kWh.
(2) Includes fuel adjustment credit of $.on387/kWh.
Residential customers of the Authority paid an average of 3.58 cents per kWh during the twelve months ended September 30,1979. This compares with the national residential average of 4.24 cents per kWh as g
reported by the Edison Electric Institute for the same period. The Authority's average annual use per residential customer was !I,745 kWh for the twelve months ended September 30, 1979, 32.95 % more than the national average of 8,834 kWh as reported by the Edison Electric Institute for the same period.
13
Power Supply The Authority's existing generating facilities consist of:
Date Placed I nergy racility I oestion in Seriiee Capahitity Source Jefferies flydroelectric Generating Station Moncks Corner 1942 128 MW(1) llydro Wilson Dam Gcnerating Station I.ake Marion 1950 2
Ilydro Jefferies Generating Station Moncks Corner Units I and 2 1954 92 Oil Units 3 and 4 1970 320 Coal Grainger Generating Station (2)
Conway 1966 170 Coal Combustion Turbines Myrtle Beach 1962 20(3)
Oil / Gas Combustion Turbines Myrtle Beach 1972 40(3)
Oil Combustion Turbinc(2) llilton IIcad Island 1973 20(3)
Oil Combustion Turbine Ilitton IIcad Island 1974 20(3)
Oil Combustion Turbine Myrtle Beach 1976 28(3)
Oil Winyah Generating Station Georgetown Unit 1 1975 280 Coal Unit 2 1977 280 Coal Combustion Turbine Ililton IIcad 1979 56(3)
Oil Island Total Capability 1,456 M W (1) A project authorized by the U. S. Congress will require the diversion into the Santee Riser of a substantial part of the flows which are presently utihzed by the Authority at its Jetieries lli melectric Generating Station and the construction d
and operation by the U. S. Army Corps of I'ngineers of an 144 MW h>droelectric project m the sicinity of St.
j Stephen. South Carohna tihe "St. Stephen Plant"h l'or a discuwion of the Cooper Riser redisersion project, which I
will affect operations at the Jefferies ll>droelectric Generating Station, s the lleck Report, Appendit I "l uture Power Supply Operations of the Authority."
(2) The Authority has entered into certain of the lease contracts referred to in footnote O) of the table under " Outstanding Obligations and I?quity" for the purpose of prosiding for the leasing from Central and the operating by the Authority of such facilities and certain transmiwion facilities. The Authcrity has an option under each such lease contract to purchase the respective facilities at any time during the term of such lease contract for a,um equal to Central's indebteJness in respect of such facihties remaining outstanding at the time of the exercise of such option. If the option is not escrened before or at the time of the espiration of such lease. control of such facihties will return to Central. Ihe Authority plans to exercise each and escry option to acquire ownership of such facilities prior to espiration of the leases.
(3) Summer rating.
In addition, the Authority receives a firm power supply from SEPA of 105 MW, bringing its total power supply resources to 1,561 MW. In June 1977, SEPA advised the Authority that its power supply contract with the Authority will terminate effective June 30,1981. SEPA has advised the Authority, however, that prior to the effective date of termination it intends to review its existing supply contracts with utilities, including the Authority, and that power reallocations may or may not result. Preliminary indications from SEPA are that present allocations will continue and that a new contract will be signed prior to the termination of the present contract.
In the table below the capability in MW of the Authority's existing power supp!y resources is classified by energy source. For information as to the projected additional capability planned to be placed in com-mercial operation through the fiscal year ending June 30,1985, see caption " Capital improvement Program
-1980-1985--General".
Soures of Power Supply Capability G of Total Ilydro Generation 130 MW 8.3%
SEPA (llydro) 105 6.7 Coal 1,050 67.3 Oil, Oil / Gas 276 17.7 Total 1,561 M W 100.0 %
x 14
Transmission I
The Authority's transmission system (including facilities leased from Central) consists of approximately 2,549 miles of transmission lines of 44 kV and above and 89 substations.
Interconnections The Authority's transmission system is interconnected with other major electric utilities in the region. It is directly interconnected with South Carolina Electric and Gas Company ("SCE&G") at five locations with two additional interconnections scheduled to be completed in 1980 with the Virgil C. Summer Nuclear Station Unit No.1 (" Summer Nuclear Station"); with Carolina Power & Light Co. ("CP&L") at five locations; and with SCE&G, Duke Power Company (" Duke"), Georgia Power Company and SEPA through a five-way interconnection at the SEPA Clari Ilill hydroelectric plant on the Savannah River. Through the foregoing interconnections, the Authority's system is interconnected with the regional transmission system serving the southeastern area of the nation.
Heliability Agreement The Authority is a party to the Virginia-Carolinas Reliability Agreement ("VACAR") which exists for the purpose of safeguarding the reliability of electric service of the parties thereto. Other parties to the VACAR agreement are SCE&G, CP&L, Duke, SEPA, Yadkin, Inc. and Virginia Electric and Power Company.
Distribution The Authority owns distnbution facilities in three districts: the Moncks Corner District serving St.
Stephen, Moncks Corner and Pinopolis; the Conway District serving the City of Conway, the Town of Loris and part of the adjacent rural area; and the Myrtle Beach District serving an area along the Atlantic coast from the North Carolina border to Georgetown.
D CAPITAL D1PROVEMENT PROGRAM-19801985 General The Authority's capital improvement program for the fiscal years 1980-1985 consists of major power supply facilities to be added to the Authority's system and general improvements, including improvements to present power supply facilities, extensions of and improsements to transmission facilities, improvements to the AutFority's distribution system and a new oflice and service complex at Moncks Corner.
The capital improvement program includes five new major power supply facilities estimated to be placed in commercial operation through the fiscal year ending June 30,1985: the Authority's one-third share in the Summer Nuclear Station, Winyah Units 3 and 4, all of which are now under construction, and Cross Units 1 and 2 for which detailed site investigations are underway and for which certain contracts have been awarded.
Present forecasts of capability and load demand indicate that the Authority's existing power supply resources and reserves (assuming extension of the SEPA contract), plus the planned capability of such units available to the Authority, will be adequate to serve the Authority's needs through 1988.
15
The following table sets forth certain information with respect to the Authority's power supply resources estimated to be placed in commercial operation through the fiscal year ending June 30, 1985. Construction
{
costs do not include the cost of related transmission facilities, coal fuel stockpiles, funded laterest, reserves or financing costs.
Est mated Power Supply Falmated Construction Resource and Commercial Cost helmated I oc_ation Description Operation llate Per kW Comteaction Costs Winyah Unit 3 280 N1W, coal-fueled May 1980
$454
$ 12 f. 230,000 (Georgetown, South steam-clectric unit Carolina)
Summer Nuclear Station 900 MW, nuclear-fueled December 1981(I) $912
$273,594.000(2)
(near Columbia, South steam-clectric unit Carolina)
( Authority's share is one-third or 300 MW)
Winyah Unit 4 280 MW, coal-fueled May 1982
$447
$125,175,000 (Georgetown, South steam-electric unit Carolina)
Cross Unit 2 (near Cross, 450 MW, coal-fueled November 1983
$830
$373,617,000 South Carolina) steam-electric unit Cross Unit I (near Cross, 450 MW, coal-fueled South Carolina) steam-clectric unit May 1985
$889
$400,000,0u0 (1) Awumes six months deiay from commercial operation date projected by SCEAG..see Deck Report, Appendix I.
(2) Authorityi one-third share of Semmer Nuclear Station costs, including nuclear fuel and other capitahzed costs. See Beck Repos!, Appendit I.
The following table sets forth the Authority's projected capability as of June 30,1985 by energy source:
Projected Additional Capabihty To Capability Become Available r~c of As allable Through 1985 Total Total Sources of Power Supply _
Hydro Generation 130 MW 130 MW 3.9 %
SEPA (Hydro) 105 105 3.2 Coal 1,050 1,460 MW(1) 2,510 75.6 Nuclear 300(2) 300 9.0 Oil, Oil / Gas 276 276 8.3 Total 1,561 MW 1,760 M W 3,321 MW 100.0 %
t1) Includes Winyah Units 3 and 4 (280 SlW cach) and Cross Units I and 2 (450 MW) each.
(2) Authorityi one. third share of Summer Nuclear Station.
Summer Nuclear Station l
The Summer Nuc! car Station, now under construction, is located approximately 26 miles northwest of Columbia, South Carolina, on the east bank of the Broad River and adjacent to SCE&G's Fairfield Pumped Storage Project, which will provide the cooling water requirements for the Summer Nuclear Station. The Station will contain a Westinghouse Electric Corporation (" Westinghouse") pressurizsd water reactor of the light water type as its nuclear steam supply system. Steam will be supplied to a turbine generator having a net ou'put of approximately 900 MW under expected conditions of operation.
I The Authority and SCE&G have entered into a joint ownership agreement dated October 18,1973 (the
" Summer Agreement"), providing that the Authority and SCE&G shall own the Summer Nuclear Station as tenants in common with undivided interests of 33%% (300 MW) for the Authority and 66%% (600 MW) for SCE&G. SCE&G, as agent for itself and the Authority, is solely responsible for the design, construction, operation and maintenance of the Summer Nuclear Station and the Authority is obligated to pay its ownership 16 1
i
share of all costs relating thereto. The award of contracts for construction in excess of $600,000 and any change l
which would increase a contract price by an amount in excess of $200,000 are subject to the approval of the Authonty. The Authority also has the right of approsing operating and construction budgets.
In January 19SO SCEAG revised the construction schedule for the Summer Nuclear Station to reticct the present status of project construction and to incorporate known changes in regulatory requirements which hase esolved as a consequence of the 1hree 51ile Island ("1511") accident. The present construction effort calls for completion of the Summer Nuclear Station and its readiness for fuel loading in December 1980.
Af ter fuel loading, approximately six months will be required for start-up, testing, power ascension procedures, compliance with regulatory procedures and other matters before commencement of commercial operation.
SCEAG has resised its estimates of construction costs for Summer Nuclear Station based on a June 1981 commercial operation date.
The Nuclear Regulatory Commission ("NRC") stati currently projects that an operating license (which is required prior to loading of nuclear fuel) will not be issued prior to the Spring of 1981 because of stati and licensing restraints evolsing from the TN11 accident. Accordingly, the ability of SCEAG to meet a June 1981 commercial operation date will require that the NRC greatly accelerate its licensing actisities. T he Authority and R. W. Beck and Associates believe it prudent to plan for a further delay of the June 1981 commercial operation date of Summer Nuclear Station (to re0cet possible delays in the issuance of the operating license) in planning the power supply resources available to meet expected loads during the Sumn er of 1981. Accordingly, the Authority is assuming a commercial operation date of December 1,1981 for its power supply amJ financial planning purposes.
The Authority's estimated capital costs of its 300 51W ownership share of the Summer Nuclear Station, based on a December 1,19SI date for commercial operation, exclusise of funded interest, reserves and financing costs, is $273,594,000.1his amount prosides for the Authority's share of the initial fuel core, working capital and contingency (includmg amounts related to TN11 modifications) in addition to con-struction costs.
See Beck Report, Appenda 1.
For additional information concerning licensing l
delays and other licenses and authorizations required in connection with the Summer Nuclear Station, see the caption " Regulatory 51atters-Nuclear N1atters" SCE&G reports that as of December 31, 1979 the engineering of Summer Nuclear Station was approxi-mately 94G complete and construction was approximately 94G complete.
SCEAG has not completed its financing arrangements for its share of the Summer Nuclear Station. SCE&G is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance there-with files reports and other information with the Secunties and Exchange Commission. The Annual Report on Form 10-K for the fiscal year ended December 31,1979 (the " Form 10-K") of SCE&G has been filed by SCE&G with the Securities and Exchange Commission. ~1he Form 10-K may assist the reader in assessing SCEAG's ability to finance its construction program, including its ownership share of the Summer Nuclear Station and the fuel cores therefor.
The Form 10-K arid other annual and quarterly reports of SCE&G (including financial information) may be inspected and copied at the public reference facilities maintained by the Commission at Room 6101,1100 L Street N.W., Washington, D. C. and at the Commission's regional 00 ices at 219 South
Dearborn Street,
Chicago, Ill.; 26 Federal Plaza, New York, N. Y., and 10960 Wilshire Boulevard, Los Angeles, Calif., and copics of such matenal can be obtained from the Public Reference Section of the Commission, 500 North Capito' Street, Washington, D. C. 20549 at prescribed rates. SCE&G's Common Stock is listed on the New York Stock Exchange, where reports and other information concerning SCE&G may also be inspected. SCE&G will furni3h without charge to each person to whom this OHicial Statement is dehvered, upon written request, a copy of the Form 10-K, excluding exhibits. Requests should be addressed to: Robert W. Stedman, Con-troller, South Carolina Electric & Gas Company,328 Stain Street, Columbia, SC 29218. Neither the Authority nor the Underwriters make any representation as to the accuracy or completeness of such information, nor do they represent that there has been no material change in the information presented since the respective dates as of which it is given.
I For information concerning the fuel supply for the Summer Nuclear Station, see caption " Fuel Supply" 17
Win 3ah Generating Station-Unit 3 Winyah Unit 3, now under construction by the Authority, will consist of a coal-fueled steam-clectric unit l
of approximately 280 MW and associated transmission facilities. Winyah Unit 3 will be located at and become an integral part of the Winyah Generating Station which is located approximately three miles southwest of the City of Georgetown, South Caro!Ma. The Authority has retained Burns and Roe, Inc. as design and con-struction engineers for Winyah Unit 3 to prepare plans and specifications, to perform re'ated services and to manage construction of the project.
Winyah Unit 3 will be essentially a duplicate of Winyah Unit 2, with the exception of changes in the cooling water and flue gas treatment systems. The Unit will include a single steam-turbine generating unit having a net capability of approximately 280 MW; boiler; condenser; coal pulverizing, handling and storage equipment and facilities; related ciectrical and mechanical equipment and a limestone scrubber.
The construction permit for Winyah Unit 3 has been received from the South Carolina Department of IIcalth and Ensironmental Control ("DHEC"). For information as to compliance of Winyah Unit 3 with environmental laws and regulations and other permits and authorizations required for construction and operation of Winyah Unit 3, see the caption " Regulatory Matters-Environmental Matters".
Site work for Winyah Unit 3 was initiated in September 1977. As of December 31,1979, the engineering of Winyah Unit 3 was approximately 98G complete and construction was approximately 91% complete.
Initial operation of Winyah Unit 3 is scheduled for April 1980, and commercial operation is scheduled for May 1980.
The total construction costs for Winyah Unit 3, exclusive of funded interest, reserves and financing costs, are estimated by Burns and Roe, Inc. to be $127,230,000. These estimated total construction costs include the costs of pollution control equipment considered adequate in the opinion of Burns and Roe, Inc., to meet existing pollution control codes and regule.tions. As of December 31, 1979, the Atithority had entered into 76 contracts totaling approximately $111,600,000, which represents approximately 93% of the estimated j
total direct construction costs of the unit.
In addition to the construction costs for Winyah Unit 3, the capital costs cf Winyah Unit 3 include approxi-mately $9,000,000 to finance transmission facilities necessary to deliver output from the Winyah Generating Station to the Authority's existing transmission system and $4,800,000 to increase the coal stockpile at the Station. The Authority and Burns and Roe, Inc. estimate the total capital costs of Winyah Unit 3 to be
$ 141,030,000, which are being provided from the proceeds of Expansion Bonds previously issued and the investment earnings therefrom.
Winy ah Generating Station-Unit 4 Winyah Unit 4, now under construction by the Authority, will consist of a coal-fueled steam-electric unit of approximately 280 MW and associated transmission facilities. Winyah Unit 4 will be located at and become an integral part of the Winyah Generating Station. The Authority has retained Burns and Roe, Inc.
as design and construction engineers for Winyah Unit 4 to prepare plans and specifications, to perform related services and to manage construction of the project. The Burns and Roe Let:., describing Winyah Unit 4 in more detail, is attached to this Oflicial Statement as Appendix III.
Winyah Unit 4 will be essentially a duplicate of Winyah Unit 3. The unit will include a single steam-turbine generating unit having a net capability of approximately 280 MW; boiler; condenser; coal pulverizing, handling and storage equipment and facilities; related electrical and mechanical equipment and a limestone scrubber.
The construction permit for Winyah Unit 4 has been received from DHEC. For information as to compliance of Winyah Unit 4 with environmental laws and regulations and other permits and authorizations required for construction and operation of Winyah Unit 4, see the caption " Regulatory Matters-Environ-mental M atters" 18
Site work for Winyah Unit 4 was initiated in September 1978. As of December 31,1979, the engineering of Winyah Unit 4 was approximately 5W comp'ete and construction was approximately 209 complete.
Initial operatHn of Ninyah Unit 4 is scheduled for June 1981, and commercial operation is scheduled for May 1982.
The total construction costs for Winyah Unit 4. exclusisc of funded interest, reserves and financing costs, are estimated by Burns and Roe, Inc. to be $125,175,000. These estimated total construction costs include the cost of pollution control equipment considered adequate, in the opinion of Burns and Roe, Inc., to meet existing pollution control codes and regulations. As of December 31,1979, the Authority had entered into 54 contracts totaling approximately 593,399,000, which represents approximately 80G of the estimated total direct construction costs of the unit.
In addition to the construction costs for Winyah Unit 4, the capital costs of Winyah Unit 4 include approximately $9,000,000 to finance transmission facilities necessary to deliver output from the Winyah Generating Station to the Authority's existing transmission system and $5,000,000 to increase the coal stockpile at the Station. The Authori'y and Burns and Roe, Inc. estimate the total capital costs of Winyah Unit 4 to be $139,175,000. The Authority has reduced the authornation of Expansion llonds to finance the capital costs of Winyah Unit 4, funded interest and reserves from $200,000.000 to $184,000,060, of which $100,000.000 were a part of the 1979A Bonds and $51,000,000 are a part of the 1980A Bonds.
Crow Site-Unit 2 The Authority has begun detailed site investigations and awarded certain long-lead time contracts for Crow Unit 2 which will be located on the north side of the Authority's diversion canal as it enters Lake Moultrie in Berkeley County, South Carolina. The site of Cross Unit 2 as presently envisioned will ultimately be expanded to include four units with a net station capacity of approximately 1.800 MW, subject to federal and state regulatory approvals and the r;ecipt of necessary licenses and permits. The first unit to be built at the l
Cross site will be designated as Unit 2 so that better construction access is available wl.en the other units are constructed. The Authority has retained Burns and Roe, Inc. as design and construction engineers for Cross Unit 2 to prepare plans and specifications to perform related services and to manage construction of the project. Commercial operation is scheduled for November 1983, subject to timely receipt of the necessary licenses and permits and exceution of an accelerated construction schedule.
The coal-fired unit will include a boi!cr; turbine-generator; condenser; coal pulverizing, handling and storage equipment and facilities; an eleven mile rail spur; and related electrical and mechanical equipment and a limestone scrubber. The circulating water system will be a closed loop utilizing a mechanical draft cooling tower.
The construction permit for Cross Unit 2 has been received from DHEC. For information as to com-pliance of Cross Unit 2 with environmcntal laws and regulations and other permits and authorizations required for construction and operation of Cross Unit 2, see captions " Regulatory Matters-Federal Energy Regulatory Commission and Environmental Matters" The total construction costs for Cross Unit 2. exclusisc of funded interest, reserves and financing costs, are estimated by Burns and Roe, Inc. to be $373,617,000. TI.ese estimated construction costs include the cost of pollution control equipment considered adequate, in the opinion of Burns and Roe, Inc., to meet existing pollution control codes and regulations. As of December 31,1979, the Authority had entered into 21 contracts totaling approximately 5120,847,000, which represents approximately 32"c of the total estimated construction costs of the projett.
In addition to the construction costs for Cross Unit 2 the capital costs of Cross Unit 2 include approxi-mately $35,000,000 to finance transmission facilities necessary to deliver output from the Unit to the Authority's existing transmission system and $12,200,000 for the initial coal stockpile. The Authority and l
Burns and Roe, Inc. estimate the total capital costs of Unit 2 to be 5420,817,000 which will be obtained from future financings.
19
General Imprm ements 4
The Authoritis general improsement program for fiscal years 19S0-1985 consists of extensions and improsements to the Authority's existing generating facilities, transmission and distribution systems and general plant. 'Ihe Authority estimates the total capital costs of the extensions and improvements, exclusiu of funded interest, resenes and financing costs, to be approximately $267,970,000. These improvements are desenbed below.
The Authority plans to make extensions and improvements to its transmission and distribution system, in addition to transmission facilities included in the capital costs of new generating units under construction or planned, estimated to cost approximately $119.575,000. Included in this amount are the costs of two 230 kV lines to transmit the Authority's share of the power from the Summer Nucicar Station to the Au-thority's system, one 230 kV line between the Authority's Winyah and Jetieries Generating Stations, two 230 kV lines between the Jetieries Generating Station and the Authority's Carnes Crossroad Substation from which senice to Alumax will be provided and certain transmission facilities to upgrade the transmission sys:rm and interconnect the Cross site with the Authoritis present and future power supply resources.
The balance of the Authority's general improsement program consists of improvements to existing generating facilities, estimated to cost $32,326,000, improvements to the Authority's general plant, estimated to cost approximately 540,206.000; future generating station site studies and acquisitions, estimaied to cost approximately $4,000,000; and initial construction of additional future generating units with estimated expen-ditures of $71,863,000. Included in improvements to general plant is a new ollice and senice complex, including a seven story general ollice building, central warehouse complex, central garage and general main-tenance building, to be built on a 75-acre tract in Stoneks Corner.
The Authority plans to finance the cost of its gencial improvement program through the proceeds of inpansion llonds presiously issued, part of the procecJs of the 1980A flonds, future financings and revenues from the Authority's system.
Future Power Supply Program-Crow Site The Authority's long range power supply program contemplates the development of three additional gen-erating units of 450 MW each adjacent to Cross Unit 2.
Present projections indicate that Cross Unit 1, the second unit to be constructed at the Cross site, will be required to be placed in commercial operation in N1ay 1985. Cross Unit 1 is planned to be a duplicate of Cross Unit 2. 'Ihe Authority has retained Ilurns and Roe, Inc. as design and construction engineers of I
the project.
The total construction costs of Cross Unit 1, including the cost of transmissien facilities and initial coal stockpile but exclusise of funded interest, reserves and financing costs, are estimated to be approximately
$43 2,300,000. Contracts are presently awarded simultaneously with the Cross Unit 2 contracts with zero cancellation charges for eighteen months to two years after the Unit 2 award. As of December 31, 1979, the Authority has entered into 12 contracts totaling approximately $81,788,000, which represents approx-imately 209 of the total estimated construction costs of the unit. The only cancellation charge prior to 1981 is the turbine-generator contract cancellation charge which starts July 1980.
The Authority has filed all permit applications for Cross Unit I simultaneously with the Cross Unit 2 applications. See captions entitled " Regulatory 51atters-Federal Energy Regulatory Commission and Environ-mental Statters."
The Authority is also evaluating additional locations for selection as sites for future generating stations.
l 20
- blimated Financing Requirements for Capital Improsement Program k
The following table sets for'h estimated financing sequirements for the Authority's capital improvement program during fiscal years 1980-1985 before gising cliect to the issuance of the 1980A Ilonds. Only projects scheduled for commercial operation by the end of fiscal year 1985 are included. As stated elsewhere in this Ollicial Statement, the Authority has begun initial planning for generating units with commercial operation dates subsequent to fiscal year 1985, and it is expected that a portion of the costs of these additional projects will be expended during the periods shown and will be financed with the proceeds of additional Expansion Ilonds.
Ihe Authority's capital requirements for the period 1950-1985 described below would be reduced by approxi-mately $500.000,000 assuming implementation of the proposed contracts between the Authority and Central (described in the sixth paragraph under the caption " Central Contracts"). Such reduction would occur because the proposed contracts require Central to finance 459 of the capital costs of Cross Units I and 2.
Carirat Capital Cosn Ner S heduled In tred
~
In$eres rstimared (ernrne ra al
't hrough Rese rs e and tupanuon InternaHy Addinonal
( Drcr ater n hst al i car 1942 Require.
Issua nce Honds be nerated I:nanons I mpenws Tot al Issued funds Recurred Ibte 19'9 1940 19at 19e rnent (Dollar, in Millions; Summer Nuclear Station 12/81
$ 192.9
$ 41.4
$ 31.9
$ 7.4
$ 27.3
$ 89.1 5 390.0
$284.6
$ 105.4 Winyah I'mt 3 5/80 78.9 56.0 5.6
.5 10.7 34.3 186.0 186.0 Winyah Unit 4 5/82 14.3 53.6 59.9 11.4 13.5 28.3 181.0(1) 100 0 81.0 Cross Umt 2 11/83 6.9 22.4 39.0 352.5 42.4 81.8
.,0 0 545.0 Cross Unit 1 5/85 2.0 25.0 405.3 44.6 117.1 5943 594.0 General Imrrosements 53.5 35.4 107.2 4.3 44.8 245 2 191.2 54.0
$293.0
$ 228.9
$196 8
$ 884.3
$ 142.8
$ 395.4
$ 2,ld 2
$570.6
$191.2 $ 1.379.4
- I) Total finanting required for Win >ah Unit 4 has been increased to $184,000,000 to reflect the terms of the 1980A Bonds.
With respect to the financing needs described above, it has been the Authority's policy to pursue an orderly process of entry into the bond market and, consequently, the amount of additional Expansion llonds which will be issued during each subsequent fiscal year may not correspond to the budgeted capital requireme its for such year.
Ihtimated Power Supply Resources and Requirements The following table sets forth the Authority's projected energy requirements for the fiscal years 1980-1985.
Fiscal Year Ending June 30 1980 1981 1982 1983 1984 1985 Energy Sales l
Wholesale ( l) 3,207GWh 3,421 GWh 3,679GWh 3,960GWh 4,292GWh 4,643GWh
.\\lilitary and Large Industrial (2) 2,197 4,281 4,941 5,030 5,150 5,309 Residential, Commercial, Small Industrial and Other 1,093 1,131 1,206 1,287 1,377 1,474 1
Total Sales 6,497 8,833 9,826 10,277 10,819 11,426 Losses and Wheeled for SEPA 561 628 666 691 718 753 Total Energy Requirements 7,058GWh 9,461GWh 10,492GWh 10,968GWh 11,537GWh 12,179GWh (1) Includes sales to Central.
(2) Includes sales to Alumax starting in 1981.
21
The following table prepared by R. W.13eck and Associates sets forth the Authority's projected power supply resources and requirements for the calendar years 1980 - 1985:
l Projetted Resourets and Requirements-1980194515tW) 1980 1981 1982 1983 1984 1985 Power Supply Resources:
Generating Capability Existing (l) 1,456 1,456 1,456 1,456 1,456(2) 1,456(2)
Under Construction (3)
Winyah Unit 3 280 280 280 280 280 280 Summer Nuclear Station 300(4)
-300 300 300 Winyah Unit 4 280(5) 280 280 280 280 Planned (3)
Cross Unit 2 450 450 Cross Unit 1 450 Total Generating Capability (6) 1,736 2,016 2,316 2,316 2,766 3,216 SEPA Allocation 105 105(7) 105(7) 105(7) 105(7) 105(7)
St. Stephen Ilydro Plant 20(2) 40(2)
Total Power Supply Re-sources I,841 2,121 2,421 2,421 2,891 3,361 Maximum Annual Demand (July-August)(8) 1,600 i,868 1,966 2,084 2,227 2,377 Less: Interruptible Demand 40 40 40 40 40 40 Net Maximum Annual De-mand Responsibility 1,560 1,828 1,926 2,044 2,187 2,337 g
Power Supply Resources Avail-able for Reserves 281 293 495 377 704 1,024 Purchased Reserves 50 50 50 50 50 50 Total Purchased Reserves and Resources Availabic for Reserves 331 343 545 427 754 1,074 Total Purchased Reserves and Resources Available for Re-serves as a Percent of Net Maximum Annual Demand Responsibility Less SEPA Al-lotment 23 %
20 9 30 %
22 %
36%
48 %
(1) See the caption "The Authority-Power Supply" (2) The Authority plans to purchase gradually increasing portions of the capacity which will be made available as a result of the St. Stephen Plant: 20 AlW in 1984, and 40 AlW in 19x5. See section captioned " Future Power Supply Operations of the Authority"in the lleck Report, Appendix 1.
(3) IJnit capabilities are shown in the first calendar year during which unhs under construction or planned wid be available to meet the summer peak demand, which normally occurs in August.
(4) Summer Nuclear Station is presently assumed to be available for commercial operation in December 148!; however, the first calendar year during which its capability will be available at the time of the Authority's projected annual system peak demand will be 1982.
(5) Winyah Unit 4 is planned to commence temporarily initial operation in June 1981, during the time of the projected 1981 annu.d system peak demand.
(6) Amounts shown assume all units will be available for service at the designated capability during the time of the
...uas system peak demand.
(i) Assumes SEPA power equal to that provided under the present contract will continue to be available after June 30, 1981, which includes approximately 44 5tW of SEPA capacity wheeled to SEPA preference customers.
(8) Projected maximum annual demands shown include projected interruptible loads. In 1981 and thereafter the amounts shown include approximately 286 AlW of demand associated with Alumax.
22
PROJECTED OPERATING RESULTS R. W. Beck and Associates have made a projection of the operations of the Authority for the fiscal years, ending June 30,1980 through 1984 based upon analyses of historical operations and trends and the Authority's adopted budget, and taking into account factors known to them and factors which can, in their opinion, reasonably be expected to occur. A summary of these projected operating results is shown in the Beck Report Appendix I, and in condensed form herein.
The Beck Report was prepared on the assumption that the 1980A Bonds would be issued in the principal amount of $105,000,000 at an average annual interest rate of 8.5% and with a final maturity of July 1, 2019.
In the opinion of the Authority, the difTerences between these assumptions and the actual interest rates and terms of the 1980A Bonds would not materially affect the Authority's debt service coverages shown in Exhibit D ta the Beck Report and summarized herein. Because the net proceeds of the sale of the 1980A Bonds will be lower than the amount assumed in the Beck Report, the Authority may be required to issue additional Expansion Bonds in the future in order to complete the financing of Winyah Unit 4.
The major considerations and assumptions utilized by R. W. Beck and Associates in preparing their estimate of the projected revenues and expenses are summarized as follows:
- 1. Projected revenues from customers other than Central have been based: (i) for power deliveries through April 1981, on rates presently in efIcct; (ii) for power deliveries during the period May 1981 through October 1982, on ates adopted by the Authority to become eficctive May 1981; and (iii) for the period commencing with power deliveries in November 1982, on rates to be hereafter adopted to implement the rate program adopted by the Authority on March 26,1979 to become effectise November 1982. Pursuant to the Authority's financing requirements for the construction of Cross Unit I and its rate program, it may be necessary for the Authority to adjust its rates etTective with power deliveries commencing in May 1984. Ilowever, such future rate adjustments have not been reflected in R. W.
Beck and Associates' projections of future operating results. Resenues from sales to commercial and g
large consumers, other than Central, reflect the terms of the Authority's contracts with such customers.
- 2. Revenues to be derived from Central have been projected on the basis of the present terms of the F Power Contract. Upon completion of Summer Nuclear Station, a substantial amount of energy produced by the Authority will be from nuclear fuel, the cost of which is projected to be less than the cost of fossil fuel. The Authority has advised Central that it intends to reconsider the fuel adjustment clause in its contract with Central when nuclear power generation is commenced by the Authority and that concurrent therewith, changes will be negotiated in the rate and fuel clause provisions of the contract.
The Authority and Central have entered into discussions concerning a new contract and possible joint ownership of future power supply and related matters. It is not possible to predict at this time what changes may be made in the Central contract when Summer Nuclear Station is completed or as a result of the outcome of the discussions currently underway between the Autharity and Central. R. W. Beck and Associates' projections of revenues and expenses assume that Central will continue to purchase its power supply requirements from the Authority as provided under the present contract.
- 3. Projections of revenues and expenses assume that Alumax will require power supply from the Authority with a build-up of loads commencing in April 1980 to approximately 286 MW beginning in December 1980 for the first and second potlines. If Alumax gives notice to proceed with additional pot-lines as provided in the Alumax contract, or if the operation dates of any potlines change, projected revenue and expenses could change significantly.
- 4. Generation by the Jelleries flydroelectric and Wilson Dam Generating Stations has been pro-jected to range from 570 million kWh to 745 million kWh for the riscal years 1980-1984.
- 5. Purchases and wheeling of power and energy from SEPA have been projected on the basis that the Authority and SEPA will execute a new contract containing terms and conditions, including the power allocated to the Authority, which will be substantially the same as the present contract as to which SEPA has served notice of termination efIective June 30, 1981. Such assumption reflects the average
)
energy available for wheeling and direct use of the Authority's system of approximately 300 million kWh annually of which approximately 198 million kWh are wheeled for Central and municipal customers.
23
l
- 6. The cost of coal has been projected using as tbc base the Authority's budget estimate for fiscal years ending June 30,1980,1981 and 1982 and escalated at the rate of approximately 8.79 per year l
throughout the remaining portion of the projection.
7.
No sales of surplus energy hase been assumed to be made to SCE&G or CP&L.
8.
Power costs are predicated in part on the availability of the following new generation in addition to the AuthorityN present generating resources: (i) 2h0 N1W-Winyah Unit 3 in May 1980; (ii) 300 MW-Summer Nuclear Station in December 1981; (iii) 280 MW-Winyah Unit 4 in May 1982 with temporary initial operation in June 1981; (iv) 450 MW-Cross Unit 2 in November 1983; and (v) 450 MW-Cross Unit 1 in May 1985.
9.
'Ihe Authority has or will obtain all licenses and permits required for all fossil generation and transmission facilities in its 1980-1985 capital improvement program on a schedule commensuicte with construction needs.
- 10. SCE&G will obtain all licenses and permits necessary for and Summer Nuclear Station will commence commercial operation in December 1981 as presently anticipated by the Authority and it W. lleck and Associates. Summer Nuclear Station is projected to operate at an average monthly plant factor of 60'J during the first two years of operation and an 80% monthly plant factor for subsequent years with two-month refueling periods. ( An 80'J monthly plant factor, with annual refueling period of two months, is equisalent to approximately a 67% annual plant factor.)
- 11. Nuclear fuel costs for Summer Nuclear Station are estimated on the basis that the 82G. of the initial fuel core uranium already delivered will be at costs prosided in the Westinghouse contract. See caption entitled "I uci Supply-Nuclear". All reload fuel uranium will be purchased on the open market at costs based on price lesels of approximately $44 per pound escalated at 5% per year.
- 12. 'I he total amount of Exp.msion Ilonds required to be issued to pay the costs of Summer Nuclear Station was estimated based upon the Authority purchasing its ownership share of the initial nucicar fuel under the terms and at the costs set forth in the Westinghouse contract, with the exception of the approxi-
{
mately IMG of the initial core uranium conecntrates purchased by SCE&G on the spot market.
- 13. Operation and maintenance expenses, exclusive of fuel, base been based on the Authority's budget estimate for fiscal years ending June 30,1980,1981 and 1982, and increased each year there-after to reflect increased expenses required for projected growth and escalation based on inflation rates and other conditions prevailing in the present economy.
- 14. Debt sersice requirements for the period shown have been projected 'itilizing the following criterix (i) the actual debt service schedules on outstanding Priority Obligations and on the Expansion lionds heretofore issued; (ii) the estimated debt service requirements at an annual irterest rate of 8.50%
on $105,000,000 of 1980A flonds with interest requirements on the portion allocable to Winyah No. 4 funded from Expansion liond proceeds to Nosember 1,1982; (iii) the estimated debt service requirements at an annual interest rate of 8.0% on 5105,400.000 of Expansion lionds assumed to be authorized but not yet issued for the completion of Summer Nuclear Station with interest requirements funded from Expansion liond proceeds to June 1,1982 on said Expansion llonds and Expansion llonds heretofore issued alh> cable to Summer Nuclear Station; (iv) the estimated debt service requirements at an annual interest rate of 7.5% on 530,000,000 of unauthoriz:d and not yet issued Expansion Ilonds to fund General improvements; (v) the estimated debt service requirements at an annual interest rate of 8.25%
on the initial issue of $200,000,000 and 7.5'1 on the completion issues of $345,000,000 for a combined amount of $545,000,000 of presently unauthorized and not yet issued Expansion Ilonds to fund the construction of Cross Unit 2 with interest requiremena funded from Expansion llond proceeds to May 1, 1984; (vi) the estimated debt service requirements at an annual interest rate of 7.5G on $594,000,000 of presently unauthorized and not yet issued Expansion llonds to fund the construction of Cross Unit I with interest requirements funded from Expansion Ilond proceeds to Nosember I,1985 which is beyond the period of the projections shown; and (vii) the payment of principal and interest requirements, if any, associated with the short-term borrowing utilized by the Authority for interim financing of capital improvements is assumed to be paid from the proceeds of future Expansion Ilond issues.
24
In the table below, Ogures from Exhibit D, captioned " Projected Operating Results", contained in l
the Beck Report have been summarized. In addition, opposite the caption " Debt Senice Coverage Rc0ccting Program of Additional Rate Increases,' the Authority has shown its debt senice coverage on Priority Obli-gations and lixpansion Bonds as adjusted to reucet additional revenues which it projects it will receive as a result of the program of additional rate increases adopted by its Board of Directors on February 25, 1980.
See caption "The Authority-Rates." These additional revenues were not included in projected operating results or projected debt service coverages included in the Beck Report and amount to 51,200,000, 57,300,000, 514,900,000 and $23,700,000 in the fiscal years ending June 30,1981 through 1984, respectively.
Flwal Year Ending June 30(I) 1980 1981 1982 1983 1984
( Dollars in T housands)
Operating Revenues
$ 163,308 5250,895 5304.363 5350,236
$403,804 Other Income 3,467 5.339 6,562 8,204 9,267 Total 5166,775 5256,234
$310,925
$358,440 5413,071 Operating Expense (except depre-ciation )
125,662 190,353 211,847 235,462 268,520 Resenues Available for Debt Serv-iec, Lease Payments and Other Purposes 5 41,113 5 65,881 S 99,078 5122,978
$ 144,551 Debt Service:
Priority Obligations S 4,322
$ 4,319
$ 4,322
$ 4,319 5 4,473 Expansion Bonds-Issued (2) 17,554 29,350 34,901 60,968 65,826 Expansion Bonds - Author-ized but Not Yet Issued and Expected to be Authorized and Issued (3) 1,125 3,147 11,488 19,106 g
Total Debt Service.
5 21,876 5 34,794 S 42,370 5 76,775
$ 89,405 Balance Available for Payment of Leases. Other Obligations, and Capital Improvements 19,237 31,087 56,708 46,203 55,146 Lease Payments and Other Obliga-tions 4.661 5,349 5,469 5,588 5,591 Balance Availab!c for Capital Im-provements and Other Purposes S 14.576 S 25,738 5 51,239
$ 40,615
$ 49,555 Debt Service Coverage (Priority Ob-ligations and Expansion Bonds)(4) 1.88 1.89 2.34 1.60 1.62 Debt Senice Coverage Reflecting Program of Additional Rate In-creases (Priority Obligations and Expansion Bonds) 1.88 1.93 2.51 1.80 1.88 (1) See footnotes in Eshibit D to the lleck Report Appendis I.
(2) incluJes estimated debt senice at an a.umed interest rate of 8.5 g on the 1980A Honds in the assumed principal amount of $105.ek:0.00 } and ewludes portion of interest which has been or is to be funded. A !) of I G change in interest rate on the 1%0A Honds would result m a change in debt service coverage of approumately.01.
(3) Includes estimated d+t service at an assumed annual interest rate of 8 0'i on $105.400D00 of additional ISpansion Honds acumed to be issued for Summer Nuclear Station and estimated debt senice on additional Espansion Honds espected to be authorized and iwued: $30 000.000 at an assumed annual interest rate of 7.59 for general improvements and at an assumed annual mterest rate of 8.259 on the initial $200,000.000 and 7.59 on the completion ioues of
$ 34 5.000.000 tor a comt,ined amount of $545.000.000 of thpansion Honds foi the planned Cross Umt 2.
Escludes portion of interest w hich is to be f unded.
(4) Coserage of debt ser ice, lease payments and other obligations is projected at 1.55; I44; 2.07; 1.49; and 1.52, respectisely.
FUEL SUPPLY
'he availability of fossil fuels (coal and oil) used by the Authority and the prices at which such fuels can be pu. chased by the Authority are subject to various factors which aficct the availability and the price of fuels in the domestic and world markets and to actions by governmental authorities with respect to fuels, including mandatory federal allocation programs for oil and regulations with respect to mining.
25
During the 12 months ended December 31,1979, the Authority's energy supply including energy wheeled to preferense (ustomers was derised approsimately 79.3% from coal-fueled generation. 0.39 from od-fueled l
pencranon.12.7G trom the Authonty's hydro tacilities and 7.7'; from purchases from St PA, SCl1G and Cl%I.
'I he following table ind;eates the percentages of energy to be produced by the various fossil fuets and non-fooil somees expected to be as ailaNe to the Authority through the hseal ycar ending June 30.1985:
1 is al Year ll dro, Other(1 )
i nding Junc 30 Oil Coal Nmicar 3
19SO
- 1. l '1 83.4 "
10.5 G 5.0 %
1981 2.8 S6.S 6.6 3.8 1%2 1.1 80.3 9.19 6.0 3.5 1953 1.4 75.6 13.9 5.7 3.4 19S1
.S 78 9 12.1 4.9 33 1985
.3 79.7 12.6 4.3 3.1 e1) St P \\ MJm, as unang power cqual to that prosidcJ under pre ent contract will coniinue to be asailaHe in ibcol year 1982 and tha caner..out pm s hees h orn M lh I or mfoimahon concernmg a potennal rcJustion in supph of energy frorn
\\1 PA in sush ) car, see urnon "I he.babor 03 --Pow er Supply" Coal
'lhe Authority reccises bituminous coal for its Grainger, Jefferies and Winyah Generating Stations from fne companies under sit separate contracts and f rom limited spot pmehases.
One comract, espiring December 31, 1983, prosides for delivery of 350,000 tons annually. A second connat t, espiring December 31,1959, prosides for dehsery of 480,000 tons annually. A third contract, expiring September 30,199S, or upon the eshaustion of the coal reserses leased by the supplier, prosides for delivery of 420,000 tons annually and plants to the Authority options to increase tonnage to be delisered to 500,000 tons annu.dly. A f aurth contract prosides for delisery of 1.000.000 tons annually and expires December 31, q
1949 A tifth contract, espirmg January 1, 2004, prosides f or delisery of 100,000 tons annually beginning in 1951, gradually incre:0,ing to 1,000,000 tons annually in 1986. I?nder this contract, the Authority has the first right ol refusal to all recoserable coal reserves on the mined properties estimated to be 34,500,000 tons.
A sisth contract, espirmg December 31, 2000 prosides for delisery of 500,000 tons annually beginning in %Ia) 1950. Ihe Authority may increase tonnage to be delivered under such contract by 500,000 tons
.mnually by the end of 19h0, by.m addnional 500.000 tons annually during 1983 and 1984, and by an additional 500.000 tons annually during 1984 and 1985. In addition, the Authority has first right of refusal to any addnional tonnage abose 2,000,000 tons produced annually from the mined properties which are estimated to contain oser 70 million tons of recoserable coal reserves. All of such suppliers, with the esception of one, base fast loading facilities and proside for delivery of coal in unit train shiprt:nts.
As of February 25, 1980. the Authority had on hand coal sullicient to satisfy its requirements for approximately 82 days of projected operation.
The astual coal tonnages required during the fiscal years ended June 30,1978 and 1979 and the estimated tonnages required for the fiscal years ending June 30,1980 through 1985 and amounts under contract, are as follow s:
l'iu al T car Tons l'nder l n&d June 30 Tons itcqipired Contract t 1 )
1978 2,363,788 1979 2.441,456 19SO 2,744,396 2,560,000 19S1 3,816,383 2,800,000 19S2 3,906,222 2,950,000 1983 3,846,846 3,050,000 1984 4,189,828 2,975,000
{
1985 4,465,404 3,025,000 (I) Docs not instude aJJitional tonnare asailable unir contract espansion options.
26
Air quality requirements for emissions from the Authority's generating units limit the maximum sulfur
)
content of coal used by the Authority. Such requirements range from a limit of 1.19 in the case of Unit 2 at the Winyah Generating Station to 2.09 in the case of Units 3 and 4 at the Jefferies Generating 'itation and the Grainger Generating Station. The sulfur content of coal receised under existing contracts ranges from approxi-mately.9G to 2.09. The Authority does not anticipate difficulty in obtaining an adequate coal supply with sulfur content within acceptable ranges to meet foreseeable needs.
Should the need arise, the Authority has the flexibility to transfer unit train deliveries between the Jefferies and Winyah Generating Stations, as well as receiving less than unit train deliveries at either of these two stations. The Authority has purchased 154 coal cars to insure their availability.
'Ihe average cost of coal purchased by the Authority during the four fiscal years ended June 30,1979 and during the 12 months ended December 31, 1979, including the cost of rail freight, was as follows:
A urage Ascrage Cmt Perimi Cmt per Ton per Million llen Fiscal y car ended June 30:
1976 525.85 51.102 1977 25.99 1.124 1978 31.80 1.384 1979 34.95 1.484 12 months ended L)etember 31,1979 35.85 1.476 The Authority belieses that as a result of the Federal Surface Mining Control and Itcelamation Act of 1977 and the rules promulgated thereunder, which also alicet underground mining, there will be increases in the cost of coal to the Authority which will be recovered through its fuel adjustment clause.
Nuclear Under the Summer Agreement SCE&G acts for itself and as agent for the Authority in the construction and operation of the Summer Nu icar Station including the acquisition and management of nuclear fuel.
In order to fuel and operate a nuclear generating station, six distinct stages of the fuel cycle are involved:
(1) the mining and milling of uranium ore to yield uranium concentrates, (2) the consersion of uranium concentrates to uranium hexalluoride, (3) the enrichment of the uranium hexalluoride, (4) the conversion of the uranium hexafluoride to uranium dioxide and the fabrication of fuel assemblies into which the uranium dioxide is incorporated, (5) the utilization of the nuclear fuel in the generating station reactor and (6) the reprocessing of the spent fuel including the appropriate disposition of radioactive wastes, or, alternatively, the extended storage of the spent fuel.
At the present time, SCE&G has under contract with Westinghouse the requirements for uranium con-centrates, consersion services and fabrication services to meet the Summer Nuclear Station requirements for the initial core loading (three regions) and the eight reload regions, of which one reload region is required approdmately esery year. Under anticipated operating conditions such contract is sutlicient to cover a period of approximately ten years. It will be,ccessary for SCE&G to enter into future contracts to cover the difference between its total requirements and tNsc covered by its present contract. SCE&G has also cc'itracted with the United States Department of Enc.yy (" DOE"), formerly the Energy Research and Devoopment Administra-tion, for supplying the necessary en.ichment services through the year 2002, which is adequate for operation through the year 2004. SCE&G currently has no commitments for reprocessing nuclear fuel as there are no reprocessing facilities presently operating commercially or planned in the United States. The presently known alternative to reprocessing is extended storage of the spent fuel. Facilities are being incorporated in Summer Nuclear Station for on-site storage of 13 reload regions of fuel which is expected to be adequate for approx.
imately ten years of operation and to permit storage of the entire reactor core (3 regions) in the event complete unloading should be required for any reason. SCE&G presently has no arrangements for off-site storage of spent nuc! car fuel.
27
The following table summarizes the SCE&G's contract commitments for the stages of nuclear fuel a%Cmblics; f
Ope rating Commitment Contra (inr Hegiorn Years l Atintated Uranium Concentrate Westinghouse 1-11 1981-1990 Conversion Westinghouse I-l1 1981-1990 Through 2002 Enrit hment IX)E I abrication Westinghouse 1-11 1981-1990 Reprocessing None None None
- Requiremenn contra t.
In September 1975, Westinghouse notified SCE1G that "Under piesent and anticipated market conditions, Westinghouse finds itself unable to obtain sutheient uramum to meet.. customer needs except at such onerous prices that performance on Westinghouse's part would be conunercially impracticable" In October 1975, SCI:&G commenced an action against Westinghouse seeking specific performance of the uranium supply provisions of the contract and damages for its breach. In October 1978, the United States District Court for the !! astern District of Virginia ruled that Westinghonse had breached its contract to supply uranium for the Summer Nuclear Station and recommended that SCI &G and other utdities with similar contracts attempt to negotiate a settlement of the damages with Westinghouse. On Starch 4,1980, the Court was adsised that SUl &G and Westinghouse had reached an oral agreement in principle to settle the litigation. Any settlement is subject to the execution of a definitise settlement agreement, the approval of the lloards of Directors of SCE1G, the Authority and Wcstinghouse and the approval of the Court.
Under an interim consent order issued by the Court, SCEAG has received for the Summer Nuclear Station approximately 731,000 pounds of uranium concentrates from Westinghouse, which is approximately 180 of the original Westinghouse commitment to SCI &G (estimated at approximately 4,100,000 pounds) and approximately 82G of the first core fuel requirements. 'I be 731,000 pounds of uranium cmcentrate acquired from Westinghouse pursuant to the mder were obtained at a contract price of approximately $13.66 per pound, including consersion. Sullicient quantities of uranium concentrates to meet the remaining require-ments of the initial core were purchased on the open market with prices averaging approximately $40 per pound. 'Ihe fabrication of the 157 fuel awemblies comprising the i,itial fuel core has been completed, and all of such assembhes are presently in storage at the Summer Nuclear Station.
SCI AG is continuing discussions with Westinghouse and also with other suppliers for the purpose of obtaining an adequate supply of uranium n needed and minimizing any damages or costs resulting from the actions of Westinghouse.
REGU LNI ORY SINITEllS I~cdcral linergy I egulator,5 Commiuion
'Ihe Authority operates its Jefferies flydroelectric Generating Station and certain other property under I ieense No. 199 issued by the Federal Energy Regulatory Commission ("FERC") pursuant to the Federal Power Act. I he license is scheduled to espire on Starch 31,2006.
'Ihe Authority is required to obtain the approval of the FERC for the construction of its planned generating station near Crow, South Carolina as it will be nece3sary to draw make-up waters from the project area of 1 I RC Project No.199. An application for permission to use the project waters for the Cross station has been fded with 1 I:RC and public notice of that filing has been issued. No protests or petitions to intervene base been filed in connection w h that application.
Dam Sa/cty /mprction. E ider regulations of the FERC, dams forming a part of a licensed project must undergo ufety inspections at fin year intersals. In 1976 the engineering firm of Chas. T. Stain, Inc. ("Alain")
was retained by the Authority to perform the required inspection.
Extensise testing performed under hiain's supervision and reviewed by the FERC staff and its expert consultants rescals that the West Pmopohs Dam at Lake Nioultrie would be marginally unstable under applicable design earthquake criteria and the North Santee Dam at Lake Station would be unstable under applicable design earthquake criteria. It was determined that all dams could withstand the probable maxi-mum tbod.
28
Additional tests are being performed on the West Pinopolis Dam which may establish that this dam
)
complies with FERC standards. Ilowever, because of the location of that dam with regard to heavily populated areas, the Authority is conducting studies to determine what action is necessary to increase the West Pinopolis Dam's safety with respect to seismic activity.
As the area along the Santee River below the North Santee Dam is uninhabited swamp and flood plain, a break in that dam would result in littic property damage and probably no loss of life.
The Authority has requested Main to furnish it with cost estimates to repair or rebuild the North Santee Dam and with flood maps showing the extent and time delay for flooding of both the Santee and Cooper Rivers to update and refine its Emergency Action Plan.
The FERC has not determined what action the Authority will be required to take with regard to either of the mentioned dams.
Environmental Matters lloth federal and state authorities have imposed various environmental control requirements relating pri-marily to airborne pollution and the discharge of pollutants, including heat, into waters in the vicinity of the Autbonty's generating stations. Standards related to en ironmental suitability are subject to change, and litiga-tion by environmental groups and others may affect the construction of facilities or their operation. The Authority endeavors to insure that its facilities comply with applicable environmental regulations and standards; however, no assurance can be t een that necessary authorizations and permits will be received, or that standards as to environmental suitability will not be changed in a manner to afTect adversely the Authority or its operations. The Authority cannot now estimate the precise effect of existing and potential regulations and Icgislation upon any of its existing and proposed facilities and operations, nor the impact of additional costs which may be incurred in eficcting compliance with potential regulations and legislation.
Air Guality. Pursuant to the Federal Cican Air Act of 1970, as amended (the " Air Act"), the Environ-mental Protection Agency (" EPA") promulgated primary and secondary ambient air quality standards with respect to certain air pollutants includir.g, particulates, sulfur oxides and nitrogen oxides. These standards are to be achieved by the application of control strategies developed by the states and included in imple-mentation plans filed with the EPA for approval and by the enforcement of federal new or modified source performance standards. DilEC has adopted state implementation plans generally designed to achieve the primary and secondary air quality standards, which plans have been approved by the EPA. These regulations affect the siting of new plants as well as the type of pollution controls required and provide for penalties for noncompliance after a certain date. Plants on which construction commences after the promulgativa of proposed regulations must use the "best technological system of continuous emission reduction", and the use of untreated low sulfur coal as a sole means of compliance is precluded.
The EPA has promulgated regulations establishing stringent standards for particulate, sulfur dioxide and nitrogen oxide emissions for generating stations, the construction of which is commenced subsequent to August 17,1971 or which after such date, are modified in such a way as to increase emissions of air pollutants or cause the emission of air pollutants not previously emitted. The EPA Administrator proposed revised new source performance standards in September 1978. These standards, which have a prospective efTect from the date of proposal, include not only an emission limitation but also require the achievement of a percentage reduction from the emissions that would otherwise result from combustion of non-treated fuels.
The Authority has received operating permits for all of its existing generating facilities. The Authority believes its facilities are operating substantially in compliance with the permits.
The EPA has published regulations (the "PSD regulations") designed to prevent "significant deterior-ation" of air quality in portions of a state where air quality is now better than the applicable secondary ambient standards. In June 1978, the EPA published amended PSD regulations. Revised regulations have been proposed. The Authority is unable to predict the effect which the PSD regulations will have upon its operations.
The Authority has received construction permits for Winyah Units 3 and 4 and Cross Units 1 and 2, subject to certain conditions. The Authority does not anticipate any difficulties in meeting the conditions of the permits.
29
15 nier Quality. The Federr.1 Water Pollution Control Act, as amended (the " Water Act") prohibits the discharge of pollutants, including heat, from point sources into waters of the United States, except as l
authorized in permits of no longer than five years duration issued under the National Pollutant Discharge Elimination System (" NPDES permits"). T he Water Act presides for reduction of pollution discharges in various stages and categories. Ihe Water Act abo requires that cooling water intalse structures retlect the "best technology available for minimiting adverse ensironmental impact" The EPA has promulgated regulations with respcet to such matters, some of which are being contested in the courts.
DilEC has issued NPDES permits, expiring in 1981, for all of the Authority's existing generatmg facilities. It is expected that the Authority will be required to comply with more stringent requirements in order to obtain renewals of such permits as additional prmisions of the Water Act become applicable.
The Authority has applied to DilEC for NPDES permits for Winyah Units 3 and 4 and intends to apply for permits for Cross Units I and 2 in 1980. The Authority does not anticipate any dilliculties in obtaining such permits.
In Nos ember 1975, the EPA promulgated regulations requiring each state or regional planning agency within each +ue to develop and implement water quality management plans for all waters of the state, which plans e to give clicet to, among other things, a state-wide " anti-degradation" policy.
In Jane 1979, he EPA issued resised regulations governing the permit program under the Water Act.
Proceedings seeking hview of certain aspects of these regulations have been instituted by the electric utilities and other industries. Although it is not possible to predict the outcome of these proceedings, shou!d the contested regulations ultimately be sustained in their present form, they could result in substantial additional costs for the Authority in obtaining and implementing water discharge permits, although the exact nature and the amount of such costs cannot be accurately predicted.1he EPA has also proposed new sampling requirements for water discharge permit renewals by adding over one hundred pollutants to existing testing requirements. While some sampling requirements may be reduced upon final promulgation, it is expected that significant additions to the Authority's sampling and testing effort will be necessary in 1980. The Autharity cannot predict how or whether this additional sampling will affect its water discharge permits.
g Nucicar Matters
'ihe Summer Nuclear Station is subject to regulation by the NRC, a successor to the Atomic Energy Commission ("AEC"). The construction permit for the Summer Nuclear Station was issued by the AEC in 1973. In December 1976, an application for an operating license for the Summer Noelcar Station was filed with the NRC. In February 1978, the NRC granted the petition of a party living near the site of the Summer Nuclear Station to intervene in the liecosing procceding.
in December 1978, Central petitioned the NRC to make a finding of significant change in the activities of I
the Authority and SCE&G, the licensees, and to refer the matter to the Attorney General of the United States for l
a, antitrust review and his advice as to any conditions relating to the antitrust laws that should be placed in the
(
operating license for the Summer Nuclear Station.1he petition as amended alleges that the licensees agreed i
to restrict competition between themselves in the sale of electric power, that Centralis almost entirely dependent i
upon the Authority for bulk power supply, and that the Authority's dual rates to Central unfairly restrict Centrars constituent members from competing with the Authority for large power loads. The Authority and l
SCE&G have opposed such petition. While the ultimate relief sought by Central in its petition is not clear, the NRC has no direct jurisdiction over the Authority's rates, and Centrars petiuon states that " Central I
notes that it is dependent on the Authority for almost all of its power supply and would suffer serious injury if there were to be any delay in granting an operating license for said Eummer unit." The Authority and SCE&G do not believe, even if the petition were granted, that any such antitrust resiew would rcsult in delay in issuance of the operating license. In March 1979, the staff of the NRC filed a response to Centrars amended petition concluding that the NRC should deny such petition.
The NRC has issued a rule. ellective September 4.1979, which is being contested by certain inter-venors in court proceedings, relating to the environmental impact of fuel processing and waste disposal. This rule would proside for a generic proceeding to consider evidence "regarding the likelihood that nuclear waste can be safely disposed of and when that, or somt other oft-site storage solution, can be accomplished." No g
prediction can be made as to whether these matters will delay the issuance of an operat ng license for the Summer Nuclear Station.
30
l SCE&G and the Authority are required to obtain liability insurance and a United States Government
)
indemnity agreement for the Summer Nuclear Station prior to the time the NRC operating license is issued to insure against their maximum liability under the Price AnJerson Act (currently $560,000,000) for any pubbe claims arising from a nuclear Heident. Comn encing August I,1977, the United States Gosernment's indemnity responsibilities began to be phased out and replaced by a mandatory industry-wide program of self-insurance, under which each licensee of a nuclear power plant became obbgated, in the esent of a nuelcar incident involvmg any commercial nuclcar facility in the country, to pay a deferred premium of up to $5,000,000 per incident, up to a maximum of $10,000,000 per year in the esent of more than one incident.
The 5560,000,000 limitation will increase as amessments available under the self-insurance program exceed that amount, due to an increase in the number of units subject to such assessments. After the Summer Nuclear Station becomes subject to the deferred premium system, the Authority will be liable for one-third of each deferred premium assessed with respect to the Station.
In March 1979, an accident occurred at TN11 hacated near liarrisburg, Pennsylvania resulting in a shut-down of Unit 2, the release of radiation to the ensironment, and damage to the core of.he nuclear reactor.
The extent of the damage has not been determined. Insestigations of the accident base been undertaken by various gesernmental and regulatory commissions.
The Chairman of the NRC indicated at an appearance before the House Energy and Power Subcommittee on November 5,1979 that the NRC would not permit utilities to begin operating or constructing new reactors until it completed a detailed resiew of a study of TMI by the statT of the NRC, the report of a Presidential commission appointed to study the accident, an independent study of the NRC and its procedures, and new rules proposed to improve the quality of emergency planning for nuclear accidents. On February 29, 1980, the NRC granted a restricted license permitting fuel loading and zero power physics testing for a new nuclear plant. Further approval will be required before low power testing (up to 59 ) can be conducted for this plant. It is not clear how rapidly the NRC will resume the issuance of full power operating licenses, and neither SCU&G nor the Authority can predict when the operating license for the Summer Nuclear Station will be receivrJ.
As a result of the TMI accident and the consequent safety resiews and investigations, changes base been and are being made at the Summer Nuclear Station. Additional changes may be required, but neither the Authority nor SCEAG can predict the cuent of such changes or the magnitude of the cost thereof. The Authority and SCE&G also cannot predict the ultimate eticet of the TMI accident and subsequent develop-ments in legislation and regulation upon the future operations of the Summer Nuclear Station.
Department of Energy-Rate Afaking and Fuel Use l
The Public Utility Regulatory Policies Act of 1978 requires, among other things, that each electric utility having annual retail sales in excess of 500 million kWh, including the Authority, determine, after a public hearing held prior to November 4, 1981, whether adoption of various retail rate design standards (such as time of day, seasonal and interruptible rates, rates based on cost of service, the pmhibition of certain declining bhick rates and various load management techniques) will conserve energy supplied by such j
utility, promote clheient use of such utility's resources and provide equitable rates to such utility's retail customers. The Act provides that the Secretary of the DOE, any atiected electric utility, or any atfected retail customer of such utihty may intervene in any ratemaking or similar proceeding in order to initiate and partici-pate in the consideration of such standards. The Authority has retained Main as consultants to adsise it concerning steps necessary to comply with the foregoing requirements.
In addition, the Act requires such cicetric utilities to determine, after public hearings held prior to Nosember 9,1981, whether to adopt certain retail practice standards (concerning automatic adjustment clauses, master metering, information to consumers, advertising and termination of electric service). The Authority has held the required hearings concerning the retail practice standards and its Board of Directors has completed the required determinations.
The Powerplant and Industrial Fuel Use Act of 1978 places restrictions, among other things, on the use of petroleum and natural gas as a fuel in certain electric powerplan:s. With respect to certain existing 31
powerplants, which are fueled by oil, including Units 1 and 2 of the Jefferies Generating Station and the Authority's existing combustion turbines, the Economic Regulatory Administration (" ERA") of the DOE
{
may prohibit the use of oil as a primary energy source if the ERA finds that such powerplant has or had the technical capability to use coal or an alternate fuel as a primary energy source or could have such capability without substantial physical modification or substantial reduction in its rated capacity, and that it is financially feasible to use coal or an alternate fuel. The Authority normally generates less than two percent of its power supply from oil.
CERTAIN PROVISIONS OF111E INDEN'IURE AND RESOLUTION The following statements are summaries of certain prosisions of the Indenture and Resolution and are subject to the detailed prosisions thereof. See also caption " Security for Expansion Bonds-Pledge of Revenues, Reserve Account Requirement and Rate Covenant" Terms used under thi caption which are defined in the indenture and Resoluticn are used herein as so defined.
Funds and Accounts Revenue Fund: The Revenue Fund shall be held in trust and administered by the Indenture Trustee so long as any of the Priority Obligations are outstanding and thereafter shall be held in trust and administered by the Authority. The Authority covenants and agrees in the indenture that it will pay into the Revenue Fund, as promptly as practicable after receipt thereof, all of the revenues of the System.
Order of Payments from Revenue Fund: Under the Indenture moneys shall be disbursed by the Indenture Trustee from the Revenue Fund to other funds and accounts of the Authority, created by the Indenture, or permitted by the Indenture and created by the Resolution, in the following order:
- 1. Operating Fund: To pay monthly to the Authority for its Operating Fund an amount sufficient to cover operating and maintenance costs for 30 days. Ilowever, no moneys shall be so paid for Lease
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Pay ments.
- 2. Interest Fund: To pay monthly to the Interest Fund a proportionate amount of the next due i
interest payment on the Priority Obligations.
1
- 3. Bond Fund: To pay month!y to the Bond Fund a proportionate amount of the next due pay-ment for the principal and sinking fund installments on the Priority Obligations.
4.
Debt Service Reserve Fund: To pay to the Debt Service Reserve Fund for the Priority Obliga-tions amounts suflicient to maintain that Fund at the required level equal to debt service on the Priority I
Obligations for the next 24 months.
j
- 5. Expansion Bond Fund: To pay monthly to the Expansion Bond Fund Trustee, proportionate amounts of the next due interest, principal and sinkin;; fund installments on the Expansion Bonds, for deposit appropriately in the Interest Account, Principal Account, and Hond Retirement Account. In the l
crent that a deficiency shot.ld occur in the Rescrve Accormt, payments into such account to restore such deficiency over a period of 60 month.; would be required. See caption " Security for Expansion Bonds-Reserve Account Requirement" l
6.
Lcasc Fund: Ti pay monthly to the Authority for deposit in the Lease Fund a proportionate i
amount of the next due Lease Payments.
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- 7. Contingency Fund: Whenever a deficiency occurs in the Contingency Fund, whereby there is in such fund less than the required amount of $1,152,000, payments into such fund are required to be made to restore such deficiency over a pe2iod of 60 months.
l 8.
Capital Improvement Fund: To pay into the Capital Improvement Fund amounts approved by the Authority. Under the Indenture no minimum amount is required to be so paid. Under the Resolution
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an annual Minimum Capital Improvement Requirement is established. The requirement is an amount l
which, together with the amounts deposited in the Capital improsement Fund in the two immediately preceding fiscal years, is at least equal to M of the grow resenues (Operatmg Resenues and Other income) dericed from the ownership and operation of the Authonty's System in the thwe immediately preceding fiscal years; prosided that, af ter the 1973 ihmds and 1974 11onds are no longer outstanding, the requirement is an amount which, together with the amounts deposited m the Capital Improsement Fund in the two immediately preceding fiscal years,is at least equal to 124 al the gross resenues (Oper-ating Resenues and Other income) of the Authority after deducting therefrom " fuel" expense (including
" nuclear fuel expense") and the energy related component of " purchased power" expense, determined in accordance with the Umform System of Accounts prescribed for Public l'tdities and I icensees of the Federal Power Conunission in effect on January 1,1977, derised from the ownership and operation of the Authority's System in the three immediately preceding fiscal ye,rs.
9 Special Rc3crve Timd: '!he Indenture provides that on January 15 and July 15 of each year, after meeting all the requirements of the funds and accounts presiously mentioned, any moneys remaining in the Resenue i und, accumulated prior to the preceding January 1 and July 1, shall he divided by the Indenture Trustee into two parts. One half shall be paid by the Indenture I rustee to the Treasurer of the State of South Carolina for the general funds of the State, and the remainder shall be paid into the Special Reserve Fund, and become asailable for any lawful purpose of the Authority, as the Authority may determine.
Effect of the Resolution Under the Resolution, after all Priority Obligations have been retired, or provision has been made therefor, the lhpansion ilonds will become gross resenue bonds. Nfoneys shall then be disbursed by the Authority from the Resenue l'und in the following order:
I 1.
IUpansion Hond fund: To pay monthly to the lhpansion lland Fund Trustee, proportionate amounts of the nat due interest, principal and sinking fund installments on the Ihpansion Honds, for 1
deposit appropriately in the Interest Anount, Principal Ac count and Hand Retirement Accormt. In the esent that a defhiency should occur in the Reu ne Account, payments mio such account to restore such deficiency over a period of 60 months wouhl be required.
2.
Leate fund: To pay monthly to the 1. case Fund a proportionate amount of the next due 1. case Pay ments.
- 3. Operatine I trenscr: To pay expenses of operation and maintenance.
l 4.
Capital Improvement fund: To pay during each fiscal year into the Capital Improvement Fund amounts at leas.t equal to the Niinimum Capital Imprmement Requirement.
Any moner remaining in the Resenue Fund after making the foregoing payments woulJ then be available l
for any lawful purpose of the Authority, includmg the making of payments to the State of South Carolina.
l Ingestment of Funds Funds established by the Indenture, other than the Operating 1:nnd, the interest Fund and the Hond Fund, may be invested, but only in securities constituting direct ob!igations of, or unconditionally guaranteed as to principal and interest by, the United States of America. Income received from the investment of such mon )s is to be deposited by the Indenture Trustee in the Resenue Fund.
'I he Resolution defines " Government Obligations" as direct obligations of, or obligations the principal of and interest on which are unconditionally guarameed by, the United States of America and " Investment Securities" as (1) Government Obligations, (2) obligations of any agency or corporation which is or may hereafter be ercated by an Act of the Congress of the United States as an agency or instrumentality thereof, (3i Publie llousing llonds or Project Notes fully secured by contracts with the United States of America and (4) obligations to the payment of the principal of and interest on which the full faith and credit of the State of South Carolina is pledged.
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Moneys in the Construction Fund may be invested in Insestment Securities and in certificates of deposit issued by any bank, trust company or national banking association in South Carolina which has capital stock
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and surplus of at least $4,000,000 or in any other State which has capital stock and surplus of at least
$ 50,000,000.
Moneys in the Interest Accoun:, Principal Account and Bond Retirement Account in the Expansion Bond Fund and in the Lease Fund may be invested in Gosernment Obligations. Amounts in the Interest Account representing funded interest on the 1979A and 1980A Bonds may be insested in Insestment Securities.
Moneys in the Reser e Acceunt in the Expansion Bond Fund may be invested in Insestment Securities.
After all Priority Obligations bas e been retired, or prosision has been made therefor, moneys in the Resenue Fund and in the Capital improvement Fend may be insested in Gosernment Obligations and insestment Securities, respectisely.
Insestments of any fund or account shall mature at the times required to proside moneys to make the payments required to be made from said fund or accoum. except that investments of the Reserve Account in the Expansion Bond Fund must mature within sesen years from the date of making the insestment.
Additional Expansion ilonds
- 1. Additional Espansion Bonds may be issued under the Resolution and their terms shall be established by a Series Resolution.
2.
If such additional Expansion Bonds are being issued to acquire or construct a Power Plant, the amount to be authorized shall be not less than the amount of the estimated cost of the Power Plant, including capita!ized interest, Reserve Account provision and expenses of issuance after deducting estimated investment camings and any amount being provided for by moneys other than bond proceeds. Such authorized amount may be issued at one time or from time to time.
3.
Ifoweser, in case of issuance from tin'c to time, debt service computations (involved in determining compliance with the carnings test provision of tne Resolution respecting additional Expansion Bonds) shall re-late to the total authorized amount, with equal annual combined principal and interest payments, computed at the aserage interest rate on the Expansion Bonds then being issued, beginning the second July I following the then estimated date of commercial operation of tLe Power Plant and continuing until the final maturity date of such Expansion Bonds theretofore issued or then being issued. Also, in case of issuance from time to time, after the first of such authorized Expansion Bonds have been issued in compliance with the carnings test provision of the Resolution, second and subsequent installments of the authorized Expansion Bonds may be issued provided that the Construction Engineer shall file with the Expansion Bond Fund Trustee a certificate that in his opinion the costs of construction of the Power Plant hase not increased so as to require an increase in the amount of Expansion Bonds authorized for the Power Plant. If the costs of construction have increased, the Authority must increase the amount of the authorized issue accordingly and must again comply with the carnings test provision of the Resolution.
4.
If the Authority proposes to issue Expansion Bonds for a second project while a Power Plant partially financed is still under construction, the Construction Engineer for such Power Plant shall certify that the costs of construction of such Power Plant have not increased. If such costs have increased, the amount of Expansion Bonds authorized for such Power Plant shall be increased accordingly unless the investment of the proceeds of the Expansion Bonds or Revenues of the Author ty will be available to meet such deficiency, and the Authority must, in complying with the carnings test prcvision of the Resolution, reflect such increased amount of Expansion Bonds.
- 5. Additional Expansion Bonds may be issued provided that (a) there is no default in any of the provisions of the Indenture or Resolution; (b) the amount in the Reserve Account in the Expansion Bond Fund is, or will be upon issuance of such Expansion Bonds, equal to the Reserve Account Requirement; and (c) except in the case of the second or subsequent installments of authorized Expansion Bonds as set forth above, a certificate of the Consulting Engineer is filed with the Expansion Bond Fund Trustee evidencing l
34
comphance with the carnings test prosision of the Resolution. Such earnings test prosision is contamed in
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Article 11 (Section 21) of the Resolution and is briefly summariicd below.
6.
Net Resenues (being the Operating Revenues and Other income less expenses of operation and maintenance, except 1. case Payments and depreciation) in each succeeding tiscal year to and including (a) the fiscal year which is the third succeeding fiscal year after the date of sale of the additional Expansion Honds or (b) the fiscal year which is the first tiscal year after the date, or estimated date, of commercial operation of any Power Plant to pay the costs of construction of which additional Expansion Honds base been or are then being issued or are then authorized to be issued, whicheser is later, shall be at least equal to the sum of (i) the amount required in such fiscal year to pro Je for the payment of the principal of and interest on the v
Pnority Obligations, the Espansion Honds then outstanding, and the additional Espansion Honds then being iwued; (ii) the amount estimated to be required in such fiscal year to proside for the payment of the principal of and interest on aJditional Espansion Honds which hase been authorized but not yet issued; (iii) the amount required in such fiscal year for payment into the Lease Fund; and (iv) an amount equal to 89 of the gross res enues (Operating Resenue and Other income) in such fiscal year. In computing interest requirements, amounts funded or authorized to be funded shall be omitted.
l 7.
Net Resenues for each fiscal year covered by the carnings test sha!! be Net Revenues for the Base l
Period adjusted by the Consulting Engineer as prosided in the Resolution and summarized below. The Base Penod shall be twehe consecutise months out of the preceding eighteen n onths.
S.
The Consulting Engineer shall adjust the Net Resenues for the Base Period by any or all of the following conditions and requirements as may be appropriate to the circumstances; (a) Acquisition of operating electric utility properties; (b) Changes in rates including any which are to go mto effect not less than 12 months poor to (i) l the estimated Date of Commercial Operation of the new Power Plant or (ii) the date to which interest on the additional Expansion Honds then being issued is capitahzed, whicheser occurs earlier; (c) New or amended power sales contracts with customers; (d) Insestment income on increased amounts to be held in the Reserse Account in the Expansion l
Ilond Fund by reason of the issuance of additional Expansion Honds; 1
l (e) increases or decreases in power production expenses in case water conditions during the Base Period resulted in output of the Authority's hydroelectric generating facilities bemg more or less than the average of the preceding twenty years; l
(f) Estimated revisions of salary and wage rates and fuel, equipment and supply prices and rate realation prosisions of power sales contracts; (g) Power sales contracts with other electric utilities for the sale by the Authority of surplus power l
and energy and power purchases from other electric utilities to supplement the Authority's generating I
capability; and (h) increases in sales to custom 9 at rates of increase determined after a study of the rates of increase for the preceding ten fiscal years and other factors which the Consulting Engmeer may deem pertment and increases in cost associated with the increase in sales and the installation of additional facilities.
Amendments of the Resolution Effected by Supplemental Resolutions 113 a supplemental resolution, adopted February 16, 1977, the Authority has amended the foregoing prosisions of the Resolution respecting additional Expansion Honds, to take effect at such time as the 1973 Honds and the 1974 Honds are no longer outstanding, so that subclause (iv) of clause (b) of paragraph 6 shall read:
35
"(is ) an amount equal to 12r: of the grow resenues (Operatmg itesenues and Other income) after Jeducting therefrom ' fuel' espense (includmg ' nuclear fuel espense') and the energy related com-g ponent of ' purchased power' expense deternuned in accordance with the Uniform S) stem of Accounts prescnbed for Pubbe Utihties and 1.icensees of the i ederal Power Comnnwion in clicct on January 1, 1977, in suth hseal years."
Ily a supplemental resolution, adopted August 31,1977, the Authority has amended the foregomg pro-sismns of the ltesolution respectmg addmonal 1:xpansion llands. to take c!!cct at such time as the 1973 lionds, the 1974 Ilonds and the 1977 itefunding Ilonds are no longer outstanding, so that daur (b) of paragraph X shall read:
"(b) Changes i._.ac rates of the Authonty which hase been adopted by the Authority at.d are then in ellect or udl be m effect m a fiscal year to which his certificate pertains?
Neparate Splem Under the Itesolution, after the Priority Obligations base been retired, the Authority may create a separate utility system for the purpose of financing facilities for the generation of electne power and energy or for the transmiuion thereof at soltages of 230 kV or more, by the iwuance of bonds or other evidences of indebtedness, other th:m ITransion llonds, which shall be payable solely from the resenues or other income derised from the ownership and operation of such separate utility sptem. In the event that the Authority shou!J purchase. for use in the Sptem, power and energy produced or transmitted by such separate utility sptem, payments therefor would be payable only after required payments hase been made to the !!xpansion liond I und and the I. case Fund.
.lunior I.icn Obligations Notinng m the Itesolution shall prevent the Authonty from issuing bonds, notes, bond anticipation notes, warrants, certdicates or other esidences of ind btedness the payment of which shall be made from the pro-
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ceeds of I spansion lionds or other indebtedness of the Authority or from revenues, arJ if payable from resenues sha!! be made junior and subordinate to the payment of the Expansion llonds. The Authority may create special foads to proside for the payment of such obligations, payments to which shall be made after payments to the lhpansion llond l'unJ, and may, at the Authority's option, be made prior to or after payments into the I case Fund.
I'ngineering Itcports and Audits
~l he Indenture requires that, no less frequently than once in each period of three years, the Authority and the Indentme 'I rustee shall each appoint an independent I ngineer who together shall select a third Independent Engineer, the three to constitute a "lloard of Engineers", who shall resiew the books and records of the Authority, inspect the properties and report its findings and recommendations. Under the ltesolution, af ter the Prionty Obligations base been retired, the Consulting Engineer will perform such function.
The Itesolution requires that, whenever the Authority has determined to iwue additional Expansion llonds m connection with the acquisition and construction of a Power Plant, it shall engage a Construction Engineer, with experience m the design and constructmn of power plants and estimating the cost thereof, to design and supersise construction and to prepare the cost estimates and quarterly progress reports required by the lleso-lution. For the Summer Nuclear Station Gilbert Awociates, Inc. is performing the design services, Daniel Construction Company is providing construction services and SCE&G is providing overall management and preparing the cost estimates. Ilurns & Itoe, Inc. has been appointed Construction Engineer for Winyah Units 3 and 4 and Crow Units I and 2. Ihe itesolution also requires the Authority to employ a Consulting Engineer, with esperience in analy/ing the operation of electric utility sptems, forecasting loads and resenues, preparing rate analpes and preparing feasibility reports respecting the financing of electric sptems, to prepare any certificate which is icquired by the Itesolution in connection with additional Expansion llends, sales of property or any other matters.
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The Resolution requires quarterly financial reports and an annual full audit and report to be made by g
a ecrtified or chartered Accountant. Ihe Resolution aho requires, during the period of construction of any Power Plant, a quarterly progress report. Any such report shall be furnished to any llor.dholder who has furnished his name and address for such purpose.
Insurance TI:e Indenture and the Resolution require the Authority to insure such of its various properties as are usually insured by utilities owning like properties in similar amounts and coserages, with insurance companies, and to carry hability insurance in reasonable amounts.
Sale,l. case or Other Disposition of Properties
'Ihe Autnority may sell, lease or otherwhe dispose of the System if simultaneously therewith prosision is made for the retirement of all outstanding Priority Obligations and Expansion llonds. The Authority may sell, lease or otherwise dispose of any part of the 5 stem if the Consulting Engineer shall certify to the Authority 3
that, after taking into consideration the use by the Authority of the proceeds of su~h sale, lease or other dnposition, the estimated Resenues to be derised from the remaining properties of the System will be sulli-cient to enable the Authority to comply with all the covenants and conditions of the Resolution. The Authority may sell, lease or otherwise dispose of surplus lands, crops, timber, stumpage, buildings and any portion of the works, plant and facilities which shall become unsmiceable, inadequate, obsolete, worn out or unfit to be used in the operation of the System or no longer necessary, material to or useful for such operation.
Esents of Default and Remedies under the Resolution So long as any Priority Obligations are outstanding, the rights and remedies upon an Event of Default provided by the Resolution may only be escreised by the holders of the Expansion llonds and the llond Fund Trustee to the extent that the excrei6e of such right or remedy will not impair the rights of the holders of the Priority Obligations. lisents of Default under the Indenture and the remedies of the holders of the Priority D
Obligations and the Indenture Irustee are summarized below under the subcaption " Events of Default and Remedies under the Indenture" An lisent of Default under the Resolution may occur which is not an Esent of Default under the Indenture and rire vma.
Under the Resolution, the happening of one or more of the following events constitutes an Event of Default: (i) default in the performance of any obligation with respect to payments into the Revenue Fund; (ii) default in the payment of the principal of or default for 30 days in the payment of interest or sinking fund installments on any Expansion Ilonds; (iii) default for 90 days in the obsenance and performance of any other of the covenants, conditions and agreements of the Authority in the Resolution; (iv) the sale or conveyance of any properties constituting part of the System except as permitted by the Resolution or the failure to use its best efforts to maintain, the voluntary forfeiture or the lapsing or termination by negleci or default of, any license, franchise, permit or other prisilege necessary or desirable in the operation of the System; and (v) certain esents in connection with the bankruptcy, insolvency or reorganization of the Authority.
1 In case an livent of Default has occurred which has not been eured, the llond Fund Trustee is required to exercise such of the rights and powers sested in it by the Resolution and use the same degree of care and skill in the exercise thereof as a prudent man would exercise or use under the circumstances in the conduct of his own a!! airs.
If an Event of Default has occurred, and shall not have been remedied, the Ilond Fund Trustee or the holders of not less than 259 in principal amount of the Expansion llonds then outstanding may declare the principal of all Expansion lionds and the interest accrued thereon to be immediately due and payable, but such declaration may be rescinded under certain circumstances.
Af ter the occurrence of an Event of Default and prior to the curing of such Event of Default, the llond Fund Trustec may, to the extent permitted by law, but only if the Priority Obligations are no longer out-37
standmg, take powession and control of the %) stem and operate and m.iintain the same, presenbe rates for espabihty or power sold or supphsd through the facihties of the System, collect the gross resenues resultmg l
from suth operatum and perform all of the agreements,md onen.mts contained in ;my contract which the Authonty is then obhyated to perform Suth gross resenues, subject to the tights of the hohlers of the Psiority Obhp inons, sh dl bc apphed nrst to the payment of the reasonable expenses and h.duhues of the llord I und f rustce and thcicatics to the payment of opt rahng expenses and principal of and mterest on the lixpansion ilonds After all sums then due m respcu of the l sp. union lionds base been pmd, and after all Ikents of Delauh h.nc been cmed or setuted. to the sanstaction of the liond I und t rustee, the liond I:und Trustee is requoed to schnqunh pouession and connol of the Sptem to the Authority. At any suth time the llond I und Irusice shall be entokd to the appomiment of a recener of the business and property of the Sprem, of the moneys. secontics and f unds of the Anthonty pledged under the Resolution, and of the Resenues, and of the income therction), with all such powers as the touit or courts making such appointmem shall confer,
't he Rcsolution empowers the llond I und I rustce to file proofs of claims for the benefit of the holders of the lapanuon llonds m b.mkiuptcy, insohcncy, or scorg.nu/ation proteedmps and to institute suit for the collection of sunn due and unpaid in wnnet hon w oh the Iap.msion lionds, to enforce specilie performance of costnants contained in the Resolution or to obtain injunctne or other appropriate rehef for the protection of the holders of the Inpansion ilondt No hohler of 1%p.msion llonds has any nght to institute suit to enfore :my prosision of the Resolution or the execution of any trust thereunder f cxcept to enforce the payment of prmeipal or interest installments as they matureI, unless the liond I:nnd I rustee has been requested by the hohlers of not less than 25G in pnncipal amount of the i spansion llonds then outstanding to exercise the powers granted it by the Resolution or to instuute such soit and unlcw the llond 1:und Trustee has refused or failed, within 60 days after the receipt of such request and af ter h.ning been ollcred adequate security and mdemmty, to comply with such request. In the esent the llond I:und t rusice has tailed or refused to comply with the aforesaid request, the Resoluhon prosides for the creation of a "lloodboldcts' Conuniuce" 4
INents of Default and I emedics t nder the Indenture 1:nder the Indenture, the happening of one or more of the following esents shall constitute an Ikent of Defauh : (i) def ault in the payment of the poncip.d of any Priority Obliganon when the amount shall become due and payable whether by the ternn thereof. by call for redemption or by d slaration; (ii) default in the payment of any installment of mterest on any Priority Obligation when the same shall become due and payable, and such defauh shall mutinue for 30 days; (m) default for 60 days in the payment or setting aside l
of any amounts reqmrcd to be paid to or set aside in, or in the performance of any other obligation contained I
in the Indenture in respect of the Resenue i und, the Interest I und, the liond 1 und, the Debt Senice Reserve l'und, the Contingency I und, the Capital Imptosement 1 und or the Speci.d Resene l'und whith is required by the terms of the Indenture to be made; tis ) any improper payments by th; Authority out of any of the funds mentioned in (iii) abose, unlew reimbursed or corrected within 30 days after written notice el such default from the i rnstce, which notice shall be phen upon the request of the holders of not less than 10G l
of the outstandmg Priority Obliganons; t v) the sale, transfer, assignment or conveyance of the System or l
any portion thereof, necessai> or desirable in the use and operation thereof, otherwise than as permined by the indenture or the allowante of any of its f ranchises, casements, or other rights, necessary in the operation l
of suth properties to lapse or to be forfeited; hi) the lapse of forfeiture of any license, permit or franchise l
of the Authonty necess.n> in the operation of such properties; hii) certain events in connection with the bankiuptcy, insoheney or scorgani/ anon of tis Authority; and hiii) default by the Authority in the observ.
l ance of any other cosenant, condition or apretment of the Authority under the indenture continuing for a period of 60 dap after written notice of such default to the Authority from the t rustee, which notice shall be gnen upon request of the holden of not Icw than 59 of the Priority Obligations.
l
~ihe temedies avadable to the Indenture t rustee and the hohlers of the Priority Obligations under the indenture include remethes substantially identical to the remedies of the liond 17und Tiustee and the holders of the bpansion ilonds summarved herein under the subcaption "lSenh of Default and Remedies under the l
38 i
l
Resolution", except that the Indenture only provides for the appointment of a receiver and does not proude
)
for the Indenture Trustee to take possession of the System.
Alodifications of the Resolution Niodifications of the Resolution and of the rights and duties of the Authority and the holders of Expan-sien Bonds may be made with the consent of the Authority and written consent of the holders of not less than 6W; in principal amount of the Expansion Bonds at the time outstanding; provided that no modifica-tion shall be made which will (i) permit the creation of a lien on the Revenues pledged under the Resolution superior or prior to or on a parity with the lien of such llonds (except to the extent provided in respect to the issuance of additional Expansion Bonds or Priority Obligations to refund outstanding Priority Obligations) or which will gise any preference to any such Bonds over any other such Bonds or (ii) cxtend the fixed maturity date for the payment of any Lixpansion Bond, or reduce the principal amount of or interest rate on any such llond or reduce any premium payable upon redemption or adsance the date upon which any Expansion Bond may first be called for redemption; or (iii) reduce the percentage of Expansion Bonds the holders of which are rtquired to consent to any amendment to the Resolution; or tiv) give any Expansion Bond or Bonds any preference mer any other Expansion Bond or Bonds or reduce the payments required to be made to the Expansion Bond Fund, without the consent of the holders of all the Expansion Bonds atiected thereby.
Defcasance The obligations of the Authority under the Resolution shall be fully discharged and satisfied as to any Expansion Bond and such Expansion Bond shall no longer be deemed to be outstanding thereunder when payment of the principal of and the applicable redemption premium, if any, on such Bond plus interest to the due date thereof (a) shall have been made or caused to be made in accordance with the terms thereof, or (b) sh-Il hase been provided by irrevocably depositing with the Bond Fund Frustee or the Paying Agents D
therefor in trust solely for such payment (i) moneys sutlicient to make such payments or (ii) Permitted Insestments (as hereinafter defined) maturing as to principal and interest in such amounts and at such times I
as will insure the availability of sutlicient moneys to make such payment, and, except for the purposes of such payment, such Expansion Bond shall no longer be secured by or entitled to the benefits of the Resolution; provided that, with respe t to Expansion Bonds which by their terms may be redeemed or otherwise prepaid prior to the stated maturities thereof but are not then redeemable, no deposit under (b) above shall constitute such discharge and satisfaction unless such Expansion Bond shall have been irrevocably called or designated for redemption on the first date such Expansion Bond may be redeemed in accordance with the provisions thereof and notice of such redemption shall have been given or irrevocable provision shall have been made for the gising cY such notice. Permitted Investments are defined in the Resolution as (i'; direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America. (ii) public flousing Bonds or Project Notes fully secured by contracts with the United States of America and (iii) obligations to the payment of the principal of and interest on which the full faith and credit of the State of South Carolina is pledged.
PAY 31ENTS TO STATE AND EOCAL GOVERN 31ENTS Payments in lieu of taxes to the State of South Carolina and local governments in each of the last five fiscal years have been:
1975
$1,168,063 1976 1,394,477 1977 2,531,775 1978 1,853,982 1979 1,926,696 See item 9 under caption "Certain Provisions of the Indenture and Resolution-Funds and Accounts".
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PENDING LEGAL PROCEEDINGS 4
No htigation is now pending, or, to the knowledge of the Authority, threatened, questioning the corporate existence of the Authority or the right of its ollicers to their respective otlices or the right of the Authority to fix rates and other charges for the sale of electric energy, or questioning the right of the Authority to issue the 19SOA Honds.
There are no other actions, suits or gosernmental proceedings pending, or to the knowledge of the Author-ity, threatened, before any court. administrative agency, arbitrator or gosernmental body which will, if determined adsersely to the Authority, hase a material adserse effect on its financial condition or its ability to transact its business.
TAN EXENIPTION In the opinion of Bond Counsel, interest on the 1980A Bonds is exempt from present Federal income taxes under existing laws and regulations, and the 1980A Honds and interest thereon are exempt from present South Carolina property and income taxes.
APPROVAL OF LEGAL PROCEEDINGS Wood & Dawson, New York, New York, and NieNair Glenn Konduros Corley Singletary Porter & Dihble, Columbia. South Carolina. Bond Counsel to the Authority, will render opinions with respect to the validity of the 1980A Honds. A copy of such opinions will be printed on the 1980A Honds and will be in substantially the form set forth in Appendix IV. Certain legal matters will be passed upon on behalf of the Underwriters by Simpson Thacher & Bartlett, New York, New York.
RATINGS Nfoody's Investors Service, Inc. and Standard & Poor's Corporation have g;ven the 1980A Bonds ratings of "Al" and "A+", respectively. Such ratings reflect only the respective views of such organizations and an explanation of the significance of such ratm;s may be obtained only from the rating agency furnishing the same. There is no assurance that such ratings will continue for any given period of time or that they will not be resised downward or withdrawn entirely by either or both of such rating agencies, if in the judgment of either or both, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the 1980A Bonds.
UNDERWRITING The 1980A Honds are being purchased by the Underwriters for whom Lehman Brothers Kuhn Loeb Incorporated Blyth Eastman Paine Webber incorporated,51errill Lynch, Pierce, Fenner & Smith Incorporated, Smith Barney, liarris Upham & Co. Incorporated and The Robinson-liumphrey Company, Inc., are acting as representatis es. The Underwriters have jointly and severally agreed, subject to certain conditions, to purchase the 1980A Honds at an aggregate discount of S1,496.250 from the initial ofTering prices set forth on the cover page of this Orlicial Statement, plus accrued interest,if any. The Contract of Purchase provides that the Under-wri ers will purchase all 1980A Honds if any are purchased. The initial offering prices may be changed, from t
time to time, by the Underwriters.
The Underwriters may offer and sell the 1980A Bonds to certain dealers (including dealers depositing 1980A Bonds into investment trusts) and others at prices lower than the prices stated on the cover page hereof.
AllSCELLANEOUS All of the foregoing summaries of the Act, Indenture, Resolution, Contract Obligation, Lease Contracts, I
F Power Contract, Summer Agreement, Beck Report and Burns and Roc Letter are made subject to all of k
the provisions of such documents and such summaries do not purport to be complete statements of such 40 l
g prosions. Reference is hereby made to such documents for further information in connection therewith. The y
Ilcek Report, audited financial statements and the llurns and Roe Letter are attached as Appendices I,11 and lit, respectncly, to this Otheial Statement. A copy of each of such documents may be examined at the main office of the Authority in Moncks Corner, South Carolina, at the ollice of McNair Glenn Konduros Ccriey Singletary Porter & Dibble, Ilond Counsel, in Columbia, South Carolina, and at the othee of Wood &
Daw son, Ilond Counsel, in New York, New York.
The agreements of the Au'hority with holders of the 19XOA Ilonds are fully set forth in the Resolution and the Ninth Supplemental liond Resolution. This Ollicial Statement is not to be construed as a contract aith the purchasers of the 1980A llonds. Any statements herein involsing matters of opinion or estimates, whether or not expressly so stated, are intended merely as such and not as representations of fact. This Otlicial Statement has been approved by the lloard of Directors of the Authority.
Sourii CAROLINA PulitIc Sr RVICE AUTitontTY By /s/ WII.UAh! C. ME5CIIER I
Wi!!iam C. Mescher President and Chief Executive Oflicer l
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APPENDIX I The Report of R. lI'. Reck and Aswciates which follon s was prepared on the assumption that the l 1980A Ronds would be issued m the principal amount of $105,000,000 at an average annual interest rate of 8.5G ond uith a final maturay of July 1,2019. As set forth in the Ol]icial Statement, the 1980A Ronds are being is.ned in the principal amount of S75.000,000 at an as crage annualinterest rate of 9.98Cc and with a final maturity of July 1, 2010. In the opinion of the Authority, the diferences in interest rate and terms of the 1980A Hands would not materially afect the projected debt service coverages shown in Exhibit D to this Report. Because the net proceeds of the sale of the 1980A Ronds will be lower than the amount auumed in this Report. the Authority may be required to issue additional Expansion Rands in the future in order to complete the financing of Il'inyah Unit 4. R. W. BECK AND Assonus (NLNilb WD(OW Linis 15' o E ni C ( h ( N 4 I'k.s l 'FMnC'0't I [f "m"*' rosiom nou - [,]"". omsno n orn s % s..s _ s March 7,1980 south CAnot1NA Pusuc SERVICE AUTiloRITY 223 North L.ive Oak Drive Moncks Corner, South Carolina 29461 Gentlemen:
Subject:
Consulting Engineer's Report on Financing and Capital Improvement Program Presented herein is a summary of our analyses, investigations, and swdies concerning the financing and capital improvement program of the South Carolina Public Service Authority (the " Authority") to accompany its OHicial Statement iegarding the issuance of 5105.000.000 Electric System Expansion Revenue Bonds, 1980 Series A (the "1980A Bonds") to fund the costs of completion of construction of a fourth coal-fueled steam electric generating unit adjacent to the Winyah Generating Station Units Nos.1,2, and 3, and to fund certain general improvements to the Authority's electrie system and general plant. A detailed description of the unit which is now under construction by the Authority with commercial operation scheduled on May 1, 1982,is set forth in the section captioned "Winyah Generating Station Unit No. 4." On Apri! 19,1979, the Authority authorized the issuance of S200,000,000 of Electric System Expansion Bonds (" Bonds"), to finance the costs of construction of the fourth coal-fueled steam electric generating unit at the Winyah Generating Station, certain transmission facilities and to proside an amount to increase the coal fuel stockpile at the Winyah Generating Station ("Winyah No. 4"). and $10.000,000 to fund certain general system improvements. The Authority has heretofore issued $110,000,000 of such authorized Bonds (the "1979A Bonds"). On March 27.1980, the Authority is expected to authorize the issuance of $81.000,000 of the Bonds to fund the costs of completion of Winyah No. 4 and $24.000,000 of Bonds to pay a portion of the costs of certain general improvements. The remaining $19,000,000 of Bonds authori7ed for Winyah No. 4, are not expected to be issued and the Authority is expected to reduce the authorization to S181,000,000. Concurrently, the Au hority is expected to increase to S343,000,000, the authorized amount of Bonds to be issued to pay I-l SeaHIe. W A Deaver. CO e PhoeMs. AZ
- Orlando. FL Columbus. NE e We4edey, M A Indianapolis. IN. Minneapolis. MN Nashville, TN
- Sacramento. CA
the esumated tosts of acipaisition and construction of its ownership interest in the Vhgil C Summer Nuticar Station 1:mt No. 1 ( the " Summer Nuclear Station"). ~l he adddional llonds authon/cd to fund acqmsition I a'n! constt uction of the Summer Nucle.ir Stanon are not being iwucd at this time, but are expected to be issued at a larcr date. 't he 19XOA flonth and the athhhonal Hond, for Summer Nuclear Station which are to be authori/c I but are not now being iwoed are consulcred Authon/cd lionds for purposes of this report. Referente is made to the Prchmin.ny othcul Statement of the Authority dated Alarch 7,1980 (the "()l!icial Siatement") for a desupnon of the liond Resolutmn, as amended and supplemented (the "Remlution"). CAPII AI. I\\lPROVI311'N I PROGRATI 't he Authority's capital improvement program for the fiscal years 1980-1985 consists of new power supply f acihhes and pencial imprmements, includmg imprmements to present power suppl 3 facihties, exten-sions and improvements to transmission f a,;ilitics, imprmements to the Authonty's distribution system and pencral plant and a new othce and senice comples at Stoncks Corner, South Caruhna. 'i he major power supply and trammisuon facihties included in the Authority's capital imprmement program are shown on the centeriold map. The Authontis capital imprmement plan for the hscal years 19x01985 and the expet ted wurces of funds therefor are summati/cd m the f ollowing paragraphs. Winyah Gent rating Station,1: nit No. 4 't he Authority is now constructing Winyah No. 4 which consists of a coabfueled steam-clectric unit of appimunately 2ho AlW net capabihty and associated trammissmn lacihtics. 'I he Winyah No. 4 unit will essen-tially be i duphcate of Winyah Generating Station llmt No. 3 ("Winyah No. 3") and wdl be located at, and becorne an integral part of, the Winyah Generating Station whn h is located approximately three miles south-west of the ('ity of (ieorretow n, South ('arolina. 'I he Wmyah Generatmg Stahon presently comists of Winyah Generating Station ll nit No.1 ("Winyah No. 1") wluch was placed in commercial operation on N1 arch 26, 1975; Winyah Generating Station linit No. 2 ("Winyah No 2") which was placed in commercial operation on July 1,1977; and Winyah No. 3 which is presently under construction and scheduled to be placed in commercial operation on Stay 1,1980. 'Ihe Authority has retained Ihtrns and Roe, Inc. as design and con truction eng,ineers for Winyah No. 4 to prepare plans and specifications, to perform related senices, and to manage construction of the project. A detailed descophon of Winyah No. 4, exclusive of certain transmission facihties and the allowance for increasing the coal fuel stockpile, as prepared by llurns and Roc. Inc., appears in Appendix lit of the O!1icial Statement. A wmtruction permit setting forth rc<piired performance conditions has been issued by the South Carolina I)cpartment of Ilealth and I mironmental Control (" Dill C"). 'Ibe Authority and flurns and Roe, Inc. have imheated that other required permits and licemes have been or are expected to be obtained on a schedule connnemurate with construction and operation needs Commercial operation of Winyah No. 4 is now sheduled for Niay 1,19H2. Iloweser, to meet the Authoritis projected sununer peak demand in 1981, the Authority has accelerated portions of the Winyah No. 4 comtruction activities to provide for initial operation on June I,19x1. Following the summer peak demand period, the Authority plans to remove Winyah No. 4 from senice to complete final comtruction of the unit. 'I he total construction costs for the Winyah No. 4 unit are estimated by llurns and Hoe, Inc. to be i %I25,175,000. t his estimated total comtruction cost includes the cmt of pollution control equipment con-sidered adequate, in the opinion of ilurns and Roe, Inc., to meet exishng State of South Carolina pollution control codes and regulations This amount is approximately 521,000,000 below the construction cost estimated by llurns and Roe, Inc. at the time of authorization of Hands to fund Winyah No. 4. As of I)ecember 31, 1979, the Authority had entered into 54 contracts totaling apprmimately 593,349.000 which represent apprmimately h0% of the estimated total direct construction cmts of the unit; engincering was approx.mately SM; ; and metall comtruction was approximately 20'J complete, in addition to the construction cmts of the Winyah No. 4 unit, the total capital costs of Winyah No. 4 include an amount to fund certain transmission facilities necessary to dehser the output from the pencrating sta- { tion to the AuthmityN existing transmiwion systetu and an amount to increase the coal fuel stockpile at the Win-I-2
yah Generating Station. Such transmission facilities willinclude a 230 kV transmission line and terminal facility k from the Winyah Generating Station to the Authoritis Hemingway Substation. Construction of such facilitics has commenced, with completion planned in early 1982. The Authority has estimated the costs of the transmission facilities to be 59,000,000 and the coal fuel stockpile to be $5,000,000. The estimated total capital costs of Winyah No. 4, as prepared by Burns and Roe, Inc., and the Authority, excluding funded interest, reserves and financing expenses, are summarized in the following table.
SUMMARY
OF ESTIMATED CAPITAL COSTS WINYAll NO. 4 Generating Station: Land and Land Rights Structures and Improvements 12,396,000 Boiler Plant Equipment 61,228,000 Turbine Generator Unit 18.576,000 Accessory Electrical Equipment 5,469,000 N1iscellaneous Power Plant Equipment 61,000 Station Equipment 2,358,000 TOTAL DIRECT CoNSTRIJCTION Cost $ 100,088,000 Engineering Design and Construction N1anagement 8,340,000 Escalation Included in above accounts Contingency 11,455,000 Other Costs and Expenses 5,292,000 TOTAL CoNSTRL'CTioN COST GLNERATING SrATioN $ 125,175,000 Transmission Facilities
- 9,000,000 Fuel Stockpile 5,000,000 TOTAL CAPITAL COSTS-WINYAn No. 4
$ 139,175,000 ' Amount sbn includes the estimated cost of the 230 kV Winyah-Ilemingway line and terminal facilities. Winyah Generating Station Unit No. 3 The Authority is now constructing Winyah No. 3, a coal-fueled steam-electric unit with an expected net capability of approximately 280 MW, and associated transmission facilities. Winyah No. 3 will be located at and become an integral part of the Winyah Generating Station. Winyah No. 3 will be essentially a duplicate of Winyah Nos. I and 2 with the exception of changes in the cooling water and flue gas treatment systems. A construction permit, setting forth required performance conditions, has been issued by DHEC. The Authority and Bras and Roe, Inc. have indicated that cther permits and licenses which are required for construction or operation of Winyah No. 3 have been or are expected to be obtained on a schedule commensurate with construction and operation needs. The total construction costs for the Winyah No. 3 unit are estimated by Burns and Roe, Inc. to be $ 127.230,000. This total estimated construction cost includes the cost of sulfur dioxide emission control equipment considered adequate, in the opinion of Burns and Roe, Inc., to meet existing State of South Carolina pollution control codes and regulations. This amount is approximately 315,000,000 below the construction cost estimated by Burns and Roe, Inc., at the time of authorization of the 1978 Bonds. As of December 31, 1979, the Authority had entered into 76 construction and equipment contracts totaling approximately $111,600,000 which represent approximately 93Cc of the estimated total direct ccnstruction cos:s of the unit. Overall site construction was estimated to be approximately 91Cc complete. Initial operation of the unit is expected to commence in March 1980, and commercial operation is scheduled for May 1,1980. In addition to the construction costs of the Winyah No. 3 unit, the total capital costs of Winyah No. 3 ) include certain transmission facilities necessary to deliver the output from the generating station to the Authority's existing transmission system and an amount to increase the coal fuel stockpile at the Winyah I-3
Generating Station. Construction of the transmission facilities commenced in mid-1978, with completion planned in the Spring of 1980. The Authority has estimated the costs of the transmission facilities to be j $ 9,000,000 and the amount for increased coal fuel stockpile to be $4.800,000. The total capital costs of Winyah No. 3 tased on a May 1,19SO commercial operation date are estimated to be $141,030,000, exclusive of funded interest, reserves and financing expenses. Summer Nuclear Station The Authority and South Carolina Electric & Gas Company ("SCE&G") have entered into a joint owner-ship agreement dated October 18.1973, providing the Authority and SCE&G which own the Summer NucIcar Station as tenants in common, with undisided interests of 33B G for the Authority and 66%G for SCE&G. Pursuant to this agreement, SCE&G acts for itself and as agent for the Authority in the construction and operation of the Summer Nuclear Station, including fuel acquisition and management. The Summer Nucicar Station is now under construction at a site approximately 26 miles northwest of the City of Columbia, South Carolina. on the east bank of the Broad Riser and adjacent to SCE&G's Fairfield Pumped Storage flydroelectric Station. The Summer Nuclear Station will be capable of producing a net output of appioximately 900 MW under expected operating conditions. The construction permit for the project was issued by the Atomic Energy Commission, the predecessor agency to the Nuclear Regulatory Commission (the "NRC") on March 21,1973. SCE&G reports that as of December 31,1979 the engineering of Summer Nuclear Station was approxi-mately 94G complete and construction was approximately 949 complete. SCE&G submitted its application for an operating license to the NRC on December 10,1976, and it was accepted by the NRC for docketing on February 24.1977. On May 21,1979, the NRC announced its intention to delay the issuance of new operating licsnses and construction permits pending the outcome of the sarious investigations of the Three Mile Island accident (see subsection in the OHicial Statement " Capital Improvement Program-1980-1985-Summer Nuclear Station"). In January 1980, SCE&G revised the construction schedule to reflect the present status of projtet constraction and to incorporate known changes in regulatory requirements which have evolved as a consequence of the Three Mile Island accident. SCE&G's present construction schedule calls for completion of Summer Nuclear Station and its readiness for fuel loading in I)ecember 1980. However, SCE&G cannot load fuel prior to the issuance of an operating license, and the NRC statI has projected that an operating license will not be issued prior to the spring of 1981. After fuel loading, approximately six months are required for start-up, testing, power ascension procedures, compliance with regulatory procedures and other matters before commencement of commercial cperations. SCE&G has revised its estimates of construction costs for Summer Nuclear Station based on a June 1981 commercial operation date. The ability of SCE&G to meet the June 1981 commercial operation date will, in our opinion, require that the NRC promptly resume and diligently pursue licensing activities as well as a major emphasis by SCE&G on future construction efforts and a fully integrated testing and start-up program. In our opinion, it will be prudent at this time to allow for a further delay in the commercial operation date of Summer Nuc! car j l Station (to redect, in part, possible additional delays in the issuance of the operating license) in planning l th, ower supply resources available to meet expected loads during the summer of 1981. Wc believe that it is reasonable at this time to assume a commercial operation date of December 1,1981 for power supply and financial planning purposes. The estimated construction costs, which have been furnished by SCE&G, are based on a commercial l operation date of June 1981. Such total estimated construction costs of Summer Nuclear Station, excluding nuclear fuel, contingencies and interest or other carrying charges, but including an allowance for escalation to the June 1.1981 commercial operation date are now estimated to be $682,630,000. This is approx-imately $69,094,000, or 11.39, above the construction costs estimated by SCE&G at the time of issuance of the 1979A Bonds. SCE&G reports that the principal factors which have contributed to such increase in the estimated construction costs are due to delays in the completion of the construction principally to incorporate new regulatory requirements arising from the Three Mile Island cccident and higher than predicted inflation rates. 1-4
As shown in the table which follows, the Authority's ownership share of the total estimated construction ) cost, as estimated by SCE&G, is $227,543,000. In addition to the total estimated construction costs of the project, we have included $3,000,000 as u part of the capital costs to be prosided from bond proceeds for the estimated one-time capital cost to the Authority representing its obliga' ion for costs assignable by SCEAG to Summer Nuclear Station for cooling water supplied from the upper re,enoir of SCEAG's Fairfield Pumped Storage Project; $15,500,000 for the estimated cost of the Authority's share of the initial nuclear fuel core based on the estimated cost of uranium concentrate < discussed hereinafter in the section captioned " Fuel Supply" $351,000 for the Authority's direct costs not otherwise included in SCE&G's construction cost esti-mates; $2,000,000 as the Authority's share of working capital; and 58,200,000 as a working fund for nuclear fuel replacement. The foregoing estimated amounts are exclusise of allowances for contingencies. In our opinion, it is prudent at this time to include a substantial allowance for contingencies in planning the financing for the Authority's ownership share of Summer Nuclear Station to provide for the possible delay in commercial operation, as hereinbefore discussed, and a reasonable amount for unforescer construc-tion costs. We believe that an allowacce for contingencies of 517,000.000 is reasonable at this time. This contingency prosides for a possible further six-month delay in comercial operation plus approximately $5,000,000 for additional changes and modifications which may result from further regulatory changes ewhing from the Three.\\lile Island accident. The resultine estimated capital cost of the Authority's ownership share of Summer Nuclear Station, including the foregoing amount for contingencies, but excluding funded interest, resenes and financing expenses, is $273,594,000. The Authority has heretofore issued $284,600.000 of Bonds to pay the costs of acquisition and con-struction of its ownership share of Summer Nuclear Station and, concurrent with the authorization of the 1980A Bonds is expected to increase to $343,000.000 the authorized amount of additional Bonds for such purpose. The total amount of Bonds issued and authorized are estimated to be sutlicient to pay the costs of construc-tion based on a commercial operation date of June 1,1981 as presently projected by SCE&G, including the I funding of interest requirements to that date. For purposes of planning the financing requirements for D Summer Nuclear Station the Authority and we base assumed a commercial operation date of December 1, 1981 with interest requirements funded to June 1,1982. Based on such assumption, the total amount of Bonds which will be required to be issued to pay the costs of Summer Nuclear Station is estimated to be $390,000,000, of which $284,600,000 hase heretofore been issued. The remaining $105,400,000 of Bonds are presently contemplated to be issued subsequent to the assumed commercial operation date. Our projections l of operating results assume such amount and an issuance date in early 1982, 1 I-5
SO3DIAltY OF ESTITI ATED CAPITAL COSTS Sununer Nuclear Station l ($000) Authority's Ownership Total Plant (1) Share Land and 1.and Rights 700 233 Structures and Improsements(2) 114,900 38,300 Reactor Plant Equipmeat 172,300 57,433 Turbine Generator 1.quipment 44,000 14,667 Accessory I lectrical Equipment 40,500 13,500 N1;scellaneous Power PLmt Equipment 7,200 2,400 Station Equipment 5,600 1,867 Construction Costs 118,628 39,543 Subtotal-Direct Construction Costs $503,828 $ 167,943 Other Direct Costs: Engineering 5 56,745 5 18,915 Ow ner's Cost 99,921 33,307 Sales Tax 3,000 1,000 Other Costs 19,136 6,378 lotal-Const ruction Costs $682,630 $227,543 Nuclear Fuel-Initial Core 15,500(3) Water Rights Adjustment 3,000 l otal-Plant Costs $246,043 Contingencies 17,000 Authoritis Diieet Cost 351 Working Capital: Nuckar i uel 8,200(4) Other 2,000 Total Capital Costs-Authority's Ownership Share $273,594 (1) ILised on Jann.u s 198n eshmates by SCF&G. (2) incluJes transmiuion sh uttures and impiosements. (3) na'cJ on appiosimately s 2 ', of milial core uranium concentrates already receised from Westinghouse at the contract piste and appiosunate?) 1 S', picsicusly punhased on spot mar ket. t4) insludes approximately $1.052.000 for the Authorit/s share of uranium concentrates purchased by SCE&G on the spot mar ket and aunlable to hit partial needs for reload fuel. Crow Generating Station in order to meet projected load growth through the 1980's, the Authority has initiated studies and taken certain acticos including the purchase of land and the placement of orders for certain long delisery equipment for the development of a major generating station, which for planning purposes has been referred to as the " Cross Generating Stat on" to be located in llerkeley County. South Carolina. The Cross Generating Station, i as presently planned, will ultimately be expanded, subject to Federal and state regulatory approval and the granting of necessary licenses and permits, to accommodate four 450 51W coal-fueled steam-clectric units. In order to facilitate construction access when subsequent units are to be constructed, the Authority's plans proside that the first 450 51W unit at the site will be designated as Cross Generating Station Unit No. 2 FCross No. 2") and the second 450 51W m:it at the site will be designated as Cross Generating Station ( Unit No.1 (" Cross No.1"). ( I-6
The Authority has retained Burns and Roe, Inc. as design and construction engineers for Cross Generating g Station. The Cross Nos. 2 and I units wi!! include air and water pollution control facilities as required to meet uppheable Federal and state regulatory requirements. The total construction costs for Cross No. 2 are esti-mated by Burns and Roe, Inc. to be $373,617,000. As of December 31,1979, the Authority had entered into 21 contracts totaling approximately 5120,547,000 which represenu approximately 329 of the total estimated construction costs of the unit. Commercial operation of Cross No..: is presently scheduled for November 1983. The ability of the Authority to meet the scheduled date of commercial operation will depend upon the timely receipt of the necessary licenses and permits and execution of an accelerated construction schedule. In addition to the estimated construction costs of Cross No. 2, included as a par: of the planned project capital costs are amounts to fund certain 230 kV transmission facilities necessary to deliver the power and energy from the generating station to the Authority's existing transmission system and an amount to establish an initial coal fuel stockpile at the Cross Generating Station. The Authority has estimated the cost of such transmission facilities as presently planned to be 535,000,000 and the allowance for initial fuel stockpile to be 512,200,000. The resulting total estimated capital cost of Cross No. 2, exclusive of funded interest, reserves and financing costs,is $420,817,000. The Authority is proceeding with initial work on Cross No. I to allow commercial operation commencing May 1,1985. The total construction costs for Cross No. I are estimated by Burns and Roe, Inc., to be $400,000,000. As of December 31,1979, the Authority had entered into 12 contrac:s totalling approximately SSI,7S8,000, which represents approximately 20G of the total estimated construction costs of the unit. The Authonty reports that the contracts awarded pertaining to Cross No. I are cancellable by the Authority for a period of two years after the date of said contracts without incurring any cancellation charges. In addition to the estimated construction costs of Cross No.1, included as a part of the planned project capital costs are an amount to fund certain transmission facilities and an amount to increase the coal fuel stockpile at the Cross Generating Station to accommodate the initial fuel requiremerits associated with Cross No.1. The Authority has estimated the cost of such transmission facilities as presemly planned to N $17,300,000 and the allowance for increasing the coal fuel stockpile to be 515,000.000. The resulting total estimated capital cost of Cross No.1, exclusive of funded interest, reserves and financing costs, is 5432,300,000. The Authority has not heretofore authorized Bonds for the Cross Generating Station. Based on present construction schedules and cost estimates, the Authority estimates that it will be necessary to issue approxi-mately $545,000,000 of Bonds for Cross No. 2 and $594,000,000 of Bonds for Cross No.1. Such Bonds are planned to be issued in a number of series of issues. The first such issue is now planned for the fall of 1980. General Imprmements The proposed general improvements for fiscal years ending 1980-1985 include extensions and improve-ments to the Authority's transmission and distribution systems, general plant, and existing generating facilities. The costs of transmission and distribution system improvements, which include both the construction of new facilities and the upgrading of existing facilities planned for construction during the fiscal years ending 1980-1985 as estimated by the Authority are (i) transmission and distribution substations- $40,900,000; (ii) transmission and distribution equipment, improvements, betterments and customer facilities-536,175,000; i and (iii) transmission and distribution lines-542,500,000, which includes two 230 kV transmission l lines from the Jetieries Generating Station to a new substation near the site of a major primary aluminum reduction plant being constructed by Alumax, Inc. of South Carolina ("Alumax"). The Authority estimates that the construction of the substation and a line will be completed by July 1980 which is in suflicient time to proside electric power and energy requirements to Alumax pursuant to the terms and conditions of the Alumax contract as presently amended. Other general system improvements planned for fiscal years 1980-1985, and the estimattd cost thereof, include (i) improvements to existing generating facilities required to maintain and improve availability and etliciency-$32,326,000. (ii) improsements to general plant-540,206,000; (iii) future generating station site studies and acquisitions-$4,000,000; and (iv) initial construction of additional future generating units - 571.863.000. This latter amount represents anticipated costs associated with future generating units scheduled to be completed subsequent to fiscal year ending 1985. The majority of such expenditures are expected to be incurred during the later portion of the Authority's capital improvements program. I-7
The improvements to general plant include $13,525,000 for the construction of a new headquarters facility for the Authority located in N1oncks Corner, South Carolina. The Authority has acquired property for j the new facility, has entered mto a contract with the County of flerkeley, South Carolina for the sale of the existing facility, and is proceeding with plans for completion of the new facility in fiscal yeat 1981. The amount included in the capitalimprovement program for this facility is net after sale of the existing facility. I'stimated Costs and Expected Sources of Funds-1980-1985 Capital Improsement Program 'Ihe estimated capital costs, exclusive of funded interest, reserves and financing costs, of the Authority's capital improsement program for tiscal years 19SO-1985, together with the expected sources of funds to pay such estimated costs, are summarized in Exhibit A. ENPECTED DISPOSIIION OF llOND PROCEEDS Ilased upon estimates of direct construction costs and other capital costs as set forth above, and upon a commercial operation date of May 1,1982, the expected disposition of the proceeds from the sale of the 1979A Ilonds allocable to Winyah No. 4 and the 19SOA Bonds required for the construction of Winyah No. 4 and certain general ssstem improvements is shown in the following table: FINANCING ltEQUIREMENTS FOR WINYAll NO. 4 AND GENERAI, SYST131 IMPROVEMENTS ($000) 1980 A Ilonds W"'ah No. 4--- - r-otal Total 1979A 1980A Improsements 1980A Ilonds llands( 1,) limuh( l ) 19M0AItonds llands Capital Costs $ 139,175 $ 76,109 $63,066 $22,393 $ 85,459 Iess: Amounts from Investment in-come( 2 ) 15,814 7,457 8,357 913 9,270 Accrued Interest 589 589 0 0 0 l Paid From Hond Proceeds $ 122,772 $ 68,063 554,709 $21,480 $ 76,189 Reserve Account (3) 13,516 6,631 6,885 2,040 8,925 Funded Interest (4) 41,563 23,777 17,786 0 17,786 Hond Discount 3,149 1.529 1,620(5) 480(5) 2,100 ~' Principal Amount of Honds $ 181,000 5100,000 $81,000 $24,000 $ l 05,000 t1) Amounts shown reflect that portion allocable to Winyah No. 4. (2) Amouna shown inchide insestment earnings to December 31.1979 if any, and future insestment earnings at an estimated average annual rate of 8.50%, as prouded by the Authont> s financial adusor. (3) Pur*uant to the ite olution, the amounts show n are equal to the maumum annual amount of interest requirements. (4) Amounh hown reflect interest requirements to Nosember 1,1982 of $23.776.911 associated with the portion of the 1979A lionds allocable to Winyah No. 4 and estimated interest requirements to November 1,1982 of $17,786 On0 awo-ciatcJ with the portion of the 1980A lionds allocable to Win >ah No. 4. (5) Amoun's shown are estimated at 2.OuG of the principal amount of Ilonds. IlUSINESS OF TIIE AUTIIORITY 'lhe Authority was created in 1934 by an Act of the General Assembly of the State of South Carolina to construct and acquire flood control, nasigation and reclamation works on the Cooper River, the Santee Riser and the Congaree Riser and to produce, distribute and sell electric power. The Authority initiated its electric power operations in 1942 upon completion of construction of the Santec Cooper Hydroelectric
- Project, During the twelve months ended December 31,1979, the Authority sold 6,138 million kilowatt-hours of electric energy and teceived total operating resenues of $144,592,804, as shown on Exhibit C. At December 31,1979, the Authority's net electric plant in service (electric plant in service less accumulated depreciation) as reported by the Authority was $377,037,393 (unaudited). During the ten-fiscal year period 1970 through I-8
1979, the Authority invested $41,114,742 in additions and improvements to its utility plant from operating ) revenues. The Authority sells electric energy at wholesale to puPc authorities and other utilities and at retail to industrial, commercial and residential customers. Elcetric System Properties The Authority owns electric generation, transmission and aistribution facilities and leases certain generation and transmission facilities under contract with Central Electric Power Cooperative, Inc. (" Central") which are operated collectisely by the Authority as a fully integrated electric system. The Authority's generating capability in service totals 1,456 MW comprising 130 MW of hydroelectric,1,142 MW of steam electric, and 184 MW of combustion turbine capability, in addition, the Authority purchases 105 MW from the Southeastern Power Administration ("SEPA") which amount includes approximately 44 MW associated with wheeling SEPA energy to preference customers and excludes 50 MW of purchased reserves. Transmission and distribution facilities include approximately 2,549 miles of 230 kV,115 kV,69 kV and 44 kV overhead transmission lines, 89 sub-stations, distribution system properties, offices and other buildings, equipment and related facilities. Rates In the opinion of the Authority's general counsel, the Authcrity is empowered and required under the Act to fix, establish and collect rates, tolls and other charges which shall be at least sufficient to provide for the payments of a!! costs and expenses of ownership and operation and maintenance of the properties and facilities of the Authority and to conform to the requirements of its Resolution and Indenture. We have relied upon such opinion in developing our projections. The Indenture and Resolution, under which the Authority's outstanding priority obligations and Bonds were issued and the 1980A Bonds will be issued, require that the rates and charges shall be at least adequate to produce revenue sufficient for the payment of all obligations of the Authority, including payments into all l funds established urder the Indenture and Resolution, and that the Authority will, from time to time and as often as necessary, revise the rates and charges to provide the required revenues. The Authority hns rr.aintained rates for electric service which have been sullicient to provide for all oper-ating and maintenance costs and expenses, debt service, lease payments, repairs, renewals to and replacements of its electric system and for substantial additions thereto. At the same time, the Authority's charges for electric service compare favorably with those of other major suppliers in the State of South Carolina as shown on Exhibit B. Rate increase-Stay 1979 The rates presently in efIect applicable to residential, commercial, municipal street lighting and industrial customers were adopted on March 21, 1978 and became effective on power deliveries after May 1,1979. These rates were subsequently reviewed in light of the Authority's then most recent capital and operating budgets and modified accordingly by the Authority's Board of Directors on January 29,1979. The rates are applicable to residential, commercial, municipal street lighting, and industrial customers. The rates are designed to produce an estimated increase in revenue for the fiscal year ending June 30, 1980, of approx-l imately $9,809,000, or an increase in revenues from customers other than Central of approximately 10.79. The average percentage increase on the basic rate schedules to major customer classes is estimated to be approximately 10.5% for industrial customers,14.8% for municipal customers,11.8% for commercial cus-tomers and 9.6% for residential customers. Rate increase-Afay 1981 On March 26, 1979 the Authority's Board of Directors adopted new rates to become effective for power deliveries commencing May 1,1981. The new rates, based on projections for the fiscal year ending June 30,1982, and as compared with rates presently in effect, were designed to produce an estimated increase in revenues from customers other than Central of approximately $21,377,000, or an increase in revenue of I-9
approximately 12.69. The average percentage increase in the basic rate schedules to major customer classes is estimated to be approximately 8.39 and 12.4% for large (350,000 kWh or more per month) and small ( mdustrial customers, respectively,6.64 for municipal customers,23.9G for commercial customers and 21.3% for residential customers. The rates will be subject to resiew prior to their implementation to reflect any changes in estimated costs determined appropriate at the time of the review. Rate increase-May 1982 in conjunction with its program of future power supply development, the Authority adopted a program prosiding for rate increases which it estimates will be required to carry out the initial phase of developing the Cross Generating Station. To carry out this program the Authority, by resolution of its Board of Directors adopted on N1 arch 26,1979, provided for increases in rates to become effective for power deliveries commene-ing not la'er than May 1,1982 which when compareJ with rates scheduled then to be in etTect will produce an increase in resenues from customers other than Cemral of $23,175,000 or approximately 9.8% in the fiscal Scar ending June 30, 1984 distributed to major customer classes based on a cost of service study. With the rescheduling of the conunercial operation date of Cross No. 2 to November 1983, the Authority may elect to defer the ctiective date of such rate increase to November 1,1982. In our projections of operating results we base assumed that the Authority will cleet to so defer the effective date of this rate increase. The Authority has iccently authocized preparation of a detailed rate study to implement the rate pro-gram previously adopted and to reflect any changes to the projected cost of service which have occurred subsequent to the adoption of the rate program. Prior to the efIcctive date of the rate increase, the Authority proposes to resiew such rate program and adopt rate schedules applicable to each customer class. The Authority has also taken action to initiate a rate pre, ram which will be required in connection with the deselopment of the first two units at the Cross Generating Station. Execpt as hereinbefore discussed, we have not included the etTects of such program in our projections. The adopted rates of the Authority have been based on future costs and reficct, in general, certain of the ratemaking standards established by the Public Utility Regulatory Policies Act. Existing contracts entered into between the Authority and Central, the most recent contract having become effectise April 29,1971, as amended (the "E Power Contract"), provide among other things that the Authority will furnish and Central will purchase, until October 22,1987, all of Centrars power and energy requirements. After October 22, 1987, and for the remainder of the F Power Contract (June 2005), the Authority is obligated to sell and deliver to Central, and Central is obligated to purchase and receive annually from the Authority 600 million kWh. The F Power Contract includes provisions for periodic rate review and rate changes related to costs pursuant to a formula. As the result of the most recent rate review efTective January 1,1979, the monthly charge applicable to power and energy delivered to each point of delivery is $1.875 per kilowatt of billing demand and 5.65 mills per kWh for the first 100,000 kWh of billing energy and 4.33 mills per kWh for all additional billing energy. The energy charges are adjusted monthly for increased cost of fuel and purchased energy pursuant to the terms of the F Power Contract. The Authority and Central hase carried out extensive negotiations concerning a new contract pursuant to which the Authority's rates to Central would be determined on the basis of a cost-of-service methodology substantially similar to the methodology utilized by the Authority in determining its rates to its other large customers. In our opinion, rates so determined applicable to Central would produce revenues from Central which will be greater than revenues derised from Central under rates determined pursuant to the F Power Contract for equivalent amouats of power. The proposed contract will also provide joint ownership of future power supply resources. The proposed contract will also contain provisions whereby Central will have the right to own a portion of future generating facilities to be constructed to serve the combined loads of the Authority and Central. The proposed contract has been approved by the Authority's Board of Directors and Centrars Ibard of Trustees but must be approved by the REA Adn inistrator prior to its becoming etTective. Occause it is not possible at this time to determine whether the REA Administrator will approve the contract and if changes may be required, our projections as they relate to the Cross Generating Station and future sales to Central and the attendant revenues and expenses attributable to Central hase been based on the terms [5 of the existing F Power Contract. I-10 l
In our projection of operating resenues for the Authority for the period iiscal years 1980-1984, we l have utilized the rates, and resenues resul ting therefrom, which are to become efTective as hereinabove discussed. Under the provisions of contracts with certain industrial customers, the Authority is required to resiew its rates not less than 120 days prior to the elTective date thereof and to adjust the rates to reflect then current data. Such reUcw and adjustment of the tates which became effective for power deliveries commencing Alay 1,1979 re undertaken prim to the etfective date. Power Contract with Alumax,Inc. On September 23,1977, the Authority and Alumax Inc., an integrated aluminum co.npany, entered into a contract for power supply to a major prim:.ry reduction plant to be constructed in the Authority's service area. This contract has been subsequently assigned to Alumax Incorporated of South Carolina ("Alumax") but Alumax, Inc., guarantees performance under the terms of the assignment. (See subsection captioned " Power Contract with Alumax loc." in the Ollicial Statement.) Under the provisions of the power supply contract, as amended, the Authority agrees to make available and Alumax agrees to purchase (i) 166 N1W for the first potline commencing April 1,1980, (ii) 80 51W for the first half of the second potline commencing October 1,1980, and (iii) 55 A1W for the second half of the second potline commencing December 1,1980. In addition, the Authority agrees to make available, upon 6 months' notice,30 N1W of additional power for the second potline. The contract also contains provisions pursuant to which the Authority agrees to provide power supply to third and fourth potlines as follows: for a third potline-150 to 160 51W upon at least 42 months' notice from Alumax to be given not prior to 8 months after notice is given for service to the second half of the second potline which notice for sersice to the second half of the second potline was given July 30, 1979; for a fourth potline-150 to 160 N1W upon at least 42 months' notice from Alumax to be given not prior to 8 months after notice is given for the third potline. Alternatively, the Authority agrees to provide 300 to 320 N1W for a third and fourth potline upon Alumax giving at least 50 months' notice to be given not prior to 51 arch 30,1980. The contract also prosides that during an initial operating period of up to 12 months for the first potline and 8 months for the second, third and fourth potlines Alumax is required to pay for power and energy caly as actually furnished an.1 used. Thereafter Alumax is required to pay the demand charge in accordance with the applicable rate schedule for the amount of power specified in t!.e notice. The rate for service to Alumax is to be at the Authority's large industrial power rate schedule as revised from time to time by the Authority. Under the contract Alumas has certain rights of review of the Authority's rates applicable to it. Similar review rights are also extended to Atacalloy Inc., another large industrial customer of the Authority. Alumax commenced initial site work in June 1978, and is proceeding with construction of the plant. Alumax reports construction work to be on schedule for initial operation of the first potline in July 1980, the first half of the second potline in October 1980, and the second half of the second potline in December 1980. In our projection of operating results we have assumed that deliveries of power and energy for the first potline would begin in July 1980 with a build-up to the full requirem, nts of the first and the second potlines by January 1981. The contract permits a demand of 30151W; however, Alumax has advised the Authority that the demand is expected to be 286 51W. These dates are approximately one year earlier than those used in our projections at the time of issuance of the 1979A Ilonds and rellect the anticipated power requirements as reported by Alumax. The prior projection represented the approximate maximum delay allowable under the contract for that portion of the Alumax load for which initial notice had been received. Pow er Requirements and Supply The Authority provides retail electric service for residential, commercial and other customers in Berkeley, Georgetown and Horry Counties, which includes the N1yrtle Ileach area, and to certain industries, public authorities, two municipalities and Central (which supplies 15 cooperative electric utilities) throughout its transmission area which encompasses, ir, whole or in part, the eastern two-thirds of the State of South Carolina. During the fiscal years ended June 30,1970 through 1979, the Authority's total system energy require-ments increased at an average annual rate of approximately 8.7G per year. D iring the period 1974 1-11
through 1976, the average rate of increase was less, reflecting the general effects of the energy crisis resulting from the oli embargo, conservation. and a cutback by one large industrial customer. The Authority's historical ( system power and energy requirements for the fiscal year 1970-1979 period are as follows: IIistorical System Power nnd Energy Requirements I'ses of Energy-31;Ilion kWh I'iwal Non. Total iear Peak To SEPA Territorial Setem Ended Demand
- For, L ltimate
% heeling Trans-Sprem Energy June 30 ( 51% ) Rcsale Cu tomers Total (11 actions (2) I m es Requirements 1970 558 1,219 1,589 2,808 0 78 180 3,066 1971 622 1,355 1,742 3,097 33(3) 631 227 3,988 1972 630 1,307 1,882 3,189 198 530 198 4,115 1973 736 1,576 2,048 3,624 198 680 257 4,759 1974 871 1,795 2,172 3,967 198 257 255 4,677 1975 911 2,018 2,241 4,259 198 46 232 4,735 1976 943 2,221 2,265 4,486 198 26 265 4,975 1977 1.089 2,577 2,527 5,104 198 53 310 5,665 1978 1,231 2,844 2,718 5,562 198 319 313 6,392 1979 1,241 2.882 3,071 5,953 198 50 307 6,508 1979(4) 1,352 2,987 3,151 6,138 198 132 303 6,771 (I) Does not inslude los<es as ociated with the w heeling of SEPA energy to preference customers. t2) Includes net interchange with SCI 1G and CP&L. and inadsertent energy,if any. (3) The Authority commenced on Stay 1,1971, the wheeling of SEPA energy to preference customers. (4) Twebe months ended December 31,1979. The Authority's existing power supply resources consist of hydroelectric, steam electric and combustion turbine power plants together with power purchased from SEPA with supplemental amounts of power pur-chased from time to time from SCE&G and Carolir;a Power & Light Company ("CP&L"). The existing power q supply resources net capability of each and year of initial installation of the generating units are shown below: Power St pply Resources Year First Capability Operated (%IW) Generation: Jefferies Hydroelectric Generating Statio.t 1942 130(1) Jefferies Generating Station: Units I and 2 1954 92 Units 3 and 4 1970 320(2) Grainger Generating Station (3) 1966 170(2) Winyah No. I 1975 280(2) Winyah No. 2. 1977 280(2) Combustion Turbines 1962 20(4) Combustion Turbines 1972 40(4) Combustion Turbine (3) 1973 20(4) Combustion Turbine 1974 20(4) Combustion Turbine 1976 28(4) Combustion Turbine 1979 56(4) Total Generation 1,456 Received from SEPA(5) 105 Total Power Supply 1,561 (1) Includes 2 N1W from Wibon Dam Generating Station. (2) Net capability available for peak load or short term operation; net continuous capability may be less. (3) Leased from Central. (4) Summer rating. (5) includes approximately 44 SlW associated with the wheeling of SEPA energy to preference customers, and excludes 50 $1W of reserse capacity purchased by the Authority from SEPA. 1-12
Fuel Supply h During the twebe months ended December 31,1974 Se Authority's total system energy supply, including SEPA energy wheeled to preterence customers, was dei ,roximate!y 79.39 from coal-fueled generation, 0.3Fc from oil-fueled generation,12.7'i from the Authoi ,ydroelectric facilities and 7.77c from purchases from SEP3, SCE&G and CP&L. By fiscal year 19S3, the nrst full fiscal year following completion of Summer Nuclear Station, this distribution of energy sources, including the wheeling of SEPA energy to preference customers, is expected to be approximately 75.6G from coal-fueled generatic,n,13.9Fc from nuclear-fueled generation, 5.70 from hydroelectric facilities, 3.4Cc from SEPA and other purchases, and. 4rc from oil-fucled generation. The Authority uses coal for fuel at three generating stations-Winyah, Jefferies (Units 3 and 4) and Grainger Generating Stations. Delis eries to Winyah a d Jefferies Cenerating Stations are by unit train shipment under long-term contracts with four rWning companies. The major part of the Authority's coal rcquLements are being purenased under four long-term contracts which expire December 31,1983, December 31, 1989, September 30, 1998 and December 31, 1999. The Authority nas entered into two additional long-term contracts providing for the delisery of coal beginning in 1980 and 1981 and expiring in the years 2000 and 2004, respectively. Limited " spot" purchases are utihzed when favorable prices can be obtained and I to meet requirements not satisfied by long-term contracts. Prices under the various coal contracts are subject to up or down adjustments based on production costs and prevailing market conditions. (See caption " Fuel Supply-Coal" in the Official Statement). The air quality requirements for emissions from the Authority's generating plants limit the maximum sulfur content of coal used at the individual coal-fueled stations and, in the case of the Winyah Generating Station, at the individual units. Following is the maximum sulfur content of coal allowabic under the present specifications utilized by the Authority for coal purchases to assure conipliance with existmg sulfur emission l codes and regulations. D %fnimum Sulfur Station or (Jnit Content t 1) 1 Jefferies 3 and 4 2.0"c Grainger 2.0 Winyah No. I 1.3 Winyah No. 2 1.1(2) Winyah No. 3 and 4 1.5(2)(3) (I) Based on coal hamg a heat content of 1, D0 R'u per pound. (2) With SO: scrubber in sersice. (3) Estimated by the Authority. The sulfur content of coal received under existing contracts ranges from about 0.97c to 2.09. The Authority has informed us that it anticipates no ditliculty in obtaining adequate coal with sulfur content within j acceptable ranges to meet foreseeable needs. The average cost of coal purchased by the Authority during the three fiscal years ended June 30,1977, 1978, and 1979 and during calendar year 1979, including :he cost of rail freight, was as follows: Fiscal Year Aseras:e At erage Ended Cod per Cod per June 30 Ton .\\fiHion Btu 1977 525.99 $ 1.124 1978 31.80 1.384 1979 34.95 1.484 1979* 35.85 1.476
- Twehe months ended December 31,1979.
At the present time, SCE&G, acting for itself and as an agent for the Authority, has contracts with Westinghouse Electric Corporation (" Westinghouse") for the supply of uranium rancentrates, conversion services and fabrication services to meet the Summer Nuclear Station requirements for the initial core loading I-13
and eight reload regions, of which one reload region is required approximately every 3 car. SCF&G has also the Umted States Energy ltescarch and Desclopment l contracted with th. Department of Energy, formerly Administration, to supply the necessary enrichment sersices through the Scar 2002, which is adequate for operanon through the year 2004. Facihties are being incorporated in Summer Nuclear Station for on-site storage of thirteen te oad regions of spent nuclear fuel which are expected to be adequate for approximately l ten years of operation. SCE&G presently has no prosis:ons for off-site storage of spent nuclear fuel. Our projections of operating results of the Authority are haed on the assumption that the cost of approx-imately 82G of the initial core uranium concenirate fuel requirements for Summer Nuclear Station previously supplied by Westinghouse will be the Westinghonse contract price as estimated by SCE&G. The remaining approximately 18G of the initial core uranium concentrate fuel requirtments are included at the spot market prices paid therefor. Additionally, it has been assumed that SCE&G will purchase uranium concentrates for reload nuclear fuel ass mblics on the open market at costs basco on price levels of approximately 544 per pound escalated at 54 per year. For a discussion of 1;tigation related to the nuclear fuel contract with Westinghouse, and the status of settlement thereof, see caption " Fuel Supply-Nuclear" in the Otheial Statement. Our projections do not refle:t any benefits which the Authority and SCE&G may derise as a result of settlement of the dispute except to the extent that such settlement may relate to the initial core as stated in the preceding paragraph. FUTURE l'OM Ett SUPPIX OPEllATIONS OF THE AUTIIOlHTY Estimates of the energy requirements of the Authority's system for the period 1980 through 1985 hase been prepared based upon an analysis of historical and current trends of customer and sales by class of sersicc and the prospectise sales to tne several classes of customers. These projections include the requirements of Alumax based on the assumption that Alumax will proceed with construction of the aluminum reduction plant to require and utilize power supply fram the Authority of 286 MW for the first and second potlir,es by January 1,1981 with build-up of loads prior to such dato as herein discussed. I ollowing is a summary of the projected energy requirements of the Authority for the period 1980 to 1985: Projected System Energy Requirements ISes of Energy- %1illion kWh Sales Total l'iscal Non Terri. Setem Year To SFPA torial ICnergy I nded l'or I ltimate % heel. Trans-Spiem Require. June 30 itesale Customers 'Iotal ing(l) action ( 2 ) I. owes ments 1979(3) 2,882 3,071 5,953 198 50 307 6,508 1980 3.207 3,290 6,497 198 0 363 7,058 1981 3,421 5,412(4) 8,833 198 0 430 9,461 1982 3.679 6,147(5) 9,826 198 0 468 10,492 1983 3,960 6,317(5) 10,277 198 0 493 10,968 1984 4,292 6,527(5) 10,819 198 0 520 11,537 1985 4,643 6,783(5) 11,426 198 0 555 12,179 (1) Ibes not include losses associated with the whcchng of SEPA energy to preference customers which are provided by SEPA. (2) includes net interchange with SCE&G and CP&l, and inadvertent energy,if any. (3) Actual. (4) Projected amounts of demand and energy sales to ultimate customers include 145 MW and approximately 1,933 million kWh of attendant energy atuibutable to Alumas. (5) Projected amounts of demand and energy sales to ultimate customers include 286 MW and approximately 2,455 milhon kWh of auendant enstgy altnbutable to Alumax. As indicated by the foregoing tabulation, the total system energy requirements of the Authority, including assumed annual energy sales to Alumax of approximately 1,933 GWh commencing in fiscal year 1981, and increasing to 2,455 GWh in the following fiscal year, can be expected to increase by approximately 73% in the six-year period 1980 through 1985. Such increase, excluding assumed direct sales to Alumax, is estimated to be approximately 389, This compares with an increase of approximately 39% in the six-year period 1974 through 1979. I-14
[ Power supply to meet projected req iirements through fiscal year 1985 will consist of the Authority's existing generation and firm purchases agg:egating 1.561 N!W the 280 51W from Winyah No. 3, the 300 51W from the Summer Nuclear Station, the 280 51W from Winyah No. 4, the 450 MW from Cross No. 2 and the 450 51W from Cross No.1. In addition to the Cross Generating Station, which, as now being planned, will contain four units hasing a combined capacity of approximately 1,800 N1W. the Authority is in the process of esaluating additional potential locations for selection as sites for future generating stations. As hereinbefore discussed, the Authority and Central hase entered into discussions concerning a new contract and possible joint ownership of future power supply resources. We do not know at this time what etIcet, if any, such discussions concerning a new contract and possible joint ownership of future power supply facilities will have on the Authority's future power supply facilities and projected requirements and the attendant resenue; and expenses attributable to Central. In our projection of future power requirements we have assumed that Central will continue to purchase all of its power supply requirements from the Authority pursuant to the terms of the F Power Contract. The Authority presently receives approximately 105 MW of firm capacity and associated energy of approximately 300 million kWh annually from SEPA. Approximately 44 MW and 198 million kWh are received for wheeling to the Authority's wholesale preference customers. The balance (approximately 61 MW and 102 million kWh) is purchased by the Authority for its own use. On June 29,1977, SEPA gave notice to the Authority that its contract will terminate efIcetive June 30, 19S1. In its notice of termination, SEPA advised the Authority that it * . has initiated the development of a new power allocation policy which is to be embodied in contracts as soon as possible after development, On October 16, 1979, SEPA announced in the Federal Register that it has developed a proposed power marketing policy for its Georgia-Alabama System of Projects which SEPA intends to implement as existing contracts expire. 'Ihe proposed policy is anticipated by SEPA to be implemented through negotiated contracts for terms not to exceed ten years and addresses the following major areas: (i) market areas; (ii) allocations of power; (iii) energy from pumped water; (iv) utilization of utility systems; (v) wholesale rates; (vi) resale h rates; and bii) conservation measures. Pursuant to the proposed policy, the existing preference customers within the marketing area will be entitled to retain their present allocations of energy and new preference customers located within the selected utility areas will be entitled to share equitably with existing preference customers in new power. The proposed policy indicates that wholesale rate schedules shall be drawn so as to recover all costs associated with producing and transmitting the power in accordance with then current repayment criteria and that production costs will be determined on a system basis. The proposed policy also contemplates that each customer purchasing SEPA power shall agree to finance and take reasonable measures to encourage the consersation of energy by ultimate consumers. In our projections of power and energy supply and operating results of the Authority, we have assumed that the Authority will continue to purchase the amounts of SEPA power provided for by the present contract. The reserves and standbys for the Authority's generating plants have been provided from the Authority's generating capability in execss of its power requirements and through interconnections with others. The Author-ity presently purchases 50 N1W of reserse capacity frorn SEPA under long-term contract. The Authority utilizes a planned rescrse criterion of 20G of the projected peak demand less firm purchases for power supply planning purposes. The Authority has interchange agreements with SCE&G and CP&L which provide for certain reserve arrangements and power sales between the parties. The Virginia-Carolinas Reliability ("VACAR") Agreement which the Authority executed on March 26, 1961, and which has been executed by SCE&G, CP&L, Duke Power Company, SEPA, Yadkin, Inc., and Virginia Electric and Power Company, prosides a basis which reasonably supports the assumption that pro-visions for limited term power purchases and sales among VACAR members will continue to be available in k the area. In addition, the Authority is a member of the Southeastern Electric Reliability Council, an organiza-I-15 i
tion of all major utilities in the southeastern United States whose purpose, among others, is to study and coordinate the activities of its members with regard to reliability and continuity of power supply. The Cooper River Rediversion Project (the " Project") was authorized by the Rivers and liarbors Act of 1968 to permanently reduce shoaling in the Charleston, South Carolina harbor. The Project, currently scheduled for completion in December 1983, under the direction of the United States Army Corps of Engineers (the " Corps"), includes the construction of a canal to divert waters into the Santee Riser which would have otherwise flowed into the Cooper River and an 84 MW hydroelectric plant on the diversion canal near St. Stephen, South Carolina (the "St. Stephen flydro Plant"). The reduced water flow in the Cooper River will limit the output of the Jefferies ifydroelectric Generating Station to approximately 44 MW at its present capacity factor. The output of the 84 MW St. Stephen flydro Plant, which will be made available to the Authority, will result in a total capacity available from the two plants being equal to the present capacity available from the Jetieries liydroelectric Generating Station when operated at approximately the same capacity factor that exists today. Additional capacity of up to 84 MW will be available to the Authority when the plants are operated at a lower capacity factor. Energy generated from the combined operation of the two plants is expected to be less than that currently being generated at the JefTeries flydroelectric Generating Station. A contract executed by the Corps and the Atchority provides for compensation to the Authority for the project's adverse ellects such as the reduction in energy generated, the loss of future capability at the JefTeries flydroelectric Generating Station, and the addition of cooling equipment rcquired at the JefTeries Steam Plant due to the reduced water flow. The contract also provides for compensation to the United States Government for the Project's benefits such as increased generating capacity. Under the terms of the contract, the Authority is not required in the initial year to accept full capacity available as a result of the Project, but it must accept at least 20 MW. The assumptions utilized herein regarding the conditions resulting from the Project are outlined in the " Projected Operating Results" section of this report. Recent studies undertaken by the Authority indicate certain of the dams at the Authority's hydroelectric q facility would probably not be adequate to meet the applicable design earthquake criteria. The Authority, in cooperation with the 17 deral Energy Regulatory Commission, is continuing to study the matter and it is not e possible at tnis time to determine what remedial measures, if any, may be required or what, if any, costs may be incurred in connection therewith (see section captioned " Regulatory Matters" in the Official Statement). Our projections assume continued operation of the Authority's hydroelectric plants under present conditions including arrangements relating to the St. Stephen flyt a Plant. The tabulation on the following page summarizes the projected loads and resources of the Authority for the calendar years 1980 through 1985. Data in this table is presented on a calendar year basis rather than a fiscal year basis because the Authority's peak system demand occurs in the summer months and the Authority plans its power supply resources on that basis. The loads set forth therein assume that Central will continue to purchase its entire power supply requirements trom the Authority in excess of amounts Central purchases from SEPA. See subsection captioned " Central Contracts" in Ollicial Statement concerning discussions with Central regarding future power supply. I I-16
Projected Power Supply Hesources and Loads ) (Amounts in MW, unless otherwise noted) Calendar Year 1980 1981 1982 1983 1984 1985 Power Supply Resources: Generating Capability Esistmg (I) I,456 1,456 1,456 1,456 1,456(2) 1,456(2) Under Construction (3) Winyah No. 3 280 280 280 280 280 280 Summer Nuc! car Station 300(4) 300 300 300 Wmyah No. 4 280(5) 280 280 280 230 Pta nned ( 3 ) Cross No.2 450 450 Cross No. 1 450 1 otal Generating Capability (M 1.736 2.016 2,316 2,316 2,766 3,216 SEPA Alk> cation 105 105(7) 105(7) 105(7) 105(7) 105(7) St. S:ephen flydro Plant '0(2) 40(2) iotal Power Supply Resources 1.841 2,121 2,421 2,421 2,891 3,361 Alasimum Annual Demand fluly-August) (8) 1.600 1,868 1,966 2,084 2,227 2,377 !.ess: Interruptible Demand 4u 40 40 40 40 40 Net Niaumum Annual Demand Re-sponsibility 1,560 1,828 1,926 2,044 2,187 2,337 Power Supply Resources Asailable for Reserves 281 293 495 377 704 1,024 Purchased Resenes 50 50 50 50 50 50 Total Purchased Resenes and Resources Auutable for Resenes 331 343 545 427 754 1,074 Total Purchased Resenes and Resources Avail-able for Resenes as a Percent of Net Staximum Annual Demand Responsibility less SEPA Allocation 23G 20 % 30 % 22 % 36 % 48 % ( t) See tabulation in section captioned " Power Reg urements and Supply" (2) l he Authority plans to purchase gradually inreasing portions of the capacity which will be made available as a result of the St. 5tephen flydro Plant: 20 SIW in 1984, and 40 MW in 1985. See section captioned " Future Power Supply Opera-tions of the Authoisty.' (3) Unit capabihties are shown in the first calendar year during thah units under construction or planned will be available to meet the sum:ner peak demand, which normally occurs in August. (4) Summer Nuclear Station is presently assumed to be available for commercial operation in December 1981; however, the first calendar Scar during which its capability will be available at the time of the Authority's projected annual system peak demand will be 1982. (5) Winyah No. 4 is planned to commence temporarily initial operation in June 1981, during the time of the projected 1981 annual system peak demand. (6) Amounts shown assume all units will be asailable for senice at the designated capability during the time of the annual system peak demand. (7) Assumes SEPA power equal to that prosided under the present contrcct will continue to be available after June 30, 1531, which meludes approumitely 44SIW of SEPA capacity wheeled to SEPA preference customers. (8) Projected masimum annual demands shown include projected interruptible loads. In 1981 and thereafter the amounts uaown include approumately 286 htW of demand associated with Alumax. PROJECTED OPEllATING RESULTS We have prepared estimates and projections of the operation, of the Authority for the period covering the fiscal > cars ending June 30,1980 through 1984 based upon our analyses of the Authority's retail and wholesale operations and the loads and resources of th Authority as hereinbefore discussed. Our projecdons of operating results for the Authority are presented in Exhibit D to this Report. Our projections are based on the following principal considerations and assumptions: 1. Projected revenues from customers other than Central have been based: (i) for power deliveries through April 1981, on rates presently in efIect; (ii) for power deliveries during the period May 1981 through October 1982, on rates adopted by the Authority to become effective May 1981; and (iii) for the period commencing with power deliveries in November 1982 and continuing thereafter through the term of the projections, on rates to be hereafter adopted to implement the rate program adopted by the Authority to become efIective November 1982, including in each case the fuel adjustment provisions of g such rates. Pursuant to the Authority's fintncing requirements for the constmetion of Cross No. I and its rate program, it may be necessary for the Authority to adjust its rates effective with power deliveries I-17
commencing in Stay 1984. Ilowever, such future rate adjustments have not been reflected in cur pro-jections of future operating results. Resenues from sales to commercial and large consumers, other than l Central, reflect the terms of the Authority's contracts with such customers. 2. Revenues to be derived from Central have been projected on the basis of the present terms of the F Power Contract, including adjustments computed in accordance with the contract. Upon com-plction of Summer Nuclear Station, a substantial amount of energy produced by the Authority will be from.:uclear fuel, the cost of which is projected to be less than the cost of fossil (coal and oil) fuel. The Authority has presiously adsised Central that it intends to reconsider the fuel adjustment clause in its contract with Central when nuclear power generation is commenced by the Authority and that concurrent therewith, changes will be negotiated in the rate and fuel clause prosisions of the contract which wdl be fair and equitable to both parties. The Authority and Central have entered into negmiations concerning a new contract and possible joint ownership of future power supply and related matters. It is not possible to predict at this time what changes may be made in the Central contract when Summer Nuclear Station is completed or as a result of the outcome of the discussions currently underway between the Authority and Central. Our projections of revenues and expenses assume that Central will continue to purchase its power supply requirements from the Authority as provided under the present contract.
- 3. Projections of revenues and power supply expenses assume that Alumax will require and utilize power supply from the Authority with a build-up of loads commencing in April 1980 to approximately 286 A1W beginning in December 1980 for the first and second potlines. These dates are based on the latest advice to the Authority from Alumax cnd reflect construction progress at the Alumax plant.
If Alumax gives notice to proceed with additional potlines as provided in the Alumax contract, as amended, or if the operation dates of any or all potlines change from those stated above, the projected revenue and expenses could change significantly, 4. Generation by the JeIIeries liydroelectric and Wilson Dam Generating Stations has been pro-jected for the fiscal year ending June 30,1980 at 745 million kWh, for the fiscal years ending 1981 through 1983 at 628 million kWh annually and 570 millicn kWh for the fiscal year ending 1984. Comple-tion of the Cooper River Rediversion Proiect and subsequent commercial operation of the St. Stephen Ilydro Plant currently scheduled to begin in December 1983 are expected to reduce the output of the Jefferies Hydroelectric and Wilson Dam Generating Stations to approximately 129 million kWh annually thereafter. Generation from the St. Stephen Ilydro Plant, which will be made available to the Authority, is projected to provide an additional 405 million kWh annually resulting in a combined output of 534 million kWh annually or net reduction in hydroelectric generation of approximately 94 million kWh annually. Generating capacity provided by the JelTeries Hydroelectric and Wilson Dam Generating Stations has been projected at 130 51W through fiscal year 1984. In addition. the Authority currently plans to purchase 20 51W of the capacity provided by St. Stephen Hydro Plant in fiscal year 1984 and 40 51W in fiscal year 1985. The estimated contractual costs associated with the anticipated benefits and adverse efTects of the Project have been netted and included as a purchased power expense. It is not possible at this time to estimate what costs, if any, or other measures. if any, may be required in connection with the dams of the Authority's hydroelectric facilities. Our projections assume continued operation at the Authority's hydroelectric plants including arrangements relating to the St. Stephen flydro Project.
- 5. Purchases and wheeling of power and energy from SEPA have been projected for the period shown on the basis that the Authority and SEPA will execute a new contract containing terms and con-ditions, including the power allocated to the Authority, which will be substantially the same as the present contract as to which SEPA has served notice of termination effective June 30, 1981. Such assumption reflects the average energy available for wheeling and direct use of the Authority's system of approximately 300 million kWh annually of which approximately 198 million kWh are wheeled for Central and municipal customers. The costs of purchases of power and energy from SEPA commencing in October 1979 through June 30,1984, reflect the recently approved, on an interim basis, adjusted wholesale power rate schedules applicable to the Authority which became effective for the billing month beginning October 1,1979.
I-18
- 6. The cost of coal has been projected using as the base the Author;ty's budget estimate for fiscal
) years ending June 30,1980,1981 and 1982 and escalated at the rate of approximately 8.7% per year throughout the remaining portion of the projection. 7. Upon advice of the Authority, we have assumed that no sales of surplus energy would be made to SCE&G or CP&L. 8. Power costs used herein are predicated in part on the availability of the following new generation resources in additica to the Authority's present resources; (i) 280 MW-Winyah No. 3 in May 1980; (ii) 300 MW-Summer Nuclear Station in December 1981; (iii) 280 MW-Winyah No. 4 in May 1982 with temporary initial operation in June 1981; (iv) 450 MW-Cross No. 2 in November 1983; and (v) 450 MW-Cross No. I in May 1985. The Summer Nuclear Station is projected to operate at an average monthly plant factor of approximately 60% during the first two years of operation and an 80% monthly plant factor for subsequent years with two-month refueling periods annually. (An 80% monthly plant factor with annual refueling period of two months is equivalent to approximately a 67G annual plant factor.
- 9. The Authority has or will obtain all licenses and permits required for all fossil fucied generation and transmission facilities included in its 1980-1985 capital improsement program on a schedule com-mensurate with construction needs, and SCE&G has or will obtain all licenses and permits required for Summer Nuclear Station on a schedule to permit commercial operation of the station no later than December 1,1981.
- 10. Nuclear fuel costs for Summer Nuclear Station are estimated on the basis that the 82% of the initial fuel core uranium already delivered will be at the costs provided in the Westinghouse contract.
All reload fuel uranium will be purchased on the open market at costs based on price levels of approxi-mately S44 per pound escalated at 5G per year.
- 11. The total amount of Bonds required to be issued to pay the costs of Summer Nuclear Station D
was estimated based upon construction costs as presently estimated by SCE&G and reflect an amount of $17,000,000 for contingencies for the Authority's one-third ownership share as hereinbefore dis-cussed and the Authority's purchasing its ownership share of the initial nuclear fuel under the terms and at the costs set forth in the Westinghouse contract, with the exception of the approximately 18% of the initial core uranium concentrates purchased by SCE&G on the spot market. Based on such costs and on an assumed commercial operation date of December 1,1981 as heretofore discussed, we have estimated that the total amount of Honds which will be required to be issued to pay the costs of construction of the Summer Nuclear Station including the funding of interest requirements to June 1,1982 is $390,000,000 of which $284,600,000 of Bonds have been herctofore issued. We have assumed that the Authority will authori7e and issue the remaining amount of such Bonds following commercial operation of Summer Nuclear Station (assumed to be December 1,1981) with interim financing as required to be provided by short-term borrowings.
- 12. Operation and maintenance expenses, exclusive of fuel, have been based on the Authority's budget estimate for fiscal years ending June 30,1980,1981 and 1982 and increased each year there-after to retlect increased expenses required for projected growth and escalation based on inflation rates and other conditions prevailing in the present economy.
- 13. Payments in lieu of taxes reflect present levels of such payments and are projected to increase approximately in proportion to increases in sales to certain classes of customers.
- 14. Revenues which are expected from rentals of land owned by the Authority, whccling of SEPA power for the account of the cooperatives and municipalities, and miscellaneous revenues including sales of timber harvested from Authority-owned lands have been projected at approximately current levels.
- 15. Investment income has been forecasted utilizing as a base the Authority's budget estimate for fiscal years ending June 30,1980,1981 and 1982 with adjustments calculated on the basis of
) applying a 7.5% to 8.5% annual investment earnings rate to expected increases in the level of funds c' available for investment in accordance with the Resolution. I-19
4 9h <h f* scayo k-9 k ef' ,s O g pjp ///// (f \\k// '%'O& pp k(4O' V i ee ev <u 1,0~ j T.ST TARGET (MT-3) i l i I ^ I 1.0 lfm BM amp E nt i l,l f
- O@
\\M 1.25 IA 1.6 i i 6" = 4 + e I. I. / / '43$ 'SN 3, .h,,<g&# O g$
g 4 4) O / \\ IMAGE EVALUATION NNNN i ] TEST TARGET (MT-3) 4 I l.0 ll 2 01A i !.= m g =2 2 i 't n1 t !S l]ll2.0 l-l L 1.8 1.25 1.4 ll i.6 l l 4 6" 1 i i .i 4 s/O 4 \\ [W>/p \\*?! %//// '4A>*( ~ o
- 16. Lebt service requirements for the period shown have been projected utilizing the following criteria: (i) the actual debt service schedules on ottstandmg Priority Obligations and on the Bonds heretofore issued, (ii) the estimated debt senice requirements at an annual interest rate of 8.5% as pro-vided by the Authoritis financial advisor on 5105.000,000 of 1980A Bonds with interest requirements on the portion allocable to Winyah No. 4 funded from Bond proceeds to November 1,1982; (iii) the estimated debt service requirements at an annual interest rate of 8.0% on 5105,400.000 of Bonds which have been assumed to be authorized but not yet issued for the completion of Summer Nuclear Station with interest requirements funded from Bond proceeds to June 1,1982 on said Bonds and Bonds heretofore issued allocable to Summer Nuclear Station; (iv) the estimated debt senice requirements at an annual interest rate of 7.5 % on $30,000,000 of Bonds to be issued in the spring of 1981 to fund General Improve-ments; (v) the estimated ocbt service requirements at an annual interest rate of 8.25G on the initial issue of 5200,000,000 and 7.5% on the completion issues of $345,000,000 for a combined amount of 5545,000,000 of Bonds :o be issued to fund the construction of Cross No. 2 with interest requirements funded from B~ '. pecceds to Stay 1,1984; (vi) the estimated debt service requirements at an annual interest rate of 7.59 on 5594,000,000 of Bonds to be issued to fund the construction of Cross No. I with interest requirements funded from Bond proceeds to November 1,1985 which is beyond the period of the projection shown; and (vii) the payment of principal and interest requirements, if any, associated with short-term borrowings utilized by the Authority for interim fmancing of capital improvements is assumed to be paid from the proceeds of future Bond issues.
Escalation rates other than for fuel have been based upon current inflation rates and other conditions prevailing in the present economy and, in our opinion, are reasonable for the purposes of the projections set forth herein. However, we can give no assurance that such rates will not be exceeded. Due to uncertainties caused by variable factors including labor disputes and other factors which influence the cost of all energy sources, we can give no assurance as to the reasonableness of the rate of escalation used herein with respect to fuel costs. Since at the present time it is not possible to predict the outcome of the litigation involving the Westinghouse contract or the availability or price of uranium from other sources, we can give no assurance as to the estimates used herein with respect to nuclear fuel costs. j OPINION Based upon our studies, investigations and analyses as summarized herein and the considerations and assumptions as set forth above, we are of the opinion that:
- 1. The Authority's proposal to construct and operate Winyah No. 3 and Winyah No. 4, each having a net generating capability of approximtacly 280 h1W with commercial operation scheduled in hiay 1980 and h1ay 1982 respectisely, the Authority's ownership of a one-third interest (equal to approximately 300 h1W) in the Summer Nuclear Station with commercial operation assumed in December 1981 and the proposed Cross ho. 2 having a net capability of approximately 450 51W with commercial operation presently scheduled for November 1983, all of which have heretofore been authorized by the Authority, together with the Authority's existing power supply resources, are necessary in order to produce additional power supply needed to meet the projected power requirements of the Authority for the period shown including the power supply requirements which will result from or be attributable to Alumax in :ccordance with the terms of the Alumax contract.
- 2. The construction, operation and ownership by the Authority of Winyah No. 4 as presently being designed by Burns and Roe, Inc. are economically feasible.
- 3. The net operating revenues of the Authority, after giving effect to the rate increase adopted by the Authority to become efTective beginning hiay 1981, will be adequate to meet all estimated debt service on all authorized Bonds, including $58,400,000 of Bonds to be authorized but not yet issued to pay the costs of construction of Summer Nuclear Station, and lease payment requirements for the periods shown and to make payments into the Capital Improvement Fund established pursuant to the Resolution, in amounts at least equal to the minimum requirement therefor, to provide for needed renewals, replacements and additions to the Authority's plant and facilities. If the Authority proceeds with construction and operation of Cross No. 2 as presently planned for commercial operation l
in November 1983, it will be necessary for the Authority to implement, effective not later than November I-20
1982, the rate program which the Authority has authorized and to adopt rates to produce revenues of net less than $23,175,000 in nscal year 1984 in excess of resenues estimated to be derived from the rates theretofore in effect. The additional resenues to be derived from such rates are estimated to be adequate to meet the additional debt service requirements on Bonds not now authorized but estimated to be required for the completion of the Summer Nuclear Station based on an assumed commercial operation date of December 1,1981.
- 4. The Consulting Engit.cer's Certificates required under the Authority's Resolution to issue the 1980A Bonds can be furnished.
l We have reviewed the Official Statement to which this Consulting Engineer's Report is appended and, in our opinion, the data presented therein which is taken from our report is accurately represented. I Respectfully submitted, R. W. BECK AND ASSOCIATES l l l I I-21
Exhibit A CAPITAL 131PROV131ENT PROGRA31(1) Fiscal Years 1980-1985 ($000) Estimated Capital Costs (2): Completion of Winyah No. 4(3) $ 124,832 Completion of Winyah No. 3(3) 62,107 Completion of Summer Nuclear Station-Authority's Share (3) 80,700 Cross No. 2( 3) 413,890 Cross No.1 432,300 Piture Generating Units 71,863 General System Improvements Generation System Improvements $ 32,326 Transmission and Distribution System Improvements (4) 119,575 General Plant Improvements (5) 40,206 Future Site Studies and Acquisitions 4,000 Total General System Improvements 196,107 Total Fstimated Cost of Capital improvement Program $ 1,381,799 Expected Sources of Funds: Proceeds of Bonds: Winyah No. 4 1980A Bonds $ 54,709 1979A Bonds 68,652 Winyah No. 3 1978 Bonds 144,155 Summer Nuclear Str. ;on ( Authority's Share) 1973 Bonds,1976 Bonds and 1977 Bonds (6) 179,929 Future Bonds (7) 58,606 General Improvements 1980A Bonds 21,480 l Additional Bonds Expected to be Authorized but not yet Issued Cross No. 2 Bonds (8) 378,975 Cross No. I Bonds (9) 381,233 General Improvements Bonds (10) 27,300 Total Proceeds of Bonds 1,315,039 Investment Earnings (l1) 202,319 Revenues (12) 157,528 Total Expected Sources of Funds $1,674,886 Less: Amounts Expended at June 30,1979(13) 293,087 Total Funds $ 1,381,799 (1) Excludes approximately $4,000,0no of facilities to be constructed and funded from REA loans to Central. Under the esisting lease agreements, the facilities are to be lemed and operated by the Authority. (2) The estimated capital costs shown are esclusisc of funded interest, resenes and financing costs. (3) Balance of estimated construction costs remaining as of July 1.1979. (4) Amount shown includes the following costs for transmission and distribution system improvements: (i) substations $40,900,000; (ii) equipment, betterments and customer facilities $36175,000; and (iii) lines $42.500.000. for the acquisit on and construction of a new otlice facility. (5) Amount shown includes a net amount of $13,525.000 i (6) The 1976 Bonds were defeased on March 10.1977, through the issuance of the 1977 Refunding Series Bonds. (7) Amount shown assumes the issuance in June 1982 of $105,400,000 of Bonds assumed to be authorized but not yet issued to pay the costs of construction to complete the Authosity's ownershy share of Summer Nuclear Station. (8) Amount shown assumes th( authorization and issuance of an aggregate of $545,000,000 principal amount of Bonds to fund the construction of Cross No. 2 with the initial series of said lionds assumed to be issued in mid-1980. (9) Amount shown assumes the authorization and issuance of an aggregate of $594,000.000 principal amount of Bonds to fund the construction of Crow No. I with the initial series of said Bonds assumed to be issued in mid.1981. (10) Amount shown assumes the authorization of General improvements Bonds in the principal amount of $30,000,000 to be issued in 198 L (11) Amount shown includes accrued interest resulting from the difference in the date of 'he bonds and the date of closing, actual investment earnings to June 30,1979 on funds which are retained in the various construction and improvement funds; and estimated future investment earnings on the: (i) Winyah No. 4 Construction Fund, (ii) Winyah No. 3 Construction Fund, (iii) Winyah No. 2 Construction Fund, fiv) Summer Nuclear Station Construction Fund (v) planned Cross No. 2 Construction Fund. planned Cross No. I Construction Fund, and (si) General Improvements Fund. (12) Amount shown includes anticipated payments into the Capital improvements Fund from revenues and the June 30,1979 l balance of said Fund of $11,755,136. (13) Amount shown includes construction expendituces, esclusive of funded interest, reserves, and financing costs, rounded as follows: (i) Winyah No. 4-$14.343.000. (ii) Winyah No. 3-578,923,000, (iii) Summer Nuclear Station (Authority's Share)-$192,894,000, and (iv) Cross No. 2-$6,927,000. I-22
APPENDIX I l Exhibit Il SOUTil CAllOLINA Pull 1.IC SEllVICE AUTIIOlllTY Comparison t,f Typical Alonthly llills (As of December,1979) Rnidentiall'lectric Senice Rate 300 500 700 1.000 Schedule LMh kWh LWh LWh Authority (1) (S) RS-79R 514.89 522.13 529.02 539.35 (W) RS-79R 14.14 20.58 26.37 35.05 Duke Power Company R 16.84 25.08 33.32 45.68 Carolina Power & Light Company (S) RES-9 16.47 23.85 31.23 42.30 (W) RES-9 16.47 23.85 31.23 40.38 South Carolina E!cetric & Gas Company (2) 8 19.38 28.30 37.21 50.59 Commercial Senice GOO lloun of kW Demand) Rate 3.000 5.000 7.500 Schedule kMh kMh kWh Authority (l) (S) GS-79R 5120.45 5196.35 5291.23 (W) GS-79R 102.25 166.15 246.03 Duke Power Company G 151.93 243.96 344.7S Carolina Power & Light Company SGS-9 116.42 190.71 269.83 South Carolina Electric & Gas Company (2) 9 165.48 275.80 381.70 Industrial Senice Rate 1.000 kW 2.000 kW 9.000 kW 40.000 kW Schedule 500.000 kWh 1.000.000 kWh 5.000.000 kWh 25.000.000 kWh Authority (3) L-79R $ 12,283.00 $22,898.00 5104,768.00 5501,918.00 Duke Power Company I 14,249.71 26,907.21 125,802.21 604,592.21 Carolina Power & Light Company LGS-9 13,330.00 26,435.00 126,425.00 606,975.00 i South Carolina Electric & Gas Com-pany(2) 23 15,600f 0 30,550.00 144,900.00 695,650.00 Summer rate schedule designated (S); Winter rate schedule designated (W). (1) Includes fuel adjustment credit of $.00405/kWh. (2) Rates in effect are under bond and subject to refund. (3) Includes fuel adjustment credit of $.00387/kWh. 1-23
APPENDIX I Exhibil C SOUTil CAltOLINA PUllLIC SEltVICE AU'lllORITY Summary of IIistorical Operating itesults Fiscal Year Ended June 30(1) Twelse hionths Ended cem-inc 31, 1979 1975 1976 1977 1978 1979 ( Unaudited ) Total System Requirements: Demand-AlW........... 911 943 I,089 1,23I 1,241 1.352 Energy Supply-htWh (2) 4,736,277 4,975,457 5,666,005 6.391,880 6,508,421 6,771,625 Less: Non-Territorial Sales (2) 46,520 25,710 53,654 318,773 50,104 132,433 Wheeling Deliveries (3) 197,865 198,407 197,M65 197,865 197,865 197,865 Net System Energy Supply 4,491,892 4,751,340 5,414,486 5.875,242 6,260,452 6,441,327 SalewMWh To Ultimate Customers (4) 2.240,698 2,265,356 2,527,592 2,717,611 3,071,019 3,150,975 For Resale (5) 2,018,602 2,220,560 2,576,795 2,843,955 2,881,781 2,986,858 Total Sales 4,259,300 4,485,916 5,104,387 5,561,566 5,952,800 6,137,833 Losses-AlWh 232,592 265,424 310,099 313,676 307,652 303,494 { Operating Revenues: A Sales of Electricity-Sales to Ultimate Customers (4) $43,767,696 $44,348,866 $50,268,249 $ 63,642,932 $ 74,320,502 $ 79,832,697 Sales for Resale (5)... 32,038,490 36,215.359 42,264,846 54,101,024 59,975,290 63,361,479 Non-Territorial Sales (2) 1,021,682 506,960 975,255 149(6) 280(6) 435t6) Total Sales of Electricity $76,827,868 $ 81,071,185 $93,508,350 $ 117,744,105 $134,296,072 $ 143,194,611 Other Operating Revenues: SEPA Transmission (7)..... 446,964 449,548 459.311 481,393 642,866 635,279 Land Rentais 321,272 322,420 322.264 322,107 321,887 321,845 Aliscellaneous 210,111 395,808 437,068 432,572 436,601 441,069 Total Operating Revenues. $77,806,215 $82,238,961 $94,726.993 $ 118,980,177 $ 135,697,426 $144,592,804 Operating Expenses: Production-flydro......... $ 816,028 $ 813,173 $ 1,187,721 $ 1,398,102 $ 1,711,304 $ 1,859,820 Steam and Combustion Turbine (excluding fuel) 2,740,028 3,603,055 5.785,867 7,486,113 9,540,080 9.905,124 Fuel (8). 37,704,204 42,716,672 46,848,296 76,168,515 81,056,669 82,561,218 Other...... 83,368 162,935 165,973 227,631 372,592 442,392 Purchased Power 13,679,493 2,213,916 8,331,935 (4,749,340)(6) 2,109,654(6) 865,090 Total Power Supply Expense $55,023,121 $49,569,751 $62.319,792 $ 80.532,021 $ 94,790,299 $ 95,633,644 Transmission Expense 1,241,540 1,325,484 1,922,761 2,237,102 2,591,969 2,699,893 Distribution Expense 714,509 817,709 920,531 960,885 1,124.415 1,226.066 Customer Accounts 625,503 748,615 895,972(9) I,277,390(9) 1,271,731(9) 1,269,375(9) 147,538 156,473 194,593 230.987 214.227 228,461 Sales Exper e........ 1,659,906 I,890,723 2,562,405 2,9m 13 3,935,495 4.349,464 Administrain e and General In Lieu of T: -s (10) 404,528 550,482 734,278 6f. 7 381,034(l!) 417,169(l1) otal Operating Expenses. $ 59,816,645 $55,259,237 $69,550,332 5 88,802,:45 $ 104,309,170 $105,824,072 Net Operating Revenues $ 17,989,570 $26,979,724 $ 25,176,661 $ 3v,17i,932 $ 31,388,256 $ 38,768,732 Other income: Investment income (12).. 1,864.052 2,806,586 2,806.184 3,481,324 4,782,578 5.184,27 R gther Income and income Deductions. 129,2o3 g,308 108,060 136,444 132,397 199,g
iTc iiTUI!icTTuTposes-TITTCTdT 615 528,090,903 5 33,m,/ou y w,uw,wu -- >fuJ;gm, Priority Obligations $ 4,317,573 $ 4,323,527 $ 4,317.371 $ 4,319,365 $ 4,319,070 $ 4,320,292 1971 Honds (14) 3,460,216 7,123,251 3,066,951 1973 Bonds. 701,700 701,700 701,701 701,701 1,114,200 1974 Honds........ 496,138 5,138,299 7,211,310 7,261,310 1977 Refunding Bonds. 2,844,978 6,921,786 6,945,846 6,959,022 1979A Bonds 164,689 467,623 Total Debt Service $ 7,777,789 $12,148,478 $ 11,4 27,138 $ 17,081,151 $ 19,342,616 $ 20,122,447 Lease payments to Central (15) 2,105,355 2,412,599 2,983,721 3,354,659 3,876,796 4,115,269 Principal and Interest on Other Obhgations (16) 147,137 1,690,690 1,363,660 1,402,401 92,351 90,937 Halance after Debt Service, Lease payments and Other Obligations 5 9,952,604 $ 13,546,851 $ 12.316,386 $ 11,957,489 $ 12,991,468 $ 19,823,743 Payments to State of South Carolina 763,535 843,996 1,797,497 1,200,564 I,200,380 1,250,148 Payments to Reserve Fund Payments into Contingency Fund. 2,352 Balance Available for Renewals, Replacements, Capital Additions to Plant and Other Lawful Purposes $ 9,189,069 $12,700,503 $ 10,518,889 $ 10,756,925 $ 11,791,088 5 18,573,595 Coverage: On Debt Sersice 2.57 2.45 2.46 1.98 1.88 2.19 I ) I (1) Prepared from financial statements and data of the Authority. Net revenues not reduced by depreciation, lease payments I or interest on long-term debt, for determining revenue available for debt service and other purposes, all in accordance with the Indenture, as amended and supplemented, and the Resolution. (2) Amounts shown include sales to SCE&G and CP&L (3) Amounts shown reflect SEPA energy wheeled by the Authority to preference customers. (4) Amounts shown include sales to residential, commercial, industrial, public street and highway lighting, and other public authorities-military. wh (5) Amounts shown include sales to Central, Berkeley Electric Cooperative, Inc., City of Georgetown, South Caralina, and Town of Bamberg, South Carolina. (6) During the fiscal year ended June 30,1979, the Authority revised its treatment of recording revenues from non. territorial sales for resale and purchased power expense, and restated the amount of revenues from non-territorial sales for resale I and purchased power expense for the fiscal year ended June 30, 1978. The revised accounting treatment of reflecting net settlements for exchange of electricity as prescribed in the Uniform System of Accounts does no; affect net revenues as defined in the Resolution. (7) Revenues received for wheeling SEPA power to preference customers. (8) Amounts shown include fuel and fuel handling expense. l (9) Amounts shown include Customer Service and Informational Expense. (10) Amounts shown include the following payments to counties recorded as an operating expense: Fiscal Year Ended June 30 Amount 1975 $ 256.920 1976 282,744 1977 441,737 1978 358,4I8 In the opinion of Hond Counsel, such amounts are available for the payment of debt service and for debt service cover-age; however, such amounts are not reflected in the coserage calculations shown in this exhibit. (11) Amounts shown exclude payments to counties recorded as an operating expense which were paid from the Special Reserve Fund in the fiscal year ended June 30,1979 and the tweise months ended December 31,1979 of $345,281 and $357,674, respectively. (12) Amounts :.hown exclude interest earned by reawn of the investment of moneys in any Construction Fund or ratable portions of the Reserve Account during a construction period, established with the proceeds of Bonds, all in accordance with the Resolution. (13) The amounts shown were paid from revenues and exclude amounts which were funded from Bond proceeds. (14) The 1971 Bonds were defcased on March 10,1977, through the issuance of the 1977 Refunding Bonds. (l5) Cash basis. (16) Amounts shown include payment of bank loans.
i APPENDIX I Exhibit D 50tml CAROLINA PUBLIC SERVICE AUTilORITY Pro}ected Operating Results Fiscal Year Ending June 30(1) (Dollars In Thousands) 1984 1981 1982 1983 1944 Total System Requirements: Demand-MW (2) 1.372 t,794 1,894 2,024 2,173 Energy Supply-GWh(3). 7.058 9,461 10.492 10,968 11,537 Less: Non-Teritorrial Sales Wheehng Dehveries 199 198 198 198 198 Net System Energy Supply 6.860 9,263 10,294 10,770 11.339 Sales--G%h: To Ultunate Customers (4) 3.290 5,412 6,146 6.317 6.527 For Resale (5) 3.207 3.421 3.679 3,960 4,292 Total Sales 6,497 8.833 9.825 10,277 10.819 Losses 363 430 469 493 520 Operating Revenues: Sales of Electricity (6) Sales to Ultunate Customers (4) $ 91,075 $162.005 $199.916 $224.68G $254,569 Non-Territorial Sales.. 70,744 87,279 102,713 123,698 147,248 Sales for Resale (5) Total Sales of Electricity. $161,819 $249.284 $302,629 $348,378 $401,817 Other Operatin8 Revenue SEPA Trammiminn(7)..... 641 666 699 727 750 Land Rentals 322 322 322 322 322 Mucellaneous 526 623 713 809 915 Total Operating Revenues. $163,308 $250,895 $304,363 $350,236 $403,804 Operating Expenses: Production-Hydru......... $ 1.806 $ 1,962 $ 2,109 $ 2,320 $ 2,552 Steam and Combustion Turbine (Excluding Fuel) 10.868 11,301 18,010 22.160 27,414 Fuel (8) 96,170 157.831 171.145 188,277 214,879 Other 2.460 2.309 2,636 2.939 3.232 Purchased Power 2.727 4,038 3,473(9) 3.822(9) 2.871(9) Total Power Supply Estense. $114.031 $177.441 $197,373 $219,518 $250,948 Transminion Expense 3.085 3,520 3.859 4,245 4.669 Distnbution Expense 1,445 1,595 1,757 1,933 2,126 Customer Accounts 1,304 1,482 1.689 1,858 2,044 293 339 386 425 467 Sales Expenw.........,, 5.047 5,472 6,141 6,755 7.430 Administrative and General. In Lieu of Taxes (10) 457 504 642 728 836 Total Operating Expenses $125.662 $190.353 $211,847 $235,462 5268.520 Net Operating Revenues $ 37,646 3 60,542 5 92,516 $114,774 5135,284 Other Income: Investment income (11) 3,459 5.330 6,553 8,176 9,241 Other Income and Deductions. 8 9 9 28 26 Revenue Available for Debt Service and Other Purposes $ 41,113 $ 65,881 5 99,078 $122,978 $1,4,551 Debt Service (12) Priority Obbgations $ 4,322 $ 4,31* $ 4,322 $ 4,319 3 4,473 1973 Bonda 1,527 1,567(13) 2,018(13) 6.498 6,505 1974 Bonds........, 7,311 8,085 8.038 8.079 8,076 1977 Refunding Bonds, 6,972 7,735(13) 8,339(13) 14.390 14.394 1977 Bonds 510 1,020(13) 1.898(13) 6,911 6,920 1978 Bonds. 8,053 11,722 12,409 12,254 1979A Bonds.... 724 725 721 5.646 8.207 1980A Bonds (14) 510 2,165 2,165 7,035 9,470 Total Debt Service on Anthorized and Issued Bonds. -........... $ 21,876 $ 33,669 $ 39,223 $ 65,287 $ 70,299 Additional Bonds Authorized but not yet issued or Expected to be Authorized and Ismed: General Improvements Bonds (15).. 1,125 2,444 2.444 2.444 Summer Nuclear Station Bonds (16) 703 9,044 9,044 Cross No. 2 Bonds (17) 7,618 Total EstimatM Debt Service on Bonds: Authorized and Issued Ex-pected to be Authorized and lasned $ 21,876 $ 34,794 $ 42,370 $ 76,775 $ 89,405 1.mase Payments to Centra!(l8)............. 4,572 5,263 5,386 5,508 5,514 Principal and Interest on Other Obligations (19) 89 86 83 80 77 Total Estimated Debt Service, Izase Payments and Other Obligation Payments $ 26,537 $ 40,143 $ 47.839 $ 82,363 $ 94,996 Balance Available for Payments to State of South Can> hna, Renewals, Replacements, Additions to Plant and Other Lawful Purposes $ 14,576 $ 25,738 $ 51,239 $ 40,615 $ 49,555 Coverage: Total Debt Service on Authorized and Issued Bonds 1.88 1.96 2.53 1.88 2.06 Total Estimated Debt Service on Bonds: Authorized and lasued Expected to Be Authorized and Lisued 1.88 1.89 2.34 1,60 1.62 I-26
(1) Prepared from data of the Authority. Net revenues not reduccd by depreciation, lease payments or interest on long-h term debt, for determining revenue available for debt service and other purposes, all in accordance with the Indenture, as amended and supplemented, and the Resolution. (2) Projected amounts of demand reflect January-February peal Included in the peak demands for fiscal year 1982 and thereafter are approximately 286 MW attributable to Alumax. (3) Projected amounts shown reflect SEPA energy wheeled by the Authority to preference customers. (4) Projected amounts shown include sahs to residential, commercial, industrial, public street and highway lighting, and other public authonties-military. (5) Projected amounts shown include sales to Central: City of Georgetown, South Carolina; and Town of Bamberg, South Carolina. (6) Projected revenues from customers, in general, other than Central have been based on the following: (i) for power deineries through April,1981 on rates presently in effect; (ii) for power deliveries dunng the period May,1981 through Octobct,1982, on rates adopted by the Authority to become effecine May,1981; and (iii) for the period commencing with power dehveries in Nosember.1%2 and continuine thereafter through the term of the projectrons, on rates to be hereafter adopted to implement the rate program adopted by the Authority to become etTectne November,1982, including in each case the fuel adjustment provisions of such rates. Resenues to be derned from Central hase been projected on the basis of the present contract terms including ad,ustments computed in accordance with the F Power Contract, and that Central will continue to purchase its entire power supply requirements from the Authority. (7) Projected amounts shown include resenues espected to be received for wheeling SEPA power to preference customers. (8) Projected amounts shown include estimated fuel and fuel handling expense. (9) Projected amounts shown assume SEPA power will continue to be purchased under contract terms and in the same amounts as prouded under the exnting contract between the Authority and SEPA. (10) Does not include certain estimated tax payments payable from the Special Resene Fund to counties for determining projected revenues available for debt service and debt senice coserage. (11) Eteludes all interest earned by reason of the investment of monc>s in any Construction l'und established with the proceeds of Bonds or ratable portions of the Resene Account during the construction period, all in accordance with the Indenture and Resolution. Assumes existmg insestment income lesels with adjustments for additional investment income associated with Resene Account requirements and other deposits into the Espansio:, tsui.i i unJ commencing with the commercial operation of various facilities er the date which interest has been or is espected 'o be funded from Bond proceeds. (12) Projected amounts shown are payable from revenues and exclude amounts which are funded or are etrected to be funded from Bond proceeds. (13) Fiscal years 1981 and 1952 are adjusted to resect additional funding of interest requirements to June I,1982 on Bonds heretofore issued which are allocable to Summer Nuclear Station: Estimated Amount to Le Funded From a Portion of the D Proceeds of Additional Bonds Fiscal Year Ending June 30: ($000) 19A1 1982 1973 Bonds $ 3,281 $ 4,476 1977 Refunding Bonds. 4,443 6,060 977 Bonds 3,666 5,040 Total $11,390 $15,576 (14) Estimated debt service on 1980A Bonds prorated on the basis of $81,000.000 allocable to Winyah No. 4 and $24,000.000 allocable to General Improvements at an 8.59 annual interest rate. Amounts shown redect the following estimated requirements payable from revenue: ($000) Fiscal Year 1. 3g General Sptem June 30: Winyah No. 4 Improvemi nts Total t 1980 5 510 $ 510 1981 2,165 2,165 1982 ' 165 2,165 1983 4,870 2,165 7,035 1984 7,305 2,165 9,470 (IS) Estimated debt service requiremena on Bonds expected to be authorized and issued which are anticipated to be required for 1980-1985 Capital Improvement Program to fund General Improvements. Amounts shown reflect the e pected issuance in fiscal year 1981 of $30.000,000 of Bonds at a 7.5% annualinterest rate. (16) Estimated debt service requirements at an annual interest rate of F 0% on $105,400,000 of Bonds which have been assumed to be authorized and issued for the completion of Summer Nuclear Station with interest requirements funded from Bond proceeds to June I,1982 on said Bonds and Bonds heretofore issued allocable to Summer Nuclear Station. (17) Estimated debt senice requirement at an annual interest rate of 8.25% on the initial issue of $200,000,000 and 7.5% on the completion issues of $345,000,000 for a combined amount of $545,000,000 of Bonds which hase been assumed to be authorized and issued to pay the costs of construction of Cross No. 2 with interest requirements funded i from Bond proceeds to Mcy 1984. (18) Amounts shown include estimaud lease payments on K and L Ixase Contracts. (19) Amounts shown include principal and interest payments on a note held by Bankers Trust of South Carolina. I-27
APPENDIX II I OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Advisory Board South Carolina Public Service Authority Columbia, South Carolina We have made a joint examination of the balance sheet of the South Carolina Public Service Authority at June 30,1979 and the related statements of net earnings, accumulated earnings reinvested in the business and char.ges in financial position for the year then ended. Our joint examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procederes as vce considered necessary in the circumstances. In our opinion, the above-mentioned financial statements examined jointly by us present fairly the financial position of the South Carolina Public Service Authority at June 30, 1979 and the results of its operations and the changes in its financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year after giving D retroactive effect to the change, with which we concur, in the method of accounting for capital Icases as l described in Note 6 to the financial statements. J. W. Hunt and Company Coopers & Lybrand Columbia, South Carolina Atlanta, Georgia November 20,1979 1 D II-1 j l
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APPENDIX 11 h OPINION OF INDEPENDENT CERTIFIED PUlsLIC ACCOUNTANTS The Advisory Board South Carolina Public Service Authority Columbia, South Carolina We have examined the balance sheet of the Sc,uth Carolina Public Service Authority as of June 30,1978, and the related statements of net earnings, accumulated earnings reinsested in the business and changes in financial position for the four years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records a: d such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying financial statements present fairly the financial position of the South Carolina Public Senice Authority as of Junc 30,1978, and the results of its operations and changes in financial l position for the four years then ended, in et nformity with generally accepted accounting principles applied on a consistent basis after restatement for the change, with which we concur, in the method of accounting I for capital leases as described in Note 6 to the financial statements. J. W. HUNT AND COh1PANY Columbia, South Carolina November 20,1979 11-3
APPENDIX II Exhibit A d SOUTII CAROLINA PUBI!fC SERVICE AUTIIORITY BAIMCE SIIEETS ASSETS Dr crmher 31, 1979 June 30, June 30, (l'naudited) 1979 1978 UTIUTY PLANT-AT COST (Note 1): Electric plant in service $ 482,073,774 $ 476,881,954 $ 442,185,190 Construction work in progress U3,362,069 363,497,952 206,158,403 Total 925,435,843 840,379,906 648,343,593 Less accumulated deprecir.: ion 105,036,381 98,213,047 85,881,733 Electric plant-net 820,399,462 742,166,859 562,461,860 Nuclear fuel 18,180,856 17,672,416 15,473,917 Utility plant-net 838,' 80,318 759,839,275 577,935,777 OTi!ER PIIYSICAL PROPERTY (Net of accumulated depreciation) 464,626 482,733 490,446 UNEXPENDED FUNDS FRO 51 SALE OF ELECTRIC SYSTEst ExPANsloN REVENL'E bonds (Note 2) 145,742,926 208,763,668 217,258,039 DEBT SERVICE AND OTIIER SPECIAL FUNos (Note 2) 151,715,936 170,118,148 154,598,467 g CURRENT ASSETS: Cash and securities: Held by Trustee 5,677,963 7,207,020 7,311,424 Other 1,845,790 2,461,961 5,894,262 Accounts receivable less allowance for uncollectible accounts 13,939,902 13,135,282 12,438,059 Interest receivable 3,654,265 828,206 940,931 Inventories, at average cost: Fuel (coal anJ oil) 23,741,556 17,750,329 16,207,742 Materials and supplies 2,520,670 2,635,766 1,783,825 Other 361,725 369,690 394,177 Total current assets 51,741,871 44,388,254 44,970,420 DEFERRED DEstTS: Unamortized debt expense (Note 1) 3,444,667 3,459,109 3,223,189 Unamortized loss on reacquired debt (Note 1) 10,163,666 10,354,288 10,738,401 Other 574,283 353,026 379,586 ~ Total deferred debits 14,182,616 14,166,423 14,341,176 TOTAL $1,202,428,293 $1,197,758,501 $1,I)09,594,320 See Accompanying Notes to Financial Statements. I II-4 1
l I l l APPENDIX II Exhibit A (Continued) SOUTII CAROLINA PUBLIC SERVICE AUTIlORITY BALANCE SIIEETS LIABILITIES December 31, 1979 June 30, June 30, (l'naudited) 1979 197N LoNo-TERN 1 DEBT (Note 4): Priority Obligations 5 72,270,862 73,492,809 74,860,842 Electric System Expansion Resenue Bonds 844,890,000 846,455,000 737,975,000 Capitalized lease obligations 87,119,810 88,056,022 68,204,642 f Bank Credit Agreement 25,000,000 25,000,000 I Other 375,000 375,000 1,700,000 Tota Ung-Term Debt 1,029,655,672 1,033,378,831 882,740,484 Unamortized debt ciscount and premium-net (13,886,296) (14,130,012) (12,882,827) Long-Term Debt-Net 1,015,769,376 1,019,248,819 869,857,657 ACCRUE.D INTEREST ON LOsc-TERht DEBT 27,121,378 25,233,802 8,108,685 g CONSTRUCTION FUND LIABILITIES-ACCOUNTS PAYABLE 7,268,731 16,044,938 1.065,331 CURRENT LIABILITIES: Accounts payable 9,788,689 7,469,520 9,528,424 Customer deposits 2,160,591 2,072,866 1,491,237 Accrued sums in lieu of taxes 420,918 353,304 297,783 Other 161,711 146,509 439,441 Total Current Liabilitas 12,531,9 5 10,042,199 11,756,885 COhthf!ThfENTS (Note 7) UNAhf 0RTIZED GAIN ON REACQUIRED DEBT (Note 1) 1,544,234 1,687,110 1,994,279 CAPITAL CONTRIBUTIONS-U. S. GOVERNMENT GRANTS 34,438,264 34,438,264 34,438,264 AccUhfULATED EARNINGS REINVESTED IN TIIE BustNESS 103,754,401 91,063,369 81,473,219 Total $1,202,428,293 $1,197,758,501 $1,009,594,320 See Acwmpanying Notes to Financial Statements. k 11-5
APPENDIX II Exhibit B SOUTIl CAROI.INA PUBLIC SERVICE AUTIIORITY STATEMENTS OF NET EARNINGS Twelve Months Ended December 31 Year Ended June 30, 1979 (Unaudited) 1979 1978* 1977* 1976* 1975* OPrRsTING Rrvrst'rs: Sales of electricity $143,194.611 $134.296.072 $117,744,105 $93,508,350 $81,071,185 $76.827,868 Other operati g revenues 1.398,193 1,401,354 1,236.072 1,218,643 1,167,776 978,347 Total operating revenues 144,592.804 135,697,426 118,980,177 94,726,993 82,238,961 77,806,215 Orr R sTtso ExrrNsts: Operation expense: Production 86,552.924 84,529,074 79,353,325 49,285,927 44,870,111 39,378,046 Purchased and interchanged power-net 865,090 2.109,654 (4,748,340) 8.331.935 2,213,916 13.679,493 Transmission 1,316,616 1,242,108 1,131,318 878,526 739,523 682.546 Dktribution 778,322 729,969 607,529 595.166 575 947 478,273 Customer Accounts 1,269,375 1,271,731 1,273,236 895,972 748 615 625,503 Sales 228,461 214.227 235,142 194.593 156,473 I d 7,538 Administrative and general 4,046,226 3,642,924 2,655,041 2,375,039 1,738,419 1,573,574 Maintenance expense 10,349.889 10,188,449 7,636.576 6,258,896 3,665,751 2.847,144 Total operat.on and maintenance expenses 105,406.903 103.928,136 88,143.827 68.816,054 54,708,755 59,412.117 Depreciation 13,046,379 12,433,947 11,060,022 8,324,687 7,591.884 5.820,451 Sums in lieu of taxes 774,843 726.315 658,418 734,278 550.482 404,528 Total op ating expenses 119.228,125 117,088.398 99,862,267 77,875,019 62,851,121 65,637,096 OPERATING INCOME 25,3 4,679 18,609,028 19,117,910 16,851,974 19,387,840 12,169,119 OTutR INcour: Interest income 29.293,058 26,879,580 17,159,446 12,553,297 12,371,iOO 16,998,629 Allowance for funds used during con-struction-other than borrow ed funds (Note 1) 1,029,418 1,084,631 45',879 Other-net 199,386 132.398 0409) (35,803) (59,291) 4,204 Total other income 30.521.862 28.096,609 17.583,304 12,517,494 12.312,309 17,002,833 Total 55.8o6,541 46.705.637 36,701,214 29,369,468 31,700,149 29,171,952 INTIPEST CHARGrs: Interest on long-term debt 54.294.964 49,609,758 37,870,422 30,337,448 24,672,665 23,226,112 Allowance for borrowed funds used during constructior. (Note 1) (18,008,986) (14.415,741) (7,215,703) (9,298,720) (4,673,754) (1,918,452) Other 780,192 721,090 530,902 (18,387) (186,391) (274,675) Total interest charges 37,066,170 35.915,107 31,185.621 21.020,341 19,812,520 21,032,985 NrT EARM % s $ 18.820,371 $ 10.790,530 $ 5,515,593 $ 8,349,127 $11,887,629 $ 8,138,967 See Accompanying Notes to Financial Statements. J
- Reclassified to conform to 1979 presentation.
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l APPENDIX II Exhibit C l l SOUTil CAROLINA PUllLIC SERVICE AUTilORllY STATEMENTS OF ACCUMULATED EARNINGS REINVESTED IN Tile IlUSINESS Tnelse 3fonths Ended Decer er 31, Year Fnded June 30 Detail (l'naudited) 1979 1978 1977 1976 1975 Accumulated Earnings Rein-vested in the Busmess, as Previously Reported, Be-ginning of Penod S 87,310,902 585,699,107 $81,065,189 573,884,469 562,S26.474 555,147,987 Adjustment Relating to AFUDC (Note 1) 3,017,716 i Cumulative EfTect on Prior Years cf Capital Lease Re-statement (Note 6) (4,144.440) (4,225.888) (3,906,999) (3,277.909) (3,263.548) (2,960,493) As Restated 86,184,178 81,473.219 77,158,190 70,606,560 59.562,926 52,187,494 Net Earnings for the Period I S,S20,371 10,790,530 5,515,593 8,249,127 11,887.629 8,138,967 Total 105,004,549 92,263,749 82,673,783 78,955,687 71,450,555 60,326,461 Distribution to the State of South Carolina 1,250,148 1,200,380 1,200,564 1,797.497 843,995 763.535 Accumulated Earnings Rein-k vested in the Business, End of Period $ 103,754,401 $91,063,369 581,473,219 $77,15 8,190 570.606,560 559,562,926 See Accompanying Notes to Financial Statements. l II-7
APPENDIX H Exhibit D SOUTil CAROLINA PUllLIC SERVICE AUTIIORITY STATE 31ENTS OF CIIANGES IN FINANCIAL POSITION Twche Slomhs Ended Uccember 31. Year Ended June 30, 1979 ( Unaudited ) 1979 1978 1977 1976 1975 FcNer. PRovroro By: Operations: Net earnings. $ 18,820.371 $ 10,790.530 $ 5,515,593 $ h 349,127 $ 11,887.629 $ 8.138.967 Charges (credits) ta net earn.ngs not pro-siding or requiring fund < Derreciation 13.046.379 12.433.947 11.060.022 8,324,687 7,591,884 5.820,451 Allowances for funds used during con-struetion (19.038,404) (15,500.372) (7.673,582) (9,298,720) (4.673,754) ( t,918,452 Amortization of debt discount and et-rense $88.961 547.539 391,786 145,149 99,148 70,854 \\mortiza: ion of Ims en rea quire.1 debt-ne 86,218 76.944 59,397 (227,496) (364,951) (382,219) To:al from operations 13,503.525 8,348,588 9.353,216 7,292,747 14.539.956 11.729,601 Sale of bonds 110.000.000 110.000,000 315.000,000 100.000.000 Capitalized lease oNigatiens 21.6"8,714 21.545,286 1,363,252 2.796.513 9.193.049 8,736.088 Bank loans 25,000.000 25.000.000 525.000 5.648,949 Decrease (increase) in unexpended funds from sair of Elcetne Systera Espansioa Revenue Bands 43,467.949 8.494.371 (162.225,897) 57,401,486 (22.724.469) 59.526,767 Decrease 6ncrease) in debt sersice and other special funds 3,714.412 (15,519,686) (63,998,504) 18.301.478 (901,452) (4.030.307) Increase (decrease ) in accrued interest on long-term debt 4.147,756 17,125,117 4.091,735 (966.615) Increase (decrease) in construction fund lia-bilities 4.232,037 14.079,607 (1,050,059) 3933 81 147 M) (1,205,868) Reduction of current liabilaies by bond re-l funding 2.508,85' Othsr 74,898 26.560 131,675 39,456 (161,620; (23,601) Total fund < Hosided 225.749,261 189.099,8 3 102,665,328 88,292,798 100.093 5 4 80,3 M,629 FcNDs APPLIEDTo: Increase in utility plant and other phpical property 208.439.551 178,329. 0 83.463,538 P l.203,157 88,135.041 65,287.591 Retirement of long-term den 3,056.712 4,213.033 3,817,638 4.8U 589 3,540,890 1.218,132 Principal payments-caritalized lease obli-gations 1,783,165 1.693.906 1.461.566 1.374,152 1.243,950 1,142.695 Distributions to the State of South Carolina I,250,148 1.200,380 1,200,564 1,797,497 843,995 763,535 Addition to unamortized debt discount and expense 2.081.855 2,030,644 6,140,524 45,529 2.170.468 212,843 Total funds applied 216,611.431 187,967,323 96.083,830 89,252,924 95.934.344 68.624,796 l'dCREAsE (DrCREssE) IN WORK.lSG CAPITAL $ 9,137.830 $ 1,132,520 $ 6,581,498 ($1,0:0.126) $ 4.159,020 $ 11,756,833 INCREASE (DECRE ASE) IN WoRF'.G CAPITAt. By CostPONE NT: Cash and securities: Held by trustee 559,482 5 (10J 404) $ 934.620 $ I,060,148 $ 751.059 $ 2,116,996 Other 68.238 (3,432.301) 2,908,542 (I,328.024) 1,498,728 1,245,202 Accounts receivabic, less allowance for un-collectible accounts 2,168,653 697,223 (1,212.250) 2,871,971 2,213.587 3,084.805 Accrued interest receivable. 2.990,F41 (112,725) 467,810 (23.572) I12.228 147.750 Insentones 902,318 2.394,528 5,033,383 (174,197) 901,978 3,128.793 Other current assets (139.541) (24.487) (66,120) 149,946 53,801 48,863 Accounts payable 2.953,114 2,058,904 (!.144,456) (3,246.085) ( l.146,v90 ) 2,432,088 Customer deposits (340.847) (581.629) (280,593) (226,131) (257,690) (171,176) Accrued sums in lieu of taxes 76,104 (55.521) (22.060) 33,172 (88,532) (185,056) Other current liabilities (100,532) 292,932 (37,378) (117,354) 119,951 (91,432) Increase (decrease) in working capital $ 9,137,830 $ 1,132.520 $ 6,581.498 $(1,000,126) $ 4.159,020 $ 11,756.833 1 See Accompanying Notes to Financial Statem ts, II-8
APPENDIX II ) Exhibit E SOUTil CAROLINA PUllI.lC SERVICE AUTIIORITY NOTES TO FINANCIAI, STAT 1311:NTS Information for the in che months ended December 31,1979 is unaudited. Note 1-Summary of Significant Accounting Policies: A-SisIEM or Accot N1s-The accounting records of the Authority are maintained substantially in accordance with the Uniform S stem of Accounts prescribed by the Federal Energy Regulatory Commission 3 (FERC). See Note F below relating to calculation of allowance for funds used during construction. B-UTitity PE ANT CAPITAti/AlioN ANo.\\l AINTEN ANCE-Additions to plant are recorded at cost, which includes material, labor, oserhead and allowance for funds used during construction. The costs of current repairs and minor replacements are charged to appropriate operating expense and c! caring accounts. Costs of n newals and betterments are capitalized. The original cost of utility plant retired and the cost of removal less salvage are charged to accumulated depreciation. C-DEPRECIATION-Depreciation is provided on a straight line basis over the estimated useful lives of the various asses of the plant. Annual depreciation provisions, expressed as a percent of average depreciable utility plant in service, were approximately 2.539, 2.599, 2.569, 2.56G, 3.05G and 3.229 for the years ended June 30.1975 to 1979 and December 31,1979, respectively. D-OPERAllNG REVENUES AND ENERGY COSTS-Revenues from sale of electric energy, including amounts resulting from application of fuel adjustment clauses, are recorded as meters are read. Costs of fuel consumed are reflected in operating expenses as incurred. E-PENSION COSTS-Salaries paid by the Authority are subject to withholding and employer contribu-tions in accordance with the provisions of a State Pension Plan administered by the South Carolina State Retire-ment System. Rmes are fixed by State statutes. The contributions to the State Pension Plan were 5439,686, 5498,706, 5606,513, 5673.981, 5821,556 and 5924,909 for the years ended June 30,1975 to 1979 and December 31,1979, respectively. F-AuOWANCE l'oR FUNos USED DURINo CoNsntcTioN-The allowance for funds used during con-struction ( AFUDC) reflects the cost for the period of. apital devoted to plant under construction, including nuclear fuel. This cost represent interest charges on borrowed funds and a reasonable rate of return on other funds used to finance plant additions during construction periods and is capitalized in the same manner as construction labor and material costs. Prior to fiscal year 1978, AFUDC was capitalized only on construction projects for which funds were borrowed to finance such projects and was calculated using the net interest cost of each financing (actual interest paid less interest income carned from investing unexpended proceeds). For the year ended June 30, 1978, AFUDC was calculated using the formulary method prescribed by FERC and was applied to all con-struction projects. This change in the method of calculation increased AFUDC rad net earnings for 1978 by 5946,000. During fiscal year 1979, the Authority reevaluated the calculation method as related to the manner in which construction projects are actually financed. Since cons'ruction projects are substantially financed by specific identifiable borrowings, it was determined that AFUDC would be more reasonably calculated using a specific identification method. Accordingly for the year ended June 30,1979, AFUDC was calculated using the effective interest rates from specific borrowings applied to the related construction projects. AFUDC for other funds utihzed was calculated based on the Authority's average rate of return for the last three years. This change in the method of calculation increased AFUDC and net earnings for 1979 by approximately 52,326,000. Accumulated earnings reinvested in the business at January 1,1979 has been adjusted to reflect certain errors in the calculation of AFUDC and the application of the specific identification method relating to the six months ended December a1,1978. Cr WORT 1AT!oN-Unamortized debt discount, premium and expense are being amortized over the lives of the < elated debt issues. Unamortiz_ gains and losses on reacquirc.' lebt are being amortized over the respective lives of the refunding debt issues. Note 2-Unexpended Funds from sale of Expansion Bonds and Debt Senice and other Special Funds: l Unexpended funds from the sale of expansion bonds, debt service funds and other special funds are held and maintained by trustees and their use restricted in accordance with applicable provisions of various trust indentures, bond resolutions, lease agreements and the Enabling Act included in the South Carolina law. Such funds consist principaily of investments in government securities carried at amortized cost. 11-9
SOUTH CAROI.INA PUBLIC SERVICE AUTIIORITY NOTES TO 1INANCIAL STAT 13 TENTS (Continued) Information for the twelse months ended December 31,1979 is unaudited Note 3-Summer Nucicar Station: The Authority and Sauth Carolina Electric and Gas (SCE&G) are parties to a joint ownership agreement providing that the Authority and SCIMG shall own the Summer Nuclear Stanon presently under construction as tenants in common with undisided interest of 33' 3 9 and 66:3 G, respectis ely. SCIMG. as agent for itself and the 'uthonty,is solely responsible for the design, construction. operation and maintenance et the Summer Plant anu the Authority is obligated to pay its ownership share of all costs relating thereto. At ikecmber 31, 1979, construction work in progress included approx;mately 5224.000.000 representing the Authonty's insest-ment, including AFUDC, in the Summer P! ant. Nuclear fuel represents the Authority's mvestment in fuel acquired for the plant. Note 4--Long-Torm Debt Outstanding: December 3I,1979 ( l'naudit ed ) 1979 1978 Priority Obligations: Electric Revenue Bonds, Series of 1950, bear-ing interest at 2.707 and due 1980 to 1993 $ 10,880,000 5 11,120,000 $ 11,355,000 Electric Revenue Bonds. Series of 1967, bearing interest at 4Ce and 4.109 and duc 1980 to 1981 and 2006 50,725,000 50,865,000 51,000,000 Electric Revenue Bonds, Refunding Series of 1973 bearing interest from 59 to 5H G and due 19S0 to 19S9 S,605,000 9.250.000 9,860,000 Contract Obligations, payable 1980 to 1985 2,060,862 2,257,809 2,645,842 Total Priority Obligations 72.270,862 73,492.809 74,860,843 l Eleettic System Expansion Revenue Bonds: Expansion Bonds.1973 Series, bearing interest from 59c to 535 Cc and due 1980 to 1993 and 2013 100,000,000 100.000,000 100,000,000 Expansion Bonds,1974 Series, bearing interest from 6% to 633 9 and due 1980 to 1999 and 2014 109,000,000 109,000,000 109,000,000 Expansion Bonds,1977 Refunding Series, bear-ing interest from 3.70G to 6% and due 1980 to 997 and 2002 and 2016 210.890,000 212,455,000 213,975,000 Expansion Bonds,1977 Series, bearing interest from 4G to SMG and due 1982 to 2002 and 2017 115,000,000 115,000,000 115,000,000 Expansion Bonds,1978 Series, bearing interest from 4.209 to 5h G and duc 1981 to 1998 and 2008 and 2018 200,000,000 200,000,000 200,000,000 l Expansion donds, 1979 Series A, bearing in-terest from 5.40% to 6% fc and due 1980 i to 2003 and 2009 and 2019 110,000,000 110,000,000 Total Expansion Bonds 844,890,000 846,455,0I0 737,975,000 Capitalized Subordinated Lease Contracts, payable 1980 to 2014 87,119,810 88,056,022 68,204,642 Bank Credit Agreement 25,000,000 25,000,000 Other 375,000 375,000 1,700,000 Total Long-Term Debt $ 1p29,655,672 51,033,378,831 $ 882,740,484 The Authotity utilizes proceeds of debt issues primarily in financing its construction program. II-10 I
S00111 CAROLINA PUlll.IC SI:RVICE AUTIIORITY k NOI ES 10 l'INANCIAL STAT 131ENTS (Continued) Information for the twebe months ended December 31,1979 is unaudited The Electric System Expansion Revenue Honds,1971 and 1976 Series, were adsance refunded and defeased in 1977 by iwuance of 1977 Refunding Series Honds and Special Obliganon Refunding Series llonds. The prmsipal ameunt et the refunded bonds and Special Obligation llends remaining outstandinc at December 31.1479 totated 5254.4S5.000. Such bonds will be retired as they mature from the proceeds of Gosernment Obligations held by the Refunding Trustee. The Authoritis bond indentures proside for certain restrictions, the most significant of v hich are: The Authority covenants to establish rates and charges adequate to proside resenues sullicient, among other things, to pay debt scruee when d ie on the priority obligations and expansion bonds to make required payments when due into the lease fund and the capitalimprosement fund and to pay the costs of operation and maintenance of the Authoritis electric sfstem and all necessary repairs, replacements and renewals thereof. ~Ihe Au;hority is presently required to pay annually into its capital in o ovement fund an amount which, tegether with the amount 3 deposited therein in the two prt reJing tiscal yc,, is at least equal to SG cf the Autheritis gross rese ues s..s defined) in the three preceding fiscal pars. The Authority may issue additional parity expansion bonds if, among other things, the Authority's Con-sulting Engineer certifies that resenues (as defined) in each succeeding fiscal year after the date on which m. such additional bonds are sold to and including the later of (a) t 4 third succeedmg full fiscal year atter such date or (b) the first full fiscal year after the estimated date of commercial operation of any power plant to pay the cost of construction of which additional expansion bonds base been, are being or are then authorized to be iwued. shal! be at least equal to the sum of the amounts required in such fiscal year for (i) debt sersice on the priority ohiigations and the expansion bonds then outstanding, being issued, or authorized but not yet iuued iii) payments into the lease funJ: and (iii) payments into the capital improvement fund. Maturities of priority obhgations and expansion bonds during the 3 cars ended December 31, 1950, through 19S4, are as follow s: December 31, 1980 $4,079,210 December 31,1981 5,851.891 December 31, i'82 6,584,728 December 31, 1983 8.071,017 December 31, 1984 8,799,052 ~lhe contract obhgations included above arose through an agreement to purchase certain transmission lines (generally known as the 'A-B" System) from Central Eiectric Power Cooperative, Inc. Principal and interest at 2G per annum are payable in semiannual installments. See Note 6 for details concerning long-term lease obligations. Note 5-Hank Credit Aurcement: In May 1979, the Authority authorized the execution of a credit agreement with several banks which expires in 14X2. The participating banks agreed to loan to the Authority from time to time up to 550,000,000 at a fluctuatmg rate per annum equal to 40'c of the prime commercial rate of one of the major lending banks, plus 2G per annum (8.29 at December 31, 1979). In accordance with the agreement, the Authority bor-rowed 525.000Rio on the date the agreement was executed. June 1,1979. The proceeds from such borrowing must be used solely for plant construction. Note 6-Long-Term I. case Commitments: The Authority has lease contracts with Central Eicctric Power Cooperative, Inc., covering a steam electric generation plant, transmission facilities and various other facilities. The lease terms range from sixteen to thirty-six years. Quarterly lease payments are based on a sum equal to the interest on and principal of Ccntrars indebtedness to the Rural Electrification Adriinistration for funds borrowed to construct the above-mentioned facilities. The Authority has an option to purchase the leased properties at any time during the period of the lease agreements for a sum equal to Centrars indebtedness remaining outstanding on the property involved at the time the option is exercised or to return the properties at the termination of the lease. In addition, the Authority and Central are parties to a power contract which provides that the Authority will provide and l Central will purchase all of its energy requirements less amounts which Central purchases directly from the 11-11
SOUTil CAROLINA PL'Bl.lC SERVICE AUTIIORITY NOTES TO FINANCIAL STAIEMENTS (Continued) Informarkn for the tuche months ended December 31,1979 is unaudited Southeastern Power Administration through October 1987. Res e-es receised from Central approximated 529,601,000, 534,692,000, 540,624,000, 552,046,000, $57,800,,~0 and $60,981,000 for the years ended Juae 30,1975 to 1979 and December 31,1979, respectively. In June 1979, the Authority retroactively recorded all capital leases as asscts and liabilities in accordance with Statement No.13 of the Financial Accounting Standards Board-Accounting for Leases. Prior to that time, capitalleases entered into before January 1,1977, were treated as operating leases under the transitional rules of Statement No.13. The effect of this change was as follows: June 30, June 30, 1979 1978 Increase in Electric Plant in Service and Construction Work in Progress $ 100,960,291 $ 79,415,005 Increase in Accumulated Depreciation 21,681,536 19,469,256 Increase in Capitalized Lease Obligations 88,056,022 68.204,642 Decrease in Reserve for Future Rental Payments 4,013,489 3,538,373 Decrease in Net Earnings 43,258 318,889 Financial statements of prior years have been restated and the cumulative effect at July 1,1974, has been charged to accumulated earnings reinvested in the business. The eticet of this restatement was to decrease net earnings by 5303,055, 514.361 and 5629,090 for the years ended June 30,1975 to 1977, respectively, Future minimum lease payments on Centralleases at December 31,1979, were: Year Ending I)co mher 31: Amount 1980 $ 5,196,841 { 1981 5,307,414 1982 5,468,967 1983 5,520,169 1984 5,506,776 Thereafter 121,910,789 Total minimum lease payments 148,910,956 Less, amounts representing interest 57,791,146 Present value of net minimum lease payments 91,119,810 Less, approsed loans not yet advanced to Central 4,000,000 Balance at December 31,1979 $ 87,119,810 Leases, other than Central leases, are not material. Note 7-Commitments: The Authority's Construction Budget, as adjusted for known changes, provides for expendituus (prin-cipally consisting of generating facilities-Winyah n3, Winyah =4, Summer Plant, Cross =2, Cross el and other cor.struction) of approximately $227,400,000 during the fiscal year ending June 30,1980, and $ 1,112,700,000 during later years, 11-1 2 Im IM
APPENDIX 111 ) 6h ~p Burns and Roe,Inc. P.O. Bo= 663 e 283 Rout 17 Souh a P va%s. Yv. Jwv 0782 5 Te!. N.J. C01) 265-871 ~ - N.Y, (212) $n4 9210 Teten 1344c3 m Cab;e BURCE FA A AVUS N J C'652 'f am O'Ne 550 W r m an Ace OracN. New J +vv 076.G Ren : s ooo
Subject:
W. O. 3415 Santee Cooper Winyah Unit 4 hiarch 7,1980 hir. W. C. hiescher, President South Carolina Public Service Authority P.O. Box 396 hioncks Corner, SC 29461
Dear hir. hiescher:
The South Carolina Public Senice Authority has retained Burns and Roe, Inc. to provide engineering, design, and construction management services for the Winyah Unit 4 addition to the Winyah Electric Generating l Station located approximately thre. miles southwest of Georgetow n, Seuth Carolina. Burns and Roe, Inc.'s responsibilities will be similar to those presided for the Winyah Units I and 2, recently completed, and Unit 3. presently under construction and cover complete engineering and construction manager..ent senices, including preparation of plans, specifications, capital cost estimate, economic analyses, project schedule, resiew of bids, expediting of vendors and contractors, managing of construction contracts, coordination of contractors, supervision and general direction of contractor work. establishing and administer-ing security, first aid and other ..e programs, assistance in plant startup and test, and all related items to result in the ccmplete and successfully operating fourth unit. The proposed Unit 4 addition being constructed by Santec Cooper will consist of a coal-fired steam generator, turbine-generator, cooling water sptem, and 230 KV switchyard, all complete with structures, auxiliary equipment, instrumentation, controls and other associated accessories. This unit will essentially be a duplicate of Winyah Unit 3, and will hase a net capabihty of approximatdy 280,000 KW. The original estimated construction cost of the Unit 4 was $146,175,000 excluding interest during construction, bond reserve requirements, and expense of financing, but it is now anticipated to be completed for $125,175,000. This reduction has resulted from the duplication of the Unit 3 design, the purchase of some Unit 4 items with those of Unit 3, a favorable construction market, and an earlier completion date of certain phases of construction than originally planned which reduces the efTect of escalation. A more detailed explana-tion is included in the succeeding paragraphs. The revised capital cost estimate attached hereto as Exhibit A covers the complete coal-fired generating plant equipment and construction including the extension of the 230 KV switchyard; engineering and construction management senices; Santec Cooper's expenses; contingency and escalation. The present site of approximately 2.000 acres is adequate for the structures, cooling water and coal l handling systems for the proposed Unit 4 addition. III-I
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for Unit 4 may be met. An additional contingency of 52.750,000 has been allowed in the capital cost l estimate to coser the possible use of osertime and reduced productnity associated with the highly competitise labor construction market resulting from ether heasy construction anticipated in the general area during the construction of this project. The particulate, SO; and NO, emission control equipment contemplated is designed to meet existing pollution codes and regulations. The ciectrostatic precipi'ator already contracted for under the steam generator contract for the removal of fly ash from the tlue gas is guaranteed to meet the existing pollution codes and regu- !ations, and is essentially a duplicate of those furnished for Units 1,2, and 3. The steam generator is guaranteed to meet current Federal NO, emission standards. I he flue gas desulfurization system is guaranteed to meet current Federal SO; emission standards. The permit has been granted for Urut 4 based on execeding the removal citiciency required by current Federal SO; emission standards in order that the otIsite ground concen-trations resulting from thc oserall (four units) station emissions are witlh allowable limits. A closed cycle cooling water sptem utilizing a mechanical draft cooling tower is incorporated in the design in order to rueet state and Federal thermal discharge regulations. It is our considered opinion with respect to the Unit 4 addition that:
- 1. The present plans and designs are suitable for the site and the site is suitable for the Unit 4 addition.
- 2. The program for construction of an essentially duplicate fourth unit is realistic and the completion of Unit 4 in accordance with the construction schedule is reasonably assured.
We understand that Santee Cooper will make copies of this letter available to all persons who may consider purchasing Santee Cooper's Espansion Resenue Bonds,1980 Series A. We authorize Santec Cooper to cause a copy of this letter to be appended to its C"icial Statement with respect to said benJs. Very truly yours, I W. H. RICHARDOT Managerof Projects WHR:nhd Attachruents k III-3
EXIlllllT A l CONSTRUCTION COST ESTITI ATE Direct Construction Costs-Winyah Generating Station-Unit 4 SUbiNIARY Account N umber Dewription Total 310 Land and Land Rights 5 0 311 Structures and Improvements 12.396,000 312 Boiler Plant Equipment 61,228,000 34 Turbiie Generator Unit 18,576,000 315 Accessory Electrical Equipment 5,469,000 316 Aliscellaneous Power Plant Equipment 61,000 353 Station Equipment 2,358,000 TOT At. CONsTRt CTioN Cost $ 100,088,000 Engineering, Design & Construction Slanagement $ 8,340,000 Escalation included in above accounts Contingency 11,455,000 Labor Premium Allowance 2,750,000 Other Costs and Expenses 1,702,000 South Carolina Taxes 840,000 TOTAL COST-GLNI. RATING STATION $ 125,175,000 g i III-4
APPENs)IX IV FORM OF OPINIONS OF WOOD & DAWSON ANL) McNAIR GLENN KONDUROS CORLEY SINGLETARY PORTER & DIW E April ,1980 Board of Directors SOUTil CAROLINA PUBLIc SERVICE AUTHORITY Moncks Corner, South Carolina 29461 Dear Sirs-SOUTH CAROLINA PUBLIC SERVICE AUTIIORITY ELECTRIC SYSTEM EXP/ NSION REVENUE BONDS,1980 SERIES A, S75,000,000 At your request we have examined into the validity of an issue of $75,000,000 South Carolina Public Service Authority Electric System Expansion Revenue Bonds,1980 Series A ("the 1980A Bonds"), of the South Carolina Public Service Authority, South Carolina (the " Authority"). The 1980A Bonds are issuable in coupon foe.1, recistrable as to principal only, in the denomination of $5,000 each, and in fully registered form, without coupons, in the denominations of $5,000 or any multiple thereof. The coupon 1980A Bonds are numbered from I upwards, and the fully registered 1980A Bonds are numbered from R-1 upwards. The coupon 1980A Bonds are dated April 1,1980, and the fully registered 1980A Bonds, except for fully registered D 1980A Bonds initially issued, which shall be dated April 1,1980, shall be dated so that no gain or loss of interest shall result from exchanges or transfers thereof as provided therein and in the Resolution and Supple-mental Resolution hereinafter mentioned. The 1980A Bonds mature on July 1 in each of the years and in the principal amounts, and bear interest payable July 1,1980, and semi-annually thereafter on January I and July 1 at the rates per annum, as follows: Interest Interest Year Amount Rate Year Amount Rate D l IV-1 IM
The 19S0A Bonds maturing on and after July 1,1991, are subject to redemption prior to maturity upon the terms and conditions set forth therein. The 1980A Bonds recite that they are issued under the authority j of and in full compliance with the ConstNtion and statutes of the State of South Carolina, including, particu-larly, Act No. 887 of the Acts of the State of South Carolina for 1934, as amended (Code of Laws of South Carolina 1976, Title 58, Sections 58-31-10 through 58-31-390, inclusive), and under and pursuant to a resolution adopted by the Board of Directors of the Authority on August 31,1971, as amended (the "Resolu-tion"), and a resolution supplemental thereto adopted by the said Board of Directors on March ,1980 (the " Supplemental Resolution"), for the purpose of financing the cost of acquisition and construction of capital additions and improvements to the Authority's System (as def.ned in the Resolution) and for other corporate purposes of the Authority. We have examined the Constitution and statutes of the State of South Carolina, and certified copies of proceedings of the Board of Directors of the Authority authorizing the issuance of the 1980A Honus, meluding the Resolution and Supplemental Resolution, and such other records and documents as we base considered necessary or appropriate for the purposes of this epinion. We have also examined an er.ecuted coupon 1980A Bond. In our opinion the 1980A Bonds have been authorized and issued in accordance with the Constitution and statutes of the State of South Carolina, and constitute valid and legally binding obligations of the Authority payable from and secured by a lien upon and pledge of the Revenues (as defined in the Resolution) of the System, all as set forth and provided in the Resolution, on a parity with the presently outstanding and unpaid bonds of (a) an issue of $100,000,000 Electric System Expansion Revenue Bonds,1973 Series, (b) an issue of $109,000,000 Electric System Expansion Revenue Bonds,1974 Series, (c) an issue of $215,150,000 Electric System Expansion Revenue Bonds,1977 Refunding Series, (d) an issue of $115,000,000 Electric System Expansion Revenue Bonds,1977 Series, (c) an issue of $200,000,000 Electric System Expansion Revenue Bonds,1978 Series, and (f) an issue of $110,000,000 Electric System Expansion Revenue Bonds, 1979 Series A, heretofore issued pursuant to the Resolution and any bonds hereafter issued pursuant to the Resolution on a parity with said bonds and the 1980A Bonds, subject to a prior lien on said Revenues for the payment of the principal of and interest on the presently outstanding and unpaid po:. ion of a $9,000,000 Contract Obligation of the Authority entered into by the Authority as of January 1,1950, the presently outstanding and unpaid bonds of (a) an issue of $15,300,000 Electric Revenue Bonds, Series of 1950, of the Authority, dated July 1,1950, (b) an issue of $51,600,000 Electric Revenue Bonds, Series of 1967, of the Authority, dated January 1,1967, and (c) an issue of $12,050,000 Electric Revenue Bonds, Refunding Series of 1973, of the Authority, dated April 1,1973 (said Contract Obligation and said bonds being herein-after referred to, collectively, as the " Original Bonds"), and, so long as any of the Original Bonds are outstand-ing, subject also to the payments required by the Indenture, dated as of July 1,1949, as amended and supplemented, pursuant to which the Original Bonds were issued and are secured, to be made t; the Operating Fund, Interest Fund, Bond Fund and Debt Service Reserve Fund established pursuant to said indenture. It is to be understood that the rights of the holders of the 1980A Bonds under the 1980A Bonds and under the Resolution and Supplemental Resolution and the enforceability thcreof under the same may be subject to judicial discretion, the valid exercise of the sovereign police powers of the State of South Carolina and of the constitutional powers of the United States of America and valid bankruptcy, insolvency, reorgani-zation, moratorium and other laws for the relief of debtors. It is also our opinion that the interest on the 1980A Bonds is exempt from income taxation by the United States of America under existing law and regulations, and that, under the laws of the State of South Carolina, the 1980A Bonds and the interest thereon are presently exempt from property and income taxation within said State. Very truly yours, l 1%2}}