ML20206R519

Scana Corp 1998 Annual Rept

ML20206R519
Person / Time
Site:	Summer
Issue date:	12/31/1998
From:	Timmerman W SCANA CORP.
To:
Shared Package
ML20206R517	List: ML20206R519 ML20206R524 RC-99-0105, Forwards Copy of Sce&G Co 1998 Annual Financial Rept & Sc Public Service Authority 1998 Annual Financial Rept, for VC Summer Nuclear Station
References
NUDOCS 9905200142
Download: ML20206R519 (65)

Text

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1 FELLOW SHAREHOLDERS: I i 3 %y ? l / sk . y& 1 f t is my pleasure to present to you SCANA Corporation's 1998 annual report. This report focuses on how SCANA achieves success through shared values. Values are defined as principles or qualities that are intrinsically desirable. At SCANA, we have our own set of val-ues. We live them. Our success today and into the future belongs to our employees who bring these desirable traits into the workplace and the communities we serve each and every day. I hope you enjoy meeting some of our employees as you read this report. Before I take you through a financial and operational review of 1998, let me discuss some exciting recent events that will help shape the future growth of our Company. On February 16, 1999, we reached an agreement to acquire Public Service Company of North Carohna Inc., a Gastonia, North Carolina-based natural gas distribution company in a transaction valued at approximately $900 million, including the assumption of debt. Incorporated in 1938, PSNC transports and sells natural gas to approximately 340,000 resi-dential, commercial and industrial customers in a 31-county service territory covering 95 cities and communities spanning from the Research Triangle area of Raleigh, Durham and Chapel Hill in the north central portion of the state to the Concord, Statesville, Gastonia region in the Piedmont to Asheville in the west. Following the completion of this transaction, which we expect by the end of 1999, PSNC will 7 become a wholly owned subsidiary of SCANA. PSNC's Chairman, President and Chief Executive Omccr Charles E. Zeigler, Jr., will become president and chief operating omcer o.f the PSNC subsidiary and a member of a three-person Omce of the Chairman that will include myself and Jack Skolds, president and chief operating omcer of South Carolina Electric & Gas Company. Charlie and two other PSNC directors also will be joining SCANA's Board. t This acquisition is an important growth opportunity for SCANA that will allow us to further maximize shareholder value in the face of a changing utility industry. It will allow our Company to extend natural gas service into some of the fastest growing markets in North Carolina while doubling our gas customer base to more than 750,000 stretching from Georgia through the Carolinas. h

SCANA and PSNC share a common mission, vision and values that are focused on compet-itive prices, high-quality customer service, serving our communities and increasing share-holder value. PSNC's management team has built one of the most competitive gas distribu-tion companies in the nation, and their expertise will be a valuable addition. Financially in 1998, we carned $2.12 per share, up from $2.06 per share in 1997. Earnings for 1998 included a nonrecurring gain of 5 cents per share re!ated to a retroactive change in electric depreciation rates in the first quarter of 1998. Earnings for 1997 included a one-time gain of 16 cents per share from the sale of our oil and natural gas exploration and production subsidiary. The increase in 1998 earnings was driven primarily by higher sales of electricity, which increased 12.5 percent as a result of one of the warmest summers on record. True growth in electric customer base increased 2.7 percent. The 1998 earnings per share results also beneGred from the completion of a $110 million stock repurchase program that reduced our outstanding common shares by approximately 3.7 million. At the close of the year the Public Service Commission of South Carolina ordered a reduction of $22.7 million in retail electric rates for SCE&G beginning in 1999. The Commission ordered the reduction because SCE&G earned more than the allowed return on common equi-ty as a result of record breaking hot weather during the summer. However, the Commission did reaHirm our authorized return on common equity of 12 percent. In conjunction with the PSNC transaction, your Board of Directors adopted a common stock dividend policy that will bring the Company's dividend payout more in line with growth-ori-ented utilities and increase retained cash How to position the Company for growth. The Board declared a Grst quarter 1999 dividend of 381/2 cents per share of common stock. Under the new policy, the Board anticipates declaring a 381/2 cents per share dividend in the second quarter and reducing the dividend to 271/2 cents per share thereafter. This will make the Company's indicated annual dividend rate on common stock of $1.10 per share or 52 per-cent of 1998 earnings per share. The Board will review the dividend on an annual basis. The decision to reposition the dividend was a difGcult one, but it will provide us the Dexibil-ity to deal with the demands of a more competitive utility industry while implementing our growth strategies. Our Company has historically paid 70 percent to 75 percent ofits annual earnings in dividends to common shareholders. As competition in our industry intensiGes, we need to retain more of our earnings to position the Company for growth. Reducing the dividend lowers our payout ratio to 50 to 55 percent of earnings, which is more in line with other growth-oriented utilities with whom we are competing. It strengthens our Gnancial position and broadens our ability to make additional investments in our energy and telecom-munications businesses. We believe this strength-through-growth strategy will increase future earnings, providing a sound basis for future growth in the dividend and in stock price. Total return to shareholders in 1998 was approximately 13 percent, which compared favor-ably to other utilities. Forba picked SCANA as one of only 15 energy distribution compa-nies in the country in its Platinum 400 list of superior performing large companies. However, in the Grst few months of this year, SCANA's stock price has declined, along with other util-ities, because of mild weather, concerns over rising interest rates and reaction to the PSC's order reducing electric rates. Despite this short-term set back, we believe the Company's long-term outlook is bright as we move toward more aggressive growth. Operationally,1998 was an active year for the Company. Summer Station continued its record of excellence, becoming one of only four nuclear plants in the nation to earn all h

Category I ratings from the Nuclear Regulatory Commission. In addition, the 1,000-megawatt facility led the nation in capacity factor averaged over the past three years and was second in the world in capacity factor in 1998. Our overall electric generating system also performed excelkntly as we were able to meer record energy demand of our customers this past summer without needing to purchase very expensive supplemental power. We also were successful in pursuing our goal of finding growth opportunities outside of our traditional utility service territories. Using a comprehensive marketing strategy to introduce the SCANA brand to Georgia's natural gas customers, we have signed up more than 175,000 new customers in a little more than four months in that state's newly opened retail market. Start-up costs associated with entering this market are affecting earnings. But we are build-ing on our proven strengths in customer service and competitive pricing in quickly growing revenues from this new market. On a similar note, we continue to be pleased with our various te!ecommunications invest-ments and the added value they give SCANA from exposure to their marketing practices and the opportunity to sell our products and services on an amliated basis in the future. In June, we invested an additional 575 million in convertible preferred stock of Powertel, Inc., a lead-ing provider of digital wireless Personal Communications Services (PCS), as that company continues the buildout ofinfrastructure needed to provide contiguous service across much of the Southeast. The Year 2000 is an issue to SCANA and other companies because many computers, systems and software were originally programmed using two digits rather than four to identify the year, which may prevent them from accurately processing information with dates beyond 1999. Because this issue could have a material impact on the operations of the Company if not addressed, our goal is to be Year 2000 ready and we are on schedule to have all critical systems corrected by July 31,1999. On a personal note, I would like to thank Bill Cassels and Creighton McMaster for their many dedicated years of service to SCANA as members of our Board of Directors. Both will turn 70 before the 2000 Annual Meeting and are therefore retiring from the Board in April 1999. Their wisdom and counsel have been very important to SCANA's development, and they will be missed. In closing. let me once again praise our dedicated team of employees. Collectively, SCANA's employees own 12 percent of the outstanding shares of common stock. Not only do they own a large portion of the Company, but they ensure SCANA's continued success by putting our shared values to work every day. Respectfully submitted, W.B. Timmerman Chairman, President and Chief Executive Officer February 22,1999 h

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WE'RE PRODUCING LOW-COST ELECTRICITY AND DEllVERING IT SAFE, REllABLE AND ENVIRONMENTALLY SENSITIVE MANNER TO MORE THAN HALF A MILLION HOMES AND BUSINESSES. The V.C. Summer Nuclear Station typifies our excellent operating and safety records in the elec-tric generation business. This 1,000-megawatt facility tied for second place in the world for capacity factor in 1998 and led the nation in the same category as averaged over the past three years. Our cooperative preventive maintenance programs proved their worth during the extreme summer weather of 1998. Our system of 22 fossil, hydro, nuclear and internal combustion facil-ities never wavered as our customers set five new records for electric demand in the span ofone month. Operationally, our system availability and heat rate factors continue to outpace indus-try averages, and continuing system improvements are helping us reduce our emissions, lower our production costs and increase electric output. And that translates into afTordable, responsi-ble and reliable comfort and convenience for consumers. pn F Lawrence Youmans, Jr., Plant Mechanic "I love working with World Changers, a church-oriented youth group that helps those less fortunate. It really gives you satisfaction to help those who can't TO help themselves." 3.; ' q ; *l w .y 4 Jack Skolds is Group Executive of SCANfs Electric Group and President and Chief Operating Officer of South Carolina flectric & Gas Company. He is responsibic for all electric generation, transmission and distribution operations. 'g

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WE'RE EXPANDING OUR NATURAL GAS TRANSPORTATION AND DEl SYSTEMS TO PROVIDE ENERGY ALTERNATIVES FOR OUR GROWING (USTOMER BASE. Our gas group is cor,tinually assessing SCANA's transmission and distribution systems to ensure reliability now and into the future for more than 256,000 South Carolina homes and businesses. At the same time, we're evaluating systemwide capacity needs to maintain pace with a rapidly growing economy. Most of the major growth areas - Myrtle lleach and the IllufTton area outside Hilton H:ad are two prime examples - are located at the far ends of our system delivery points. While this makes pipeline expansion more challenging, these areas offer sig-nificant new opportunities for gas sales. Our transportation and delivery systems have out-standing safety and reliability records. Our distribution system is one of the most eflicient in the Southeast when measured in terms of the number of customers served and revenue gener-ated per employee. Safety and reliability remain the cornerstones of SCANA's pipeline network as we strive daily to find ways to continue to better serve our customers, reduce costs and bring value to our shareholders. lb y Jy (M f Barney Murphy, Director of System Control l l QL " Meaningful work - thai s what it's all about. All of 7. our jobs are important to benefit our customers, community, shareholders and fellow employees. I'm proud to be a part of the leading edge: SCANA.* l 4 Berry Gibbes is Group Executive of SCANA's Gas Group and President of South Corolina Pipeline Corporation. He is responsible for 0!I natural gas transmission and distribution operations and propone businesses. 2

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WE'RE AGGRESSIVELY BREt. KING OUT OF OUR TRADITIONAL NATURAL GAS SERVICE AREA AND EMERGING AS THE TOP NEW MARKETER IN l GEORGIA'S RESIDENTIAL AND COMMERCIAL MARKETS. In the fall of 1998, Georgia became the first state in the nation to deregulate natural gas ser-vice to residential and commercial customers. Deregulation of the natural gas business began in 1978 at the well head. It spread to the pipelines and eventually to the industrial sector, where we provide natural gas and other energy marketing services to approximately 180 cus-tomers, including more than 100 in Georgia, in more than 20 states. Expanding into Georgia's residential and commercial markets is a natural extension for SCANA's gas busi-nesses. In a little over four months' time, more than 175,000 residential and commercial cus-comers had chosen SCANA as their natural gas provider, making us the top new marketer. We achieved this success by focusing on customer service, eH'ective marketing and the forma-tion of strategic alliances. In the latter part of 1998 we opened six customer service oHices and placed full-service kiosks at 30 Kroger grocery store locations. Alliances and partnerships with electric cooperatives, AAA, schools, churches, municipalities and other groups also offer new opportunities for Georgia consumers to choose SCANA and save on a variety of goods and services. We will continue to aggressively marker natural gas and, in the future, offer our customers additional products and services, such as home security and appliance maintenance pro-grams, wireless communications and internet access. Derrick Johnson, Commercial Sales Representative "If you say you're going to do something, complete the task. I mink people respect that." 4 Kiosks at 30 Kroger grocery stores in Georgia make it easy for customers to choose SCANA as their natural gas supplier. F

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WE'RE SETTING OUR SIGHTS BEYOND THE METER TO BE A PARTNER WITH RESIDENTIAL AND BUSINESS CUSTOMERS, OFFERING NEW PRODUCTS AND SERVICES THAT WILL ENHANCE THEIR QUALITY OF LIFE. As the energy industry becomes increasingly compctitive, we are focused on reinforcing SCANNs image as more than just an energy provider. We also will provide our residential and business customers with additional products that can add comfort and convenience to the home and workplace. We want to provide greater value to our customers by ofTering options to purchase a menu of products and services from one source.1:or residential customers, that means things like home security and appliance maintenance and repair services. For commer-cial customers, it means comprehensive energy information services that help businesses iden-tify and control their energy costs, increase productivity and manage their energy dollars more effectively and efTiciently. Our top priority is ensuring customer satisfaction through under-standing and adapting to meet our customers' needs. We will then translate these needs into new products, new markets, multiple sales and strategic alliances for the future. aj_ _ a x ' <,) jf Jolin Tringcli, Commercial Account Manager "Our customers know when they call us with questions or a problem, the iilformation they get is truly to their benefit." 4 Ann Milligen is Senior Vice President of Marketing and is responsible for 011 residential and commercial market-ing and sales operations, public Offairs and corporate communications. )

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WE'RE EXPANDING OUR TELECOMMUNICATIONS OPERATIONS AND INVESTMENTS FOR FUTURE GROWTH OPPORTUNITIES THROUGHOUT THE SOUTHEAST. SCANA's telecommunications operations include a 500-mile fiber optic network that provides high bandwidth technology to a growing number ofcarriers and businesses throughout South Carolina. This digital highway is leased to long-distance telephone companies, local exchange carriers, internet service providers and others interested in reliable, high-capacity service. We also operate an 800-megahertz radio communications network for public safety and utility users in South Carolina. A third line of business involves the acquisition, development and construction of telecommunications towers to meet the increasing demand for new towers and co-location anernatives for providers of cellular relephone, paging and digital wireless Personal Communications Services (PCS). In a related business activity, we continue to participate in the development of PCS networks in 32 markets across the Southeast through an equity own-ership in Powertel Inc., an affiliate of ITC Holding Company. With a total investment of 5240.5 million, SCANA's equity ownership in Powertel is approximately 29 percent on a fully converted basis. Other direct investments with telecommunications companies include local and long-distance business carrier ITC^DeltaCom and Knology Holdings, which offers expanded cable television, local and long-distance telephone services as well as internet access. Cynthia Mathis, Telecommunications Supervisot "When the customer calls us, we get in there and do the job." 4 George Bullwinkelis Senior Vice President and President of SCANA Communications. He is responsible for all telecommunications operations as well as governmental affcirs and economic development. h

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WE'RE WORKING HARD TO PROVIDE DEPENDABLE, AFFORDABLE ENERGY IN AN ENVIRONMENTALLY SENSITIVE MANNER. SCANA is the largest utility based in South Carolina, and we htlieve we have a responsibility to work for a cleaner and beuer environment. That's why we've adopted an environmental policy to guide us in meeting the requirements of all environmental laws and regulations w hile encour-aging employee involvement in environmental protection efforts. All manufacturing processes - including the generation of electricity - produce by-products that companies must manage responsibly. As new technologies become available, and as we learn more about the impact of our operations, we take steps to improve everything we do from the way we operate our gener-ating plants to how we label and store chemicals and other compounds used in our processes. SCANA is committed to operating our plants within all regulatory limits established by state and federal agencies to protect the public's heahh and safety. In the future, we will continue to make further modifications and improvements with the environment in mind. Beyond opera-tions, SCANA and our employees support the environment through sponsor-ship of and participation in programs such as the annual Beach Sweep / River Sweep clean up; environmental stewardship awards programs for elemen-tary, middle and high school students: and the donation of seedlings to community groups to promote new tree growth. Wall Motorwella, Senior Environmental Specialist "If I am open and honest, it helps me and the company establish the image of an environmentally conscious, good corporate neighbor." l 4 Tom Attlior is Senior Vice President and General (consel and is responsible for all of SCANA's regulatory and legal operations as well as environmental compliance. Q

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WE'RE COMMITTED TO PROVIDING SCANA SHAREHOLDERS WITH ALL OF THE SERVICES THEY NEED TO FEEL CONFIDENT ABOUT THEIR INVESTMENTS THROUGH PROGRAMS WE ADMINISTER IN-HOUSE. + Our shareholders represent all 50 states and several foreign countries. But it doesn't matter if you're one of SCANA's newest shareholders or have been one for many years, we appreciate your investment and the confidence you have in our future. As a result, we are committed to making it easy for you to do business with us by offering a number of services provided by our own in-house stafT. Our SCANA Investor Plus Plan provides a convenient and econom-ical way to buy, hold and transfer shares of common stock. In addition, investors can acquire shares of common stock directly from SCANA and avoid middlemen. As always, we invite ~ your comments and questions as we look for ways to better serve our shareholders. G I Sheri Wicker, Analyst "Whether a consumer, business or shareholder contacts us, we always look for ways to improve our services to allow them the flexibility to conduct business with us in an easy manner." 4 Kevin Marsh is Senior Vice President of Finance, Chief Financial 0fficer and Controller. He is also responsible for administration, human resources, information systems, Year 2000 compliance, corporate taxation, risk management, investor relations and shareholder services. g

BOARD OF DIRECTORS 4. Bill L Amick James A. Bennett William 11. Ihmkhart, Jr. Chairman and CEO Senior Vie President and Partner Amick Farms. Inc. Dir. of Professional Banking Bookhan Iarms Batesburg SC Iirst Citizens Bank i lloree, SC Columbia. SC

1..

. d 11 ugh M. Chapman Elaine T. Ireeman lawrence M. Gressette, Jr. Retired Chairman 1 xecutive Director Chairman i.meriius NationsBank South ETV Endowment of SC. Inc. $CANA Corporation Atlanta. GA Spartanburg. $C Columbia. SC f 1. s 4 1 W. Ilayne flipp lynne M. Miller John B. Rhodes Chairman. President and Cl O Cl O. I nvironmental Chairman and ClO The 1.iberty Corporation Strategies Corporation Rhodes O I Company. Inc. Greemille. SC Reston. VA Walterboro. $C Directors I meriti-Tdham R. Bruce. Sr.: James 11. Edwards; Kenneth W. I renth; g Benjamin A. llagoal Jask I. liassell. Jr.: John ll.1.umpkin. Sr.: Allan C. Mustard: Ilenry Ponder; Virgil C. Summer; and John A. Warren. Maceo K. Sloan William 11. Timmerman Chairman, President and Cl O Chainnan. President and Cl O Sloan Financial Group. Inc. & SCANA Corporation NCM Capital Management Columbia, SC Group, Inc. Durham, NC )

OljiG0 LNG DIRECTORS SCANA 0FFICERS m

• William B. Timmerman Chairman of the Board. President

\\ and Chief Executive Officer I'

• Kevin B. Marsh Senior Vice President - Finance.

Chicf Financial Omcer and Controller J

• H. Thomas Arthur,11 1

Senior Vice President - General Counsel William T. Cassels, Jr. ' Ann M. Milligan William T. Cassels, Jr. is retiring from Senior Vice President - Marketing SCANA's Board of Directors after nine years of service. Elected to the Board in 1990 Mr. ' John L Skolds Cassels served on the Audit Comminee, the Group Executive - SCANA Electric Group Management Development and Corporate President and Chief Operating Omcer Performance Committee and the long-Term South Carolina Electric & Gas Company Compensation Comminee.

• Asbury H. Gibbes Mr. Cassels is Chairman of the Board of Gnmp Executive - SCANA Gas Group Southeastern Freight Lines, Inc.

President - South Carclina Pipeline Corporation

• George J. Bullwinkel, Jr.

President - SCANA Communications, Inc. . 3 Senior Vice President - Governmental ~ AfTairs, Economic Development and Customer Relations Theodore E. Boone, III Vice President - Human Resources h George T. Devlin,111 Vice President - Corporate Compliance E Creighton McMaster and Audit Services Charles B. McFadden E Creighton McMaster is retiring from Vice President - Governmental Affairs SCANA's Board of Directors after 25 years and Economic Development of service. Elected to the Board in 1974, Mr. McMaster has served on various com-Mark R. Cannon mittees of the Board including the Audit Treasurer Comminee, the long/Ferm Compensation Committee and as Chairman of the Nuclear Lynn M. Williams Oversight Comminee. Corporate Secretary Mr. McMaster is President and Manager of

• Executive officers Winnsboro Petroleum Company.

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t FELLOW SHAREHOLDERS: ((. 'tes y f* r s i n f t is my pleasure to present to you SCANA Corporation's 1998 annual report. Th report focuses on how SCANA achieves success through shared values. Values are defmed as principles or qualities that are intrinsically desirable. At SCANA, we have our own set of val-ues. We live them. Our success today and into the future belongs to our employees who bring these desirable traits into the workplace and the communities we serve each and every day. I hope you enjoy meeting some of our employees as you read this report. Before I take you through a financial and operational review of 1998, let me discuss some exciting recent events that will help shape the future growth of our Company. On February 16, 1999, we reached an agreement to acquire Public Service Company of North Carolina, Inc., a Gastonia, North Carolina-based natural gas distribution company in a transaction valued at approximately $900 million, including the assumption of debt. Incorporated in 1938, PSNC transports and sells natural gas to approximately 340,000 resi-dential, commercial and industrial customecs in a 31-county service territory covering 95 cities and communities spanning from the Research Triangle area of Raleigh, Durham and Chapel Hill in the north central portion of the state to the Concord, Statesville, Gastonia region in the Piedmont to Asheville in the west. Following the completion of this transaction, which we expect by the end of 1999, PSNC will I become a wholly owned subsidiary of SCANA. PSNC's Chairman, President and Chief Executive Officer Charles E. Zeigler, Jr., will become president and chief operating officer of the PSNC subsidiary and a member of a three-person Office of the Chairman that will include myself and Jack Skolds, president and chief operating officer of South Carolina Electric & Gas Company. Charlie and two other PSNC directors also will be joining SCANA's Board. This acquisition is an important growth opportunity for SCANA that will allow us to further maximize shareholder value in the face of a changing utility industry. It will allow our Company to extend natural gas service into some of the fastest growing markets in North j Carolina while doubling our gas customer base to more than 750,000 stretching from Georgia through the Carolinas. O E

SCANA and PSNC share a common mission, vision and values that are focused on compet-itive prices, high-quality customer service, serving our communities and increasing share-holder value. PSNC's management team has built one of the most competitive gas distribu-tion companies in the nation, and their expertise will be a valuable addition. Financially in 1998, we earned $2.12 per share, up from $2.06 per share in 1997. Earnings for 1998 included a nonrecurring gain of 5 cents per share related to a retroactive change in electric depreciation rates in the first quarter of 1998. Earnings for 1997 included a one-time gain of 16 cents per share from the sale of our oil and natural gas exploration and production subsidiary. The increase in 1998 earnings was driven primarily by higher sales of electricity, which increased 12.5 percent as a result of one of the warmest summers on record. True growth in electric customer base increased 2.7 percent. The 1998 earnings per share results also benefited from the completion of a $110 million stock repurchase program that reduced our outstanding common shares by approximately 3.7 million. At the close of the year the Public Service Commission of South Carolina ordered a reduction of $22.7 million in retail electric rates for SCE&G beginning in 1999. The Commission ordered the reduction because SCE&G earned more than the allowed return on common equi-ty as a result of record breaking hot weather during the summer. However, the Commission did reaffirm our authorized return on common equiry of 12 percent. In conjunction with the PSNC transaction, y, 'ur Board of Directors adopted a common stock dividend policy that will bring the Company's lividend payout more in line with growth-ori-ented utilities and increase retained cash flow t, position the Company for growth. The Board declared a first quarter 1999 dividend J 381/2 cents per share of common stock. Under the new policy, the Board anticipates declaring a 381/2 cents per share dividend in the second quarter and reducing the dividend to 271/2 cents per share thereafter. This will make the Company's indicated annual dividend rate on common stock of $1.10 per share or 52 per-cent of 199.8 earnings per share. The Board will review the dividend on an annual basis. The decision to reposition the dividend was a difficult one, but it will provide us the flexibil-ity to deal with the demands of a more competitive utility industry while implementing our growth strategies. Our Company has historically paid 70 percent to 75 percent ofits annual earnings in dividends to common shareholders. As competition in our industry intensifies, we need to retain more ofour earnings to position the Company for growth. Reducing the dividend lowers our payour ratio to 50 to 55 percent of carnings, which is more in line with other growth-oriented utilities with whom we are competing. It strengthens our financial position and broadens our ability to make additional investments in our energy and telecom-munications businesses. We believe this strength-through-growth strategy will increase future earnings, providing a sound basis for future growth in the dividend and in stock price. 7btal return to shareholders in 1998 was approximately 13 percent, which compared favor-ably to other utilities. Forbu picked SCANA as one of only 15 energy distribution compa-nies in the country in its Platinum 400 list of superior performing large companies. However, in the first few months of this year, SCANA's stock price has declined, along with other util-ities, because of mild weather, concerns over rising interest rates and reaction to the PSC's order reducing electric rates. Despite this short-term set back, we believe the Company's long-term outlook is bright as we move toward more aggressive growth. Operationally,1998 was an active year for the Company. Summer Station continued its record of excellence, becoming one of only four nuclear plants in the nation to earn all h

Category I ratings from the Nuclear Regulatory Commission. In addition, the 1,000-megawatt facility led the nation in capacity factor averaged over the past three years and was second in the world in capacity factor in 1998. Our overall electric generating system also performed excellently as we were able to meet record energy demand of our customers this past summer without needing to purchase very expensive supplemental power. We also were successful in pursuing our goal of fmding growth opportunities outside of our traditional utility service territories. Using a comprehensive marketing strategy to introduce the SCANA brand to Georgia's natural gas customers, we have signed up more than 175,000 new customers in a little more than four months in that state's newly opened retail market. Start-up costs associated with entering this market are affecting earnings. But we are build-ing on our proven strengths in customer service and competitive pricing in quickly growing revenues from this new market. On a similar note, we continue to be pleased with our various telecommunications invest-ments and the added value they give SCANA from exposure to their marketing practices and the opportunity to sell our products and services on an afliliated basis in the future. In June, we invested an additional $75 million in convertible preferred stock of Powertel, Inc., a lead-ing provider of digital wireless Personal Communications Services (PCS), as that company continues the buildour ofinfrastructure needed to provide contiguous service across much of the Southeast. The Year 2000 is an issue to SCANA and other companies because many computers, systems and software were originally programmed using two digits rather than four to identify the year, which may prevent them from accurately processing information with dates beyond 1999. Because this issue could have a material impact on the operations of the Company if not addressed, our goal is to be Year 2000 ready and we are on schedule to have all critical systems corrected by July 31,1999. On a personal note, I would like to thank Bill Cassels and Creighton McMaster for their many dedicated years of service to SCANA as members of our Board of Directors. Iloth will turn 70 before the 2000 Annual Meeting and are therefore retiring from the Board in April 1999. Their wisdom and counsel have been very important to SCANA's development, and they will be missed. In closing, let me once again praise our dedicated team of employees. Collectively, SCANA's i employees own 12 percent of the outstanding shares of common stock. Not only do they own { a large portion of the Company, but they ensure SCANA's continued success by putting our shared values to work every day. Respectfully submitted, A p W.B. Timmerman Chairman, President and Chief Executive Officer February 22,1999 J

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WE'RE PRODUCING LOW-COST ELECTRICITY AND DEllVERING IT IN SAFE, RELIABLE AND ENVIRONMENTALLY SENSITIVE MANNER TO MORE THAN HALF A MILLION HOMES AND BUSINESSES. The V.C. Summer Nuclear Station typi6es our excellent operating and safety records in the elec-tric generation business. This 1,000-megawatt facility tied for second place in the world for capacity factor in 1998 and led the nation in the same category as averaged over the past three years. Our cooperative preventive maintenance programs proved their worth during the extreme summer weather of 1998. Our system of 22 fossil, hydro, nuclear and internal combustion facil-ities never wavered as our customers set Hve new records for electric demand in the span of one month. Operationally, our system availability and heat rate factors continue to outpace indus-try averages, and continuing system improvements are helping us reduce our emissions, lower our production costs and increase electric output. And that translates into affordable, responsi-b!e and reliable comfort and convenience for consumers. (YQ towrence Youmsas, Jr., Plant Mechanic "I love working with World Changers, a church-oriented youth group that helps those less fortunate. It really gives you satisfaction to help those who can't help themselves." l ? 1 4 Jack Skolds is Group Executive of SCANA's Electric Group and President and Chief Operating Officer of South Carolino Electric & Gas Company. He is responsible for all electric generation, transmission and distribution operations.

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WE'RE EXPANDING OUR NATURAL GAS TRANSPORTATION AND D SYSTEMS TO PROVIDE ENERGY ALTERNATIVES FOR OUR GROWING CUSTOMER BASE. Our gas group is continually assessing SCANNs transmission and distribution systems to } ensure reliability now and into the future for more than 256,000 South Carolina homes and businesses. At the same time, we're evaluating systemwide capacity needs to maintain pace with a rapidly growing economy. Most of the major growth areas - Myrtle Beach and the BlufTron area outside Hilton Head are two prime examples -- are located at the far ends of our system delivery points. While this makes pipeline expansion more challenging, these areas ofter sig-nificant new opportunities for gas sales. Our transportation and delivery systems have out-standing safety and reliability records. Our discribution system is one of the most efficient in the Southeast when measured in terms of the number of customers served and revenue gener-ated per employee. Safety and reliability remain the cornerstones of SCANNs pipeline network as we strive daily to find ways to contir.ue to better serve our customers, reduce costs and bring value to our shareholders. Barney Murphy, Director of System Control ' Meaningful work - that's what it's Oll about. All of our jobs are important to benefit our Customers, Community, shareholders and fellow employees. Im proud to be a part of the leading edge: SCANA.* l 4 Berry Gibbes is Group Executive of SCANA's Gas Group and President of South Carolina Pipeline Corporation. He is responsible for all natural gas transmission and distribution operations and propone businesses. h_)

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WE'RE AGGRESSIVELY BREAKING OUT OF OUR TRADITIONAL NATUR GAS SERVICE AREA AND EMERGING AS THE TOP NEW MARKETER IN GEORGIA'S RESIDENTIAL AND COMMERCIAL MARKETS. In the fall of 1998, Georgia became the first state in the nation to deregulate natural gas ser-vice to residential and commercial customers. Deregulation of the natural gas business began in 1978 at the well head. It spread to the pipelines and eventually to the industrial sector, where we provide natural gas and other energy marketing services to approximately 180 cus-tomers, including more than 100 in Georgia, in more than 20 states. Expanding into Georgia's residential and commercial markets is a natural extension for SCANA's gas busi-nesses, in a little over four months' time, more than 175,000 residential and commercial cus-iomers had chosen SCANA as their natural gas provider, making us the top new marketer. We achieved this success by focusing on customer service, efTecuve marketing and the forma-tion of strategic alliances. In the latter part of 1998 we opened six customer service oGces and placed full-service kiosks at 30 Kroger grocery store locations. Alliances and partnerships with electric cooperatives, AAA, schools, churches, municipalities and other groups also ofter new opportunities for Georgia consumers to choose SCANA and save on a variety of goods and services. We will continue to aggressively market natural gas and, in the future, ofter our customers additional products and services, such as home security and appliance maintenance pro-grams, wireless communications and internet access. Derrick Johnson, Commercial Sales Representctive "If you say you're going to do something, complete the task. I think people respect that." 4 Klosks at 30 Kroger grocery stores in Georgia make it easy for customers to choose SCANA as their natural gas supplier. h

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WE'RE SETTING OUR SIGHTS BEYOND THE METER TO BE A PART RESIDENTIAL AND BUSINESS CUSTOMERS, OFFERING NEW PRODUCTS AND SERVICES THAT WILL ENHANCE THEIR QUALITY OF LIFE. J As the energy industry becomes increasingly competitive, we are focused on reinforcing SCANA's image as more than just an energy provider. We also will provide our residential and business customers with additional products that can add comfort and convenience to the home and workplace. We want to provide greater value to our customers by offering options to purchase a menu of products and services from one source. For residential customers, that means things like home security and appliance maintenance and repair services. For commer-cial customers, it means comprehensive energy information services that help businesses iden-tify and control their energy costs, increase productivity and manage their energy dollars more efTectively and efficiently. Our top priority is ensuring customer satisfaction through under-standing and adapting to meet our customers' needs. We will then translate these needs into new products, new markets, multiple sales and strategic alliances for the future. /+ ;,.

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[r3.c h John Tringoli, Commercial Account Manager "Our customers know when they call us with questions or a problem, the information they get is truly to their benefit." 1 4 Ana Milligen is Senior Vice President of Marketing and is responsible for all residential and commercial market-ing and sales operations, public affairs and corporate communications. 'I 1

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WE'RE EXPANDING OUR TELECOMMUNICATIONS OPERATIONS AND INVESTMENTS FOR FUTURE GROWTH OPPORTUNITIES THROUGHOUT THE SOUTHEAST. SCANA's telecommunications operations include a 500-mile fiber optic network that provides high bandwidth technology to a growing number of carriers and businesses throughout South Carolina. This digital highway is leased to long-distance telephone companies, local exchange carriers, internet service providers and others interested in reliable, high-capacity service. We also operate an 800-megahertz radio communications network for public safety and utility users in South Carolina. A third line of business involves the acquisition, development and construction of telecommunications towers to meet the increasing demand for new towers and co-location alternatives for providers of cellular telephone, paging and digital wireless Personal Communications Services (PCS). In a related business activity, we continue to participate in the development of PCS networks in 32 markets across the Southeast through an equity own-ership in Powertel Inc., an affiliate of ITC Holding Company. With a total investment of $240.5 million, SCANA's equity ownership in Powertel is approximately 29 percent on a ftdly converted basis. Other direct investments with telecommunications companies include local and long-distance business carrier ITC^DeltaCom and Knology Holdings, which offers expanded cable television, local and long-distance telephone services as well as internet access. Cynthia Mathis, Telecommunications Supervisor "When the customer calls us, we get in there and do the job." 4 George Bullwinkelis Senior Vice President and President of SCANA Communications. lie is responsible for all telecommunications operations as well as governmental affairs and economic development. h)

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WE'RE WORKING HARD TO PROVIDE DEPENDABLE, AFFORDABLE ENERGY IN AN ENVIRONMENTALLY SENSITIVE MANNER. SCANA is the largest utility based in South Carolina, and we believe we have a responsibility to work for a cleaner and better environment. That's why we've adopted an environmental policy to guide us in meeting the requirements of all environmental laws and regulations while encour-aging employee involvement in envimnmental protection efTorts. All manufacturing processes-including the generation of electricity - produce by-products that companies must manage responsibly. As new technologies become available, and as we learn more about the impact of our operations, we take steps to improve everything we do from the way we operate our gener-ating plants to how we label and store chemicals and other compounds used in our processes. SCANA is committed to operating our plants within all regulatory limits established by state and federal agencies to protect the public's health and safety. In the future, we will continue to make further modifications and improvements wnh the environment in mind. Beyond opera-tions, SCANA and our employees support the environment through sponsor-ship of and participation in programs such as the annual Beach Sweep / River Sweep clean up; environmental stewardship awards programs for elemen-tary, middle and high school students; and the donation of seedlings to community groups to promote new tree growth.

q Wall Motorwalla, Senior Environmental Specialist "If I am open and honest, it helps me and the company establish the image of an environmentally conscious, good corporate neighbor."

6 4 Tom Arthur is Senior Vice President and General Counsel and is responsible f or all of SCANfs regulatory and legal operations as well as environmental compliance. g i

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WE'RE COMMITTED TO PROVIDING SCANA SHAREHOLDERS WITH AL THE SERVICES THEY NEED TO FEEL CONFIDENT ABOUT THEIR INVESTMENTS THROUGH PROGRAMS WE ADMINISTER IN-HOUSE. Our shareholders represent all 50 states and seseral foreign countries. But it doesn't matter if you're one of SCANA's newest shareholders or have been one for many years, we appreciate your investment and the confidence you have in our future. As a result, we are committed to i making it easy for you to do business with us by offering a number of services provided by our own in-house staff. Our SCANA Investor Plus Plan provides a convenient and econom-ical way to buy, hold and transfer shares of common stock. In addition, investors can acquire i shares of common stock directly from SCANA and avoid middlemen. As always, we invite your comments and questions as we look for ways to better serve our shareholders. SheriWicker, Analyst "Whether a consumer, business or shareholder contacts us, we always look for ways to improve our services to allow them the flexibility to conduct business with us in an easy manner."

p 4 Kevin Marsh is Senior Vice President of finance, Chief financial 0fficer and Controller. He is also responsible for administration, human resources, information systems, Year 2000 compliance, corporate taxation, risk management, investor relations and shareholder services.

BOARD OF DIRECTORS -f ) auk <k Bill L Amick James A. Bennett William B. Ikx4.liart, Jr. Chairman and CEO Senior Vice President and Partner Amick Farms, Inc. Dir. of Professional Banking Bookhart Farms Batesburg, SC First Citizens Bank Ellorce, SC Columbia. SC i g 6 g ? I b Ilugh M. Chapman Elaine T. Freeman Lawrence M. Gressette, Jr. Retired Chairman Executive Director Chairman Emeritus NationsBank South ETV Endowment of SC, Inc. SCANA Corporation Atlanta, G A Spartanburg, SC Columbia, SC i si - } 3 . be j' 4 W. liayne liipp Lynne M. Miller John B. Rhodes Chairman. President and CEO CEO, Environmental Chairman and CLO The Liberty Corporation Strategies Corporation Rhodes Oil Company, Inc. Greenville, SC Reston, VA Walterboro, SC Directors Emeriti-William R. Bruce, Sr.: James B. Edwards; Kenneth W. French; g Benjamin A. liagood; Jack E llassell Jr.; John 11. Lumpkin, Sr.: Allan C. Mustard; 11enry Ponder: Virgil C. Summer; and John A. Warren. Maceo K. Sloan Wdliam B. Timmerman Chairman. President and CLO Chairman. Preslent and CEO Skun Financial Group, Inc. & SCANA Corporation NCM Capital Maragement Columbia, SC Group. Inc. Durham. NC ) i

OUTGOING DIRECTORS SCANA 0FFICERS 1 m

• William B. Timmerman Chairman of the Board, President

W's and Chief Executive Omcer

• Kevin B. Marsh Senior Vice President - Finance, Chief Financial Omcer and Controller J

'H. Thomas Arthur,11 4 Senior Vice President - General Counsel and Assistant Secretarv William " Cassels,Jr.

• Ann M. Milligan William T massels, Jr. is retiring from Senior Vice President - Marh:ing SCANA's Board of Directors after nine years of service. Elected to the Board in 1990, Mr.
• John L. Skolds Cassels served on the Audit Committee, the Group Executive - SCANA Electric Group Management Development and Corporate President and Chief Operating Omcer Performance Committee and the long>rerm South Carolina Electric & Gas Company Compensation Committee.
• Asbury H. Gibbes Mr. Cassels is Chairman of the Board of Group Executive - SCANA Gas Group Southeastern Freight Lines,Inc.

Presipnt - South Carohna Pipchne Corporation

• George J. Bullwinkel, Jr.

President - SCANA Communications, Inc. s ?X Senior Vice President - Governmental '4 Affairs, Economic Development and Customer Relations Theodore E. Boone, Ill Vice President - Human Resources h George T. Devlin,111 Vice President - Corporate Compliance E Creighton McMaster and Audit Services Charles B. McFadden E Creighton McMaster is retiring from Vice President - Governmental Affairs SCANA's Board of Directors after 25 years and Economic Development of service. Elected to the Board in 1974, Mr. McMaster has served on various com_ Mark R. Cannon mittees of the Board including the Audit Treasurer Committee, the Long/ Term Compensation Committee and as Chairman of the Nuclear Lynn M. Williams Oversight Committee. Corporate Secretary

• Emutin omcen Mr. McMaster is President and Manager of Winnsboro Petroleum Company.

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INDEPENDENT AUDITORS' REPORT SCANA Corporation: We have audited the accompanying Consolidated Balance Sheets, Statements of Capitalization and Statements of Changes in Common Equity of SCANA Corporation and subsidiaries (Company) as of December 31,1998 and 1997 and the related Consolidated Statements of Income and I Retained Earnings and of Cash Flows for each of the three years in the period ended December 31, i 1998. These fmancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these fmancia.1 statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those stan-dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fmancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, 1 as well as evaluating the overall financial statement presentation. We believe that our audits pro-vide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31,1998 and 1997, and the results ofits opera-tions and its cash flows for each of the three years in the period ended December 31,1998 in con-formity with generally accepted accounting principles. db DELOITTE & TOUCHE LLP Columbia, SC February 8,1999 (February 17,1999 as to Note 13) h

CONSOLIDATED BALANCE SHEETS December 31, (Millions of dollars) 1998 1997 . Assets Utility Plant (Notes 1,3 & 4): Electric $4,406 $4,292 Gas 604 580 Other 175 84 Total 5,185 4,956 Irss accumulated depreciation and amortization 1,728 1,619 Total 3,457 3.337, Construction work in progress 251 234 Nuclear fuel, net of accumulated amortization 56 53 Acquisition adjustment-gas, net of accumulated amortization 23 24 Utility Plant. Net 3,787 3,648 Nonutility Property and Investments (net of accumulated depreciation and depletion) (Note 1) 493 364 Current Assets: Cash and temporary cash investments (Note 8) 62 60 Receivables 276 248 Inventories (At average cost): Fuel (Notes 3 & 4) 63 51 Materials and supplies 56 52 Prepayments 22 16 Deferred income taxes 22 25 Total Current Assets 501 452 Deferred Debits: Emission allowances 31 31 Environmental 22 32 Nuclear plant decommissioning fund (Note 1) 56 49 Pension asset, net (Note 1) 115 82 Other (Notes 1 & 10) 276 274 Total Deferred Debits 500 468 Total $5,281 $4,932 9

December 31, (Millions of dollars) 1998 1997 Capitalization and Liabilities S*.ockholders' Investment: Common Equity (Note 5) $1,746 $1,788 Preferred stock (Not subject to purchase or sinking funds) 106 106 Total Stockholders' Investment 1,852 1,894 ', Preferrsd Stock, Net (Subject to purchase or sinking funds) (Notes 6 & 8) 11 12 SCE&G-Obligated Mandatorily Redeemable Preferred Securities of SCE&G's Subsidiary Trust, SCE&G Trust I, holding solely $50 million principal amount of the 7.55% Junior Subordinated Debentures of SCE&G, duc 2027 50 50 Long-Term Debt, Net (Notes 3,4 & 8) 1,623 1,566 Total Capitalization 3,536 3,522 Current Liabilities: Short-term borrowings (Notes 8 & 9) 195 59 Current portion oflong-term debt (Note 3) 107 73 Accounts payable 219 131 Customer deposits 18 18 Taxes accrued 72 59 Interest accrued 28 26 Dividends declared 42 43 Other 13 14 Total Current Liabilities 694 423 Deferred Credits: Deferred income taxes (Notes 1 & 7) 628 612 Deferred investrnent tax credits (Notes 1 & 7) 108 98 Reserve for nuclear plant decommissioning (Note 1) 56 49 Postretirement benefits 87 61 Other (Note 1) 172 167 Total Deferred Credits 1,051 987 Commitments and Contingencies (Note 10) Total $5,281 $4,932 See Notes to Consolidated Financial Statements. h

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the brs Ended December 31, (Millions of dollars, except per share amounts) 1998 1997 1996 Operating Revenues (Notes 1 & 2): Electric $1,220 $ 1,103 $ 1,107 Gas 411 419 403 Transit i 1 3 Total Operating Revenues 1,632 1,523 1,513 Operating Expenses: Fuel used in electric generation 262 248 251 Purchased power 31 9 11 Gas purchased for resale 269 287 277 Other operation (Note 1) 257 239 239-Maintenance (Note 1) 84 72 68 Depreciation and amortization (Note 1) 145 153 148 Income taxes (Notes 1 & 7) 136 105 118 Other taxes 103 96 87 Total Operating Expenses 1,287 1,209 1,199 Operating income 345 314 314 Other income (Note 1): Other income, net ofincome taxes 5 13 22 Gain on sale of subsidiary assets, net ofincome taxes 18 Allowance for equity funds used during construction 8 7 7 Total Other income 13 38 29 income Before Interest Charges and Preferred Stock Dividends 358 352 343 Interest Charges (Credits): Interest on long-term debt, net 121 115 115 Other interest expense 10 12 13 Allowance for borrowed funds used during construction (Note 1 ) (8) (6) (6) Total Interest Charges, Net 123 121 122 Income Before Preferred Dividend Requirements on Mandatorily Redeemable Prefetred Securities 235 231 221 Preferred Dividend Requirement of SCE&G -Obligated Mandatorily Redeemable Preferred Securities 4 1 Income Before Preferred Stock Cash Dividends of Subsidiary 231 230 221 Prvferred Stock Cash Dividends of Subsidiary (At stated rates) (8) (9) (6) Net income 223 221 215 Retained Earnings at Beginning of Year 617 558 498 l Common Stock Cash Dividends Declared (Note 5) (162) (162) (155) Retained Earnings at End of Year $678 5617 $558 Net income 5223 5221 $215 Weighted Average Number of Common Shares Outstanding (Millions) 105.3 107.1 105.1 Earnings Per Weighted Average Share of Common Stock (Basic and Diluted) 52.12 $2.06 $2.05 See Notes *o Consolidated Financial Statements.

l l l CONSOLIDATED STATEMENTS OF CASH FLOW 5 For the Years Ended December 31, (Millions of dollars) 1998 1997 1996 Cash flows From Operating Activities: Net income $223 $221 $215 Adjustments to reconcile net income to net cash provided from operating activities: j Depreciation, depletion and amortization 152 176 183 i Amortization of nuclear fuel 20 19 19 l Deferred income taxes, net 15 30 34 1 Pension asset (33) (24) (23) i Postretirement beriefits 26 24 16 I { Allowance for funds used during construction (16) (13) (13) Changes in certain current assets and liabilities: (Increase) decrease in receivables (28) 1 (28) (Increase) decrease in inventories (16) 15 (8) Increase (decrease) in accounts payable 88 (26) 19 l Increase (decrease) in taxes accrued 13 (12) 4 Other, ner 23 1 (17) Net Cash Provided From Operating Activities 467 412 401 Cash flows From Investing Activities: Utility property additions and construction expenditures, net ofAFC (281) (250) (235) l (Increase) decrease in nonutility property and investments: Sale ofoil and gas producing properties 110 53 Nonutility property (22) (38) (37) Investments (106) (75) (85) Sale of real estate assets 8 2 Net Cash Used For Investing Activities (409) (245) (302) Cash Flows From Financing Activities: Proceeds: Issuance of notes and loans 249 86 64 Issuance of SCE&G - obligated mandatorily redeemable trust preferred securities Issuance of preferred stock 49 Issuance of common stock 99 Repayments: 29 69 Common stock (110) Mortgage bonds (50) (15) (22) Notes and loans (96) (70) (69) Other long-term debt (8) Preferred stock (1) (53) (3) Dividend payments: 7 Common stock (163) (160) (153) j Preferred stock (7) (9) (5) Short-term borrowings, cer 136 (86) 32 Fuel financings, net (14) 14 (11) Net Cash Used For Financing Activities (56) (124) (98) Net increase in Cash and Temporary Cash Investments 2 43 1 Sq Cash and Temporary Cash Investments, January 1 60 17 16 So Cash and Temporary Cash investments, December 31 $62 $60 $17 O,f Supplemental Cash Flow Informatiom Cash paid for-Interest (Includes capitalized interest of $7, $6 and $6) $127 $124 $126 -Income taxes 114 113 115 4 Noncash Financing Activities: T2! Unrealized gain on securities available for sale (net of tax) 7 18 Toj Charleston Franchise Agreement 21

==, Charleston Environmental Agreement 20 Secl See Notes to Consolidated Financial Statements. 1' . O

-~_- _ ' ~ ' - - - - - - - - - - - _ - - - - - - l (ONSOLIDATED 5TATEMENTS OF CHANGES IN COMMON EQU i 1997 1998 For the Years Ended December 31, (Millions of dollars) Comprehensive Common Comprehensive Common Income Equity income Equny $558 Retained Earnings: 5617 223 $223 221 $221 Balance at January 1 (162) Net income (162) Dividend declared on common stock 617 678 Balance at December 31 Accumulated odier comprehensive income: 18 Balance at January 1 Unrealized gains on securities, net of taxes 7 7 18 18 ($4 and $11 in 1998 and 1997, respectively) $239 5230 Comprehensive income 18 25 _ Balance at December 31 1,125 Common Stock: 1,153 28 Balance at January 1 Shares issued (110) Shares repurchased 1,153 1,043 Balance at December 31 $1,788 $1,746 Total Common Equity i d of unrealized holding gains 31,1993 uid 1997 was compr se Accumulated other comprehensive income at December d d December 31,1998 and 1997 does not include any on securities, net of taxes. Net income reported for the years en e realized gains or losses from securities. - ~ _ _ _ _

NOTES TO CONSOLIDATED FINANUAL STATEMENTS 1. Summary of Significant Accounting Policies B. Basis of Accounting A. Organization and Principles of Consolidation The Company accounts for its regulated utility opera-SCANA Corporation (Company), a South Carolina cor-tions, assets and liabilities in accordance with the provi-poration, is a public utility holding company within the sions of SFAS 71. The accounting standard requircs cost-meaning of the Public Utility Holding Company Act of based rate-regulated utilities to recognize in their financial '1935 but is exempt from registration under such Act. statements revenues and expenses in different time periods The Company, through wholly-owned subsidiaries, is than do enterprises that are not rate-regulated. As a result engaged predominately in the generation and sale of elec-the Company has recorded, as of December 31,1998, tricity to wholesale and retail customers in South Carolina approximately $216 million and $71 million of regulatory and in the purchase, sale.nd transportation of natural gas assets and liabilities, respectively, including amounts to wholesale and retail customers in South Carolina. The recorded for deferred income tax assets and liabilities of Company is also engaged in other energy-related business-approximately $130 million and $56 million, respectively. es, such as the marketing of natural gas in Georgia's newly The electric and gas regulatory assets of approximately deregulated natural gas market. The Company has invest- $50 million and $33 million, respectively (excluding ments in telecommunications companies and provides deferred income tax assets) are being recovered through fiber optic communications in South Carolina. rates and, as discussed in Note 213, the Public Service Commission of South Carolina (PSC) has approved accel-The accompanying Consolidated Financial Statements erated recovery of approximately $14 million of the elec-reflect the accounts of the Company and its wholly tric regulatory assets. In the future, as a result of deregu-owned subsidiaries: lation or other changes in the regulatory environment, the Company may no longer meet the criteria for continued Regulated utilities application of SFAS 71 and could be required to write off South Carolina Electric & Gas Company (SCE&G) its regulatory assets and liabilities. Such an event could South Carolina Fuel Company, Inc. (Fuel Company) have a material adverse effect on the Company's results of South Carolina Generating Company, Inc. (GENCO) operations in the period that a write-off would be South Carolina Pipeline Corporation (Pipeline required, but it is not expected that cash flows or fmancial Corporation) position would be materially affected. Nonregulated businesses C. Sysum of Accounts SCANA Energy Marketing, Inc. (Energy Marketing) The accounting records of the Company's regulated sub-SCANA Communications, Inc. (SCI) sidiaries are maintained in accordance with the Uniform SCANA Propane Gas, Inc. System of Accounts prescribed by the Federal Energy SCANA Propane Storage, Inc. Regulatory Commission (FERC) and as adopted by ServiceCare, Inc. the PSC. Primesouth, Inc. SCANA Resources, Inc. D. Utility Plant SCANA Petroleum Resources, Inc. (Petroleum Resources) Utility plant is stated substantially at original cost. The (in liquidation) costs of additions, renewals and betterments to utility l SCANA Development Corporation (in liquidation) plant, including direct labor, material and indirect charges for engineering, supervision and an allowance for funds Certain investments are reported using the cost or equiry used during construction, are added to utility plant ' method of accounting, as appropriate. Significant inter-accounts. The original cost of utility property retired or company balances and transactions have been eliminated otherwise disposed ofis removed from utility plant in consolidation except as permitted by Statement of accounts and generally charged, along with the cost of Financial Accouming Standards No. 71 (SFAS 71), removal, less salvage, to accumulated depreciation. The " Accounting for the EfTects of Certain Types of costs of repairs, replacements and renewals ofitems of Regulation" which provides that profits on intercompany property determined to be less than a unit of property are sales to regulated affdiates are not eliminated if the sales charged to maintenance expense. price is reasonable and the future recovery of the sales price through the rate-making process is probable. SCE&G, operator of the V. C. Summer Nuclear Station (Summer Station), and Santee Cooper (formerly the South Carolina Public Service Authority) are joint owners 9 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of Summer Station in the proportions of two-thirds and At December 31,1998 and 1997 the Company had one-third, respectively. The parties share the operating undercollected through the gas cost recovery procedure costs and energy output of the plant in these proportions. approximately $5.2 million and $7.6 million, respectively, Each party, however, provides its own financing. Plant-which are included in " Deferred Debits - Other." in-service related to SCE&G's portion of Summer Station was approximately $983.3 million and $978.2 SCE&G's gas race schedules for residential, small com-million as of December 31,1998 and 1997, respectively. mercial and small industrial customers include a weather Accumulated depreciation associated with SCE&G's normalization adjustment, which minimizes fluctuations share of Stunmer Station was approximately $369.2 in gas revenues due to abnormal weather conditions. million and $323.6 million as of December 31,1998 and 1997, respectively. SCE&G's share of the direct expenses G. Depn ciation and Amortization associated with operating Summer Station is included in Provisions for depreciation are recorded using the straight- "Other operation" and " Maintenance" expenses. line method for financial reporting purposes and are based on the estimated service lives of the various classes E. Allowance for Funds Used During Construction ofproperty. .AFC, a noncash item, reflects the period cost of capital devoted to plant under construction. This accounting The composite weighted average depreciation rates were practice results in the inclusion of, as a component of as follows: construction cost, the costs of debt and equity capital 1998 1997 1996 dedicated to construction investment. AFC is included in SCE&G 3.02 % 3.09 % 3.13 % rate base investment and depreciated as a component of GENCO _ 2.65 % 2.63 % 2.68 % plant cost in establishing rates for utility services. The Pipeline Corporation 2.63 % 2.62 % 2.56 % Company's regulated subsidiaries calculated AFC using Aggregate of Above 2.98 % 3.05 % 3.08 % composite rates of 8.7%,9.1% and 9.1% for 1998,1997 and 1996, respectively. These rates do not exceed the Nuclear fuel amortization, which is included in " Fuel maximum allowable rate as calculated under FERC Order used in electric generation" and is recovered through the No. 561. Interest on nuclear fuel in process and sulfur fuel cost component of SCE&G's rates, is recorded using dioxide emission allowances is capitalized at the actual the units-of-production method. Provisions for amortiza-interest amount incurred. tion of nuclear fuel include amounts necessary to satisfy obligations to the Department of Energy (DOE) under a E Revenue Recognition contract for disposal of spent nuclear fuel. Customers' meters are read and bills are rendered on a monthly cycle basis. Base revenue is recorded during the The acquisition adjustment relating to the purchase of accounting period in which the meters are read. certain gas properties in 1982 is being amortized over a 40-year period using the straight-line method. Fuel costs for electric generation are collected through the fuel cost component in retail electric rates. The fuel cost H. Nuclear Decommissioning component contained in electric rates is established by the Decommissioning of Summer Station is presently sched-PSC during annual fuel cost hearings. Any difference uled to commence when the operating license expires in between actual fuel costs and that contained in the fuel the year 2022. Based on a 1991 study, the expenditures cost component is deferred and included when determin. (on a before-tax basis) related to SCE&G's share of ing the fuel cost component during the next annual fuel decommissioning activities were estimated to be approxi-cost hearing. SCE&G had undercollected through the mately $200 million, including partial reclamation costs. electric fuel cost component approximately $3.1 million SCE&G is providing for its share of estimated decommis-and $1.3 million at December 31,1998 and 1997, respec-sioning costs of Summer Station over the life of Summer tively, which are included in " Deferred Debits - Other." Station. SCE&G's method of funding decommissioning Customers subject to the gas cost adjustment clause are costs is referred to as COMReP (Cost of Money billed based on a fixed cost of gas determined by the PSC Reduction Plan). Under this plan, funds collected during annual gas cost recovery hearings. Any difference through rates ($3.2 million in each of 1998 and 1997) are between actual gas costs and that contained in rates is used to pay premiums on insurance policies on the lives deferred and included when establishing gas costs during of certain Company personnel. SCE&G is the beneficia-the next annual gas cost recovery hearing. ry of these policies. Through these insurance contracts,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SCE&G is able to take advantage ofincome tax benefits benefits to retirees at no charge. The costs of postretire- . and accrue earnings on the fund on a tax-deferred basis. ment benefits other than pensions are accrued during the Amounts for decommissioning collected through electric years the employees render the service necessary to be eli-rates, insurance proceeds, and interest on proceeds less gible for the applicable benefits. Additionally, to accelerate expenses are transferred by SCE&G to an external trust the amortization of the remaining transition obligation fund in compliance with the financial assurance require-for postretirement benefits other than pensions, as autho-ments of the Nuclear Regulatory Commission. rized by the PSC, the Company amortized approximately Management intends for the fund, including earnings $15.7 million, $15.6 million and $6.2 million for the ' thereon, to provide for all eventual decommissioning years ended December 31,1998,1997 and 1996, respec-expenditures on an after-tax basis. The trust's sources of rively. (See Note 2B.) decommissioning funds under the COMReP program include investment components oflife insurance policy Disclosure required for these plans under Statement of proceeds, return on investment and the cash transfers Financial Accounting Standards No.132," Employer's from SCE&G described above. SCE&G records its liabili-Disclosures about Pensions and Other Postretirement ty for decommissioning costs in deferred credits. Benefits" are set fonh in the following tables: Pursuant to the National Energy Policy Act passed by Components of Net Periodic Benefit Cost Congress in 1992 and the requirements of the DOE, Retirement Benefits (Millions of Dollars) SCE&G has recorded a liability for its estimated share of 1998 1997 1996 the DOE's decontamination and decommissioning oblig-Service Cost $8.3 $6.8 $6.5 ation. The liability, approximately $3.6 million at Interest Cost 25.9 23.5 22.0 December 31,1998, has been included in "Long. Term Expected return on assets (59.3) (41.6) (35.5) Debt, Net." SCE&G is recovering the cost associated Prior service cost amortization 1.1 1.1 1.4 with this liability through the fuel cost component ofits Actuarial (gain) loss (9.6) (7.0) (5.2) rates; accordingly, this amount has been deferred and is Transition amount amortization 0.8 0.8 0.8 included in " Deferred Debits - Other." Net periodic benefit income $(32.8) $(16.4) $(10.0) 1. Income Taxes Other Postretirement Benefits (Millions of Dollars) Defened tax assets and liabilities are recorded for the tax 1998 1997 1996 effects of temporary differences between the book basis Service Cost $2.6 $2.5 $2.6 and tax basis of assets and liabilities at currendy enacted Interest Cost 9.4 7.8 7.8 tax rates. Deferred tax assets and liabilities are adjusted Expected return on assets n/a n/a n/a for changes in such rates through charges or credits to reg-Prior service cost amonization 0.7 0.7 0.7 ulatory assets or liabilities if they are expected to be recov' Actuarial (gain) loss 1.0 0.1 0.5 cred from, or passed through to, customers of the Transition amount amortization 19.1 18.9 9.5 Company's regulated subsidiaries; otherwise, they are Net periodic benefit cost $32.8 $30.0 $21.1 charged or credited to income tax expense. Weighted-Average Assumptions as of December 31 L ca"n 2 Pense Retirement Benefits The Company has a noncontributory defined benefit 1998 1997 1996 pension plan, which covers substantially all permanent Discount Rate 7.0% 7.5% 7.5% ernployees. Benefits are based on years of accredited ser-Expected return on assets 9.5% 8.0% 8.0% vice and the employee's average annual base earnings Rate ofcompensation increase 4.0% 4.0% 3.0% received during the last three years of employment. The ' Company's policy has been to fund the plan to the extent Other Postretirement Benefits permitted by the applicable Federalincome tax regula-1998 1997 1996 tions as determined by an independent actuary. Discount Race 7.0% 7.5% 7.5% Expected return on assets n/a n/a n/a In addition to pension benefits, the Company provides Rate of compensation increase 4.0% - 4.0% 3.0% cenain health care and life insurance benefits to active { and retired employees. Retirees share in a portion of their medical care cost. The Company provides life insurance I i

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Change in Benefit Obligation Health Care Trends Retirement Benefits (Millions of Dollars) The determination of net periodic postretirement benefit 1998 1997 cost is based on the following assumptions: Benefit obligation, January 1 $344.4 $306.9 Service cost 8.3 6.8 1998 1997 1996 Interest mst 25.9 23.5 Heahh care cost trend rate 8.5% 9.0% 9.5% Plan participants' contributions 0.1 0.2 Actuarial loss 28.3 25.1 Ultimate health care cost trend rate 5.0% 5.5% 5.5% Benefits paid (17.7) (18.1) Year achieved 2005 2004 2004 - Benefit obligation, December 31 $389.3 $344.4 The effect of a one-percentage-point increase or decrease Other Postretirement Benefits (Millions of Dollars) in the assumed health care cost trend rates on the aggre-1998 1997 gate of the service and interest cost components of net Benefit obligation, January 1 $108.8 $110.1 periodic postretirement health care benefit cost and the Service cost 2.6 2.5 accumulated postretirement benefit obligation for health Interest cost 9.4 7.8 care benefits are as foHows: Plan participants' contributions 0.5 0.5 1% 1% Actuarial (gain)/ loss 23.3 (5.2) (MiUions of Douars) increase Decrease Benefits paid (7.6) (6.9) Effect on health care cost $0.2 $(0.3) Benefit obligation, December 31 $137.0 $108.8 Effect on postretirement obligation 3.5 (3.9) K. Debt Premium, Discount and Expense, Change in Plan Assets Retirement Benefits (Millions of Dollars) Unamortized less on Reacquired Debt 1998 1997 For regulatory purposes, long-term debt premium, dis-Fair value of plan assets, January 1 $632.9 $523.5 c unt and expense are being amortized as components of Actual retum on plan assets 83.5 119.5 "Intereu on long-term debt, net" over the terms of the Company contribution 7.8 respective debt issues. Gains or losses on reacquired debt Plan participants' contributions 0.1 0.2 that is refinanced are deferred and amortized over the Benefits paid (17.7) (18.1) term of the replacement debt. Fair value of plan assets, Ekccmber 31 $698.8 $632.9 L Environmental The Company does not fund postretirement benefits The Company has an environmental assessment program identify and assess current and former operations sites t other than pensions. that could require environmental cleanup. As site assess-Funded Status of Plans ments are initiated, estimates are made of the amount of Retirement Benefits (Millions of Dollars) expenditures, if any, deemed necessary to investigate and 1998 1997 clean up each site. These estimates are refined as addi-Funded status, December 31 $309.5 $288.5 tional information becomes available; therefore, actual Unrecognized actuanal gain (213.4) (227.1) expenditures could differ significantly from the original ~ Unrecognized prior service cost 12.3 13.4 estimates. Amounts estimated and accrued to date for site Unrecognized net transition obligation 6.5 7.4 assessments and cleanup relate primarily to regulated Net amount recognized in Consolidated operations. Such amounts are deferred and amortized Balance Sheets $114.9 $82.2 with recovery provided through rates. The Company has also recovered portions ofits environmental liabilities Other Postretirement Benefits (Millions of Dollars) through setdements with various insurance carriers. As of j 1998 1997 December 31,1998, the Company has recovered all ) Funded status, December 31 $(137.0)$(108.8) amounts previously deferred for its electric operations. Unrecognized actuarialloss 34.5 12.2 The Company expects to recover all deferred amounts Unrecognized prior service cost 5.1 5.8 related to its gas operations by December 2002. Deferred Unrecognized net transition obligation 10.7 29.8 amounts, net of amounts recovered through rates and Net amount recognized in Consolidated insurance settlements, totaled $21.3 miUion and $32.4 Balance Sheets $(86.7) $(61.0) million at Decemben 31,1998 and 1997, respectively. h

NOTES TO CONSOLIDATED HNANCIAL STATEIRENTS The deferralincludes the estimated costs associated with 2. Rate Matters the matters discussed in Note IOC. A, On December 11,1998, the PSC issued an order requiring SCE&G to reduce retail electric rates on a M.. Oil and Gas prospective basis. The PSC acted in response to SCE&G 4 On December 1,1997 substantially all of the assets of the reporting that it earned a 13.04% return on common

• Company's oil and gas exploration and production sub-equity for its retail electric operations for the twelve sidiary, Petroleum Resources, were sold for $110 million, months ended September 30,1998. This return on com-

,resulting 'in an after-tax gain of $17.6 million. The mon equity exceeded SCE&G's authorized return of Company followed the full cost method of accounting for 12.0% by 1.04%, or $22.7 million, primarily as a result its oil and gas operations and, accordingly, capitalized all of record heat experienced during the summer. The order costs it incurred in the acquisition, exploration and devel-requires prospective rate reductions on a per kilowatt-opment ofinterests in oil and gas properties. In addition, hour basis, based on actual retail sales for the twelve the capitalized costs were subject to a ceiling test. months ended September 30,1998. This action will However, no non-cash writedowns resulted from the reduce fhture reported return on common equity to the application of the ceiling test for the years ended Commission-authorized level if SCE&G experiences the December 31,1997 or 1996. same weather effect and other business results as that of the twelve months ended September 30,1998. The order N. Temporary Cash investments requires the rate reductions to be placed into effect with The Company considers temporary cash investments hav-the first billing cycle ofJanuary 1999. On December 21, ing original maturities of three months or less to be cash 1998, SCE&G filed a motion for reconsideration with equivalents. Temporary cash investments are generally in the PSC. On January 12.1999, the PSC denied the form of commercial paper, certificates of deposit and SCE&G's motion for reconsideration and reaffirmed repurchase agreements. SCE&G's return on equity of 12.0%. O. ' Recently issued Accounting Standard B. On January 9,1996 the PSC issued an order The Financial Accounting Standards Board issued granting SCE&G an increase in retail electric rates of Statement of Financial Accounting Standards No.133, 7.34%, which was designed to produce additional rev- ' " Accounting for Derivative Instruments and Hedging enues, based on a test year, of approximately $67.5 mil-Activities." The provisions of the Statement, which will be lion annually. The increase was implemented in two implemented by the Company for the fiscal year begin-phases. The first phase, an increase in revenues of approx-ning January 1,2000, establish accounting and reporting imately $59.5 million annually, or 6.47%, commenced in standards for derivative instruments, including those January 1996. The second phase, an inctease in revenues imbedded in other contracts, and hedging activities. The of approximately $8.0 million annually, or.87%, was impact that adoption of the provisions of the Statement implemented in January 1997. The PSC authorized a will have on the Company's results of operations, cash return on common equity of 12.0%. The PSC also flows and financial position has not been determined. approved establishment of a Storm Damage Reserve Account capped at $50 million to be collected through P. Reclassifications ' rates over a ten-year period. Additionally, the PSC Certain amounts from prior periods have been reclassified approved accelerated recovery of a significant portion of to conform with the 1998 presentation. SCE&G's electric regulatory assets (excluding deferred income tax assets) and the remaining transition obligation = Q. Use of Estimates for postretirement benefits other than pensions, changing The preparation of financial statements in conformity the amortization periods to allow recovery by the end of with generally accepted accounting principles requires the year 2000. SCE&G's request to shift, for ratemaking nenagement to make estimates and assumptions that purposes, approximately $257 million of depreciation affect the reported amounts of assets and liabilities and reserves from transmission and distribution assets to - disclosure of contingent assets and liabilities at the date of nuclear production assets was also approved. The the financial statements and the reported amount of rev-Consumer Advocate and two other intervenors appealed enues and expenses during the reporting period. Actual certain issues in the order initially to the Circuit Court, results could differ from those estimates. which affirmed the PSC's decisions, and, subsequently, to the Supreme Court. In March 1998, SCE&G, the PSC, the Consumer Advocate and one of the other intervenors e i

s NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reached an agreement that provided for the reversal of the sideration. SCE&G has appealed these two PSC orders to shift in depreciation reserves and the dismissal of the appeal the Circuit Court where they are awaiting action. of all other issues. The PSC aho authorized SCE&G to adjust depreciation rates that had been approved in the E. On August 8,1990, the PSC issued an order appmv-1996 rate or kr for its electric transmission, distribution ing changes :n Pipeline Corporation's gas rate design for and nuclear, mduction properties to eliminate the effat of sales for resale < rvice and upholding the "value-of-ser-the depreciation reserve shift and to retroactively apply such vice" method of regulation for its direct industrial service. depreciation rates to February 1996. As a result, a one-Direct industrial cuvomers seeking " cost-of-service" based time reduction in depreciation expense of $5.5 million after rates appealed to the Circuit Court, which reversed and taxes was recorded in March 1998. The agreement does remanded to the PSC its August 8,1990 order. Pipeline not affect retail electric rates.The FERC had previously Corporation appealed that decision to the Supreme rejected the transfer of depreciation reserves for rates sub-Court, which on January 10,1994 reversed the Circuit ject to its jurisdiction. In September 1998, the Supreme Court decision and reinstated the PSC order. Court afErmed the Circuit Court's rulings on the issues Additionally, the Supreme Court interpreted the rate-contested by the remaining intervenor. making statutes of South Carolina to give discretion to the PSC in selecting the methodology to be used in set-C. In 1994 the PSC issued an order approving ting rates for natural gas service. The PSC then held SCE&G's request to recover through a billing surcharge another hearing and issued its order dated December 12, to its gas customers the costs of environmental cleanup at 1995 maintaining the present level or the maximum the sites of former manufactured gas plants. The billing markup on industrial sales (" cap"). This Order was surcharge is subject to annual review and provides for the appealed to the Circuit Court by Pipeline Corporation recovery of substantially all actual and projected site and the industrial customer group with several other par-assessment and cleanup costs and environmental claims ties intervening, including the Consumer Advocate of settlements for SCEkG's gas operations that had previ-South Carolina. On October 10,1997, the Circuit ously been deferred. In October 1998, as a result of the Court i. sued an order in favor of the Consumer Advocate annual review, the PSC approved SCE&G's request to and the industrial customer group and remanded the case maintain the billing surcharge at $.011 per therm which to the PSC to determine an overall rate of return for should enable SCE&G to recover the remaining balance Pipeline Corporation. The Circuit Court also issued a of $22.1 million by December 2002. second order which ruled against Pipeline Corporation and afErmed the PSC's decision that the cap should not D. In September 1992 the PSC issued an order granting be increased. Several motions and appeals were fded sub-SCE&G a $.25 increase in transit fares from $.50 to $.75 sequently at the Supreme Court. The Supreme Court has in Columbia, South Carolina; however, the PSC also dismissed the appeals of the PSC and Pipeline Corpor-required $.40 fares for low income customers and denied ation from the first order without prejudice until the PSC SCE&G's request to reduce the number of routes and fre-completes proceedings on remand and has held Pipeline quency of service. The new rates were placed into effect Corporation's appeal of the second order in abeyance in October 1992. SCE&G appealed the PSC's order to until the PSC completes proceedings on remand. The the Circuit Court, which in May 1995 ordered the case remanded case was heard by the PSC in June 1998. The back to the PSC for reconsideration of several issues PSC set an overall rate of return on equity for Pipeline including the low income rider program, routing changes, Corporation of 12.5-16.5%. The South Carolina Energy and the 5.75 fare. The Supreme Court declined to review Users Committee (SCEUC) appealed the order to the an appeal of the Circuit Court decision and dismissed the Circuit Court. Pipeline Corporation subsequently filed a case.The PSC and other intervenors fded another Petition Motion to Dismiss the SCEl)C's appeal on the grounds for Reconsideration, which the Supreme Court denied. that it was not timely filed. These cases should be heard The PSC and other intervenors filed another appeal to the in 1999. Circuit Court which the Circuit Court denied in an order dated May 9,1996. In this order, the Circuit Court 3. long-Term Debt upheld its previous orders and remanded them to the PSC. The annual amounts of long-term debt maturities, includ-During August 1996, the PSC heard oral arguments on ing the amounts due under the nuclear and fossil fuel the orders on remar d from the Circuit Court. On agreements (see Note 4), and sinking fund requirements for September 30,1996, the PSC issued an order aflirming its the years 1999 through 2003 are summarized as follows: previous orders and denied SCE&G's request for recon-I I 9

f NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of Dollars) through the issuance of short-term commercial paper. Ycar Amoun.t hr Amount These short-term borrowings are supported by an irrevo-1999 $106.5 2002 $ 27.5 cable revolving credit agreement which expires 12000 213.5 2003 284.4 December 19,2000. Accordingly, the amoums outstand-2001 27.5 ing have been included in long-term debt. The credit agreement provides for a maximum amount of $125 mil-Approximately $18.5 million of the portion oflong-term lion that may be outstanding at any time. debt payable in 1999 may be satisfied by either deposit

• and cancellation of bonds issued upon the basis of pr p Commercial paper outstanding totaled $66.0 million and o er-ty additions or bond retirement credits or by deposit of

$80.3 million at December 31,1998 and 1997 at weight-cash with theTrustee. ed average interest rates of 5.45% and 5.87% respectively. - On January 13,1998 the Cornpany issued $60 million 5 Common Equity of medium-term notes due January 13,2003 at an inter-The changes in " Common Stock," without par value, est rate of 6.05% Proceeds from the notes were used to during 1998,1997 and 1996 are summarized as follows: , repay unsecured bank loans totaling $60 million due Number Millions January 9,1998 which were classified as long-term debt at ofShares of Dollars December 31,1997. Balance December 31,1995 103,623,863 $1,056.7 issuance of common stock 2,551,410 68.6 On August 7,1996 the Ci:y ofCharleston executed 30-Balance December 31,1996 106,175,273 1,125.3 year electric and gas franchise agreements with SCE&G. Issuance of common stock 1,145.840 .27.6 in consideration for the electric franchise agreement, Balance December 31,1997 107,321,113 1,152.9 SCE&G is paying the City $25 million over seven years Repurchase of common stock (3,748,490) (110.0) (1996-2002) and has donated to the City the existing Balance December 31,1998 103,572,623 $1,042.9 transit assets in Charleston. The $25 million is included in electric plant-in-service. In settlement of environmen-The Restated Articles ofIncorporation of the Company - tal claims the City may have had against SCE&G involv-do not limit the dividends that may be payable on its ing the Calhoun Park area, where SCE&G and its prede-common stock. However, the Restated Articles of cessor companics operated a manufactured gas plant until Incorporation of SCE&G and the Indenture underlying the 1960's, SCE&G is paying the City $26 million over its First and Refunding Mortgage Bonds contain provi-a four-year period (1996-1999). Such amount is deferred sions that, under certain circumstances, could limit the (see Note IL). The unpaid balances of these amounts are paymem of cash dividends on its common stock. In included in "Long-T-tm Debt." addition, with respect to hydroelectric projects, the Federal Power Act requires the appropriation of a portion SCE&G has three-year revolving lines of eredh totaling of certain earnings therefrom. At December 31,1998 $75 million, in addition to other lines of credit, that pro-approximately $25.1 million of retained earnings were vide liquidity for issuance of commercial paper. The restricted by this requirement as to payment of cash divi-three-year lines of credit provide back-up liquidity when dends on SCE&G's common stock. commercial paper outstanding is in excess of $175 mil-lion. The long-term nature of the lines of credit allows Cash dividends on common stock were declared at an commercial paper in excess of $175 million to be classi-annual rate per share of $1.54, $1.51 and $1.47 for fled as long-term debt. SCE&G's commercial paper out-1998,1997 and 1996, respectively. standing totaled $125.2 million and $13.3 million at ' December 31,1998 and 1997 at weighted average interest 6. Preferred Stock rates of 5.32% and 5.90% respectively. The call premium of the respective series of preferred stock in no case exceeds the amount of the annual divi- ' Substantially all utility plant and fuel inventories are dend. Retirements under sinking fund requirements are at pledged as collateral in connection with long-term debt. par values. 4. Fuel Financings The aggregate annual amount of purchase fund or sinking Nuclear and fossil fuel inventories and sulfur dioxide fund requirements for preferred stock for the years 1999 emission allowances are financed by Fuel Company. through 2003 is $2.8 million. 9 .(

.l .s. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The changes in " Total Preferred Stock (Subject to pur-received from counsel experienced in such matters that ' chase or sinking funds)" during 1998,1997 and 1996 are there is more than an insubstantial risk that: (1) the Trust summarized as follows: is or will be subject to Federal income tax, with respect to Number Millions income received or accrued on the Junior Subordinated ofShares of Dollars Debentures, (2) interest payable by SCE&G on the . Balance December 31,1995 763,619 $48.7 junior Subordinated Debentures will not be deductible. Shares redeemed: in whole or in part, by SCE&G for Federal income tax ~ 0.7) purposes, or (3) the Trust will be subject to more than a ( (7,198) $100 par value , (50,319) (2.6) de mir imis amount of other taxes, duties, or other Sov- $50 par value crnmental charges. Balance December 31,1996 706,102~ ' 45.4 Shares redeemed: Upon the redemption of the Junior Suhordinated $100 par value (202,812) (20.3) Debentures, payment will simuksneoinly be applied to $50 par value (252,196) (12.6) . redeem Prefernd Seiurities having an aggregate liquida. tion an ount equal to the aggregate principal amount of Balance December 31,1997 251,094 12.5 the Junior Subordinated Debentures. The Preferred Shares redeemed: Securities are redeemable at $25 per preferred security $50 par value (11,042) (1.0) plus accrued dividends. . Balance December 31,1998 240,052 511.5 7. Income Taxes On October 28,1997, SCE&G Trust I (the " Trust"), a Total income tax expense for 1998,1997 and 1996 is wholly-owned subsidiary of SCE&G, issued $50 million as follows: (2,000,000. shares) of 7.55% Trust Preferred Securities. (Millions of Dollars) 1998 1997 1996 Series A (the " Preferred Securities"). SCE&G owns all of Current taxes: the Common Securities of the Trust (the " Common Federal $114.8 $101.3 $98.3 Securities"). The Preferred Securities and the Common State 2.2 (5.4) 14.1 Securities (the " Trust Securities") represent undivided Total current taxes 117.0 95.9 112.4 beneficial ownership interests in the assets of the Trust. Deferred taxes, net: The Trust exists for the sole purpose ofissuing the Trust Federal 2.3 3.5 8.6 Securities and using the proceeds thereof to purchase from State 2.0 0.3 1.7 SCE&G its 7.55% Junior Subordinated Debentures due Total deferred taxes 4.3 3.8 10.3 September 30,2027.The sole asset of the Trust is $50 Investment tax credits: million ofJunior Subordinated Debentures of SCE&G. Deferred-State 14.3 19.0 Accordingly, no financial statements of the Trust are pre-Amortization of amounts sented. SCE&G's obligations under the Guarantee deferred-State (0.9) (1.5) Agreement entered into in connection with the Preferred Amortization of amounts Securities, when taken together with SCE&G's obligation _ deferred-Federal (3.6) (3.6) (3.6) to make interest and other payments on the Junior Totalinvestment tax credits 9.8 13.9 (3.6) - Subordinated Debentures issued to the Trust and Total income tax expense $131.1 $113.6 $119.1 SCE&G's obligations under the Indenture pursuant to which the Junior Subordinated Debentures were issued' The difference in total income tax expense and the provides a full and unconditional guarantee by SCE&G amount calculated from the application of the statutory - ', of the Trust's obligations under the Preferred Securities. Federal income tax rate (35% for 1998,1997 and 1996) Proceeds were used to redeem preferred stock of SCE&G. to pre-tax income is reconciled as follows: The preferred securities of SCE&G Trust I are redeemable only in conjunction with the redemption of the related 7.55% Junior Subordinated Debentures. The Junior Subordinated Debentures will mature on September 30, 20r.' amd may be redeemed, in whole or in part, at any time on or after September 30,2002 or upon the occur-rence of a Tax Event. ATax Event occurs if an opinion is O

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of Dollars) 1998 1997 1996 ments which might result from these examinations will Net income $223.4 $220.7 $215.3 have a significant impact on the results of operations, cash Totalincome tax expenses: flows or fmancial position of thc Company. Charged to operating expenses 136.2 105.4 118.0 Charged (credited) to other items (5.1) 8.2 1.1 8. Financial Instruments ' Preferred stock dividends 7.5 9.2 5.4 The carrying amounts and estimated fair values of the Total pre-tax income $362.0 $343.5 $339.8 Company's financialinstruments at December 31,1998 and 1997 are as follows: income taxes on above at statutory Federalincome tax rate $126.7 $120.2 $118.9 (Millions of Dollars) 1998 1997 Increases (decreases) attributed to: Est. Est. State income taxe, Carrying Fair Carrying Fair (less federalincome tax effect) 11.4 8.1 10.2 Amt. Value Amt. Value Deferred income tax reversal at higher than statutory rate (3.6) (4.2) (4.1) Cash and temporary cash investments $62.0 $62.0 559.7 $59.7 I""*'tments 409.7 464.7 290.5 341.9 i vestm nt t cred (3.6) (3.6) (3.6) Liabihu.es: during constr c ion (2.8) (2.5) (2.5) Short-term borrowings 194.4 194.4 58.5 58.5 use Long-term debt 1,729.7 1,869.2 1,639.5 1,722.4 Other differences, net 3.0 (4.4) 0.2 Preferred stock Total income tax expense $131.1 $ 113.6 $ 119.1 (subject to purchase The tax effects of significant temporary differences com-prising the Company's net deferred tax liability at The information presented herein is based on pertinent December 31,1998 and 1997 are as follows: information available to the Company as of December 31,1998 and 1997. Although the Company is not aware (Millions of Dollars) 1998 1997 of any factors that would significantly affect the estimated I)cferred tax assets: fair value amounts, such fmancial instruments have Unamortized investment tax credits $66.9 $60.7 not been comprehensively revalued since December 31, Cycle billing 20.6 20.5 1998, and the current estimated fair value may difTer sig-Early retirement programs 13.0 2.7 nificantly from the estimated fair value at that date. Deferred compensation 7.4 6.9 Other postretirement benefits 32.9 14.6 The following methods and assumptions were used to Other 23.7 11.6 estimate the fair value of the above classes of Total deferred tax assets 164.5 117.0 financial instruments: Deferred tax liabilities:

• Cash and temporary cash investments, including com-Property, plant and equipment 658.8 634.3 mercial paper, repurchase agreements, treasury bills and Pension expense 39.2 27.5 notes, are valued at their carrying amount.

Research and experimentation 32.5 19.5 Reacquired debt 7,5 7.5

• Fair values ofinvestments and long-term debt are based Investments in equity securities 20.5 5.3 on quoted market prices of the instruments or similar Other 12.2 10.4 instruments, or for those instruments for which there are Total deferred tax liabilities 770.7 704.5 no quoted market prices available, fair values are based Net deferred tax liability

$606.2 $587.5 on net present value calculations. Investments which are not considered to be financial instruments have been The Internal Revenue Service has examined and closed excluded from the carrying amount and estimated fair consolidated Federalincome tax returns of the Company value. Settlement oflong-term debt may not be possible through 1989, and has examined and propose adjust. or may not be a prudent management decision. ments to the Company's Federal returns for 1990 through 1995. The Company does not anticipate that any adjust-

• Short-term borrowings are valued at their carrying amount.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately $11.2 million. Series A preferred shares

• The fair value of preferred stock (subject to purchase or are convertible in March 2002 into 2,961,542 shares of sinking funds) is estimated on the basis of market prices.

ITCD common stock (after giving effect to a two-for-one stock split). The market value of series A preferred e Potential taxes and other expenses that would be stock ofITCD is not readily determinable. However, incurred in an actual sale or settlement have not been on an as converted basis the market value of the under-taken into consideration. lying common stock for the series A preferred stock was approximately $45.2 million at December 31,1998. At December 31,1998, SCI held the following invest-resulting in an unrecorded pre-tax holding gain of ments in ITC Holding Company (ITC) and its affiliates: $33.9 million.

• Powertel, Inc. (Powertel) is a publicly traded company

+ Knology Holdings, Inc. (Knology) is a broad-band ser-that owns and operates personal communications ser-vice provider of cable, television, telephone and internet vices (PCS) systems in several major Southeastern mar-services. SCI owns 71,050 units of Knology. Each unit kets. SCI owns approximately 4.6 million common consists of one 11.875% Senior Discount Note due shares of Powertel. SCfs investment in Powertel's com-2007 and one warrant entiding the holder to purchase mon shares of approximately $68.0 million had a mar- .003734 shares of preferred stock of Knology. The cost ket value of $62.5 million at December 31,1998, of this investment was approximately $40 million. SCI resulting in a pre-tax unrealized holding loss of $5.5 also owns an additional 753 warrants which entitles it million. The after-tax amount of such loss is included to purchase 753 shares of preferred stock at $1,500 per in the balance sheet as a component of" Common share. Effective July 31,1998, SCI sold all ofits 3,639 Equity" In addition, SCI owns the following series of shares of preferred stock in Knology to ITC. For each non-voting convertible preferred shares, at the approxi-preferred share sold, SCI received $1,600 ofITC series mate cost noted: 100,000 shares series B ($75.1 mil-B convertible preferred shares, for a total of 133,664 lion),50,000 shares series D ($22.5 million) and shares. SCI also received approximately 50.4 million in 50,000 shares 6.5% series E ($75.0 million). Preferred cash. SCfs originalinvestment in these shares was series B shares are convertible in March 2002 at a con-approximately $5.3 million. version price of $16.50 per common share or approxi-mately 4.5 million common shares. Preferred series D + ITC has an ownership interest in several Southeastern shares are convertible in March 2002 at a conversion communications companies. SCI owns approximately price of $12.75 per common share or approximately 3.1 million common shares (after giving effect to a 1.7 million common shares. Preferred series E shares four-for-one stock split on August 25,1998),645,153 purchased in June 1998 are convertible in June 2003 at series A convertible preferred shares, and 133,664 series a conversion price of $22.01 per common share or B convertible preferred shares ofITC. These invest-approximately 3.4 million common shares. The market ments cost approximately $7.1 million, $8.9 million, I value of the convertible preferred shares of Powertel is and $5.0 million, respectively. Series A and series B pre-l not readily determinable. However, on an as converted ferred shares are convertible in March 2002 into ITC l basis, the market value of the underlying common common shares at a conversion price of $13.45 and l shares for the preferred shares was approximately $43.56, respectively, on a four to one basis. The market l $131.8 million at December 31,1998, resulting in an value of these investments is net readily determinable. l unrecorded pre-tax holding loss of $40.8 million. 9. Short-Term Borrowings

• ITC Delta ^Com, Inc. (lTCD) is a fiber optic telecom-The Company pays fees to banks as compensation for its munications provider. SCI owns approximately 4.1 committed lines of credit. Commercial paper borrowings million common shares of ITCD. SCPs investment in are for 270 days or less. Details oflines of credit (includ-ITCD's common shares of approximately $16.2 million ing uncommitted lines of credit) and short-term borrow-had a market value of $61.8 million at December 31, ings, excluding amounts classified as long-term (Notes 3 1998, resulting in a pre-tax unrealized holding gain of and 4), at December 31,1998 and 1997 and for the years

$45.6 million. The after-tax amount of such gain is then ended are as follows: included in the balance sheet as a component of " Common Equity

• In addition, SCI owns 1,480,771 shares of series A preferred stock ofITCD at a cost of l

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of Dollars) 1998 1997 pays ann ual premiums and, in addition, could be assessed a Authorized lines of credit at year-end $513.0 $564.0 retroactive premium not to exceed five times its annual pre-Unused lines of credic at year-end $443.8 $518.8 mium in the event of property damage loss to any nuclear .l generating facility covered under the NEIL program. Based Short-term borrowings outstanding on the current annual premium, this retroactive premium at year-end: assessment would not exceed $6.1 million. Bank loans $69.4 $45.4 Weighted average interest rate 6.66 % 6.44 % To the extent that insurable claims for property damage, Commercial paper $125.2 $13.3 decontamination, repair and replacement and other costs Weighted average interest rate 5.32 % 5.90 % and expenses arising from a nuclear incident at Summer Station exceed the policy limits ofinsurance, or to the

10. Commitments and Contingencies extent such insurance becomes unavailable in the future, A. Construction and to the extent that SCE&G's rates would not recover The Company and Westvaco each own a 50% interest in the cost of any purchased replacemens power, SCE&G Cogen South LLC (Cogen). Cogen was formed to build will retain the risk ofloss as a self-insurer. SCE&G has and operate a cogeneration facility at Westvaco's Kraft no reason to anticipate a serious nuclear incident at Division Paper Mill in North Charleston, South Carolina. Summer Station. If such an incident were to occur, it Construction of the facility began in September 1996 and could have a material adverse impact on the Company's is in the final stages. Construction financing of approxi-results ofoperations, cash flows and financial position.

mately $170 million was provided to Cogen by banks. On September 10,1998, the contractor in charge of con-C. Environmental struction fded suit in Circuit Court seeking approximately In September 1992, the Environmental Protection $51 million from Cogen, alleging that construction cost Agency (EPA) notified SCE&G, the City of Charleston overruns relating to the facility were incurred and that the and the Charleston Housing Authority of their potential construction contract provides for recovery of these costs. liability for the investigation and cleanup of the Calhoun In addition to Cogen, Westvaco, SCE&G and the Park area site in Charleston, South Carolina. This site Company are also named in the suit. The Company and encompasses approximately 30 acres and includes proper-the other defendants believe the suit is without merit and ties which were locations for industrial operations,includ-cre mounting an appropriate defense. The Company does ing a wood preserving (creosote) plant, one of SCE&G's not believe that the resolution of this issue will have a decommissioned manufactured gas plants, properties material impact on its results of operations, cash flows or owned by the National Park Service and the City of fmancial position. Charleaon, and private properties. The site has not been placed on the National Priorities List, but may be B. Nuclear Insurance added in the future. The Potentially Responsible Parties The Price-Anderson Indemnification Act, which deals (PRPs) have negotiated an administrative order by con-with public liability for a nuclear incident, currently sent for the conduct of a Remedial Investigation / establishes the liability limit for third-party claims associ-Feasibility Study and a corresponding Scope of Work. sted with any nuclear incident at $9.7 billion. Each reac-Field work began in November 1993, and the EPA tor licensee is currendy liable for up to $88.1 million per approved a Remedial Investigation Report in February reactor owned for each nuclear incident occurring at any 1997 and a Feasibility Study Report in June 1998. In July reactor in the United States, provided that not more than 1998, the EPA approved SCE&G's Removal Action Work , $10 million of the liability per reactor would be assessed Plan for soil excavation. SCE&G completed Phase One per year. SCE&G's maximum assessment, based on its of the Removal Action in 1998 at a cost of appmximately two-thirds ownership of Summer Station, would be $1.5 million. Phase Two will include excavation and epproximately $58.7 million per incident, but not more installation of several permanent barriers to mitigate coal than $6.7 million per year. tar seepage. Phase Two began in November 1998, and is expected to cost approximately $2.2 million. On SCE&G currendy maintains policies (for itself and on September 30,1998 a Record of Decision was issued behalf of Santec Cooper) with Nuclear Electric Insurance which sets forth EPA's view of the extent of each PRP's Limited (NEIL) and American Nuclear Insurers providing responsibility for site contamination and the level to combined property and decontamination insurance coverage which the site must be temediated. On January 13,1999 of $2.0 billion for any losses at Summer Station. SCE&G the EPA issued a Unilateral Administrative Order for 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Remedial Design and Remedial Action directing SCE&G revenues from external and internal sources, are Electric to design and carry out a plan of remediation for the Operations, Gas Distribution, Gas Transmission and Calhoun Park site. The Order is temporarily stayed pend-Energy Marketing. Electric Operations is comprised of ing further negotiations between SCE&G and the EPA. the electric portion of SCE&G, GENCO and Fuel Company. This segment is primarily engaged in the gen-In October 1996 the City of Charleston and SCE&G ser-eration, transmission and distribution of electricity. tied all envimamental claims the City may have had SCE&G's electric service territory extends into 24 coun-against SCE&G involving the Calhoun Park area for a ties covering more than 15,000 square miles in the cen-payment of $26 million over four years (1996-1999) by tral, southern and southwestern portions of South SCE&G to the City. SCE&G is recovering the amount Carolina. Sales of electricity to industrial, commercial of the settlement, which does not encompass site assess-and residential customers are regulated by the PSC. ment and cleanup costs, through rates in the same man-SCE&G is also regulated by the FERC. GENCO owns ner as other amounts accrued for site assessments and and operates the Williams Station generating facility and cleanup as discussed above. As part of the environmental sells all ofits electric generation to SCE&G. GENCO is settlement SCE&G has agreed to construct an 1,100 regulated by the FERC. Fuel Company acquires, owns

r. pace parking garage on the Calhoun Park site and to and provides financing for the fuel and emission transfer the facility to the City in exchange for a 20-year allowances required for the operation of SCE&G's and municipal bond backed by revenues from the parking generation facilities.

I garage and a mortgage on the parking garage. The total amount of the bond is not to exceed $16.9 million, the Gas Distribution is comprised of SCE&G's local distribu. maximum expected project cost. The parking garage is tion operations. This segment is engaged in the purchase l currently under construction and is scheduled for comple-and sale, primarily at retail, of natural gas. These opera-non m the spring of the year 2000. tions extend to 30 counties in South Carolina covering approximately 21,000 square miles. Gas Transmission is SCE&G owns three other decommissioned manufactured comprised of Pipeline Corporation, which is engaged in gas plant sites which contain residues of by-product the purchase, transmission and sale of natural gas on a chenucals. For the site located in Sumter, South Carolina, wholesale basis to distribution companies (including effecuve September 15,1998, SCE&G entered into a bCE&G), and directly to mdustnal customers m 40 coun-Remedial Action Plan Contract with the South Carolina ties throughout South Carolina. Pipeline Corporanon also Department of Health and Environmental Control wns LNG liquefacuon and storage facibues. Both gas seg-(DHEC) pursuant to which it agreed to undertake a full site investigation and remediation under the oversight of

• ?nts are regulated by the PSC. Energy Marketing is com-Pnsed of SCANA Energy, which markets electricity, natur-DHEC. Site investigation and characterization are pro-al gas and other light hydrocarbons primarily in the south-ceeding according to schedule. Upon selection and suc-cast. SCANA Energy also markets natural gas in Georgia's cessful implementation of a site remedy, DHEC will give SCE&G a Certificate of Completion, and a covenant not deregulated natural gas market.

to sue. SCE&G is continuing to investigate the other l two sites, and is monitoring the nature and extent of The accounting policies of the segments are the same as those described in the summary of significant accounting residual contamination. policies.The Company records regulated inter-afIlliate D. Franchise Agreement sales and transfers of electricity and gas based on rates See Note 3 for a discussion of the electric franchise agree. established by the appropriate regulatory authority. ment between SCE&G and the City of Charleston. Non-regulated sales and transfers are recorded at current market prices. E. Claims and Litigation The Company is engaged in various claims and litigation The Company's regulated reportable segments share a simi-incidental to its business operations which management lar regulatory environment and, in some cases, an overlap-anticipates will bt resolved without material loss to the ping service area. However, FJectric Operations

• product Company. No estimate of the range ofloss from these differs from the other segments, as does its generation matters can currently be determined.

process and method of distribution. The gas segments differ from each other primarily based on the class of customers

11. Segment of Business information each serves and the marketing strategies resulting from those The Company's reportable segments, based on combined differences. Energy Marketing is a non regulated segment.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Disclosure of Reportable Segments (Millions of Dollars) 1998 Electric Gas Gas Energy All Operations t Distribution Transmission Marketing Other2 Total External Customer Revenue 1,220 226 185 568 69 2,268 Revenue from Afliliates 286 5 145 8 444 Operating income (loss) 319 21 20 (5) 355 brerest Expense n/a n/a 4 19 23 Depreciation & Amortization 126 12 7 11 156 in ome Tax n/a n/a 8 (8) (2) (2) Set ment Net income n/a n/a 16 (14) (4) (2) Segment Assets 4,600 381 239 73 764 6,057 Expenditures for Assets 205 19 11 4 56 295 Deferred Tax Assets n/a n/a 3 9 12 1997 Electric Gas Gas Energy All Operationst Distribution Transmission Marketing Other2 Total External Customer Revenue 1,103 231 188 207 88 1,817 Revenue from Atilliates 124 3 152 2 50 331 Operating Incorne (less) 280 22 21 (4) 319 Interest Expense n/a n/a 4 14 18 Depreciation & Amortization 135 11 6 1 28 181 Income Tax n/a n/a 7 9 16 Segment Net Income n/a n/a 18 (1) 19 36 Segment Assets 4,417 364 243 40 614 5,678 Expenditures for Assets 189 15 18 70 292 Deferred Tax Assets n/a n/a 5 (1) 4 1996 Electric Gas Gas Energy All Operations 1 Distribution Transmission Marketing Other2 Total External Customer Revenue 1,107 232 171 252 71 1,833 Revenue from Afliliates 119 2 156 1 71 349 Operating income (loss) 289 19 17 (6) 319 Interest Expense n/a n/a 2 11 13 Depreciation & Amortization 129 12 6 1 38 186 Income Tax n/a n/a 9 (3) 6 12 Segment Net income n/a n/a 17 (4) 16 29 Segment Assets 4,256 350 231 34 551 5,422 Expenditures for Assets 185 19 30 1 59 294 DeferredTax Assets n/a n/a 3 12 15 Significant non-cash activities 21 20 41

1. Management uses operating income and utility plant to

2. Revenues and assets from segments below the quantita-measure segment profitability and financial position, tive thresholds are attributable to SCE&G's transit opera-respectively, for Electric Operations, Gas Distribution and tions, which are regulated by the PSC, and to nine other Transit Operations. Therefore, SCE&G's interest wholly owned subsidiaries of SCANA. These subsidiaries expense, depreciation and amortization, income taxes, seg-conduct non-regulated operations in the electric, natural ment ner income and deferred tax assets are not allocated gas and telecommunications industries. Revenues are between segments. Management uses net income and derived primarily from sales of propane, appliance war-total assets to measure segment profitability and financial ranties and home security systems and from fiber optics position for all other segments. Interest income is not and radio networks. None of these subsidiaries met any of reported by segment and is not material.

the quantitative thresholds for determining reportable seg-B

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ments in 1998,1997 or 1996. Significant non-cash activ-and the Charleston environmental agreement related to a ities included the Charleston electric franchise agreement manufactured gas plant site. Reconciliation of Reportable Segments To Consolidated Financial Statements (Millions of Dollars) 1998 Total Operating Net Revenue Income /(Ioss) Income Assets Reportable Segments $2,635 $360 $2 $5,293 All Other 77 (5) (4) 764 Unallocated (6) 225 (625) Dimination of AfIlliates (444) (4) (41) Adjustments (636) (110) Consolidated Totals $1,632 $345 $223 $5,281 1997 Total Operating Net Revenue income /(Ioss) Income Assets Reportable Segments $2,010 $323 $17 $5,064 All Other 138 (4) 19 614 Unallocated 190 (614) Elimination of Affiliates (331) (5) (5) (49) Adjustments (294) (83) Consolidated Totals $1,523 $314 $221 $4,932 1996 Total Operating Net Revenue Income /(I oss) Income Assets Reportable Segments $2,040 $32; $13 $4,871 All Other 142 (6) 16 551 Unallocated 190 (529) Elimination of Affiliates (349) (5) (4) (53) Adjustments (320) (81) Consolidated Totals $1,513 $314 $215 $4,759 The Consolidated Financial Statements report operating income consists of SCE&G's net income. Segment assets revenues, comprised of the reportable segments and the include utility plant only (excluding accumulated deprecia-non-reportable transit operations segment. Revenues from tion) for Electric Operations, Gas Distribution and Transit other non-reportable segments are included in Other Operations, and all assets for Gas Transmission and the income. Therefore, the adjustments to total revenue remaining non-reportable segments. As a result, unallocat-remove revenues from non-regulated segments. ed assets include accumulated depreciation, offset in part by common, non-utility and non-regulated plant for Adjustments to assets consist of various reclassifications SCANA and SCE&G, and by non-fixed assets for Electric made for external reporting purposes. Unallocated net Operations, Gas Distribution and Transit Operations. Reconciliation of Reportable Segments To Consolidated Financial Statements (Millions of Dollars) 1998 Segment Consolidated Totals Adjustments Totals Interest Charges $23 100 123 Depreciation and Amortization 156 (11) 145 Income Tax /(Benefit) (2) 138 136 Expenditures for Assets 295 8 303 Deferred Tax Assets 12 10 22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 Segment Consolidated Totals Adjustments Totals Interest Charges $18 103 121 Depreciation and Amortization 181 (28) 153 Income Tax /(Benefit) 16 89 105 Expenditures for Assets 292 (4) 288 . Deferred Tax Assets 4 21 25 1996 Segment Consolidated Totals Adjustments Totals Interest Charges $13 109 122 Depreciation and Amortization 186 (38) 148 Income Tax /(Benefit) 12 106 118 Expenditu es for Assets 294 (22) 272 Deferred Tax Assets 15 6 21 SigniGcant Non-cash Activities 41 41 Adjustments to Interest Charges, Income Tax /(Benefit) which are not included in the depreciation and amortiza-and Deferred Tax Assets include primarily the totals from tion reported on a consolidated basis. Deferred Tax Assets SCANA or SCE&G that are not allocated to the seg-are also adjusted to remove the non-current portion of ments. Interest Charges is also adjusted to eliminate those assets. Expenditures for Assets in 1996 are adjusted inter-afTiliate charges. Adjustments to depreciation and primarily to remove the non-cash transaction related to amortization consist of non-regulated segment expenses, the Charleston Franchise Agreement.

12. Quarterly Financial Data (Unaudited) (Millions of Dollars, except per share amounts) 1998 First Second Third Fourth Quarter Quarter Quarter Quarter Annual Total operating revenues

$406 $387 $474 $365 $1,632 Operating income 91 74 120 60 345 Net income 64 42 86 31 223 Earnings per weighted average share of common stock as reported .60 .40 .82 .30 2.12 1997 First Second Third Fourth Q_uarter Quarter Quarter Quarter Annual Total operating revenues $385 $332 $418 $388 $1,523 Operating income 81 61 100 72 314 Net income 57 30 75 59 221 Earnings per weighted average share of common stock as reported .54 .28 .69 .55 2.06

13. Subsequent Event On February 17,1999, the Company and Public Service PSNC will be operated as a wholly-owned subsidiary of Company of North Carolina, Inc. (PSNC) announced a the Company. Completion of the transaction is subim definitive agreement whereby the Company will acquire to the approval of the shareholders of both compar !a an' d PSNC in a transaction valued at approximately $900 mil-applicable regulatory approvals. It is anticipated that the lion, including the assumption of debt. The transaction approval process can be completed by the end of 1999.

will be accounted for as a purchase. It is anticipated that O

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements included in this discussion and analysis (or changing environment cannot be predicted. However, the elsewhere in this annual report) which are not statements FERC, in issuing Order 888 in April 1996, accelerated of historical fact are intended to be, and are hereby identi-competition among electric utilities by providing for open fled as, " forward looking statements' for purposes of the access to wholesale transmission service. Order 888 safe harbor provided by Section 27A of the Securities Act requires utilities under FERC jurisdiction that own, con-of 1933, as amended, and Section 21E of the Securities trol or operate transmission lines to file nondiscriminatory Exchange Act of 1934, as amended. Readers are cautioned open access tariffs that offer to others the same transmis-that any such forward-looking statements are not guaran-sion service they provide themselves. The FERC has also tees of future performance and involve a number of risks permitted utilities to seek recovery of wholesale stranded and uncertainties, and that actual results could differ costs from departing customers by direct assigntnent. materially from those indicated by such forward-looking Approximately two percent of SCANA's electric revenues statements. Important factors that could cause actual is under FERC jurisdiction for the purpose of setting rates results to differ materially from those indicated by such for wholesale service. Legislation is pending in South forward-looking statements include, but are not limited Carolina that would deregulate the state's retail electric to, the following: (1) that the information is of a prelim-market and enable customers to choose their supplier of inary nature and may be subject to further and/or contin-electricity. The Company is not able to predict whether uing review and ac justme-t, (2) changes in the utility the legislation will be enacted and, ifit is, the conditions regulatory environment, (3) changes in the economy in it will impose on utilities that currently operate in the areas served by the Company, (4) the impact of competi-state and future market participants. tion from other energy suppliers,(5) the management j of the Company's operations, (6) growth opportunities The Company is aggressively pursuing actions to position for the Company's regulated and diversified subsidiaries, itself ctrategically for the transformed environment.The (7) the results of financing efforts, (8) changes in the Company's entry into the newly deregulated retail natural Company's accounting policies, (9) weather conditions in gas market in Georgia is designed in part to provide a l areas served by the Company's utility subsidiaries, (10) potential market for any future deregulated electric indus-performance of the telecommunications companies in try (see Georgia Retail Gas Market below). In addition, which the Company has made significant investments, SCE&G has undertaken a variety ofinitiatives, including (11) inflation, (12) changes in environmental regulation, reductions in stafIing levels and the accelerated recovery (13) successful correction of any material Year 2000 prob-ofits electric regulatory assets. SCE&G has also estab-lem or, alternatively, successful implementation of a con-lished open access transmission tariffs and is selling bulk tingency plan by the Company and any critical third power to wholesale customers at market-based rates. A party suppliers and (14) the other risks and uncertainties significant new management information system was described from time to time in the Company's periodic implemented in 1998, and a new customer information reports filed with the SEC. The Company disclaims any system will be fully implemented in the first half of 1999. obligation to update any forward-looking statements. Marketing of services to commercial and industrial cus-tomers has increased significandy. SCE&G has obtained Cornpetition long-term power supply contracts with a significant por-The electric utility industry continues a major transition tion ofits industrial customers. The Company believes that is resulting in expanded market competition and less that these actions as well as numerous others that have regulation. Deregulation of electric wholesak and retail been and will be taken demonstrate its commitment to markets is creating opportunities to compete br new and succeed in the new operating environment to come. existing customers and markets. As a result, profit mar-gins and asset values of some utilities could be a dversely Regulated public utilities are allowed to record as assets affected. Irgislative initiatives at the Federal an d state some costs that would be expensed by other enterprises. levels are being considered and, if enacted, could mandate If deregulation or other changes in the regulatory environ-ment occur, the Company may no longer be eligible to market deregulation. The pace of deregulation, luture prices of electricity, and the regulatory actions wl ich may apply this accounting treatment and may be required to be taken by the PSC and the FERC in response to the eliminate such regulatory assets from its balance sheet.

I MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDlil0N AND RESULTS O l Although the potential effects of deregulation cannot be million in losses (net of taxes), including startup costs determined at present, discontinuation of the accounting which were expensed as incurred. At the current rate of treatment could have a material adverse effect on the expansion Energy Marketing anticipates incurring losses Company's results of operations in the period -hat a write-during 1999 equal or greater than those experienced in off would be requiad. h h cred that cash flows and 1998. The level of future revenues and expenditures, ' he financial position of the Company would not be including startup costs, is dependent on several factors t materially affected by the discontinuation of the account-that cannot be reasonably predicted. These factors include .ing treatment. The Company reported approximately how rapidly Energy Marketing gains market share, the $216 million and $71 million of regulatory assets and lia-intensity ofcompetition as it continues to develop, the bilities, respectively, including amounts recorded for margin Energy Marketing is able to achieve on gas sales deferred income tax assets and liabilities of approximately and its ability to find industrial interruptible customers to $130 million and $56 million, respectively, on its balance purchase available capacity. sheet at December 31,1998. Liquidity and Capital Resources The Company's generation assets are exposed to consider-The Company's cash requirements arise priraarily from able financial risks in a deregulated electric market. If SCERG's operational needs, the Company's construction market prices for electric generation do not produce ade-program and the need to fund the activities or investments quate revenue streams and the enabling legidation or reg-of the Company's non-regulated subsidiaries. The ability ulatory actions do not provide for recovery of the result-of the Company's regulated subsidiaries to replace existing ing stranded costs, the Company could be required to plant investment, as well as to expand to meet future write down its investment in these assets. The Company demand for electricity and gas, will depend upon their cennot predict whether any write-downs will be necessary ability to attract the necessary fmancial capital on reason-and, if they are, the extent to which they would adversely able terms. The Company's regulated subsidiaries recover afTect the Company's results ofoper2tions in the period in the costs of providing services through rates charged to which they are recorded. As of December 31,1998, the customers. Rates for regulated services are generally based ' Company's net investment in fossil / hydroelectric genera-on historical costs. As customer growth and inflation tion and nuclear generation assets was $1,220.3 million occur and the regulated subsidiaries continue their ongo-and $619.2 million, respectively. ing construction programs, it may be necessary to seek increases in rates. As a result, the Company's future finan-Georgia Retail Gas Market cial position and results of operations wiu be affected by In October 1998, Georgia's retail natural gas market the regulated subsidiaries' ability to obtain adequate and opened to competition.The Company's subsidiary, timely rate and other regulatory reliefif requested. Energy Marketing, is among the 19 marketers authorized to market natural gas to the 1.4 million residential and SCANA and Westvaco each own a 50% interest in Cogen commercial customers served by a Georgia utility. Energy South LLC (Cogen). Cogen was formed to build and Marketing is offering customers a competitive rate with-operate a cogeneration facility at Westvaco's Kraft Dhision out requiring a long-term contract or deposit. Energy Paper Mill in North Charleston, South Carolina. Marketing's strategy relies heavily on direct advertising, Construction of the facility began in September 1996 and

• including incentives to customers who choose Energy is in the final stages. Construction financing of approxi-Marketing to be their new service provider, in addition, mately $170 million was provided to Cogen by banks.

Energy Marketing has numerous alliances and aflinity On December 30,1998, SCANA provided a capital con-relationships with electric member cooperatives, churches tribution of approxhnately $15.5 million to Cogen. On and community organizations, among others, through September 10,1998, the contractor in charge of construc-which it offers incentives. Energy Marketing's success in tion filed suit in Circuit Court seeking approximately $51 acquiring customers is significantly exceeding its projec-million from Cogen, alleging that construction cost over-j t',ons. As a result, expenses are also significantly higher runs were incurred, and that the construction contract than expected. For the puiod ending December 31, provides for recovery of these costs. In addition to Cogen, 1998, Energy Marketing had incurred approximately $8 Westvaco, SCE&G and the Company were also named in 9 (

MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERAT the suit. The Company and the other defendants believe SCANA has in effect a medium-term note program for the suit is without merit and are mounting an appropriate the issuance from time to time of unsecured medium-defense. The Company does not believe that the resolu-term debt securities. The proceeds from the sales of these tion of this issue will have a material impact on its results securities may be used to fimd additional business activi-of operations, cash flows or fmancial position. ties in nonutility subsidiaries, to reduce short-term debt incurred in connection therewith or for general corporate On August 7,1996 the City of Charleston executed 30-purposes. At December 31,1998, SCANA had registered year electnc and gas franchise agreements with SCE&G. with the SEC and available for issuance $200.0 million In consideran.on for the electnc franchise agreement, under this program. SCE&G is paying the City $25 million over seven years (1996 through 2002) and has donated to the City the existing transit assets in Charleston. The $25 million is SCE&G's First and Refunding Mortgage Bond Indenture, included in electric plant-in-service. In settlement of envi. dated April 1,1945 (Old Mortgage), contains provisions q ronmental claims the City may have had against SCE&G prohibiting the issuance of additional bonds thereunder involving the Calhoun Park area, where SCE&G and its (Class A Bonds) unless net earnings (as therein lefmed) predecessor companies operated a manufactured gas plant for twelve consecutive months out of the fifteen months until the 1960's, SCE&G is paying the City $26 million prior to the month ofissuance are at least twice the annu-over a four-year period (1996 through 1999). As part of al interest requirements on all Class A Bonds to be out-the environmental settlement, SCE&G has agreed to con-standing (Bond Ratio). For the year ended December 31, struct an 1,100 space parking garage on the Calhoun Park 1998 the Bond Ratio was 5.30. The issuance of addition-site and to transfer the facility to the City in exchange for al Class A Bonds also is restncred to an addm..onal pn.. nce e 20-year mum..cipal bond backed by revenues from the pal amount equal to (i) 60% of unfunded net propeny parking garage and a mortgage on the park.mg garage. The addm,,ons (which unfunded net property addm,,ons totaled total amount of the bond is not to exceed $16.9 million, the maximum expected project cost. The parking garage approximately $396 million at December 31,1998), (ii) retirements of Class A Bonds (which retirement credits is currently under construction, and is scheduled for com. totaled $100.3 million at December 31,1998), and (iii) pletion in the spring of the year 2000. cash on deposit with the Trustee. The revised estimated primary cash requirements for 1999, excluding requirements for fuel liabilities and short-SCE&G has a bond indenture dated April 1,1993 (New term borrowings, and the actual primary cash require-Mortgage) covering substantially all ofits electric proper-ments for 1998 are as follows: ties under which its future mortgage-backed debt (New Bonds) will be issued. New Bonds are issued under the (Millions of Dollars) 1999 1998 New Mortgage on the basis of a like principal amount of Class A Bonds issued under the Old Mortgage which Property additions and construction have been deposited with the Trustee of the New expenditures, net of allowance for Mortgage (of which $315 million were available for funds used during construction $308 $281 such purpose at December 31,1998), until such time as Nuclear fuel expenditures 5 23 two thirds of all Class A Bonds are held by the Trustee. Maturing obligations, redemptions Thereafter, the Old Mongage may be amended to allow and sinking and purchase New Bonds to be issuable on the basis of property add.- fund requirements 158 257 tions in a principal amount equal to 70% of the original Total $471 $561 cost of electnc and common plant properties (compared to 60% of value for Class A Bonds under the Old Approximately 45% of total cash requirements (after pay-Mortgage), cash deposited with the Trustee, and retire-ment of dividends) was provided from internal sources in ment of New Bonds. New Bonds will be issuable under j 1998 as compared to 62% in 1997-the New Mortgage only if adjusted net earnings (as there-e

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF in defined) for twelve consecutive months out of the of principal, interest and premium for securities issued for eighteen months immediately preceding the month of pollution control purposes. issuance are at least twce the annual interest requirements on all outstanding bonds (including Class A Bonds) and Pursuant to Section 204 of the Federal Power Act, . New Bonds to be outstanding (New Bond Ratio). For SCE&G and GENCO must obtain FERC authority to the year ended December 31,1998 the New Bond Ratio issue short-term debt. The FERC has authorized SCE&G was 6.72. to issue up to $250 million of unsecured promissory notes or commercial paper with maturity dates of twelve The following additional financing transactions have months or less, but not later than December 31,2001. occurred since December 31,1997: GENCO has not sought such authorization.

• On January 13,1998 SCANA issued $60 million of At December 31,1998 SCE&G had $285 million of medium-term notes due January 13,2003 at an interest authorized lines of credit which includes a credit agree-rate of 6.05%. The funds were used to refmance unse-ment for a maximum of $250 million to support the cured bank loans in a like total amount.

issuance of commercial paper. Unused lines of credit at December 31,1998 totaled $285 million. SCE&G's

• On July 8,1998, SCANA issued $75 million of medi-commercial paper outstanding at December 31.1998 and ten-term notes having an annual interest rate of 6.25%

December 31,1997 was $125.2 mil!l.on and $13.3 mil. and maturing on July 8,2003. These funds were used lion, respectively. In addition, Fuel Company had a to finance an additional investment of $75 million credit agreement for a maximum of $125 million with in Powertel,Inc. the full amount available at December 31,1998. The credit agreement supports the issuance of short-term com-

• On October 23,1998, SCAN.A issued $115 million of mercial paper for the financing of nuclear and fossil fuels medium-term notes having an annual interest rate of and sulfur dioxide emission allowances. Fuel Company 5.81% and naturing on October 23,2008. These commercial paper outstanding at December 31,1998 was funds were used to reduce short-term debt.

$66.0 million.

• On October 29,1998, SCANA's shelf registration state-SCE&G's Restated Articles ofincorporation prohibit ment filed with the SEC became effective, providing for issuance of additional shares of preferred stock without the issuance of up to an additional $200 million in consent of the preferred stockholders unless net earnings medium-term notes.

(as defined therein) for the twelve consecutive months immediately preceding the month ofissuance are at least '

• On November 2,1998, SCE&G redeemed, prior to one and one-half times the aggregate of all interest charges maturity, all $30 million principal amount outstanding and preferred stock dividend requirements (Preferred ofits 7.25% Series First and Refunding Mortgage Stock Ratio). For the year ended December 31,1998 Bonds due January 1,2002, the Preferred Stock Ratio was 2.27.

Without the consent of at least a majority of the total On January 26,1998 an additional three million shares of voting power of SCE&G's preferred stock, SCE&G may SCANA common stock were registered for sale under the not issue or assume any unsecured indebtedness if, after Stock Purchase-Savings Plan (SPSP). During 1998, such issue or assumption, the total principal amount of all approximately 1.3 million shares of SCANA's commen such unsecured indebtedness would exceed 10% of the stock were purchased on the open market for issuance aggregate principal amount of all of SCE&G's secured under the SPSP. indebtedness and capital and surplus: however, no such consent is required to enter into agreements for payment ) I

MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATI The Comis iy anticipates that its 1999 cash requirements ing significantly to owne non-attainment in downwind of $471 million will be met through internally generated states. In response to that finding, EPA is requiring that funds (approximately 51%, after payment of dividends), those 22 states amend their SIP's to achieve significant end the incurrence of additional short-term and long-reductions in ozone emissions within those states, and has term indebtedness. Sales of additional equity securities targeted primarily utility sources for the application of may also be made. The Company expects that it has or more rigorous nitrogen oxide emissions controls. A num-can obtain adequate sources of financing to meet its pro-ber of states, including South Carolina, and other parties, jected cash requirements for the next twelve months and including a utility coalition of which the Company is a for the foreseeable future. member, have filed suit in federal court to challenge the EPA rule. Should the rule be upheld, the Company may Environrnental Matters be required to make significant capital expenditures to The Clean Air Act requires electric utilities to reduce add supplemental nitrogen oxide control technology to emissions of sulfur dioxide and nitrogen oxide substantial-one or more ofits fossil generation plants. ly by the year 2000. These requirements are being phased in over two periods. The first phase had a compliance The Federal Clean Water Act, as amended, provides for date ofJanuary 1,1995 and the second, January 1,2000. the imposition of effluent limitations that require various The Company's facilities did not require modifications to levels of treatment for each wastewater discharge. Under meet the requirements of Phase 1. The Company will this Act, compliance with applicable limitations is achieved most likely meet the Phase 11 requirements through the under a national permit program. Discharge permits have burning of natural gas and/or lower sulfur coal in its gen. been issued for all and renewed for nearly all of SCE&G's crating units and the purchase and use of sulfur dioxide and GENCO's generating units. Concurrent with renewal emission allowances. Low nitrogen oxide burners are of these permits, the permitting agency has implemented a being installed to reduce nitrogen oxide emissions to the more rigorous program in monitoring rnd controlling levels required by Phase II. Air toxicity regulations for the thermal discharges and strategies for mxicity reduction in electric generating industry are likely to be promulgated wastewater streams. The Company has been developing around the year 2000. compliance plans for these initiatives. SCE&G and GENCO filed compliance plans with the In 1998 DilEC promulgated regulations for the disposal South Carolina Department of Health and EnGanmental ofindustrial solid waste as directed by the South Carolina Control (DHEC) related to Phase 11 sulfur dioxide Solid Waste Policy and Management Act of 1991. The requirements in 1995 and Phase 11 nitrogen oxide require-full impact of these regulations is not yet known; however. ments in 1997. The Company currently estimates that they may significantly increase SCE&G's and GENCO's air emissions control equipment will require t.pai costs of construction and operation of existing and future expenditures of $170 million over the 1999-2003 period ash management facilities. to retrofit existing facilities, with increased operation and maintcnance cost of approximately $18 million per year. The Company has an environmental assessment program To meet compliance requirements through the year to identify and assess current and former operations sites 2008, the Company anticipates total capital expenditures that could require environmental cleanup. As site assess-of approximately $268 million. ments are initiated, estimates are made of the expendi-tures, if any, deemed necessary to investigate and clean up On September 24,1998, the United States Emiron-each site. These estimates are refined as additional infor-mental Protection Agency (EPA) issued its final regional mation becomes available; therefore, actual expenditures nitrogen oxide state implementation plan (SIP) call rule. could differ significantly from the original estimates. The rule finds that 22 eastern states, including South Anmunts estimated and accrued to date for site assess-Carolina, and the District of Columbia are all contribut-ments and cleanup relate primarily to regulated opera-

MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OP tions. Such amounts are deferred and amortized with for Remedial Design and Remedial Action directing recovery provided through rates. The Company has also SCE&G to design and carry out a plan of remediation recovered portions ofits environmental liabilities through for the Calhoun Park site. The Order is temporarily tettlements with various insurance carriers. As of stayed pending further negotiations between SCE&G . December 31,1998, the Company has recovered all and the EPA. amounts previously deferred for its electric operations. The Company expects to recover all deferred amounts in October 1996 the City of Charleston and SCE&G 'related to its gas operations by December 2002. Deferred settled all environmental claims the City may have had amounts, net of amounts recovered through rates and ser-against SCE&G involving the Calhoun Park area for a elements, totaled $21.3 million and $32.4 million at payment of $26 million over four years (1996-1999) by December 31,1998 and 1997, respectively. The deferral SCE&G to the City. SCE&G is recovering the amount includes the estimated costs associated with the matters of the settlement, which does not encompass site assess-discussed below. ment and cleanup costs, through rates in the same man-ner as other amounts accrued for site assessments and

• In September 1992, the EPA notified SCE&G, the City cleanup as discussed above. As part of the environmen-of Charleston and the Charleston Housing Authority of tal settlement, SCE&G has agreed to construct an their potential liability for the investigation and cleanup 1,100 space parking garage on the Calhoun Park site of the Calhoun Park area site in Charleston, South and to transfer the facility to the City in exchange for a Carolina. This site encompasses approximately 30 acres 20-year municipal bond backed by revenues from the and includes properties which were locations for indus-parking garage and a mortgage on the parking garage.

trial operations, including a wood preserving (creosote) The total amount of the bond is not to exceed $16.9 plant, one of SCE&G's decommissioned manufactured million, the maximum expected project cost. The park-gas plants, properties owned by the National Park ing garage is currently under construction and is sched-Service and the City of Charleston, and private proper-uled for completion in the spring of the year 2000. ties. The site has not been placed on the National Priorities List, but may be added in the future. The

• SCE&G owns three other decommissioned manufac-Potentially Responsible Parties (PRPs) have negotiated tured gas plant sites which contain residues of by-prod-an administrative order by consent for the conduct of a uct chemicals. For the site located in Sumter, South Remedial investigation / Feasibility Study and a corre-Carolina, cfrective September 15,1998, SCE&G sponding Scope of Work. Field work began in entered into a Remedial Action Plan Contract with November 1993, and the EPA approved a Remedial DHEC pursuant to which it agreed to undertake a full Investigation Report in February 1997 and a Feasibility site investigation and remediation under the oversight of Study Report in June 1998. In July 1998, the EPA DHEC. Site investigation and characterization are pro-approved SCENG's Removal Action Work Plan for soil ceeding according to schedule. Upon selection and suc-excavation. SCE&G completed Phase One of the cessful implementation of a site remedy, DHEC will give Removal Action in 1998 at a cost of approximately $1.5 SCE&G a Certificate of Completion, ed a covenant million. Phase Two will include excavation and installa-not to sue. SCE&G is continuing to investigate the tion of several permanent barriers to mitigate coal tar other two sites, and is monitoring the nature and extent scepage. Phase Two began in November 1998, and is of residual contamination.

expected to cost approximately $2.2 million. On September 30,1998 a Record of Decision was issued Regulatory Matters which sets fonh the EPA's view of the extent of each On December 11,1998, the PSC issued an order requir. PRP's responsibility for site contamination and the level ing SCE&G to reduce retail electric rates on a prospective to which the site must be remediated. On January 13, basis. The PSC acted in response to SCE&G reporting 1999 the EPA issued a Unilateral Administrative Order that it earned a 13.04% return on common equity for its

MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS retail electric operations for the twelve months ended reserves and the dismissal of the appeal of all other issues. September 30,1998. This return on common equity The PSC also authorized SCE&G to adjust depreciation exceeded SCE&G's authorized return of 12.0% by 1.04%, rates that had been approved in the 1996 rate order for its or $22.7 million, primarily as a result of record-breaking electric transmission, distribution and nuclear production heat experienced during the summer. The order requires properties to eliminate the effect of the depreciation prospective rate reductions on a per kilowatt-hour basis, reserve shift and to retroactively apply such depreciation based on actual retail sales for the twelve months ended rates to February 1996. As a result, a one-time reduction September 30,1998. This action will reduce future in depreciation expense of $5.5 million after taxes was reported return on common equity to the Commission-recorded in March 1998. The agreement does not afTect authorized level if SCE&G cxperiences the same weather retail electric rates.The FERC had previously rejected the effect and other business results as that of the twelve transfer of depreciation reserves for rates subject to its months ended September 30,1998. The order requires jurisdiction. In September 1998, the Supreme Court the rate reductions to be placed into effect with the first affirmed the Circuit Court's tulings on the issues contest-billing cycle ofJanuary 1999. On December 21,1998, ed by the remaining intervenor. SCE&G fded a motion for reconsideration with the PSC. On January 12,1999, the PSC denied SCE&G's motion On August 8,1990, the PSC issued an order approving for reconsideration and reaflirmed SCE&G's return on changes in Pipeline Corporation's gas rate design for sales f r res le service and upholding the "value-of-service" equity of 12.0%. method of regulation for its direct industrial service. Direct industrial customers seeking " cost-of-service" based On January 9,1996 the PSC issued an order grantmg rates appealed to the Circuit Court, which reversed and SCE&G an increase in retail electric rates of 7.34%, remanded to the PSC its August 8,1990 order. Pipeline which was designed to produce additional revenues, based Corporation appealed that decision to the Supreme on a test year, of approximately $67.5 million annually. Court, which on January 10,1994 reversed the Circuit The increase was implemented in two phases. The first Court decision and reinstated the PSC order. phase, an increase in revenues of approximately $59.5 Additionally, the Supreme Court interpreted the race-million annually, or 6.47%, commenced in January 1996, making statutes of South Carolina to give discretion to The second phase, an increase in revenues of approxi. the PSC in selecting the methodology to be used in set-mately $8.0 million annually, or.87%, was implemented ting rates for natural gas service. The PSC then held in January 1997. The PSC authorized a return on com-armcher hearing and issued its order dated December 12, mon equity of 12.0%. The PSC also approved establish-1995 maintaining the present level of the maximum markup on mdustnal sales (" cap"). This Order was ment of a Storm Damage Reserve Account capped at $50 appealed to the Circuit Court by Pipeline Corporation mdlion to be collected through rates over a ten-year peri-and the industrial customer group with several other par-od. Additionally, the PSC approved accelerated recovery ties intervening, including the Consumer Advocate of of a significant portion of SCE&G's electric regulatory South Carolina. On October 10,1997, the Circuit assets (excluding deferred income tax assets) and the Court issued an order in favor of the Consumer Advocate remaining transition obligation for postretirement benefits and the industrial customer group and remanded the case other than pensions, changing the amortization periods to to the PSC to determine an overall rate of return for allow recovery by the end of the year 2000. SCE&G's Pipeline Corporation. The Circuit Court also issued a request to shift, for ratemaking purposes, approximately second order which ruled against Pipeline Corporation $257 million of depteciation reserves from transmission and aflirmed the PSC's decision that the cap should not and distribution assets to nuclear production assets was be increased. Several motions and appeals were filed sub-also approved. The Consumer Advocate and two other sequently at the Supreme Court. The Supreme Court has dismissed the appeals of the PSC and Pipeline Corpor-intervenors appealed certain issues in the order imnally t ation from the first order without prejudice until the PSC the Circuit Court, which affirmed the PSC's decisions' completes proceedings on remand and has held Pipeline and, subsequently, to the Supreme Court. In March Corporation's appeal of the second order in abeyance 1998, SCE&:G, the PSC, the Consumer. dvocate and until the PSC completes proceedmgs on remand. The A one of the otherintervenors reached an agreement that remanded case was heard by the PSC in June 1998. The I i provided for the reversal of the shift in depreciation PSC set an overall rate of return on equity for Pipeline

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT Cosporation of 12.5-16.5%. The South Carolina Energy rion by geographical area, and should be fully implement-Users Committee (SCEUC) appealed the order to the ed in the first half of 1999. These new systems, which Circuit Court, Pipeline Corporation subsequently fded a comprise a significant portion of SCANA's applications Motion to Dismiss the SCEUC's appeal on the grounds software, are designed to be Year 2000 compliant, and that it was not timely filed. These cases should be heard .in 1999. therefore mitigate overall War 2000 exposure. The Company's regulated business operations were impact-In 1997, SCANA established a Corporate War 2000

• d by the National Energy Policy Act of 1992 (NEPA) and Project Office (Project Office) to direct War 2000 efforts e

FERC Orders No. 636 and 888. NEPA was designed to throughout the Company. A Steering Committee was formed to direct the efforts of the Project Office.The create a more competitive wholesale power supply market Steering Committee reports to the senior officers of by creating " exempt wholesale generators" and by potential-ly requiring utilities owning transmission facilities to pro-SCANA and to the board of directors. It is chaired by the vide transmission access to wholesalers. See " Competition" chief financial officer of SCANA and is comprised of offi-for a discussion of FERC Order 888. Order No. 636 was cers representing all operational areas. The Project Ollice intended to deregulate the markets for interstate sales of is staffed by nine full time project managers and extensive natural gas by requiring that pipelines provide transporta-support personnel.The Project Office is responsible for tion services that are equal in quality for all gas suppliers addressing War 2000 issues and coordinating the required assessment and remediation efforts. whether the customer purchases gas from the pipeline or another supplier. In the opinion of the Company, it con-tinues to be able to meet successfully the challenges of these SCANA's War 2000 efforts encompass three p reporting to the Steering Committee. The Information ahered business climates and does not anticipate any mater-Technology Project covers all mainframe and client server ial adverse impact on the resuhs of operations, cash flows, financial position or bus ness prospects. application software, infrastructure hardware, system soft-ware, desktop computers and network equipment.The Yen 2000 hsue Embedded Systems Project covers all microprocessors, The Year 2000 is an issue because many computers, instruments and control devices, monitoring equipment on power lines and in substations, security and control embedded systems and software were originally pro-devices, telephone systems and certain types of meters. grammed using two digits rather than four digits to iden-tify the applicable year. This may prevent them from The Procedures and External Interfaces Project covers War 2000 procedures, documentation and communications accurately processing information with dates beyond with key suppliers, vendors, customers, financial institu-1999. Because the War 2000 issue could have a material tions and governmental agencies. impact on the operations of the Company if not addressed, the Company's goal is to be War 2000 ready. This means that before the year 2000, critical systems' SCANA's War 2000 project approach involves the follow-ing: (1) inventorying all War 2000 internal and external equipment, applications and business relanonships wdl

• have been evaluated and should be suitable to continue items and entities and updating the War 2000 Inventory int' o and beyond tl e year 2000 and that applicable con-Database; (2) performing risk analysis and corporate prior-

, tingency plans are m place. itization of all inventory entries; (3) performing detailed assessments of all inventory entries to determine War 2000 in 1993, SCANA began the first of several projects t readiness and establishing a remediation action plan where replace many ofits business application systems to pro-necessary; (4) remediating all inventory entries assessed as vide mcreased functionahty and to improve access to busi-non-compliant, including repairing, replacing or develop-ness information. Accordingly, SCANA has implemented ing acceptable work-arounds; (5) testing through date sim-new general ledger, purchasing, materials inventory and ulation and comprehensive test data; (6) implementation of41 accounts payable systems, and is currently implementing d systems and equipment into production a new customer informanon system.The new cus-operations; and (7) contingency planning. tomer information system is being phased into produc-f

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA Detailed project plans exist for each of the Year 2000 pro-may be vulnerable to their failure to remediate their own jects. These project phns, work schedules and resource Year 2000 issues. The Company has completed an initial requirements are reviewed weekly by the project managers survey of vendors and is currently evaluating the responses and monthly by the Steering Committee. The Year 2000 to the survey and conducting additional inquiries where projects, which will address the Company's critical sys-necessary. The Company is also in the process of evaluar-tems and business relationships, are appropriately staffed ing critical third party service providers to ascertain their and are currently on schedule to be campleted by July Year 2000 readiness. The Company has developed com-1999. As reported to the North American Electric munications materials explaining its Year 2000 efforts Peliability Council (NERC) in January 1999, the and is continuing communications with signiGcant cus-Company was 100% cc..nplete with inventory tasks,63% tomers and external groups, including the South Carolina complete with detailed usasment tasks and 58% com-and Georgia Public Service Commissions. The plete with remediation tasks. Procedures and External Interfaces Project was approxi-mately 45% complete through December 1998. The Information Technology Project Team has completed the assessment and initial code remediation for all applica-The Company's pmjected total cost ofits Year 2000 tion software. Many of the applications have been tested efforts and the anticipated timing and breakdown of those in an isolated Year 2000 testing environment and the rest expenditures, is as follows: are being tested according to the project schedule. The assessment of the technical infrastructure and desktop (Millions of Dollars) Internal Out of Pocket Total computing environment is complete and required remedi-Pr ject To Date $2.0 $6.0 $8.0 ation is in process. Testing of all network equipment is in 1999 3.0 9.0 12.0 process. The Information Technology Project was approx. imately 55% complete through December 1998. Total $5.0 $15.0 $20.0 The Embedded Systems Project Team, which includes The cost of the project is based on management's best approximately 20 engineers with prior experience with estimates, which are based on assumptions regarding microprocessors, was formed, and detailed assessment, future events. These future events include continued avail-remediation and testing procedures were developed. This ability of key resources, third parties' Year 2000 readiness team is currently working closely with each of SCANA's and other factors. The cost of the project is not expected business units to complete the assessments of critical sys-to have a material impact on the resuhs or mrations or tems and equipment based on the corporate prioritiza-on the financial position or cash flows of SCANA or tion process. An Embedded Systems Audit Review SCE&G. The costs ofimplementing the new business Committee has been established to review all assessments application systems referred to earlier are not included in for critical systems. As assessments are completed, any these cost estimates, required remediation efforts are evaluated and implement-ed. Independent verifications for selected completed A failure to correct a material Year 2000 problem by the assessments are planned during the first quarter of 1999. Company or by a cn..ucal third party supph.er could result The Embedded Systems Pmject was approximately 50% in an interruption in, or a failure of the Company,s ability complete through December 1998. to provide energy services. At this time, the Company believes its most reasonably likely worst case scenario is .The Procedures and External Interfaces Project Team has that T, ear 2000 failures could lead to temporary reduced developed written documentation and procedures far Year generating capacity on the Company,s electncal grid, te 2000 compliance defim..oon, document contml, inventory, parary intermittent mterrupnons m commumcat ons and prioritization, assessment, remediat on, change contml, temporary intermittent interruptions in gas supply from business continuity plann.mg, and vendor and supph.er mterstate suppliers or producers. A l. ear 2000 problem of communications. This team is coordm.at og commumca-this nature could result in temporary interruptions in elec-tions with all s.igmficant vendors and supph.. ers m an The Comtany has no tnc or gas service to customers. attempt to determme the extent to which the Company h.istoncal experience with interruptions caused by this scc-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDlil0N AND RESULTS OF natio. However, these temporary interruptions in service, operating and monitoring systems information to ensure if any, might be similar to weather-related outages that the the prompt and effective resolution of the year 2000 issue. Company encounters from time to time in its business today. Although the Company does not believe that this Other Matters , cenario will occur, the Company is enhancing existing On December 1,1997, Petroleum Resources sold sub-s contingency plans to ensure preparedness and to mitigate stantially.l! ofits assets for $110 million. The resulting the long term effect of such a scenario. Since the expected gain of $17.6 mitiie -n recorded in "Other income." . impact of this scenario on the Company's operations, cash Proceeds from the sale were used to repurchase approxi-flow and fmancial position cannot be determined, there mately 3.7 million shares of SCANA's outstanding com-is no assurance that it would not be material. mon stock through open market purchases and through privately negotiated transactions. All of the repurchased The Company has established eight business continuity shares were retired, reducing the number of shares issued planning task groups to develop Year 2000 business conti-. and outstanding. nuity plans. These task groups have developed initial draft plans to cover the Company's Corporate Operations, investments in Equity Securities Customer Service Operations, Electric Generation, The Company, through a subsidiary (SCI), has made sig-Transmission and Distribution Operations, Gas Delivery nificant investments in the equity securities of various Operations, Telecommunications and Emergency telecommunications companies. The performance of these Preparedness, Information Technology and Procurement. investments is subject to a number of risks and uncertain-Detailed contingency plans that were already in place to rics. Important factors that impact the performance of cover weather-related outages, computer failures and gen-these investments include continuing rapid and significant cration outages were used and/or referenced as the basis changes in technology, increasingly intense competition for the initial draft Year 2000 business continuity plans. and changing consumer preferences and expectations. The initial draft plans are continuing to be enhanced, and among others. where necessary, new plans will be developed to include mitigation strategies and emergency response action plans At December 31,1998, SCI held the following invest-to address potential Year 2000 scenarios and critical system ments in ITC Holding Company (ITC) and its affiliates: failures. The final plans will also include mitigation strate-gies to address reliance on critical suppliers. Powertel, Inc. (Powertel) is a publicly traded company l that owns and operates PCS systems in several major NERC is coordinating Year 2000 efforts for the electric Southeastern markets. SCI owns approximately 4.6 utility industry in the United States and contingency million common shares of Powertel at a cost of approxi-planning within the regional electric reliability councils. mately $68.0 million. Common shares were initially Coordination in SCE&G's region is through the recorded at $14.85 per share, and closed at $13.5625 on Southeastern Electric Reliability Council (SERC). December 31,1998, resulting in a pre-tax unrealized SCE&G's contingency planning efforts are in compliance holding loss of $5.5 million. The after-tax amount of with the SERC and NERC contingency planning guide-such loss is included in the balance sheet as a compo-lines which required draft contingency plans to be com-nent of" Common Equity." On June 30,1998, SCI

• plete by December 31,1998 and will require final contin-purchased 50,000 shares of non-voting 6.5% series E gency plans to be complete by June 30,1999.

convertible preferred stock of Powertel. In addition, SCI owns the following series of non-voting convertible in addition to NERC and SERC, SCE&G is working preferred shares, at the approximate cost noted: 100,000 with the Electric Power Research Institute (EPRI) to shares series B ($75.1 million) and 50,000 shares series address the issue of overall grid reliability and protection. D ($22.5 million). Preferred series B shares are convert-To ensure that all Year 2000 issues at its Summer Station ible in March 2002 at a conversion price of $16.50 per nuclear plant are addressed, SCE&G is closely cooperat-common share or approximately 4.5 million common ing with other utility companies that own nuclear power shares. Preferred series D shares are convertible in _ plants. The utilities are sharing technical nuclear plant March 2002 at a conversion price of $12.75 per com-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS mon share or approximately 1.7 million common ofits 3,639 shares of preferred stock in Knology to shares. Preferred series E shares are convertible in June ITC. For each preferred share sold, SCI received j 2003 at a conversion price of $22.01 per common share $1,600 ofITC series B convertible preferred shares, for or approximately 3.4 million common shares. The mar-a total of 133,664 shares. SCI also received approxi-ket value of the convertible preferred shares of Powertel mately 50.4 million in cash. SC1's originalinvestment is not readily determinable. However, on an as convert-in these shares was approximately $5.3 million. ed basis, the market value of the underlying common shares for the preferred shares was approximately

• ITC has an ownership interest in several Southeastern

$131.8 million at December 31,1998, resulting in an communications companies. SCI owns approximately unrecorded pre-tax holding loss of $40.8 million. On 3.1 million common shares (after giving elTect to a four-September 15,1998, SCI received 113,656 shares of for-one stock split on August 25,1998),645,153 series Powertel Common Stock as its quarterly dividend on A convertible preferred shares, and 133,664 series B the preferred series E investment. convertible preferred shares ofITC. These investments cost approximately $7.1 million,58.9 million, and $5.0

• ITC Delta ^Com, Inc. (ITCL)) is a fiber optic telecom-million, respectively. Series A and series B preferred munications provider. On November 9,1998, SCI shares are convertible in March 2002 into ITC common purchased 500,000 common shares ofITCD at a cost shares at a conversion price of $13.45 and $43.56, of $14.50 per share. Prior to this purchase SCI owned respectively, on a four to one basis. The market value of approximately 3.6 million common shares ofITCD these investments is not readily determinable.

(after giving effect to a two-for-one stock split announced July 29,1998) at a cost of approximately Subsequent Event $9 million. ITCD common stock closed at $15.25 per On February 17,1999, the Company and Public Service share on December 31,1998, resulting in a pretax Company of North Carolina, Inc. (PSNC) announced a unrealized holding gain of $45.6 million. The after-tax definitive agreement whereby the Company will acquire amount of such gain is included in the balance shee, as PSNC in a transaction valued at approximately $900 mil-a component of" Common Equity." In addition, SCI lion, including the assumption of debt. The transaction owns 1,480,771 shares of series A preferred stock of will be accounted for as a purchase. It is anticipated that ITCD at a cost of approximately $11.2 million. Series PSNC will be operated as a wholly-owned subsidiary of A preferred shares are convertible in March 2002 into the Company. Completion of the transaction is subject to 2.961,542 shares ofITCD common stock (after giving the approval of the shareholders of both companies and effect to the two-for-one stock split). The market value applicable regulatory app avals. It is anticipated that the of series A preferred stock ofITCD is not readily deter-approval process can be completed by the end of 1999. minabic. However, on an as converted basis, the mar. ket value of the underlying common stock for the series On February 17,1999, the Board of Directors also A preferred stock was approximately $45.2 million at announced the adoption of a new %....atock dividend December 31,1998, resulting in an unrecorded pre-tax policy to bring the Company's dividend payout ratio more holding gain of $33.9 million. in line with that of growth-oriented utilities. Under tbc new policy, the board anticipates declaring the current div-

• Knology Holdings, Inc. (Knology) is a broad-band ser-idend of 381/2 cents per share payable July 1,1999 and vice provider of cable, television, telephone and inter-reducing that dividend to 271/2 cents per share, effective net services. SCI owns 71,050 units of Knology. Each with the dividend to be paid thereafter. This action would unit consists of one 11.875% Senior Discount Note make the Company's indicated annual dividend rate on due 2007 and one warrant entitling the holder to pur-cornman stock $1.10 per share.

chase.003734 shares of preferred stock of Knology. The cost of this investment was approximately $40 mil-lion. SCI also owns an additional 753 warrants which entitles it to purchase 753 shares of preferred stock at $1,500 per share. Effective July 31,1998, SCI sold all 9

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF O Restalts of Operations Ecrnings and Dividends In 1998 SCANA's Board of Directors raised the quarterly Earnings per share ofcommon stock, the percent increase cash dividend on common stock to 381/2 cents per from the previous year and the rate ofretum carned on com-share from 37 3/4 cents per share. The increase, effective , mon equity for the years 1996 through 1998 were as follows: with the dividend payable on April 1,1998, raised the indicated annual dividend rate to $1.54 per share from j 1998 1997 1996 $1.51. l ' Earnings per weighted l average share $2.12 $2.06 $2.05 On December 1,1997, Petroleum Resources sold substan-i Percent mcrease m earnmgs tially all ofits assets for $110 million. The resulting after-per share 2.9% 0.5% 20.6 % tax gain 7.6 nu. mon was recorded m.,,Other income.,, Return carned on common equity 12.8 % 12.3 % 12.8 % Electric Operations Electric operations sales margins for 1998,1997 and 1996 1998 Earnings per share and return on common equity were as follows: increased primarily as a result of more favorable weather and customer growth, which more than (Millions of Dollars) 1998 1997 1996 offset higher operating costs in 1998 and the gain Operating revenues $1,219.8 $1,103.0 $1,106.5 from the sale ofoil and gas propenies in 1997. In less: Fuel used addition, net income for 1998 includes a one-time, in generation 262.3 248.4 250.5 after-tax reduction to depreciation rates retroactive Purchased power 31.5 9.4 11.4 to February 1996. This change in rates results Marg.m $926.0 $845.2 $844.6 from the reversal of a $257 milh.on shift m depreci-ation reserves from electric transmission and distri-bution assets to nuclear production assets, previ-1998 The sales margin increased for 1998 primarily due ously approved in a PSC rate order in January to more favorable weather and customer growth. 1996. See " Liquidity and Capital Resources." 1997 The sales margin increased slightly due to the favor-1997 Earnings per share and return on common equity able impact of the rate increase placed into effect in increased primarily as a result of the $17.6 million January 1997 and economic growth factors which after-tax gain on the sale of the oil and gas properties were offset by the effect of milder weather. of Petroleum Resources and higher gas sales margins. These increases more than ofTset increases in operat-Increases (decreases) from the prior year in megawatt-hour ing expenses and the reduction to other income from (MWH) sales volume by classes were as follows: the 1996 after-tax gain reported by SCI as a result of a business combination ofI owertel. Classification 1998 1997 The Company,s fmancial statements mclude AFC. AFC Residential 676,578 (292,518) is a utility accounting practice whereby a portion of the Commercial 578,290 100,324 cost of both equity and borrowed funds used to finance ' dustrial 389,931 113,716 construction (which is shown on the balance sheet as con. Sales f r Resale struction work in progress) is capitalized. An equity por-(excluding interchange) 65,367 36,894 tion of AFC is included in nonoperating income and a Other 29,823 15 debt portion of AFC is included in interest charges (cred-Total territorial 1,739,989 (41,569) its) as noncash items, both of which have the effect of Negotiated Market Sales Tariff 610.784 (10.818) increasing reported net income. AFC represented approx-imately 4.4% ofincome before income taxes in 1998, Total 2,350,773 (52,387) 4.0% in 1997 and 3.9% in 1996. c

MANAGEMENT'S DISCUS $10N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gas Transmission 1998 The sales volume increases for 1998 were primarily Gas transmission sales margins for 1998,1997 and 1996 due to more favorable weather and customer growth. were as follows: 1997 The sales volume for residential sales decreased f ' (Millions of Dollars) 1998 1997 1996 1997 as a result of milder weather. Operating revenues $329.8 $339.9 $326.6 Less: Gas purchased for resale 276.7 289.3 279.6 Gas Distnbution Gas distribution sales margins for 1998,1997 and 1996 Margin $53.1 $50.6 $47.0 were as follows: 1998 The sales margin increased over 1997 primarily as a (Millions of Dollars) 1998 1997 1996 result ofincreased sales to electric generation facilities. Operating revenues $230.4 $233.6 $234.8

• sales margin increased over the prior year pri-i Less: Gas purchased for resale 142.4 151.9 157.1 manly as a result of higher margins on sales to I

Margin $88.0 $81.7 $77.7 industrialinterruptible customers. The higher margins were attributable to fewer curtailments due 1998 The sales margin increased over 1997 due to rene-to higher system capacity from a pipeline expan-gotiation ofindustrial customers' contracts, lower sion completed in late 1996. gas prices and increased sales to electric generation facilities. Increases (decreases) from the prior year in dekatherms (DT) sales volume by classes including transportation gas 1997 The sales margin increased over the prior year pri-were as follows: marily as a result ofincreases in contract prices and sales to industrial interruptible customers. Classification 1998 1997 Commercial 9,799 4,056 Increases (decreases) from the prior year in dekatherm Industrial 5,238,940 5,690,034 (DT) sales volume by classes, including transportation gas, were as follows: Transportation (695,921) (523,291) Sale for resale 314,895 673,205 Classification 1998 1997 Total 4,867,713 5,844,004 Residential (2,685) (2,188,215) Commercial 389,468 (123,385) 1998 The sales volume for industrial customers Industrial 2,363,341 1,820,166 increased, and transportation decreased, for 1998 Transportation gas (673,795) (430,610) as a result of lower gas prices and increased sales to electric generati n facilities. Sales for resale Total 2,076,329 (922.044) increased due to lower gas prices. 1998 The sales volume for commercial and industrial 1997 The sales volume for industrial customers customers increased, and transportation decreased, increased, and transportation decreased, for 1997 for 1998 as a result oflower gas prices and as a result of fewer curtailments due to higher sys-increased sales to electric generation facilities. tem capacity from a pipeline expansion completed in late 1996. 1997 The sales volume for residential customers decreased for 1997 as a result of milder weather which was putially offset by increases in sales to industrial interruptible customers.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDlil0N AND RESULTS OF OPERATI Energy Marketing The increase in depreciation and amortization Energy marketing sales margins for 1998,1997 and 1996 expenses for 1997 reflects the additions to plant-in-were as follows: service. The change in income tax expense is pri-marily due to changes in pre-tax operating income and the difference between estimated income taxes l

• (Millions of Dollars) 1998 1997 1996 accrued and actual income tax expense per the tax l

Operating revenues $568.1 $205.9 $261.4 returns as filed. The increase in other taxes results I Less: Gas and electricity primarily from the accrual of additional property purchased for resale 569.8 203.3 253.4 taxes, beginning in January 1997, related to the Margin $(1.7) $2.6 $8.0 Cope plant and other property additions, which was partially offset by a reduction in the 1997 prop-erty tax assessment. Recovery of the Cope plant 1998 The sales margin decreased for 1998 primarily due t property taxes is provided for in a retail electric rate losses on energy trading and continued mild weather. increase that became effective January 1997. 1997 The sales margin decreased for 1997 primarily due to mild weather. Odier Income 1998 Other income, net of taxes, decreased approximate-Other Operating Expenses and Taxes ly $25.1 million, primarily as a result of the gain on Increases (decreases) in other operating expenses, includ-the sale of Petroleum Resources recorded in 1997. ing taxes, were as follows: In addition, lower earnings from non-regulated businesses, primarily losses from energy marketing activities, resulted from decreased gas margins, Classification (Millions of Dollars) 1998 1997 volatility in power markets related to unusually hor Other operation and maintenance - $31.1 $3.1 summer weather and startup costs in new markets. Depreciation and amortization (8.2) 5.5 Income taxes 30.7 (12.5) 1997 Other income, net of taxes, increased approximate-Other taxes 5.7 8.6 ly $8.5 million. The primary factors accounting for the change in other income were the Petroleum Total $59.3 $4.7 Resources gain on the sale of oil and gas properties in 1997, offset by the gain reported by SCI in 1998 Other operating and maintenance expenses 1996 referred to under " Earnings and Dividends" increased over 1997 primarily due to mcreased and which is included in other income reported maintenance costs for electric generating and distri-for 1996. bution facilities, various other electric operating costs and Year 2000 testing and remediation. The Interest Expense decrease in depreciation and amortization expense increases (decreases) in interest expense, excluding the reflects the non-recurring adjustment to deprecia-debt component of AFC, were as follows: tion expense discussed under " Earnings and Dividends". The increase in income tax expense prirnarily reflects changes in operating incotae. The Classification (Millions of Dollars) 1998 1997 increase in other taxes primarily results from Interest on long-term debt, net $5.4 $1.1 increased property taxes. Other interest expense (1.8) (1.5) 1997 Other operation and maintenance expenses increased somewhat from 1996 levels. A decrease in transit operating costs resulting from the 1998 Interest expense increased over 1997 as a result of Company's transfer of the ownership of the the issuance of medium-term notes in the third Charleston transit system to the City of Charleston quarter of 1998, in October 1996 largely offset increases in costs at electric generating plants and other operating costs. 1997 There was no material change in interest expense. 9 F

1 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 1 Quantitive and Qualitative Disclosuses about Market Risk All financial instruments held by the Company described rive to changes in interest rates. For debt obligations, the 1 I - below are held for purposes other than trading, table presents principal cash flows and related weighted average interest rates by expected maturity dates. Interest rate risk - The table below provides information about the Company's financial instruments that are sensi- - December 31,1998 Expected Maturity Date (Millions of Dollars) Liabilities 1999 2000 2001 2002 2003 Thereafter Total Fair Value Long-Term Debt: Fixed Rate ($) 106.5 213.5 27.5 27.5 284.4 1,165.8 1,789.5 1,869.1 Average Interest Rate 6.86 5.93 6.87 6.87 6.29 7.47 7.04 While a decrease in interest rates would increase the fair Equity price risk - Investments in telecommunications value of debt, it is unlikely that events which would result companies' marketable equity securities are carried at their in a realized loss will occur. market value of $375.1 million, in accordance with Statement of Financial Accounting Standards No. I15. A In addition, the Company has invested in a telecommuni-ten percent decline in market value would result in a cations company approximately $40 million for 11.875% $37.5 million reduction in fair value and a corresponding senior discount notes due 2007. The fair value of these adjustment, net of tax effect, to the related equity account notes approximates cost. An increase in market interest for unrealized gains / losses. rates would result in a decrease in fair value of these notes and a corresponding adjustment, net of tax, to other com-prehensive income. Cotntnon Stock Information 1998 1997 4th 3rd 2nd 1st 4th 3rd 2nd 1st h h Qtt QtL h h h QtL. Price Range: (a) High 37 1/4 33 7/8 31 3/8 31 29 15/16 25 5/8 25 5/8 26 7/8 low 31 5/16 28 1/2 28 27 7/8 24 23 7/8 23 3/8 24 7/8 (a) As reported on the New York Stock Exchange Composite Listing. 1 S

SELECTED FINANCIAL DATA For the Years Ended December 31, 1998 1997 1996 1995 1994 (Millions of Dollars, except statistics and per share amounts) Statement ofIncome Data Operating Revenues $1,632 $1,523 $1,513 $1,353 $1,322 Operating income 345 314 314 288 260 Other income /(Loss) 13 38 29 8 (30) ~ Net income 223 221 215 168 115 Balance Sheet Data Utility Plant, Net $3,787 $3,648 $3,529 $3,469 $3,294 Total Assets 5,281 4,932 4,759 4,534 4,317 Capitalization: Common equity 1,746 1,788 1,684 1,555 1,359 Preferred Stock (Not subject to purchase or sinking fund) 106 106 26 26 26 Preferred Stock, net (Subject to purchase or sinking fund) 11 12 43 46 50 SCE&G - obligated mandatorily redeemable preferred securities of SCE&G's subsidiary, SCE&G Trust I, holding 3 solely $50 million principal amount of 7.55% Jurior Subordinated Debentures of SCE&G, due 2027 50 50 Long. term debt, net 1,623 1,566 1,581 1,589 1,549 Total Capitalization $3,536 $3,522 $3,334 $3,216 $2,984 Common Stock Data Weighted Average Number of Common Shares Outstanding (Millions) 105.3 107.1 105.1 99.0 94.7 Earnings Per Weighted Average Share of Common Stock $2.12 $2.06 $2.05 $1.70 $1.22 Dividends Declared Per Share of Common Stock $1.54 $1.51 $1.47 $1.44 $1.41 Common Shares Outstanding O' ear-End) (Millions) 103.6 107.3 106.1 103.6 96.0 Book Value Per Share of Common Stock (Year-End) $16.86 $16.66 $15.86 $15.00 $14.15 Number of Common Shareholders of Record 30,983 33,395 36,178 38,231 39,516 Other Statistics Electric: Customers (Year-Er.d) 517,447 503,905 493,320 484,354 476,412 Total sales (Million KWH) 21,203 18,852 18,904 17,779 17,009 Residential: Average annual use per customer (KWH) 14,481 13,214 14,149 13,859 13,048 Average annual rate per KWH $.0801 $.0799 5.0785 $.0747 $.0743 Generating capability - Net MW O' ear-End) 4,387 4,350 4,316 4,282 3,876 Territorial peak demand - Net MW 3,935 3,734 3,698 3,683 3,444 Gas: Customers (Year-End) 256,957 252,701 248,681 243,523 238,614 Sales, excluding transportation (Thousand Therms) 1,010,742 949,100 896,294 882,511 781,109 Residential: Average annual use per customer (Therms) 521 531 639 570 543 Average annual rate per therm $.86 5.86 5.74 $.82 5.84 9

INVESTOR INFORMATION Corporate OfBcc Trustee and Paying Agent SCANA Corporation Questions concerning replacement ofinterest checks, tax informa-1426 Main Street tion, transfers and other account information related to the follow-Columbia, SC 29201-2845 ing securities should be directed to the appropriate Trustee and Telephone: (803) 217-9000 Paying Agent: SCE&G First and Refunding Mortgage Bonds Stock Exchange Listings The Chase M.nhattan Bank SCANA Corporation's Common Stock is listed and traded on the Corporate Trust Depanment - 15th Floor New York Stock Exchange (NYSE).The trading symbol is SCG. 450 West 33rd Street The newspaper listing is SCANA. The 5% Series Cumulative New York, NY 10001-2697 Preferred Stock of South Carolina Electric & Gas Company Telephone: (800) 648-8380 (SCE&G) is listed on the NYSE. The trading symbol is SAC Pr. SCE&G First Mortgage Bonds The newspaper listing is SCrE f SCE&G's other series of The Bank of New York f Cumulative Preferred Stock are not listed and market prices are not 100 Asheford Center North, Suite 520 published. The 7.55% Trust Preferred Securities, Series A, issued by Atlanta, GA 30338 SCE&G Trust 1, is also listed on the NYSE. The trading symbol is Telephone: (800) 254-2826 SAC PrT. The newspaper listing is SCEG hpft SCE&G Trust 1 Trust Preferred Securities, Series A The Bank of New York Dividends 101 Barclay Street 21 West Dividends on SCANNs Common Stock and SCE&G's Cumulative Attn: CorporateTrust Administration Preferred Stock are declared quanerly by the board of directors, and New York, NY 10286 are normally payable on the first day of January, April, July and Telephone: (212) 815-5939 October to shareholders of record on or about the 10th day of the preceding month. Quarterly distributions on the 7.55% Trust Auditors Preferred Securities, Series A. issued by SCE&G Trust 1, are Deloitte & Touche LLP payable March 31, June 30, September 30 and December 31 to Certified Public Accountants holders of record on the last business day befo e such dates. 1426 Main Street,8th Floor Columbia, SC 29201 SCANA Investor Plus Plan The Plan provides investors a convenient and economical means Additional Information of acquiring, holding and transferring shares of SCANAs Publications: The Company provides a quarterly report to share-Common Stock. Participants may purchase additional shares of holders highlighting financial and operating results for the first, Common Stock through automatic reinvestment of all or a por-second and third quaners. A repy ofSCANAs 1998 AnnualReport tion of their cash dividends on SCANKs Common Stock and on Form 10-K(asfled with the Securities andExchange SCE&G's Cumulative Preferred Stock and/or by making optional Commission)is available without charge. Requests for these and cesh payments of up to $100,000 per calendar year.The Plan also other financial publications should be directed to the Investor features a direct purchase provision through which investors can Relations Department. ecquire their first shares of SCANKs Common Stock directly from Interner: Information about the Company, including financial the Company. A variety of other services, including direct deposit reports, press releases and descriptions of customer products and of dividends and safekeeping of share cenificates, are also available. services, is available on SCANA's home page on the World Wide A Plan pmspectus and enrollment card are available upon request. Web at http://www.scana.com. Investor Line: In addition to information on a variety of shareholder Shareholder Inquiries account services, the latest information on dividends, financial Questions concerning the SCANA Investor Plus Plan, stock results and other significant Company developments is available by transfer requirements, replacement oflost or stolen stock certifi-calling SCANKs 24-hour, roll-free Investor Line at 1-800-763-5891. cares or dividend checks, address changes, direct deposit of divi-dends, elimination of duplicate mailings, or other account ser-Investor Relations

Contact:

vices should be directed to the Shareholder Services Department: H. John Winn,111 By writing: SCANA Corporation Manager - Investor Relations and Shareholder Services (054) Attention: Shareholder Services (054) Telephone: (803) 217-9240 Columbia, SC 29218-0001 Fax: (803) 217 7344 By calling: (800) 763-5891 Goll-free Investor Line) (803) 217 7817 (in Columbia) Investors' Association: (803) 217-7389 (fax) For information about this organization's activities, please write to: Association of SCANA Corporation Investors Transfer Agent and Registrar clo Paul Quattlebaum, Jr. SCANA Corporation maintains shareholder records, issues dWidend 22 Broughton Road checks and acts as Transfer Agent and Registrar for the Company's Charleston, SC 29407-7529 Common Stock and SCE&G's Cumulative Preferred Ssk. Shan: holders may send stock cenificates directly to the Company's This report is issued solely for the purpose of providing information. Shareholder Services Department for transfer. There is no charge for it is not intended for use in connection with any sale or purchase of, this service. The Company recommends that cenificates be mailed by or any solicitation of offers to buy or sell, any securities. registered or certified mail. Signatures required for transfer must be guaranteed by an official of a financial institution that is an approved member of a hkdallion Signature Guarantee Program. O

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