ML073030308

Annual Financial Report, Management'S Discussion and Analysis, Overview of the Financial Statements

ML073030308
Person / Time
Site:	Summer
Issue date:	08/01/2007
From:	Cherry, Bekaert & Holland, South Carolina Electric & Gas Co
To:	Office of Nuclear Reactor Regulation
References
Download: ML073030308 (7)

Text

MANAGEMENTS DISCUSSION AND ANALYSIS Overview of the Financial Statements In June 1999 the Governmental Accounting Standards Board issued Statement No. 34, Basic Financial Statements -

Managements Discussion and Analysis - for State and Local Governments (GASB 34). The objective of this Statement is to enhance the understandability and usefulness of the general-purpose external financial reports of state and local governments to the citizenry, legislative and oversight bodies, and investors and creditors. This Statement was effective for the Authority beginning in fiscal year 2001.

By definition within this Statement, the Authority is deemed a proprietary or enterprise fund, in which a government entity operates like a business. GASB 34 requires the following components in a governmental entitys annual report.

Managements Discussion and Analysis The purpose is to provide an objective and easily readable analysis of the Authoritys financial activities based on currently known facts, decisions, or conditions.

Statement of Net Assets Assets and liabilities of proprietary funds should be presented to distinguish between current and long-term assets and liabilities.

Statement of Revenues, Expenses and Changes in Net Assets This statement provides the operating results of the Authority broken into the various categories of operating revenues and expenses, non-operating revenues and expenses, as well as revenues from capital contributions.

Statement of Cash Flows Sources and uses of cash are classified using the direct method as resulting from operating, non-capital financing, capital and related financing or investing activities.

Notes to the Financial Statements The notes are used to explain some of the information in the financial statements and provide more detailed data.

Financial Condition Overview The Authoritys Balance Sheets as of December 31, 2006, 2005 and 2004 are summarized as follows:

2006 2005 2004 (Thousands)

ASSETS Plant - net $ 3,876,291 $ 3,528,628 $ 3,165,259 Current assets 742,585 678,948 577,034 Other noncurrent assets 592,220 456,062 661,601 Deferred debits 329,397 319,564 282,238 Total assets $ 5,540,493 $ 4,983,202 $ 4,686,132 LIABILITIES & NET ASSETS Long-term debt - net $ 3,090,030 $ 2,518,991 $ 2,600,744 Current liabilities 638,352 694,944 540,576 Other noncurrent liabilities 387,725 432,697 343,633 Net assets 1,424,386 1,336,570 1,201,179 Total liabilities and net assets $ 5,540,493 $ 4,983,202 $ 4,686,132

2006 Compared to 2005 Assets

• Net plant increased by $347.7 million. Additions less retirements to Utility plant were $260.6 million in 2006. The change in Accumulated depreciation was an increase of $142.3 million and was consistent with prior years. The increase in Construction work in progress was $229.4 million and included major construction related to Cross 3, Cross 4, Pee Dee 1 and environmental compliance.

• Current assets increased $63.6 million due to increases in Accounts receivable and Inventories.

• Other noncurrent assets increased $136.2 million primarily due to an increase in restricted cash and investments.

• Deferred debits increased $9.8 million due to increases in the Costs to be recovered from future revenue and Unamortized debt expenses.

Liabilities

• Long-term debt increased $571.0 million due to the net affect of bond refinancing and new money issues, and principal repayments.

• Current liabilities decreased $56.6 million due to decreases in Commercial paper notes outstanding and Other current liabilities. These were partially offset by increases in Accounts payable, Current portion of long-term debt and Accrued interest.

• Other noncurrent liabilities decreased $45.0 million primarily due to a decrease in the Asset retirement obligation liability.

• Net assets increased $87.8 million due to the increases in Unrestricted assets, Restricted for debt service and Restricted for capital projects. These were partially offset by a decrease in Invested in capital assets.

2005 Compared to 2004 Assets

• Net plant increased by $363.4 million. Additions less retirements to Utility plant were only $75.2 million in 2005 with no single plant asset driving the activity. This figure was significantly lower than in recent years.

The change in Accumulated depreciation (including ARO) of $132.2 million was considered normal. The increase in Construction work in progress was $420.2 million related primarily to Cross 3 and Cross 4 construction.

• Current assets increased $101.9 million due to increases in Current cash and investments, Accounts receivable, Inventories, and Prepaid and Other assets.

• Other non-current assets decreased $205.5 million primarily due to an decrease in Restricted cash and investments.

• Deferred debits increased $37.3 million due to an increase in the Costs to be recovered from future revenue asset resulting from a decrease in the principal and an increase in the depreciation components.

Liabilities

• Long-term debt decreased $81.8 million due to the net affect of bond refinancing, principal repayments and new money issues.

• Current liabilities increased $154.4 million due to increases in Commercial paper notes outstanding, Accounts payables, and Other current liabilities. These were partially offset by decreases in the Current portion of long-term debt and Accrued interest.

• Other non-current liabilities increased $89.1 million due to increases in the Construction fund and Asset retirement obligation liabilities.

• Net assets increased $135.4 million primarily due to the increase in Investment in capital assets net of related debt.

Results of Operations 2006 2005 2004 (Thousands)

Operating revenues $ 1,413,343 $ 1,350,080 $ 1,151,009 Operating expenses 1,173,989 1,102,360 909,665 Operating income $ 239,354 $ 247,720 $ 241,344 Interest charges (185,505) (166,596) (163,864)

Costs to be recovered from future revenue 4,885 34,374 10,373 Other income 44,033 32,315 15,021 Transfers out (14,951) (12,422) (24,175)

Change in net assets $ 87,816 $ 135,391 $ 78,699 Ending net assets $ 1,424,386 $ 1,336,570 $ 1,201,179 2006 Compared to 2005 Operating Revenues Operating revenues for 2006 increased $63.3 million or 5% over the prior year. A rise in fuel and demand related revenues were the major factors. Energy sales exceeded 25 million megawatts for the second consecutive year.

There was a 2% increase in both the industrial and sales for resale customer classes.

2006 2005 2004 Electric Operating Revenues (Thousands)

Retail $ 280,374 $ 268,893 $ 235,679 Industrial 362,527 360,510 294,945 Sales for Resale 753,041 705,352 605,162 Totals $ 1,395,942 $ 1,334,755 $ 1,135,786

Operating Expenses Operating expenses for 2006 reflected a net increase of $71.6 million or 6% compared to 2005. Throughout the industry, market fuel prices (coal, natural gas and oil) again increased over the prior year. In a continued effort to lower fuel costs, the Authority uses a combination of long-term and short-term contracts, an expanding fuel related risk hedging program and a mix of solid fuels (petcoke, coal, and synfuel). Fuel and purchased power accounted for the majority of this expense variance, rising by $49.6 million or 7% when compared to 2005. During 2006, the Authority again used synfuel (a processed coal that is cheaper) which resulted in an estimated savings to our customers of approximately $12.7 million. Savings from synfuel are reflected in the fuel expense and revenue reported. Other generation operating and maintenance costs increased by approximately $10.0 million in 2006 due to additional costs of operating environmental equipment and station outages. Depreciation expense showed an increase over last year of

$9.4 million.

2006 2005 2004 Electric Operating Expenses (Thousands)

Fuel & Purchased Power $ 759,040 $ 709,422 $ 531,061 Other Generation 139,435 129,420 122,792 Transmission 21,952 21,055 19,600 Distribution 12,751 11,369 10,254 Customer & Sales Costs 12,654 11,385 11,377 Administrative & General 64,167 66,015 66,568 Depreciation & Sums in Lieu of Taxes 161,148 151,077 145,608 Totals $ 1,171,147 $ 1,099,743 $ 907,260 Below-The-Line Items Interest Charges - Interest charges for 2006 were $18.9 million or 11% higher than 2005 as a result of the 2005 and 2006 bond transactions.

Costs to be Recovered From Future Revenue - Costs to be recovered from future revenue increased expenses by $29.5 million when compared to last year due to higher principal payments and a decrease in the depreciation component.

Other Income - Other income increased $11.7 million or 36%. Interest income and the change in Fair market value of investments increased by $18.4 million. This was offset primarily by a reduction of $7.5 million in the surplus land sales for the reimbursement of the 2004 non-recurring special contribution to the State.

Transfers out - Transfers out represents the dollars paid by the Authority to the State of South Carolina. There was an increase of $2.5 million or 20% over 2005 which resulted from an increase in projected revenues from the prior year.

2005 Compared to 2004 Operating Revenues Operating revenues for 2005 increased $199.1 million or 17% over the prior year. The rise in fuel related revenue was a key contributing factor due to higher market prices industry wide. Energy sales for the Authority were over 25 million megawatt-hours for the year. This was an increase of 3% which represents higher sales in all customer categories. For the second consecutive year, the retail class experienced a 4% customer growth. The revenue continues to maintain a stable distribution across its customer base as follows: Retail 20%, Industrial 27%, and Sales for Resale 53%.

Operating Expenses Operating expenses for 2005 reflected a net increase of $192.7 million or 21% compared to 2004. Coal, natural gas and oil prices have risen dramatically over the past two years. The Authority strives to mitigate these costs with a combination of long-term and short-term contracts, a gas risk hedging program and burning a variety of solid fuels (petcoke, coal, and synfuel). Fuel and purchased power accounted for the majority of this expense variance, rising by $178.4 million or 34% when compared to 2004. The Authority continues to burn synfuel, a processed coal that results in savings to our customers. In 2005, this provided an estimated savings to our customers of approximately $20.0 million which was reflected in the fuel expense and revenue reported. Other generation operating and maintenance costs also increased by approximately $6.6 million in 2005 due to additional costs of operating environmental equipment and the station outages. Depreciation expense showed an increase over last year of $4.9 million due primarily to a reclassification of certain assets between depreciation groups and re-calculation of prior depreciation.

Below-The-Line Items Interest Charges - Interest charges for 2005 were $2.7 million or 2% higher than 2004 as a result of the 2004 and 2005 bond transactions and additional expense due to increased commercial paper activity and higher interest rates offset by higher debt related expenses.

Costs to be recovered from future revenue - Costs to be recovered from future revenue reduced expenses by

$24.0 million when compared to last year due to lower principal payments and an increase in the depreciation component.

Other Income - Other income increased $17.3 million or 115%. In 2004 certain lands were declared surplus property so they could be sold to reimburse the Authority for the non-recurring special contribution to the State.

These land sales in 2005 totaled $10.7 million. Interest income and the change in fair value increased by $5.9 million due to higher interest rates and favorable market conditions for the types of investments held by the Authority.

Transfers out - Transfers out represents the dollars paid by the Authority to the State of South Carolina. The expense for 2004 was $11.8 million higher than 2005 due to the non-recurring special contribution in the amount of $13.0 million which was paid in 2004 by authorization of the Authoritys Board of Directors.

Capital Improvement Program The purpose of the capital improvement program is to continue to meet the energy and water needs of the Authoritys customers with economical and reliable service. The Authoritys capital improvement program for years 2007 through 2009 is estimated to be $1.9 billion expended as follows:

2006 2005 2004 Budget 2007-09 Budget 2006-08 Budget 2005-07 Capital Improvement Expenditures (Thousands)

Cross 3 & Cross 4 Generating Units $ 465,000 $ 724,000 $ 879,000 Environmental Compliance 49,000 157,000 151,000 General Improvements to the System 647,000 510,000 386,000 Pee Dee 1 Unit 534,000 0 0 Future Nuclear Units 190,000 0 0 Totals $ 1,885,000 $ 1,391,000 $ 1,416,000

The cost of the capital improvement program will be provided from internally generated funds, additional revenue obligations, commercial paper notes and other short-term obligations, as determined by the Authority.

Currently under construction are Cross Unit 3 and Cross Unit 4 which are scheduled to be commercial in January 2007 and 2009, respectively. Each of these units will be a 600 MW (net) pulverized coal-fired unit which will be located at the existing Cross Generating Station. The capital improvement program also includes funds for Pee Dee Unit 1, two future nuclear units, and general improvements to the Authoritys system.

One new landfill generating unit was added in 2006 at the Richland County site, increasing the total landfill generating sites for the Authority to three. The Authority also dedicated a 16KW solar demonstration facility at Coastal Carolina University. Energy from these Green Power sources further diversifies the Authoritys fuel mix and reinforces the commitment to the environment for the State of South Carolina.

The Authoritys estimated three-year capital improvement program for the years ended December 31, 2005 and 2004 was $1.4 billion for each of the periods.

Debt Service Coverage The Authoritys debt service coverage (not including commercial paper) at December 31, 2006, 2005, and 2004 was 1.79, 2.01 and 1.81, respectively.

Bond Ratings Bond ratings assigned by the various agencies for years 2006, 2005, and 2004 were as follows:

Agency / Lien Level 2006 2005 2004 Fitch Ratings Priority Bonds Not Applicable AAA AAA Revenue Bonds AA AA AA Revenue Obligations AA AA AA Commercial Paper F1+ F1+ F1+

Moody's Investors Service, Inc.

Priority Bonds Not Applicable Aa2 Aa2 Revenue Bonds AA Aa2 Aa2 Revenue Obligations AA Aa2 Aa2 Commercial Paper P-1 P-1 P-1 Standard & Poor's Rating Services Priority Bonds Not Applicable AAA AAA Revenue Bonds AA- AA- AA-Revenue Obligations AA- AA- AA-Commercial Paper A1+ A1+ A1+

Bond Market Transactions for Years 2006, 2005 and 2004 Par Amount Type Date Closed Purpose Comments Year 2006

$470,765,000 Revenue Obligations: 02/01/2006 To finance a portion of the tax- Tax-exempt bonds.

2006 Series A exempt construction for Cross Unit All-in true interest cost of 4.58 No. 3, Cross Unit No. 4, SIP Call percent.

and New Source Review environmental requirements, and ongoing transmission system construction and improvements

$129,115,000 Revenue Obligations: 02/01/2006 To finance a portion of the taxable Taxable bonds.

2006 Series B construction for Cross Unit No. 3, All-in true interest cost of 5.18 Cross Unit No. 4, SIP Call and New percent.

Source Review environmental requirements, and ongoing transmission system construction and improvements

$7,268,000 Revenue Obligations: 11/15/2006 To finance a portion of the Tax-exempt mini-bonds.

2006 Series M-Current Interest Authority's capital improvements Bearing Bonds (CIBS)

$2,632,600 Revenue Obligations: 11/15/2006 To finance a portion of the Tax-exempt mini-bonds.

2006 Series M-Capital Authority's capital improvements Appreciation Bonds (CABS)

$114,755,000 Revenue Obligations: 11/16/2006 Refund the following: Gross savings of $11.2 million 2006 Refunding Series C 1999 Series A (partial) over the life of the bonds.

2002 Series B (partial)

Year 2005

$125,295,000 Revenue Obligations: 10/4/2005 Refund the following: Gross savings of $20.1 million 2005 Refunding Series A 1995 Refunding Series A (partial) over the life of the bonds.

1995 Refunding Series B (partial) 1996 Refunding Series A (partial)

$278,005,000 Revenue Obligations: 10/4/2005 Refund the following: Gross savings of $58.3 million 2005 Refunding Series B 1995 Refunding Series A over the life of the bonds.

1995 Refunding Series B 1996 Refunding Series A 1996 Refunding Series B

$78,150,000 Revenue Obligations: 02/24/2005 Refund 1993 Refunding Series C Gross savings of $14.6 million 2005 Refunding Series C Bonds over the life of the bonds.

$10,924,500 Revenue Obligations: 11/16/2005 To finance a portion of the Tax-exempt mini-bonds.

2005 Series M-Current Interest Authority's ongoing transmission Bearing Bonds (CIBS) system construction and improvements

$4,442,000 Revenue Obligations: 11/16/2005 To finance a portion of the Tax-exempt mini-bonds.

2005 Series M-Capital Authority's ongoing transmission Appreciation Bonds (CABS) system construction and improvements.

Year 2004

$434,870,000 Revenue Obligations: 04/21/2004 To finance a portion of the tax- Tax-exempt bonds.

2004 Series A exempt construction for Cross Unit All-in true interest cost of 4.46 No. 3, Cross Unit No. 4, SIP Call percent.

environmental requirements, Rainey 2002 Combined Cycle and two Simple Cycle Units, and Rainey Transmission projects.

$17,635,000 Revenue Obligations: 04/21/2004 To finance a portion of the taxable Taxable bonds.

2004 Series B construction for Cross Unit No. 4. All-in true interest cost of 4.41 percent.

$19,806,000 Revenue Obligations: 08/24/2004 To finance a portion of the taxable Tax-exempt mini-bonds.

2004 Series M-Current Interest construction for Cross Unit No. 4.

Bearing Bonds (CIBS)

$8,147,600 Revenue Obligations: 08/24/2004 To finance a portion of the taxable Tax-exempt mini-bonds.

2004 Series M-Capital construction for Cross Unit No. 4.

Appreciation Bonds (CABS)

(Note: There are no 2007 bond market transactions to date.)