SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27801; 70-9533)
SCANA Corporation, et al.
Order Authorizing Payment of Dividends Out of Capital or Unearned Surplus Before Consideration of Goodwill Impairment
February 9, 2004
SCANA Corporation ("SCANA"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), its three public-utility subsidiaries, South Carolina Electric & Gas Company ("SCE&G"), South Carolina Generating Company, Inc. ("GENCO") and Public Service Company of North Carolina, Incorporated ("PSNC") and its nonutility subsidiaries, South Carolina Fuel Company, Inc. ("SC Fuel"), South Carolina Pipeline Corporation ("SCPC"), SCG Pipeline, Inc., SCANA Energy Marketing, Inc. ("SCANA Marketing"), SCANA Energy Trading, LLC, SCANA Public Service Company, LLC, SCANA Communications, Inc., an exempt telecommunications company under section 34 of the Act, Servicecare, Inc. ("ServiceCare"), Primesouth, Inc., Palmark, Inc., SCANA Resources, Inc., SCANA Development Corporation, SCANA Petroleum Resources, Inc., SCANA Services, Inc. ("SCANA Services"), PSNC Blue Ridge Corporation, PSNC Cardinal Pipeline Company, LLC, and Clean Energy Enterprises Inc. (collectively "Applicants"), all located at Columbia, South Carolina, have filed a post-effective amendment to their application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 12(b) and (c) of the Act and rules 45, 46 and 54. The Commission issued a notice of the filing of the Application on November 26, 2003 (Holding Co. Act Release No. 27770).1
SCANA and PSNC seek an authorization permitting PSNC to pay dividends out of capital or unearned surplus before taking into consideration any impairment of goodwill recognized as a result of the merger in 2000 between the companies ("Merger"),2 in addition to the previous authorizations in which the Commission permitted PSNC to pay dividends out of additional paid-in-capital, up to the amount of its aggregate retained earnings as of the time immediately prior to the Merger, and out of earnings, calculated before the amortization of goodwill ("Prior Orders").3 Applicants request the additional authority in order to ameliorate certain effects of the 2001 adoption of Statement of Financial Accounting Standards ("SFAS") 141 (Business Combinations) and 142 (Goodwill and Other Intangible Assets).
On February 9, 2000, in the Merger Order, the Commission authorized SCANA to acquire PSNC. SCANA registered as a holding company under the Act on February 11, 2000. SCANA now owns directly three public-utility companies, PSNC, SCE&G (which generates, transmits, distributes and sells electricity and purchases and sells natural gas in South Carolina) and GENCO (which owns and operates a 580 MW generating facility in Goose Creek, South Carolina and sells all of the power generated by the facility to SCE&G).
In the Prior Orders, the Commission authorized SCANA, the three utility subsidiaries and the nonutility subsidiaries to engage, subject to certain limitations, in certain financing and related activities. Authorization under the Prior Orders for the financing related activities expired February 11, 2003.4 PSNC's authorization to pay dividends out of capital or unearned surplus was not subject to this expiration date.
Section 12(c) of the Act and rule 46 prohibit a registered holding company or subsidiary from declaring or paying dividends out of capital or unearned surplus absent an order by the Commission. The Commission authorized PSNC to pay dividends out of the additional paid-in-capital account up to the amount of its aggregate retained earnings immediately prior to the Merger and out of earnings before the amortization of the goodwill arising from the Merger.5 The Commission's authorization took into consideration the effect of (1) the application of the purchase method of accounting to the Merger that caused PSNC's retained earnings, from before the Merger, to be recharacterized as additional paid-in-capital and (2) the substantial level of goodwill resulting from the Merger, which was to be "pushed-down" to PSNC and reflected as additional paid-in-capital after the Merger.
Applicants make this additional request due to a change in an accounting rule that occurred after the previous Commission authorization addressing Applicants' accounting treatment of goodwill and upon which the authorization was premised. In 2001, after the Merger in 2000, SFAS 142 (Goodwill and Other Intangible Assets) was issued. SFAS 142 eliminated the previously permitted amortization of goodwill (or other intangibles),6 instituted a requirement of an annual analysis (at least) of intangible assets, to determine whether these asset values are impaired and a requirement that, if impaired, then a charge for impairment be taken in that year.
As required, Applicants conducted an impairment analysis and, as of January 1, 2002, PSNC was required to take an impairment charge of $230 million against the value of its goodwill. As a result of this accounting treatment, PSNC was left with no retained earnings.
Applicants request that PSNC be authorized to pay dividends out of earnings calculated before any past or future impairment of goodwill recognized as a result of the Merger, in addition to the previously authorized deductions for the 2000 and 2001 goodwill amortizations.7 Applicants state that the total amount of goodwill placed on the books of PSNC as a result of the Merger was $467 million. Applicants state that, at this time, $211 million of goodwill (of the $467 million Merger goodwill) remains on PSNC's books, after the 2000 and 2001 amortizations and after the 2002 SFAS 142 impairment charge. PSNC seeks with this further authorization to pay dividends as follows:
SCANA states that, PSNC's common equity percentage at September 30, 2002, according to generally accepted accounting principles ("GAAP"), was 70.5%. PSNC's common equity percentage at December 31, 2002 was 60%, taking into consideration the reduction in equity resulting from the goodwill impairment charge, and at September 30, 2003 was 60.2%. In addition, Applicants state that, if all of the goodwill associated with the acquisition of PSNC by SCANA were found to be impaired, then the pro forma common equity of PSNC, at September 30, 2003, would be 46.5%.
PSNC has authority to issue $600 million of additional debt under the Current Financing Order. PSNC's common equity, assuming all $600 million were issued, and taking into account the 2002 impairment charge, would be 34.7% (based on PSNC's balance sheet as of September 30, 2003). SCANA believes that, based on anticipated earnings and dividend levels, as well as its estimated financing activity, PSNC will not have common equity below 30% over the next several years. SCANA believes it can maintain PSNC's common equity at least at a 30% level (through control of debt and dividend levels) even if it were to incur additional goodwill impairment charges.
The proposed transaction is also subject to rule 54, which refers to rule 53. Rule 54 provides that, if rule 53(a), (b) and (c) under the Act are satisfied, then, in determining whether to approve certain transactions other than those involving exempt wholesale generators ("EWGs") or foreign utility companies ("FUCOs"), as defined in the Act, the Commission will not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or FUCO. Neither SCANA nor any of its subsidiaries presently has, or as a consequence of the proposed transaction will have, an interest in any EWG or FUCO. Consequently, all applicable requirements of rule 53 (a), (b) and (c) are satisfied as required by rule 54.
The fees, commissions and expenses paid or incurred or to be incurred in connection with this Application are estimated at not more than $25,000. No state commission and no federal commission, other than the Commission, has direct jurisdiction over the proposed dividend payments.
Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules, that the
Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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