10-Q 1 a2018331-10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

 scanapowerforlivinga37.jpg
Commission
 
Registrant, State of Incorporation,
 
I.R.S. Employer
File Number
 
Address and Telephone Number
 
Identification No.
1-8809
 
SCANA Corporation (a South Carolina corporation)
 
57-0784499
1-3375
 
South Carolina Electric & Gas Company (a South Carolina corporation)
 
57-0248695
 
 
100 SCANA Parkway, Cayce, South Carolina 29033
 
 
 
 
(803) 217-9000
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. SCANA Corporation Yes x No o  South Carolina Electric & Gas Company Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). SCANA Corporation Yes x No o  South Carolina Electric & Gas Company Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
SCANA Corporation
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Emerging growth company  o
South Carolina Electric & Gas Company
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  o
Emerging growth company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
SCANA Corporation o     South Carolina Electric & Gas Company   o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
SCANA Corporation Yes o No x  South Carolina Electric & Gas Company Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Description of
Shares Outstanding
Registrant
Common Stock
at April 24, 2018
SCANA Corporation
Without Par Value
142,628,142
South Carolina Electric & Gas Company
Without Par Value
        40,296,147 (a)
 (a) Held beneficially and of record by SCANA Corporation.
 
This combined Form 10-Q is separately filed by SCANA Corporation and South Carolina Electric & Gas Company.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.  South Carolina Electric & Gas Company makes no representation as to information relating to SCANA Corporation or its subsidiaries (other than South Carolina Electric & Gas Company and its consolidated affiliates).
 
South Carolina Electric & Gas Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this Form with the reduced disclosure format allowed under General Instruction H(2).





 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
Statements included in this Quarterly Report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements include, but are not limited to, statements concerning the proposed merger with Dominion Energy, recovery of Nuclear Project abandonment costs, key earnings drivers, customer growth, environmental regulations and expenditures, leverage ratio, projections for pension fund contributions, financing activities, access to sources of capital, impacts of the adoption of new accounting rules and estimated capital and other expenditures.  In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “forecasts,” “plans,” “targets,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” or “continue” or the negative of these terms or other similar terminology.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements due to the information being of a preliminary nature and subject to further and/or continuing review and adjustment. Other important factors that could cause such material differences include, but are not limited to, the following:
  
(1) the occurrence of any event, change or other circumstances that could give rise to the failure by SCANA to consummate the proposed merger with Dominion Energy; (2) the ability of SCE&G to recover through rates the costs expended the Nuclear Project, and a reasonable return on those costs, under the abandonment provisions of the BLRA or through other means; (3) uncertainties relating to the bankruptcy filing by WEC and WECTEC; (4) further changes in tax laws and realization of tax benefits and credits, and the ability or inability to realize credits and deductions, particularly in light of the abandonment of the Nuclear Project; (5) legislative and regulatory actions, particularly changes related to electric and gas services, rate regulation, regulations governing electric grid reliability and pipeline integrity, environmental regulations including any imposition of fees or taxes on carbon emitting generating facilities, the BLRA, and any actions affecting the abandonment of the Nuclear Project; (6) current and future litigation, including particularly litigation or government investigations or actions involving or arising from the construction or abandonment of the Nuclear Project or arising from the proposed merger with Dominion Energy; (7) the impact of any decision by SCANA to pay quarterly dividends to its shareholders or the reduction, suspension or elimination of the amount thereof; (8) the results of short- and long-term financing efforts, including prospects for obtaining access to capital markets and other sources of liquidity, and the effect of rating agency actions on the cost of and access to capital and sources of liquidity of SCANA and its subsidiaries (the Company); (9) the ability of suppliers, both domestic and international, to timely provide the labor, secure processes, components, parts, tools, equipment and other supplies needed which may be highly specialized or in short supply, at agreed upon quality and prices, for our construction program, operations and maintenance; (10) the results of efforts to ensure the physical and cyber security of key assets and processes; (11) changes in the economy, especially in areas served by subsidiaries of SCANA; (12) the impact of competition from other energy suppliers, including competition from alternate fuels in industrial markets; (13) the impact of conservation and demand side management efforts and/or technological advances on customer usage; (14) the loss of electricity sales to distributed generation, such as solar photovoltaic systems or energy storage systems; (15) growth opportunities for SCANA’s regulated and other subsidiaries; (16) the effects of weather, especially in areas where the generation and transmission facilities of the Company are located and in areas served by SCANA’s subsidiaries; (17) changes in SCANA’s or its subsidiaries’ accounting rules and accounting policies; (18) payment and performance by counterparties and customers as contracted and when due; (19) the results of efforts to license, site, construct and finance facilities, and to receive related rate recovery, for generation and transmission; (20) the results of efforts to operate the Company's electric and gas systems and assets in accordance with acceptable performance standards, including the impact of additional distributed generation; (21) the availability of fuels such as coal, natural gas and enriched uranium used to produce electricity; the availability of purchased power and natural gas for distribution; the level and volatility of future market prices for such fuels and purchased power; and the ability to recover the costs for such fuels and purchased power; (22) the availability of skilled, licensed and experienced human resources to properly manage, operate, and grow the Company’s businesses, particularly in light of uncertainties with respect to legislative and regulatory actions surrounding recovery of Nuclear Project costs and the announced potential merger; (23) labor disputes; (24) performance of SCANA’s pension plan assets and the effect(s) of associated discount rates; (25) inflation or deflation; (26) changes in interest rates; (27) compliance with regulations; (28) natural disasters, man-made mishaps and acts of terrorism that directly affect our operations or the regulations governing them; and (29) the other risks and uncertainties described from time to time in the reports filed by SCANA or SCE&G with the SEC.

SCANA and SCE&G disclaim any obligation to update any forward-looking statements.

3




DEFINITIONS
 
The following abbreviations or terms used in the text have the meanings set forth below unless the context requires otherwise: 
TERM
 
MEANING
AFC
 
Allowance for Funds Used During Construction
ANI
 
American Nuclear Insurers
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ARO
 
Asset Retirement Obligation
Bankruptcy Court
 
U.S. Bankruptcy Court for the Southern District of New York
BLRA
 
Base Load Review Act
CAA
 
Clean Air Act, as amended
CAIR
 
Clean Air Interstate Rule
CCR
 
Coal Combustion Residuals
CEO
 
Chief Executive Officer
CFO
 
Chief Financial Officer
CFTC
 
Commodity Futures Trading Commission
Citibank
 
Citibank, N.A.
CO2
 
Carbon Dioxide
Company
 
SCANA, together with its consolidated subsidiaries
Consolidated SCE&G
 
SCE&G and its consolidated affiliates
Consortium
 
A consortium consisting of WEC and WECTEC
Court of Appeals
 
United States Court of Appeals for the District of Columbia
CSAPR
 
Cross-State Air Pollution Rule
CUT
 
Customer Usage Tracker (decoupling mechanism)
CWA
 
Clean Water Act
DER
 
Distributed Energy Resource
DHEC
 
South Carolina Department of Health and Environmental Control
District Court
 
United States District Court for the District of South Carolina
Dodd-Frank
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dominion Energy
 
Dominion Energy, Inc.
DOR
 
South Carolina Department of Revenue
DSM Programs
 
Electric Demand Side Management Programs
ELG Rule
 
Federal effluent limitation guidelines for steam electric generating units
EMANI
 
European Mutual Association for Nuclear Insurance
EPA
 
United States Environmental Protection Agency
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
FERC
 
United States Federal Energy Regulatory Commission
FILOT
 
Fee in Lieu of Taxes
Fluor
 
Fluor Corporation
Fuel Company
 
South Carolina Fuel Company, Inc.
GAAP
 
Accounting principles generally accepted in the United States of America
GENCO
 
South Carolina Generating Company, Inc.
GHG
 
Greenhouse Gas
GPSC
 
Georgia Public Service Commission
GWh
 
Gigawatt hour
IAA
 
Interim Assessment Agreement dated March 28, 2017, as amended, among SCE&G, Santee Cooper, WEC and WECTEC
IRC
 
Internal Revenue Code of 1986, as amended
IRS
 
Internal Revenue Service
Joint Petition
 
Joint application and petition of SCE&G and Dominion Energy for review and approval of a proposed business combination as set forth in the Merger Agreement and for a prudency determination regarding the abandonment of the Nuclear Project and associated merger benefits and cost recovery plans, filed with the SCPSC on January 12, 2018

4




Level 1
 
A fair value measurement using unadjusted quoted prices in active markets for identical assets or liabilities
Level 2
 
A fair value measurement using observable inputs other than those for Level 1, including quoted prices for similar (not identical) assets or liabilities or inputs that are derived from observable market data by correlation or other means
Level 3
 
A fair value measurement using unobservable inputs, including situations where there is little, if any, market activity for the asset or liability
LOC
 
Lines of Credit
MATS
 
Mercury and Air Toxics Standards
Merger Agreement
 
Agreement and Plan of Merger, dated as of January 2, 2018, by and among Dominion Energy, Sedona and SCANA
MGP
 
Manufactured Gas Plant
MMBTU
 
Million British Thermal Units
MW or MWh
 
Megawatt or Megawatt-hour
NAAQS
 
National Ambient Air Quality Standards
NASDAQ
 
The NASDAQ Stock Market, Inc.
NAV
 
Net Asset Value
NCUC
 
North Carolina Utilities Commission
NEIL
 
Nuclear Electric Insurance Limited
NERC
 
North American Electric Reliability Corporation
NOL
 
Net Operating Loss
NOX
 
Nitrogen Oxide
NPDES
 
National Pollutant Discharge Elimination System
NRC
 
United States Nuclear Regulatory Commission
NSPS
 
New Source Performance Standards
Nuclear Project
 
Project to construct Unit 2 and Unit 3 under the EPC Contract
NYMEX
 
New York Mercantile Exchange
OCI
 
Other Comprehensive Income
ORS
 
South Carolina Office of Regulatory Staff
PHMSA
 
United States Pipeline Hazardous Materials Safety Administration
Price-Anderson
 
Price-Anderson Indemnification Act
PSNC Energy
 
Public Service Company of North Carolina, Incorporated
Registrants
 
SCANA and SCE&G
Reorganization Plan
 
Modified Second Amended Joint Chapter 11 Plan of Reorganization, filed by WEC
Request
 
Request for Rate Relief filed by the ORS on September 26, 2017, as subsequently amended
RICO
 
The Racketeer Influenced and Corrupt Organizations Act
RSA
 
Natural Gas Rate Stabilization Act
RTO/ISO
 
Regional Transmission Organization/Independent System Operator
Santee Cooper
 
South Carolina Public Service Authority
SCANA
 
SCANA Corporation, the parent company
SCANA Energy
 
SCANA Energy Marketing, Inc.
SCANA Services
 
SCANA Services, Inc.
SCE&G
 
South Carolina Electric & Gas Company
SCEUC
 
South Carolina Energy Users Committee
SCPSC
 
Public Service Commission of South Carolina
SEC
 
United States Securities and Exchange Commission
Sedona
 
Sedona Corp., a wholly-owned subsidiary of Dominion Energy
SIP
 
State Implementation Plan
SLED
 
South Carolina Law Enforcement Division
SO2
 
Sulfur Dioxide
Summer Station
 
V. C. Summer Nuclear Station
Supreme Court
 
United States Supreme Court
Tax Act
 
An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (previously known as The Tax Cuts and Jobs Act) enacted on December 22, 2017
Toshiba
 
Toshiba Corporation, parent company of WEC

5




Toshiba Settlement
 
Settlement Agreement dated as of July 27, 2017, by and among Toshiba, SCE&G and Santee Cooper
Unit 1
 
Nuclear Unit 1 at Summer Station
Unit 2
 
Nuclear Unit 2 at Summer Station (abandoned prior to construction completion)
Unit 3
 
Nuclear Unit 3 at Summer Station (abandoned prior to construction completion)
VIE
 
Variable Interest Entity
WEC
 
Westinghouse Electric Company LLC
WEC Subcontractors
 
Subcontractors to the Consortium
WECTEC
 
WECTEC Global Project Services, Inc. (formerly known as Stone & Webster, Inc.), a wholly-owned subsidiary of WEC
Williams Station
 
A.M. Williams Generating Station, owned by GENCO
WNA
 
Weather Normalization Adjustment


6




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


SCANA Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited) 
Millions of dollars
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
 
Utility Plant In Service
 
$
14,465

 
$
14,370

Accumulated Depreciation and Amortization
 
(4,659
)
 
(4,611
)
Construction Work in Progress
 
487

 
471

Nuclear Fuel, Net of Accumulated Amortization
 
191

 
208

Goodwill, net of writedown of $230
 
210

 
210

Utility Plant, Net
 
10,694

 
10,648

Nonutility Property and Investments:
 
 
 
 
     Nonutility property, net of accumulated depreciation of $137 and $133
 
268

 
270

Assets held in trust, net-nuclear decommissioning
 
133

 
136

Other investments
 
174

 
68

Nonutility Property and Investments, Net
 
575

 
474

Current Assets:
 
 
 
 
Cash and cash equivalents
 
199

 
409

     Receivables:
 
 
 
 
         Customer, net of allowance for uncollectible accounts of $7 and $6
 
578

 
665

    Income taxes
 
198

 
198

         Other
 
88

 
105

Inventories (at average cost):
 
 
 
 
Fuel and gas supply
 
119

 
143

Materials and supplies
 
165

 
161

Prepayments
 
85

 
99

     Other current assets
 
15

 
17

     Derivative financial instruments
 

 
54

     Total Current Assets
 
1,447

 
1,851

Deferred Debits and Other Assets:
 
 
 
 
Regulatory assets
 
5,578

 
5,580

Other
 
290

 
186

Total Deferred Debits and Other Assets
 
5,868

 
5,766

Total
 
$
18,584

 
$
18,739


See Notes to Condensed Consolidated Financial Statements.

7




Millions of dollars
 
March 31,
2018
 
December 31,
2017
Capitalization and Liabilities
 
 

 
 

Common Stock - no par value, 143 million shares outstanding
 
$
2,389

 
$
2,390

Retained Earnings
 
2,997

 
2,915

Accumulated Other Comprehensive Loss
 
(42
)
 
(50
)
Total Common Equity
 
5,344

 
5,255

Long-Term Debt, net
 
6,001

 
5,906

Total Capitalization
 
11,345

 
11,161

Current Liabilities:
 
 

 
 

Short-term borrowings
 
248

 
350

Current portion of long-term debt
 
727

 
727

Accounts payable
 
266

 
438

Customer deposits and customer prepayments
 
206

 
112

Taxes accrued
 
64

 
214

Interest accrued
 
94

 
87

Dividends declared
 
86

 
86

Derivative financial instruments
 
4

 
6

Other
 
80

 
93

Total Current Liabilities
 
1,775

 
2,113

Deferred Credits and Other Liabilities:
 
 

 
 

Deferred income taxes, net
 
1,315

 
1,261

Asset retirement obligations
 
572

 
568

Pension and other postretirement benefits
 
359

 
360

Unrecognized tax benefits
 
19

 
19

Regulatory liabilities
 
3,008

 
3,059

Other
 
191

 
198

Total Deferred Credits and Other Liabilities
 
5,464

 
5,465

Commitments and Contingencies (Note 10)
 
 
 


Total
 
$
18,584

 
$
18,739

 
See Notes to Condensed Consolidated Financial Statements.

8




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
Millions of dollars, except per share amounts
 
2018
 
2017
Operating Revenues:
 
 

 
 

Electric
 
$
546

 
$
577

Gas - regulated
 
361

 
322

Gas - nonregulated
 
273

 
274

Total Operating Revenues
 
1,180

 
1,173

Operating Expenses:
 
 

 
 
Fuel used in electric generation
 
159

 
136

Purchased power
 
52

 
11

Gas purchased for resale
 
406

 
370

Other operation and maintenance
 
201

 
175

Impairment loss
 
4

 

Depreciation and amortization
 
99

 
95

Other taxes
 
70

 
66

Total Operating Expenses
 
991

 
853

Operating Income
 
189

 
320

Other Income (Expense), net
 
128

 
12

Interest charges, net of allowance for borrowed funds used during construction of $3, and $6
 
(97
)
 
(87
)
 
 
 
 
 
Income Before Income Tax Expense
 
220

 
245

Income Tax Expense
 
51

 
74

Net Income
 
$
169

 
$
171

 
 
 
 
 
Earnings Per Share of Common Stock
 
$
1.18

 
$
1.19

Weighted Average Common Shares Outstanding (millions)
 
143

 
143

Dividends Declared Per Share of Common Stock
 
$
0.6125

 
$
0.6125


See Notes to Condensed Consolidated Financial Statements.



9




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) 
 
 
Three Months Ended March 31,
Millions of dollars
 
2018
 
2017
Net Income
 
$
169

 
$
171

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Unrealized Gains (Losses) on Cash Flow Hedging Activities:
 
 
 
 
Arising during period, net of tax of $1 and $(1)
 
3

 
(2
)
Reclassified as increases to interest expense, net of tax of $1 and $1
 
2

 
2

Reclassified as increases (decreases) to gas purchased for resale, net of tax of $1 and $(1)
 
2

 
(2
)
Net unrealized gains (losses) on cash flow hedging activities
 
7

 
(2
)
Deferred cost of employee benefit plans, net of tax of $- and $-
 
1

 

      Other Comprehensive Income
 
8

 
(2
)
Total Comprehensive Income
 
$
177

 
$
169


See Notes to Condensed Consolidated Financial Statements.


10




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited) 
 
 
Three Months Ended March 31,
Millions of dollars
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
169

 
$
171

Adjustments to reconcile net income to net cash provided from operating activities:
 
 

 
 

Impairment loss
 
4

 

Deferred income taxes, net
 
52

 
27

Depreciation and amortization
 
106

 
100

Amortization of nuclear fuel
 
13

 
14

Allowance for equity funds used during construction
 
(4
)
 
(9
)
Carrying cost recovery
 
(1
)
 
(5
)
Changes in certain assets and liabilities:
 
 
 
 
Receivables
 
75

 
67

Income taxes receivable
 

 
136

Inventories
 
2

 
6

Prepayments
 
17

 
(5
)
Regulatory assets
 
(9
)
 
(4
)
Regulatory liabilities
 
(115
)
 
(3
)
Accounts payable
 
(40
)
 
(48
)
Unrecognized tax benefits
 

 
55

Taxes accrued
 
(150
)
 
(142
)
Derivative financial instruments
 
(1
)
 
(3
)
Other assets
 
(113
)
 
(2
)
Other liabilities
 
87

 
(46
)
Net Cash Provided From Operating Activities
 
92

 
309

Cash Flows From Investing Activities:
 
 

 
 

Property additions and construction expenditures
 
(227
)
 
(342
)
Proceeds from investments and sales of assets (including derivative collateral returned)
 
32

 
19

Purchase of investments (including derivative collateral posted)
 
(125
)
 
(20
)
Proceeds upon interest rate derivative contract settlements
 
115

 

Net Cash Used For Investing Activities
 
(205
)
 
(343
)
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from issuance of long-term debt
 
100

 

Repayment of long-term debt
 
(8
)
 
(8
)
Dividends
 
(87
)
 
(82
)
Short-term borrowings, net
 
(102
)
 
(72
)
Net Cash Used For Financing Activities
 
(97
)
 
(162
)
Net Decrease In Cash and Cash Equivalents
 
(210
)
 
(196
)
Cash and Cash Equivalents, January 1
 
409

 
208

Cash and Cash Equivalents, March 31
 
$
199

 
$
12

Supplemental Cash Flow Information:
 
 

 
 

Cash for–Interest paid (net of capitalized interest of $3 and $6)
 
$
82

 
$
76

              –Income taxes received
 

 
123

Noncash Investing and Financing Activities:
 
 
 
 
Accrued construction expenditures
 
36

 
57

Capital leases
 
3

 


 See Combined Notes to Condensed Consolidated Financial Statements.

11




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Common Equity
(Unaudited)

 
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Millions
Shares
 
Outstanding Amount
 
Treasury Amount
 
Retained Earnings
 
Gains (Losses) from Cash Flow Hedges
 
Deferred Employee Benefit Plans
 
Total AOCI
 
Total
Balance as of January 1, 2018
143

 
$
2,402

 
$
(12
)
 
$
2,915

 
$
(37
)
 
$
(13
)
 
$
(50
)
 
$
5,255

Net Income
 
 
 
 
 
 
169

 
 
 
 
 
 
 
169

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses arising during the period
 
 
 
 
 
 
 
 
3

 

 
3

 
3

Losses/amortization reclassified from AOCI
 
 
 
 
 
 
 
 
4

 
1

 
5

 
5

Total Comprehensive Income
 
 
 
 
 
 
169

 
7

 
1

 
8

 
177

Purchase of Treasury Stock

 

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Dividends Declared
 
 
 
 
 
 
(87
)
 
 
 
 
 
 
 
(87
)
Balance as of March 31, 2018
143

 
$
2,402


$
(13
)

$
2,997

0.000002

$
(30
)

$
(12
)

$
(42
)
0.000004

$
5,344

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2017
143

 
$
2,402

 
$
(12
)
 
$
3,384

 
$
(36
)
 
$
(13
)
 
$
(49
)
 
$
5,725

Net Income
 
 
 
 
 
 
171

 
 
 
 
 
 
 
171

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses arising during the period
 
 
 
 
 
 
 
 
(2
)
 

 
(2
)
 
(2
)
Losses/amortization reclassified from AOCI
 
 
 
 
 
 
 
 

 

 

 

Total Comprehensive Income
 
 
 
 
 
 
171

 
(2
)
 

 
(2
)
 
169

Purchase of Treasury Stock

 

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Dividends Declared
 
 
 
 
 
 
(87
)
 
 
 
 
 
 
 
(87
)
Balance as of March 31, 2017
143

 
$
2,402

 
$
(13
)
 
$
3,468

 
$
(38
)
 
$
(13
)
 
$
(51
)
 
$
5,806


Dividends declared per share of common stock were $0.6125 for each period presented.

See Notes to Condensed Consolidated Financial Statements.


12





South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Balance Sheets
(Unaudited)
Millions of dollars
 
March 31,
2018
 
December 31,
2017
Assets
 
 

 
 

Utility Plant In Service
 
$
12,224

 
$
12,161

Accumulated Depreciation and Amortization
 
(4,163
)
 
(4,124
)
Construction Work in Progress
 
382

 
375

Nuclear Fuel, Net of Accumulated Amortization
 
191

 
208

Utility Plant, Net ($691 and $711 related to VIEs)
 
8,634

 
8,620

Nonutility Property and Investments:
 
 

 
 

Nonutility property, net of accumulated depreciation
 
71

 
71

Assets held in trust, net-nuclear decommissioning
 
133

 
136

Other investments
 
2

 
2

Nonutility Property and Investments, Net
 
206

 
209

Current Assets:
 
 

 
 

     Cash and cash equivalents
 
190

 
395

     Receivables:
 
 
 
 
          Customer, net of allowance for uncollectible accounts of $4 and $4
 
339

 
390

          Affiliated companies
 
159

 
32

          Income taxes
 
198

 
198

          Other
 
65

 
85

     Inventories (at average cost):
 
 

 
 

     Fuel
 
84

 
90

     Materials and supplies
 
152

 
149

     Prepayments
 
74

 
82

     Derivative financial instrument
 

 
54

     Other current assets
 
2

 
2

     Total Current Assets ($110 and $191 related to VIEs)
 
1,263

 
1,477

Deferred Debits and Other Assets:
 
 

 
 

Regulatory assets
 
5,471

 
5,476

Other
 
264

 
164

Other affiliate
 
111

 

     Total Deferred Debits and Other Assets ($34 and $50 related to VIEs)
 
5,846

 
5,640

Total
 
$
15,949

 
$
15,946


See Notes to Condensed Consolidated Financial Statements.

13




Millions of dollars
 
March 31,
2018
 
December 31,
2017
Capitalization and Liabilities
 
 
 
 
Common Stock - no par value, 40.3 million shares outstanding
 
$
2,860

 
$
2,860

Retained Earnings
 
2,034

 
1,982

Accumulated Other Comprehensive Loss
 
(4
)
 
(4
)
Total Common Equity
 
4,890

 
4,838

Noncontrolling Interest
 
144

 
142

Total Equity
 
5,034

 
4,980

Long-Term Debt, net
 
4,536

 
4,441

Total Capitalization
 
9,570

 
9,421

Current Liabilities:
 
 
 
 
Short-term borrowings
 
146

 
252

Current portion of long-term debt
 
723

 
723

Accounts payable
 
129

 
251

Affiliated payables
 
256

 
102

  Customer deposits and customer prepayments
 
159

 
70

Taxes accrued
 
58

 
208

Interest accrued
 
72

 
67

Dividends declared
 
74

 
82

  Derivative financial instruments
 
1

 
2

Other
 
40

 
47

Total Current Liabilities
 
1,658

 
1,804

Deferred Credits and Other Liabilities:
 
 
 
 
Deferred income taxes, net
 
1,212

 
1,173

Asset retirement obligations
 
533

 
529

Pension and other postretirement benefits
 
217

 
217

Unrecognized tax benefits
 
19

 
19

Regulatory liabilities
 
2,617

 
2,667

Other
 
105

 
97

Other affiliate
 
18

 
19

Total Deferred Credits and Other Liabilities
 
4,721

 
4,721

 Commitments and Contingencies (Note 10)
 


 


Total
 
$
15,949

 
$
15,946

 
See Notes to Condensed Consolidated Financial Statements.

14




South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) 
 
 
 Three Months Ended
 
 
March 31,
Millions of dollars
 
2018
 
2017
Operating Revenues:
 
 

 
 
Electric
 
$
546

 
$
577

Electric - nonconsolidated affiliate
 
1

 
1

Gas
 
155

 
141

Total Operating Revenues
 
702

 
719

Operating Expenses:
 
 

 
 
Fuel used in electric generation
 
128

 
112

Fuel used in electric generation - nonconsolidated affiliate
 
31

 
24

Purchased power
 
52

 
11

Gas purchased for resale
 
75

 
66

Other operation and maintenance
 
102

 
101

Other operation and maintenance - nonconsolidated affiliate
 
44

 
41

Impairment loss
 
4

 

Depreciation and amortization
 
80

 
77

Other taxes
 
63

 
60

Other taxes - nonconsolidated affiliate
 
2

 
1

Total Operating Expenses
 
581

 
493

Operating Income
 
121

 
226

Other Income (Expense), net
 
123

 
7

Interest charges, net of allowance for borrowed funds used during construction of $2, and $6
 
(77
)
 
(69
)
 
 
 
 
 
Income Before Income Tax Expense
 
167

 
164

Income Tax Expense
 
39

 
52

Net Income and Total Comprehensive Income
 
128

 
112

Less Net Income and Total Comprehensive Income Attributable to Noncontrolling Interest
 
4

 
3

Earnings and Comprehensive Income Available to Common Shareholder
 
$
124

 
$
109

 
 
 
 
 
Dividends Declared on Common Stock
 
$
74

 
$
79

 
See Notes to Condensed Consolidated Financial Statements.


15




South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
Millions of dollars
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
128

 
$
112

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
 
Impairment loss
 
4

 

Deferred income taxes, net
 
39

 
12

Depreciation and amortization
 
84

 
79

Amortization of nuclear fuel
 
13

 
14

Allowance for equity funds used during construction
 
(3
)
 
(9
)
Carrying cost recovery
 
(1
)
 
(5
)
Changes in certain assets and liabilities:
 
 
 
 
Receivables
 
41

 
45

Receivables - affiliate
 
(6
)
 
2

Income tax receivable
 

 
53

Inventories
 
(9
)
 
(7
)
Prepayments
 
8

 

Regulatory assets
 
(6
)
 
(2
)
Regulatory liabilities
 
(112
)
 

Accounts payable
 
(15
)
 
(11
)
Accounts payable - affiliate
 
(5
)
 
(21
)
Taxes accrued
 
(150
)
 
(93
)
Unrecognized tax benefit
 

 
97

Other assets
 
(112
)
 
1

Other liabilities
 
95

 
(14
)
Net Cash (Used For) Provided From Operating Activities
 
(7
)
 
253

Cash Flows From Investing Activities:
 
 
 
 
Property additions and construction expenditures
 
(159
)
 
(282
)
Proceeds from investments and sales of assets (including derivative collateral returned)
 
25

 
10

Purchase of investments (including derivative collateral posted)
 
(10
)
 
(12
)
Purchase of investments - affiliate
 
(111
)
 

Proceeds from interest rate derivative contract settlement
 
115

 

Investment in affiliate
 
(121
)
 

Net Cash Used For Investing Activities
 
(261
)
 
(284
)
Cash Flows From Financing Activities:
 
 
 
 
Proceeds from issuance of debt
 
100

 

Repayment of long-term debt
 
(8
)
 
(8
)
Dividends
 
(82
)
 
(79
)
Money pool borrowings, net
 
159

 
(1
)
Short-term borrowings, net
 
(106
)
 
(34
)
Net Cash Provided From (Used For) Financing Activities
 
63

 
(122
)
Net Decrease In Cash and Cash Equivalents
 
(205
)
 
(153
)
Cash and Cash Equivalents, January 1
 
395

 
164

Cash and Cash Equivalents, March 31
 
$
190

 
$
11

 
 
 
 
 
 Supplemental Cash Flow Information:
 
 
 
 
Cash for–Interest (net of capitalized interest of $2 and $6)
 
$
63

 
$
61

              – Income taxes paid
 

 
3

              – Income taxes received
 

 
143

Noncash Investing and Financing Activities:
 
 
 
 
Accrued construction expenditures
 
21

 
46

Capital leases
 
3

 


See Notes to Condensed Consolidated Financial Statements.

16




South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Statements of Changes in Common Equity
(Unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
Millions
 
Shares
 
Amount
 
Retained Earnings
 
AOCI
 
Noncontrolling Interest
 
Total Equity
Balance at January 1, 2018
 
40

 
$
2,860

 
$
1,982

 
$
(4
)
 
$
142

 
$
4,980

Earnings available to common shareholder
 
 
 
 
 
124

 
 
 
4

 
128

Total Comprehensive Income
 
 
 
 
 
124

 

 
4

 
128

Cash dividend declared
 
 
 
 
 
(72
)
 
 
 
(2
)
 
(74
)
Balance at March 31, 2018
 
40

 
$
2,860

 
$
2,034

 
$
(4
)
 
$
144

 
$
5,034

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
40

 
$
2,860

 
$
2,481

 
$
(3
)
 
$
134

 
$
5,472

Earnings available to common shareholder
 
 
 
 
 
109

 
 
 
3

 
112

Total Comprehensive Income
 
 
 
 
 
109

 

 
3

 
112

Cash dividend declared
 
 
 
 
 
(77
)
 
 
 
(2
)
 
(79
)
Balance at March 31, 2017
 
40

 
$
2,860

 
$
2,513

 
$
(3
)
 
$
135

 
$
5,505


See Notes to Condensed Consolidated Financial Statements.


17




SCANA Corporation and Subsidiaries
South Carolina Electric & Gas Company and Affiliates
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The following unaudited notes to the condensed consolidated financial statements are a combined presentation. Except as otherwise indicated herein, each note applies to the Company and Consolidated SCE&G; however, Consolidated SCE&G makes no representation as to information relating solely to SCANA Corporation or its subsidiaries (other than Consolidated SCE&G).

The following condensed notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in each company's Annual Report on Form 10-K for the year ended December 31, 2017, which also were a combined presentation. These are interim financial statements and, due to the seasonality of each company's business and matters that may occur during the rest of the year, including the matters described in Note 10 under Impairment Considerations, the amounts reported in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income are not necessarily indicative of amounts expected for the full year.  In the opinion of management of the respective companies, the information furnished herein reflects all adjustments, all of a normal recurring nature, which are necessary for a fair statement of the results for the interim periods reported. In addition, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Consolidation and Variable Interest Entities

     The condensed consolidated financial statements of the Company include, after eliminating intercompany balances and transactions, the accounts of the parent holding company and each of its subsidiaries, including Consolidated SCE&G. Accordingly, discussions regarding the Company's financial results necessarily include the results of Consolidated SCE&G.

SCE&G has determined that it has a controlling financial interest in each of GENCO and Fuel Company (which are considered to be VIEs) and, accordingly, Consolidated SCE&G's condensed consolidated financial statements include the accounts of SCE&G, GENCO and Fuel Company. The equity interests in GENCO and Fuel Company are held solely by SCANA, SCE&G’s parent. As a result, GENCO’s and Fuel Company’s equity and results of operations are reflected as noncontrolling interest in Consolidated SCE&G’s condensed consolidated financial statements.
 
GENCO owns a coal-fired electric generating station with a 605 MW net generating capacity (summer rating). GENCO’s electricity is sold, pursuant to a FERC-approved tariff, solely to SCE&G under the terms of a power purchase agreement and related operating agreement. The effects of these transactions are eliminated in consolidation. Substantially all of GENCO’s property (carrying value of approximately $500 million) serves as collateral for its long-term borrowings. Fuel Company acquires, owns and provides financing for SCE&G’s nuclear fuel, certain fossil fuels and emission and other environmental allowances. See also Note 5.
 
Income Statement Presentation

Revenues and expenses arising from regulated businesses and, in the case of the Company, the retail natural gas marketing business (including those activities of segments described in Note 11) are presented within Operating Income, and other activities are presented within Other Income (Expense).

Asset Management and Supply Service Agreement
 
PSNC Energy, a subsidiary of SCANA, utilizes an asset management and supply service agreement with a counterparty for certain natural gas storage facilities.  Such counterparty held, through an agency relationship, 32% and 39% of PSNC Energy’s natural gas inventory at March 31, 2018 and December 31, 2017, respectively, with a carrying value of $5.5 million and $11.5 million, respectively.  Under the terms of this agreement, PSNC Energy receives storage asset management fees of which 75% are credited to customers. This agreement expires on March 31, 2019.


18




Earnings Per Share
 
The Company computes basic earnings per share by dividing net income by the weighted average number of common shares outstanding for the period. When applicable, the Company computes diluted earnings per share using this same formula, after giving effect to securities considered to be dilutive potential common stock utilizing the treasury stock method.

Reclassifications
In the statement of operations, amounts previously reported under the captions “Other income”, “Other expense” and “Allowance for equity funds used during construction” have been combined into a single caption titled “Other Income (Expense), Net”. Details of the composition of this caption are described in Note 12. Also, the subtotal captioned “Total Other Expense” that previously appeared on the statements of operations has been eliminated.

New Accounting Matters

Recently Adopted

In the first quarter of 2018, the Company and Consolidated SCE&G adopted the following accounting guidance, as applicable, issued by the FASB. The adoption of this guidance had no impact on their respective financial statements except as indicated.

In January 2017, the FASB issued accounting guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. The guidance is effective for years beginning in 2020, though early adoption after January 1, 2017 is allowed. The Company adopted this guidance on January 1, 2018, and its adoption had no impact on its financial statements.

Effective January 1, 2018, the Company and Consolidated SCE&G adopted new accounting guidance for revenue arising from contracts with customers. This guidance uses a five-step analysis in determining when and how revenue is recognized, and requires that revenue recognition depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. As permitted, this guidance was adopted using the modified retrospective method whereby amounts and disclosures for prior periods are not restated. Revenue recognition patterns did not change as a result of adopting this guidance, and no cumulative effect adjustment to Retained Earnings was required. For additional required disclosures, see Note 3.

Effective January 1, 2018, the Company and Consolidated SCE&G adopted accounting guidance that changed the required presentation of net periodic pension and postretirement benefit costs. As a result, net periodic pension and postretirement benefit costs have been separated into their service cost components and non-service cost components. Service cost components continue to be included within operating income and are presented in the same line item as other compensation costs arising from services rendered by employees during the period. Non-service cost components are now excluded from operating income. This guidance has been applied on a retrospective basis for the presentation of the service cost components and other components, and resulted in the following changes to the amounts reported in 2017.

For the three months ended March 31, 2017
 
 
 
 
Increase (Decrease) Millions of dollars
 
The Company
 
Consolidated SCE&G
Other operation and maintenance
 
$
(4
)
 
$
(4
)
Total Operating Expenses
 
(4
)
 
(4
)
Operating Income
 
4

 
4

Other Income (Expense), Net
 
(4
)
 
(4
)

In addition, this guidance limits eligibility for capitalization of net periodic pension and postretirement benefit costs to only the service cost components, and requires this change to be applied prospectively. Accordingly, no reclassifications were made related to the capitalization of service costs, and the adoption of this guidance did not result in a material impact on the Company’s and Consolidated SCE&G’s respective financial statements. Amounts

19




which otherwise would have been capitalized to plant accounts under prior guidance are now being deferred within regulatory assets.

Guidance issued in January 2016 changed how entities measure certain equity investments and financial liabilities, among other things. Entities were required to record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance was effective, with certain exceptions. The Company and Consolidated SCE&G adopted this guidance when required in the first quarter of 2018 and its adoption did not have a significant impact on their respective financial statements.

Guidance issued in August 2016 is intended to reduce diversity in cash flow statement classification related to certain transactions, and entities must apply the guidance retrospectively to all periods presented. The adoption of this guidance had no impact on the financial statements of the Company and Consolidated SCE&G.

Guidance issued in November 2016 clarified how restricted cash should be presented on the statement of cash flows, and entities were to apply the guidance retrospectively to all periods presented. The adoption of this guidance had no impact on the financial statements of the Company and Consolidated SCE&G.

Pending Adoption

The Company and Consolidated SCE&G will adopt the following accounting guidance issued by the FASB when indicated below.

In February 2016, the FASB issued accounting guidance related to the recognition, measurement and presentation of leases. The guidance applies a right-of-use model and, for lessees, requires all leases with a duration over 12 months to be recorded on the balance sheet, with the rights of use treated as assets and the payment obligations treated as liabilities. Further,
and without consideration of any regulatory accounting requirements which may apply, depending primarily on the nature of the assets and the relative consumption of them, lease costs will be recognized either through the separate amortization of the right-of-use asset and the recognition of the interest cost related to the payment obligation, or through the recording of a combined straight-line rental expense. For lessors, the guidance calls for the recognition of income either through the derecognition of assets and subsequent recording of interest income on lease amounts receivable, or through the recognition of rental income on a straight-line basis, also depending on the nature of the assets and relative consumption. In the first quarter of 2018, FASB amended this accounting guidance to clarify that land easements are within the scope of the new guidance and to provide an optional transition practical expedient, that the Company and Consolidated SCE&G currently intend to adopt, that allows adopters to not evaluate under the new guidance existing or expired land easements that were not previously accounted for as leases. FASB also approved a new transition option in the first quarter of 2018, that the Company and Consolidated SCE&G are evaluating, that will allow the new standard to be adopted without revising comparative period reporting or disclosures. The new guidance is effective for years beginning in 2019, and the Company and Consolidated SCE&G do not anticipate that its adoption will impact their respective financial statements other than increasing amounts reported for assets and liabilities on the balance sheet and changing the location on their respective statements of operations where certain expenses are recorded. No impact on net income is expected. The identification and analysis of leasing and related contracts to which the guidance might be applicable continues. In addition, the Company and Consolidated SCE&G have begun implementation of a third party software tool that will assist with initial adoption and ongoing compliance. Preliminary system configuration has been completed and data from certain leases are being entered.

In June 2016, the FASB issued accounting guidance requiring the use of a current expected credit loss impairment model for certain financial instruments. The new model is applicable to trade receivables and most debt instruments, among other financial instruments, and in certain instances may result in impairment losses being recognized earlier than under current guidance. The Company and Consolidated SCE&G must adopt this guidance beginning in 2020, including interim periods, though the guidance may be adopted in 2019. The Company and Consolidated SCE&G have not determined when this guidance will be adopted or what impact it will have on their respective financial statements.

In August 2017, the FASB issued accounting guidance intended to simplify the application of hedge accounting. Among other things, the new guidance will enable more hedging strategies to qualify for hedge accounting, will allow entities more time to perform an initial assessment of hedge effectiveness, and will permit an entity to perform a qualitative assessment of effectiveness for certain hedges instead of a quantitative one. For cash flow hedges that are highly effective, all changes in the fair value of the derivative hedging instrument will be recorded in other comprehensive income and will be reclassified to earnings in the same period that the hedged item impacts earnings. Fair value hedges will continue to be recorded in current earnings, and any ineffectiveness will impact the income statement. In addition, changes in the fair value of a derivative will be

20




recorded in the same income statement line as the earnings effect of the hedged item, and additional disclosures will be required related to the effect of hedging on individual income statement line items. The guidance must be applied to all outstanding instruments using a modified retrospective method, with any cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. The Company and Consolidated SCE&G expect to adopt this guidance when required in the first quarter of 2019, though early adoption is permitted, and have not determined what impact such adoption will have on their respective financial statements.

In February 2018, the FASB issued accounting guidance allowing entities to reclassify from AOCI to retained earnings any amounts for stranded tax effects resulting from the Tax Act. The guidance must be applied either in the period of adoption or retrospectively to each period in which the effect of the change was recognized. The Company and Consolidated SCE&G must adopt this guidance beginning in 2019, including interim periods, though the guidance may be adopted earlier. The Company and Consolidated SCE&G have not determined when this guidance will be adopted or what impact it will have on their respective statements of financial position. No impact is expected on statements of operations or cash flows.

2.RATE AND OTHER REGULATORY MATTERS
 
Rate Matters
 
Tax Act Regulatory Proceedings

The Tax Act contained provisions that lowered the federal corporate tax rate from 35% to 21% effective January 1, 2018. In response, the SCPSC and the NCUC have sought information from utilities under their respective jurisdictions that would disclose the impact of the Tax Act on their individual company's operations and would propose procedures for changing customer rates to reflect those impacts. SCE&G and PSNC Energy provided to their respective commissions the requested information. The ORS filed a petition with the SCPSC that, among other things, requested that the SCPSC order that rates in effect as of January 1, 2018, be subject to refund so that ratepayers receive the benefit of the tax law changes as of January 1, 2018. The ORS has made subsequent filings with the SCPSC making specific recommendations for how it should direct SCE&G to account for the effects of the Tax Act and for the accrual of interest on deferred amounts until new customer rates are made effective. On April 25, 2018, the SCPSC issued an order that requires utilities to track and defer as a regulatory liability the effects resulting from the Tax Act.

SCE&G and PSNC Energy cannot determine when their respective commissions will take final action on this matter or what form that action will take. In the first quarter of 2018, estimates of income tax amounts charged through customer rates that relate to the effects of the Tax Act are being deferred as amounts subject to refund. Such deferrals include the accrual of estimated carrying costs. Such estimates totaled $40.0 million for the Company, of which $33.2 million was attributable to Consolidated SCE&G, and are included within Customer Deposits and Customer Prepayments on their respective condensed consolidated balance sheets. In addition, as further discussed under Regulatory Assets and Regulatory Liabilities below, certain accumulated deferred income taxes contained within regulatory liabilities represent excess deferred income taxes arising from the remeasurement of deferred income taxes upon the enactment of the Tax Act. Certain of these amounts are protected under normalization regulations and will be amortized over the remaining lives of related property, and certain of these amounts will be amortized to the benefit of customers over a prescribed period as instructed by regulators.

Electric - Cost of Fuel
 
On April 25, 2018, the SCPSC approved SCE&G’s proposal to increase the total fuel cost component of retail electric rates. Specifically, the SCPSC approved SCE&G’s increase to certain environmental, avoided capacity and DER cost components and SCE&G’s agreement to maintain its base fuel component to produce a projected under-recovered balance of approximately $1.3 million at the end of the 12-month period beginning with the first billing cycle of May 2018. This projected under-recovered balance includes the effect of offsetting fuel costs recovery with the gains realized from the settlement of certain interest rate derivatives. SCE&G also agreed to recover, over a 12-month period beginning with the first billing cycle of May 2018, projected DER program costs of approximately $29.3 million.

Electric - Base Rates

In January 2018, SCE&G requested in its annual DSM Programs filing to recover approximately $33.0 million of costs and net lost revenues associated with DSM programs, along with an incentive to invest in such programs. On April 25, 2018, the SCPSC approved SCE&G’s request effective beginning with the first billing cycle of May 2018.

21





Electric - BLRA and Joint Petition

On January 12, 2018, SCE&G and Dominion Energy filed with the SCPSC the Joint Petition for review and approval of a proposed business combination whereby SCANA would become a wholly-owned subsidiary of Dominion Energy. In the Joint Petition, approval of a customer benefits plan and a cost recovery plan for the Nuclear Project is also sought. Key provisions of this Joint Petition are summarized at Note 10. A hearing on this matter has not yet been scheduled.

On January 19, 2018, the ORS filed a report with the SCPSC in response to the SCPSC's order for a thorough inspection and audit of SCE&G's statements regarding potential adverse effects that could result from the removal of annual BLRA revenues. SCE&G subsequently filed responses to the ORS report. On January 31, 2018, the SCPSC ordered the ORS to complete the previously ordered thorough audit, inspection and examination of SCE&G's accounting records by March 30, 2018, encouraged them to employ the assistance of a utility financial professional if needed, and indicated that a request by the ORS for an extension of time would not be considered unreasonable. On February 7, 2018, the ORS requested clarification of the SCPSC's January 31, 2018 order. On February 15, 2018, the SCPSC instructed the ORS to evaluate a total of eight different scenarios to be included in its report and instructed the ORS to inform them by March 2, 2018 whether the ORS needed additional time to complete its work, By letter dated March 2, 2018, the ORS informed the SCPSC that it anticipates completing its scope of work in June 2018.

Gas - PSNC Energy

The NCUC has authorized PSNC Energy to use a tracker mechanism to recover the incurred capital investment and associated costs of complying with federal standards for pipeline integrity and safety requirements that are not in current base rates. PSNC Energy has filed biannual applications to adjust its rates for this purpose, and the NCUC has approved those applications for the incremental annual revenue requirements, as follows:
Rates Effective
 
Incremental Increase
March 1, 2017
 
$1.9 million
September 1, 2017
 
$0.7 million
March 1, 2018
 
$14.7 million

Regulatory Assets and Regulatory Liabilities
 
Rate-regulated utilities recognize in their financial statements certain revenues and expenses in different periods than do other enterprises.  As a result, the Company and Consolidated SCE&G have recorded regulatory assets and regulatory liabilities which are summarized in the following tables. Except for certain unrecovered nuclear project costs and other unrecovered plant, substantially all regulatory assets are either explicitly excluded from rate base or are effectively excluded from rate base due to their being offset by related liabilities.
 
 
The Company
 
Consolidated SCE&G
Millions of dollars
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
Regulatory Assets:
 
 

 
 

 
 
 
 
Unrecovered Nuclear Project costs
 
$
3,966

 
$
3,976

 
$
3,966

 
$
3,976

AROs and related funding
 
447

 
434

 
423

 
410

Deferred employee benefit plan costs
 
300

 
305

 
269

 
273

Deferred losses on interest rate derivatives
 
451

 
456

 
451

 
456

Other unrecovered plant
 
102

 
105

 
102

 
105

DSM Programs
 
59

 
59

 
59

 
59

Pipeline integrity management costs
 
55

 
51

 
8

 
8

Environmental remediation costs
 
29

 
30

 
24

 
25

Deferred storm damage costs
 
24

 
24

 
24

 
24

Other
 
145

 
140

 
145

 
140

Total Regulatory Assets
 
$
5,578

 
$
5,580

 
$
5,471

 
$
5,476


22




Regulatory Liabilities:
 
 

 
 

 
 
 
 
Monetization of guaranty settlement
 
$
1,094

 
$
1,095

 
$
1,094

 
$
1,095

Accumulated deferred income taxes
 
1,072

 
1,076

 
914

 
914

Asset removal costs
 
763

 
757

 
530

 
527

Deferred gains on interest rate derivatives
 
79

 
131

 
79

 
131

Total Regulatory Liabilities
 
$
3,008


$
3,059

 
$
2,617

 
$
2,667


Regulatory assets for unrecovered Nuclear Project costs have been recorded based on such amounts not being probable of loss in accordance with the accounting guidance on abandonments, whereas the other regulatory assets have been recorded based on the probability of their recovery. All regulatory assets represent incurred costs that may be deferred under applicable GAAP for regulated operations. The SCPSC, the NCUC or the FERC has reviewed and approved through specific orders certain of the items shown as regulatory assets. In addition, regulatory assets include, but are not limited to, certain costs which have not been specifically approved for recovery by one of these regulatory agencies, including unrecovered nuclear project costs that are the subject of regulatory proceedings as further discussed in Note 10. In recording such costs as regulatory assets, management believes the costs would be allowable under existing rate-making concepts that are embodied in rate orders or current state law. The costs are currently not being recovered, but are expected to be recovered through rates in future periods. In the future, as a result of deregulation, changes in state law, other changes in the regulatory environment or changes in accounting requirements or other adverse legislative or regulatory developments, the Company or Consolidated SCE&G could be required to write off all or a portion of its regulatory assets and liabilities. Such an event could have a material effect on the Company's and Consolidated SCE&G's financial statements in the period the write-off would be recorded.

Unrecovered Nuclear Project costs represents expenditures by SCE&G that have been reclassified from construction work in progress as a result of the decision to stop construction of Unit 2 and Unit 3 and to pursue recovery of costs under the abandonment provisions of the BLRA or through other regulatory means, net of an estimated impairment loss and of certain assets that have been or will be placed in service.
    
AROs and related funding represents the regulatory asset associated with the legal obligation to decommission and dismantle Unit 1 and conditional AROs related to generation, transmission and distribution properties, including gas pipelines. These regulatory assets are expected to be recovered over the related property lives and periods of decommissioning which may range up to approximately 107 years.

Employee benefit plan costs of the regulated utilities have historically been recovered as they have been recorded under GAAP. Deferred employee benefit plan costs represent amounts of pension and other postretirement benefit costs which were accrued as liabilities and treated as regulatory assets pursuant to FERC guidance, and costs deferred pursuant to specific SCPSC regulatory orders. SCE&G recovers deferred pension costs through utility rates of approximately $2 million annually for electric operations, which will end in 2044, and approximately $1 million annually for gas operations, which will end in 2027. The remainder of the deferred benefit costs are expected to be recovered through utility rates, primarily over average service periods of participating employees up to approximately 11 years.

Deferred losses or gains on interest rate derivatives represent (i) the effective portions of changes in fair value and payments made or received upon settlement of certain interest rate derivatives designated as cash flow hedges and (ii) the changes in fair value and payments made or received upon settlement of certain other interest rate derivatives not so designated. The amounts recorded with respect to (i) are expected to be amortized to interest expense over the lives of the underlying debt through 2043. The amounts recorded with respect to (ii) are expected to be similarly amortized to interest expense through 2065.

Other unrecovered plant represents the carrying value of coal-fired generating units, including related materials and supplies inventory, retired from service prior to being fully depreciated. Pursuant to SCPSC approval, SCE&G is amortizing these amounts through cost of service rates over the units' previous estimated remaining useful lives through approximately 2025. Unamortized amounts are included in rate base and are earning a current return.

DSM Programs represent SCE&G's deferred costs associated with electric demand reduction programs, and such deferred costs are currently being recovered over approximately five years through an approved rate rider. 

Pipeline integrity management costs represent operating costs incurred to comply with federal regulatory requirements related to natural gas pipelines. PSNC Energy is recovering costs totaling $4.1 million annually through 2021. PSNC Energy is

23




continuing to defer pipeline integrity costs, and as of March 31, 2018 costs of $30.6 million have been deferred pending future approval of rate recovery. SCE&G amortizes $1.9 million of such costs annually.

Environmental remediation costs represent costs associated with the assessment and clean-up of sites currently or formerly owned by SCE&G or PSNC Energy. SCE&G's remediation costs are expected to be recovered over periods of up to approximately 17 years, and PSNC Energy's remediation costs totaling $6.9 million are being recovered over a five year period that will end in 2021.

Deferred storm damage costs represent costs incurred in excess of amounts previously collected through SCE&G’s SCPSC-approved storm damage reserve, and for which SCE&G expects to receive future recovery through customer rates.

Various other regulatory assets are expected to be recovered through rates over varying periods through 2047.

Monetization of guaranty settlement represents proceeds received under or arising from the monetization of the Toshiba Settlement, net of certain expenses. The SCPSC is expected to determine how SCE&G's customers will realize the value of these net proceeds in connection with its consideration of the Request by the ORS and the Joint Petition (see Note 10).

Accumulated deferred income taxes contained within regulatory liabilities represent (i) excess deferred income taxes arising from the remeasurement of deferred income taxes upon the enactment of the Tax Act (certain of which are protected under normalization regulations and will be amortized over the remaining lives of related property, and certain of which will be amortized to the benefit of customers over a prescribed period as instructed by regulators) and (ii) deferred income taxes arising from investment tax credits, offset by (iii) deferred income taxes that arise from utility operations that have not been included in customer rates (a portion of which relate to depreciation and are expected to be recovered over the remaining lives of the related property which may range up to approximately 85 years). See also Note 6.

Asset removal costs represent estimated net collections through depreciation rates of amounts to be incurred for the removal of assets in the future.
 

3.    REVENUE RECOGNITION

Identifying Revenue Streams and Related Performance Obligations

Operating Revenues

Operating revenues arise primarily from the sale and transmission of electricity and the sale and transportation of natural gas. Electric and Gas regulated revenues consist primarily of retail sales to residential, commercial and industrial customers under various tariff rates approved by state regulatory commissions. These tariff rates generally include charges for the energy consumed and a standard basic facilities or demand charge designed to recover certain fixed costs incurred to provide service to the customer. Tariff rates also include commission-approved regulatory mechanisms in the form of adjustments or riders, such as for weather normalization, fuel and environmental cost recovery, energy conservation programs, interruptible service and real time pricing provisions, among others. Electric revenues also include wholesale sales and transmission service, primarily to municipal customers and other service providers, under contracts or tariffs approved by the FERC.

Gas nonregulated revenues arise from natural gas sales at market-based rates. Such sales to residential and certain commercial customers include charges for natural gas delivered, at either variable or fixed prices, together with any applicable customer service charges, charges originating from an interstate pipeline company, and other incidental charges. The Company has determined that its gas marketing subsidiary serves as an agent for distribution services provided by a nonaffiliated company in its retail market. Accordingly, the pass-through charges to customers related to such services are not considered revenues. Sales to other commercial and to industrial customers include commodity and transportation charges for natural gas delivered at contracted rates, together with applicable fees for storage, injection, demand, and charges originating from one or more interstate pipeline companies.

Performance obligations which have not been satisfied by the Company or Consolidated SCE&G relate primarily to demand or standby service for natural gas. Demand or standby charges for natural gas arise when an industrial customer reserves capacity on assets controlled by the service provider and may use that capacity to move natural gas it has acquired from other suppliers. For all periods presented, the amount of revenue recognized by the Company and Consolidated SCE&G for these charges is equal to the amount of consideration they have a right to invoice, and corresponds directly to the value

24




transferred to the customer. As a result, amounts related to performance obligations that have not been fully satisfied are not disclosed.

Contracts governing the transactions above do not have a significant financing component. Also, due to the nature of the commodities underlying these transactions, no performance obligations arise for returns, refunds or warranties. In addition, taxes billed to customers are excluded from the transaction price. Such amounts are recorded as liabilities until they are remitted to the respective taxing authority and are not included in revenues or expenses in the statements of operations.

Non-Operating Revenues

Non-operating revenues are derived from the sale of appliances and water heaters, as well as from contracts covering the repair of certain appliances, wiring, plumbing and similar systems and fees received for such repairs from customers not under a repair contract. In addition, the portion of fees received under asset management agreements that regulators have recognized to be incentives for the Company and Consolidated SCE&G to engage in such transactions is recorded as non-operating revenues.

Revenues from sales are recorded when the appliance or water heater is delivered to the customer. Repair contract coverage fees are recorded when invoiced, generally on a monthly basis in advance of the period of coverage. Additional charges for service calls and non-covered repairs are billed and collected at the time service is rendered. Revenues from asset management agreements are recorded when the related fixed monthly amounts are due, which corresponds to timing of the value received by the customer.

The point at which the customer controls the use of a purchased product, or has obtained substantially all of the benefits from repair services, corresponds to when revenues are recorded and performance obligations are fulfilled. Contract assets arising from invoicing repair contract fees in advance of the coverage period are not material. Income earned from financing sales of appliances and other products is recorded within interest income. Any performance obligations arising from returns, refunds or warranties are not material.

Non-operating revenues also arise from sources unrelated to contracts with customers, such as carrying costs recorded on certain regulatory assets, gains from property sales and income from rentals and from equity method investments, among others. In 2018, such amounts include gains realized upon the settlement of certain interest rate swaps (see Note 12). Such revenues are outside the scope of revenues from contracts with customers.

Non-operating revenues are further disclosed in Note 12. Such revenues arising from contracts with customers were not material for any period presented, and accordingly, detailed revenue disclosures are not provided.

Significant Judgments and Estimates

Electricity and natural gas are sold and delivered to the customer for immediate consumption and the customer controls the use of, and obtains substantially all of the benefits from, the energy and related services as they are delivered. As such, the related performance obligations are satisfied over time and revenue is recognized over the same period. The Company and Consolidated SCE&G have determined that their right to consideration from a customer directly corresponds to the value of the performance completed at the date each customer invoice is rendered. As a result, the Company and Consolidated SCE&G recognize revenue in the amounts for which they have a right to invoice. This includes estimated amounts unbilled at a balance sheet date but which are to be invoiced in the normal cycle.

Regulatory mechanisms exist within electric and gas tariffs or orders from regulators that result in adjustments to customer bills. These regulatory mechanisms are designed:
To recover costs related to fuel, pension, pipeline integrity and energy conservation, among others;
To recover carrying costs associated with debt-based financing;
To replace revenues lost as a result of the utility implementing DER programs and DSM Programs; and,
For gas revenues, to achieve weather normalization or to decouple gas revenues from weather and other factors, such as through the WNA at SCE&G or the CUT at PSNC Energy.

Recovery of deferred costs and carrying costs and the replacement of lost revenues are components of approved tariffs, and therefore, adjustments to customer bills occur as electricity or natural gas is sold and delivered to the customer. As such, the Company and Consolidated SCE&G have concluded that performance obligations related to these adjustments are not capable of being distinct from the underlying tariff based sales. Accordingly, revenues arising from these adjustments are

25




recorded within Operating Revenues - Electric or Gas regulated on the statements of operations, consistent with revenues from underlying tariff based sales.

Adjustments for SCE&G’s WNA increase customer bills when weather is milder than normal and decrease customer bills when weather is colder than normal. These adjustments are made during the same period that the underlying natural gas is sold and delivered to the customer, and the performance obligations associated with these adjustments are not capable of being distinct from tariff based sales. Such adjustments are recorded within Operating Revenues - Gas regulated on the statements of operations. When weather is significantly milder than normal, SCE&G limits such adjustments on a customer’s bill to an amount that would be added if weather were 50% milder than normal. Adjustments exceeding this limit, though still recorded as operating revenue, are deferred within regulatory assets until customers are subsequently billed for the excess with the approval of the SCPSC.

PSNC Energy’s CUT is a decoupling mechanism that adjusts bills for residential and commercial customers based on per customer average consumption. When average consumption exceeds actual usage, PSNC Energy records increased revenue associated with this undercollection and defers it within regulatory assets. Likewise, when actual usage exceeds average consumption, a decrement to revenue associated with this overcollection is recorded and deferred within regulatory liabilities. PSNC Energy’s tariff based rates are adjusted semiannually, with the approval of the NCUC, to collect or refund these deferred amounts over the subsequent 12 month period.

Amounts deferred for the WNA and the CUT arise under specific arrangements with regulators rather than customers. As a result, the Company and Consolidated SCE&G have concluded that these arrangements represent alternative revenue programs. Revenue from alternative revenue programs is included within Operating Revenues - Gas-regulated on the statements of operations in the month such adjustments are deferred within regulatory accounts, and is shown as Other revenues when disaggregated in the table below. As permitted, the Company and Consolidated SCE&G have elected to reduce the regulatory accounts in the period when such amounts are reflected on customer bills without affecting operating revenues.

Disaggregation of Revenues

The impact of several factors on the amount, timing and uncertainty of operating revenues and cash flows can vary significantly by customer class. For electric revenues and nonregulated gas revenues, which do not have weather normalization mechanisms in place, the impact of weather and conservation measures on energy usage typically affect residential and commercial customers to a greater degree than other customer classes. For utilities, revenue requirements result in increases or decreases in tariff rates approved by regulatory bodies and often vary by customer class. Also, certain cost recovery and other mechanisms may have an uneven impact on a particular customer class depending on the underlying tariffs affected. For nonregulated gas, revenues are impacted by competitive market rates tailored to appeal to specific customer classes. The Company and Consolidated SCE&G have disaggregated operating revenues by customer class as follows:
The Company
 
Consolidated SCE&G
 
PSNC Energy
 
Total Gas-regulated
 
                    Gas-nonregulated
Segments (Millions of dollars)
 
Electric
 
Gas-regulated
 
Gas-regulated
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Customer class:
 
 
 
 
 
 
 
 
 
 
  Residential
 
$
252

 
$
86

 
$
145

 
$
231

 
$
106

  Commercial
 
169

 
39

 
48

 
87

 
34

  Industrial
 
85

 
24

 
6

 
30

 
120

  Other
 
37

 
5

 
8

 
13

 
13

Revenues from contracts with customers
 
543

 
154

 
207

 
361

 
273

Other operating revenues
 
3

 
1

 
(1
)
 

 

Total Operating Revenues
 
$
546

 
$
155

 
$
206

 
$
361

 
$
273



Contract Costs

Costs to obtain contracts are generally expensed when incurred. In limited instances, SCE&G provides economic development grants intended to support economic growth within SCE&G’s electric service territory and defers such grants as regulatory assets on the condensed consolidated balance sheet. Whenever these grants are contingent on a customer entering

26




into a long-term electric supply contract with SCE&G, they are considered costs to obtain that underlying contract. Such costs are amortized on a straight-line basis over the term of the related service contract, which generally ranges from ten to 15 years.

Balances and activity related to contract costs deferred as regulatory assets were as follows:
The Company and Consolidated SCE&G
 
 
Millions of dollars
 
Regulatory Assets
January 1, 2018
 
$
16.3

Additional costs
 

Amortization
 
(0.4
)
Impairment
 

March 31, 2018
 
$
15.9

4.    COMMON EQUITY

SCANA had 200 million shares of common stock authorized as of March 31, 2018 and December 31, 2017.

Authorized shares of SCE&G common stock were 50 million as of March 31, 2018 and December 31, 2017. Authorized shares of SCE&G preferred stock were 20 million, of which 1,000 shares, no par value, were issued and outstanding as of March 31, 2018 and December 31, 2017. All issued and outstanding shares of SCE&G's common and preferred stock are held by SCANA.

SCANA’s articles of incorporation do not limit the dividends that may be paid on its common stock, and the articles of incorporation of each of SCANA's subsidiaries contain no such limitations on their respective common stock. SCANA has agreed to obtain the consent of Dominion Energy, which consent cannot be unreasonably withheld, prior to making dividend payments to shareholders greater than $0.6125 per share for any quarter while the Merger Agreement is pending.

SCE&G’s bond indenture under which it issues First Mortgage Bonds contains provisions that could limit the payment of cash dividends on its common stock. SCE&G's bond indenture permits the payment of dividends on SCE&G's common stock only either (1) out of its Surplus (which is defined as the excess of net assets over capital) or (2) in case there is no Surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, the Federal Power Act requires the appropriation of a portion of certain earnings from hydroelectric projects. At March 31, 2018 and 2017, retained earnings of approximately $95.3 million and $80.6 million, respectively, were restricted by this requirement as to payment of cash dividends on SCE&G’s common stock.

PSNC Energy’s note purchase and debenture purchase agreements contain provisions that could limit the payment of cash distributions, including dividends, on PSNC Energy's common stock. These agreements generally limit the sum of distributions to an amount that does not exceed $30 million plus 85% of Consolidated Net Income (as therein defined) accumulated after December 31, 2008 plus the net proceeds of issuances by PSNC Energy of equity or convertible debt securities (as therein defined). As of March 31, 2018, this limitation would permit PSNC Energy to pay cash distributions in excess of $100 million.

5.     LONG-TERM DEBT AND LIQUIDITY
 
Long-term Debt

Substantially all electric utility plant is pledged as collateral in connection with long-term debt.
 
Liquidity
 
Credit agreements are used for general corporate purposes, including liquidity support for each company's commercial paper program and working capital needs and, in the case of Fuel Company, to finance or refinance the purchase of nuclear fuel, certain fossil fuels, and emission and other environmental allowances. Committed long-term facilities are revolving lines of credit under credit agreements with a syndicate of banks. Committed LOC, outstanding LOC advances, commercial paper, and LOC-supported letter of credit obligations were as follows: 

27




March 31, 2018 (Millions of dollars)
 
Total
 
SCANA
 
Consolidated SCE&G
 
PSNC  Energy
Lines of credit:
 
+

 
 

 
 
 
 
Five-year, expiring December 2020
 
$
1,300.0

 
$
400.0

 
$
700.0

 
$
200.0

Fuel Company five-year, expiring December 2020
 
500.0

 

 
500.0

 

Three-year, expiring December 2018
 
200.0

 

 
200.0

 

Total committed long-term
 
2,000.0

 
400.0

 
1,400.0

 
200.0

LOC advances
 
100.0

 

 
100.0

 

Weighted average interest rate
 
 
 

 
2.97
%
 

Outstanding commercial paper (270 or fewer days)
 
248.0

 
10.9

 
145.8

 
91.3

Weighted average interest rate
 
 
 
2.70
%
 
2.75
%
 
2.52
%
Letters of credit supported by LOC
 
46.7

 
46.4

 
0.3

 

Available
 
$
1,605.3

 
$
342.7

 
$
1,153.9

 
$
108.7

 
December 31, 2017 (Millions of dollars)
 
Total
 
SCANA
 
Consolidated SCE&G
 
PSNC  Energy
Lines of credit:
 
 
 
 
 
 
 
 
Five-year, expiring December 2020
 
$
1,300.0

 
$
400.0

 
$
700.0

 
$
200.0

Fuel Company five-year, expiring December 2020
 
500.0

 

 
500.0

 

Three-year, expiring December 2018
 
200.0

 

 
200.0

 

Total committed long-term
 
2,000.0

 
400.0

 
1,400.0

 
200.0

Outstanding commercial paper (270 or fewer days)
 
350.3

 

 
251.6

 
98.7

Weighted average interest rate
 
 
 

 
1.92
%
 
1.93
%
Letters of credit supported by LOC
 
3.3

 
3.0

 
0.3

 

Available
 
$
1,646.4

 
$
397.0

 
$
1,148.1

 
$
101.3


In March 2018, SCE&G borrowed $100 million under the five-year credit agreement expiring December 2020. The interest rate on this draw at March 31, 2018 was 2.97%, and this draw is classified as long term debt. Proceeds from the draw were deposited with a natural gas supplier to provide contractually required credit support. The interest rate on this deposit currently exceeds the interest rate on the draw. Also, in February 2018 SCANA issued a $43.4 million letter of credit in favor of a natural gas supplier to provide contractually required credit support.

Portions of the proceeds received under or arising from the monetization of the Toshiba Settlement in late September and early October 2017 have been utilized to repay maturing commercial paper balances, which short-term borrowings had been incurred for the construction of Unit 2 and Unit 3 prior to the decision to stop their construction (see Note 10). Should the SCPSC or a court direct that these proceeds be refunded to customers in the near-term, or direct that such funds be escrowed or otherwise made unavailable to SCE&G, it is anticipated that SCE&G would issue commercial paper, draw on its credit facilities or issue long-term debt to fund such requirement. However, were the SCPSC to rule in favor of the ORS in response to the Request that SCE&G suspend collections from customers of amounts previously authorized under the BLRA, or were other actions of the SCPSC or others taken in order to significantly restrict SCE&G’s access to revenues or impose additional adverse refund obligations on SCE&G, the Company’s and Consolidated SCE&G's assessments regarding the recoverability of all or a portion of the remaining balance of unrecovered nuclear project costs would be adversely impacted (see Note 2). Further, the recognition of significant additional impairment losses with respect to unrecovered Nuclear Project costs could increase the Company’s and Consolidated SCE&G’s debt to total capitalization to a level which may limit their ability to borrow under their commercial paper programs or under their credit facilities. Borrowing costs for long-term debt issuances could also be impacted.

Each of the Company and Consolidated SCE&G is obligated with respect to an aggregate of $67.8 million of industrial revenue bonds which are secured by letters of credit issued by TD Bank N.A. These letters of credit expire, subject to renewal, in the fourth quarter of 2019.

    Consolidated SCE&G participates in a utility money pool with SCANA and another regulated subsidiary of SCANA. Money pool borrowings and investments bear interest at short-term market rates. Consolidated SCE&G’s interest income and expense from money pool transactions were not significant for any period presented. Consolidated SCE&G had outstanding money pool borrowings due to an affiliate of $197 million and investments due from an affiliate of $149 million at March 31,

28




2018. At December 31, 2017 Consolidated SCE&G had outstanding money pool borrowings due to an affiliate of $37 million and investments due from an affiliate of $28 million. For each period presented, money poo1 borrowings were made by Fuel Company and GENCO, and money pool investments were made by SCE&G. On its condensed consolidated balance sheet, Consolidated SCE&G includes money pool borrowings within Affiliated payables and money pool investments within Affiliated companies receivables.

6.    INCOME TAXES
 
The Company files consolidated federal income tax returns which include Consolidated SCE&G, and the Company and its subsidiaries file various applicable state and local income tax returns.

The Company’s federal returns through 2007 are closed. In addition, federal returns for 2008 and 2009 are closed except to the extent of the examination of amended return claims discussed below. The IRS is also currently examining SCANA's federal returns for years 2010 through 2016 as a result of those claims. With few exceptions, the Company, including Consolidated SCE&G, is no longer subject to state and local income tax examinations by tax authorities for years before 2010.

During 2013 and 2014, the Company amended certain of its income tax returns for 2008 through 2012 to claim additional tax-defined research and experimentation deductions (under IRC Section 174) and credits (under IRC Section 41) and to reflect related impacts on other items such as domestic production activities deductions (under IRC Section 199). The Company also made similar claims in filing its original 2013 and 2014 returns in 2014 and 2015, respectively. In 2016 and 2017, the Company claimed significant research and experimentation deductions and credits (offset by reductions in its domestic production activities deductions), related to the design and construction activities of the Nuclear Project, in its 2015 and 2016 income tax returns. The Company expects to claim similar deductions and credits in its 2017 tax return when it is filed in 2018. These claims followed the issuance of final IRS regulations in 2014 regarding such treatment with respect to expenditures related to the design and construction of pilot models.

The IRS examined the claims in the amended returns, and as the examination progressed without resolution, the Company and Consolidated SCE&G evaluated and recorded adjustments to unrecognized tax benefits; however, none of these changes materially affected the Company's and Consolidated SCE&G's effective tax rate. In October 2016, the examination of the amended tax returns progressed to the IRS Office of Appeals. In addition, the IRS has begun an examination of SCANA's 2013 through 2016 income tax returns, and it is expected that the IRS will also examine later returns.

These IRC Section 174 income tax deductions and IRC Section 41 credits were considered to be uncertain tax positions, and under relevant accounting guidance, estimates of the amounts of related tax benefits which may not be sustained upon examination by the taxing authorities were recorded as unrecognized tax benefits in the financial statements. Following the abandonment of the Nuclear Project, the Company and Consolidated SCE&G anticipate that an abandonment loss deduction under IRC Section 165 will be claimed on the 2017 tax return. As such, certain of the IRC Section 174 deductions, to the extent they are denied, would instead be deductible in 2017 under IRC Section 165. The abandonment loss deduction is also considered an uncertain tax position; however, under relevant accounting guidance, no estimated unrecognized tax benefits were recorded as of March 31, 2018. The remaining unrecognized tax benefits include the impact of the IRC Section 174 deductions on domestic production activities deductions, credits, and certain unrecognized state tax benefits.

As of March 31, 2018, the Company and Consolidated SCE&G have recorded an unrecognized tax benefit of $98 million ($19 million net of the impact of state deductions on federal returns, net of NOL and credit carryforwards, and net of receivables related to the uncertain tax positions). If recognized, $98 million of the tax benefit would affect the Company’s and Consolidated SCE&G's effective tax rates. These unrecognized tax benefits are not expected to increase significantly within the next 12 months. It is also reasonably possible that these unrecognized tax benefits may decrease by $11 million within the next 12 months. No other material changes in the status of the Company’s or Consolidated SCE&G's tax positions have occurred through March 31, 2018 (see Note 10).

                In connection with the research and experimentation deduction and credit claims reflected on the 2015 and 2016 income tax returns and similar claims made in determining taxable income for 2017, and under the terms of an SCPSC order, the Company and Consolidated SCE&G recorded regulatory assets for estimated foregone domestic production activities deductions, offset by estimated tax credits, with the expectation that these deferred costs and related interest thereon would be recoverable through customer rates in future years (see Note 2). However, an impairment loss with respect to such deferred regulatory asset was recorded in 2017.


29




Also under the terms of an SCPSC order, estimated interest expense accrued with respect to the unrecognized tax benefits related to the research and experimentation deductions in the 2015 and 2016 income tax returns was deferred as a regulatory asset through December 31, 2017 and was expected to be recoverable through customer rates in future years. An impairment loss with respect to these deferred amounts was also recorded as of December 31, 2017 (see Note 10). Otherwise, the Company and Consolidated SCE&G recognize interest accrued related to unrecognized tax benefits within interest expense or interest income and recognize tax penalties within other expenses. Related to the unrecognized tax benefits noted above, the Company and Consolidated SCE&G accrued interest expense of $4.5 million and interest income of $0.7 million during 2018. Amounts recorded for such interest income and interest expense were mostly deferred within regulatory assets during 2017 and were subsequently included within the impairment loss recorded by the Company and Consolidated SCE&G in 2017. Penalties were not material in either period presented.

In December of 2017, the Tax Act was enacted to lower the federal statutory tax rate from 35% to 21%. The rate change resulted in the remeasurement of all federal deferred income tax assets and liabilities to reflect a 21% federal statutory tax rate as of December 31, 2017. Due to the regulated nature of the Company’s and Consolidated SCE&G’s operations, the effect of this remeasurement is primarily reflected in deferred income tax balances within regulatory liabilities. As of March 31, 2018, the amortization of amounts arising from remeasurement have not affected the Company’s or Consolidated SCE&G’s effective tax rate due to such amortizations being deferred until such time as regulators determine how the benefits of such excess deferred tax amounts will be realized by customers. Upon the filing of the Company’s 2017 consolidated income tax return, adjustments to deferred income taxes may be recorded; however, these adjustments are not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

The State of North Carolina lowered its corporate income tax rate to 3.0% in 2017 and 2.5% effective January 1, 2019. In connection with these changes in tax rates, related state deferred tax amounts were remeasured, with the change in their balances being credited to a regulatory liability. The changes in income tax rates did not and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

7.    DERIVATIVE FINANCIAL INSTRUMENTS
 
Derivative instruments are recognized either as assets or liabilities in the statement of financial position and are measured at fair value. Changes in the fair value of derivative instruments are recognized either in earnings, as a component of other comprehensive income (loss) or, for regulated operations, within regulatory assets or regulatory liabilities, depending upon the intended use of the derivative and the resulting designation. 

Policies and procedures, and in some cases risk limits, are established to control the level of market, credit, liquidity and operational and administrative risks.  SCANA’s Board of Directors has delegated to a Risk Management Committee the authority to set risk limits, establish policies and procedures for risk management and measurement, and oversee and review the risk management process and infrastructure for SCANA and each of its subsidiaries.  The Risk Management Committee, which is comprised of certain officers, including the Risk Management Officer and other senior officers, apprises the Audit Committee of the Board of Directors with regard to the management of risk and brings to their attention significant areas of concern. Written policies define the physical and financial transactions that are approved, as well as the authorization requirements and limits for transactions.

Commodity Derivatives
 
The Company uses derivative instruments to hedge forward purchases and sales of natural gas, which create market risks of different types.  Instruments designated as cash flow hedges are used to hedge risks associated with fixed price obligations in a volatile market and risks associated with price differentials at different delivery locations. Instruments designated as fair value hedges are used to mitigate exposure to fluctuating market prices created by fixed prices of stored natural gas.  The basic types of financial instruments utilized are exchange-traded instruments, such as NYMEX futures contracts or options, and over-the-counter instruments such as options and swaps, which are typically offered by energy companies and financial institutions.  Cash settlements of commodity derivatives are classified as operating activities in the consolidated statements of cash flows.

PSNC Energy hedges natural gas purchasing activities using over-the-counter options and NYMEX futures and options.  PSNC Energy’s tariffs include a provision for the recovery of actual gas costs incurred, including any costs of hedging.  PSNC Energy records premiums, transaction fees, margin requirements and any realized gains or losses from its hedging program in deferred accounts as a regulatory asset or liability for the under- or over-recovery of gas costs.  These derivative financial instruments are not designated as hedges for accounting purposes.

30





Unrealized gains and losses on qualifying cash flow hedges of nonregulated operations are deferred in AOCI.  When the hedged transactions affect earnings, previously recorded gains and losses are reclassified from AOCI to cost of gas.  The effects of gains or losses resulting from these hedging activities are either offset by the recording of the related hedged transactions or are included in gas sales pricing decisions made by the business unit.
 
As an accommodation to certain customers, SCANA Energy, as part of its energy management services, offers fixed price supply contracts which are accounted for as derivatives.  These sales contracts are offset by the purchase of supply futures and swaps which are also accounted for as derivatives. Neither the sales contracts nor the related supply futures and swaps are designated as hedges for accounting purposes.

Interest Rate Swaps

Interest rate swaps may be used to manage interest rate risk and exposure to changes in fair value attributable to changes in interest rates on certain debt issuances.  In cases in which swaps designated as cash flow hedges are used to synthetically convert variable rate debt to fixed rate debt, periodic payments to or receipts from swap counterparties related to these derivatives are recorded within interest expense.

Forward starting swap agreements that are designated as cash flow hedges may be used in anticipation of the issuance of debt.  Except as described in the following paragraph, the effective portions of changes in fair value and payments made or received upon termination of such agreements for regulated subsidiaries are recorded in regulatory assets or regulatory liabilities. For SCANA and its nonregulated subsidiaries, such amounts are recorded in AOCI. Such amounts are amortized to interest expense over the term of the underlying debt. Ineffective portions of fair value changes are recognized in income.

Pursuant to regulatory orders, interest rate derivatives entered into by SCE&G after October 2013 are not designated for accounting purposes as cash flow hedges, and fair value changes and settlement amounts related to them have been recorded as regulatory assets and liabilities. Settlement losses on swaps have generally been amortized over the lives of subsequent debt issuances and gains have been amortized to interest expense or may be applied as otherwise directed by the SCPSC. See Note 2 and Note 12 regarding the settlement gain recorded in the first quarter of 2018.

Cash payments made or received upon termination of these financial instruments are classified as investing activities for cash flow statement purposes.
 
Quantitative Disclosures Related to Derivatives
 
The Company was party to natural gas derivative contracts outstanding in the following quantities: