10-Q 1 a2018630-10q.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 June 30, 2018

 scanapowerforlivinga39.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 July 27, 2018
SCANA Corporation
Without Par Value
142,625,416
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 to consummate the proposed merger with Dominion Energy; (2) the ability of SCE&G to recover through rates the costs expended on 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 to realize or maintain tax 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 involving or arising from the abandonment of the Nuclear Project; (6) current and future litigation, including particularly litigation or government investigations or any actions involving or arising from the construction or abandonment of the Nuclear Project or arising from the proposed merger with Dominion Energy, including the possible impacts on liquidity and other financial impacts therefrom; (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 with Dominion Energy; (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
Act 258
 
Act 258 (previously referenced as H. 4375) adopted by the South Carolina General Assembly
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
CEC
 
Columbia Energy Center
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
EPC Contract
 
Engineering, Procurement and Construction Agreement dated May 23, 2008, as amended by the October 2015 Amendment
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

4




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
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

5




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
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
WARN Act
 
Worker Adjustment and Retraining Notification Act
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
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
 
Utility Plant In Service
 
$
14,926

 
$
14,370

Accumulated Depreciation and Amortization
 
(4,995
)
 
(4,611
)
Construction Work in Progress
 
470

 
471

Nuclear Fuel, Net of Accumulated Amortization
 
193

 
208

Goodwill, net of writedown of $230
 
210

 
210

Utility Plant, Net
 
10,804

 
10,648

Nonutility Property and Investments:
 
 
 
 
     Nonutility property, net of accumulated depreciation of $138 and $133
 
267

 
270

Assets held in trust, net-nuclear decommissioning
 
136

 
136

Other investments
 
139

 
68

Nonutility Property and Investments, Net
 
542

 
474

Current Assets:
 
 
 
 
Cash and cash equivalents
 
238

 
409

     Receivables:
 
 
 
 
         Customer, net of allowance for uncollectible accounts of $6 and $6
 
517

 
665

    Income taxes
 
206

 
198

         Other
 
99

 
105

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

 
143

Materials and supplies
 
167

 
161

Prepayments
 
134

 
99

     Other current assets
 
14

 
17

     Derivative financial instruments
 

 
54

     Total Current Assets
 
1,494

 
1,851

Deferred Debits and Other Assets:
 
 
 
 
Regulatory assets
 
5,757

 
5,580

Other
 
304

 
186

Total Deferred Debits and Other Assets
 
6,061

 
5,766

Total
 
$
18,901

 
$
18,739


See Notes to Condensed Consolidated Financial Statements.

7




Millions of dollars
 
June 30,
2018
 
December 31,
2017
Capitalization and Liabilities
 
 

 
 

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

 
$
2,390

Retained Earnings
 
2,987

 
2,915

Accumulated Other Comprehensive Loss
 
(39
)
 
(50
)
Total Common Equity
 
5,337

 
5,255

Long-Term Debt, net
 
6,098

 
5,906

Total Capitalization
 
11,435

 
11,161

Current Liabilities:
 
 

 
 

Short-term borrowings
 
517

 
350

Current portion of long-term debt
 
568

 
727

Accounts payable
 
263

 
438

Customer deposits and customer prepayments
 
151

 
112

Revenue subject to refund
 
164

 

Taxes accrued
 
123

 
214

Interest accrued
 
88

 
87

Dividends declared
 
18

 
86

Derivative financial instruments
 
4

 
6

Other
 
69

 
93

Total Current Liabilities
 
1,965

 
2,113

Deferred Credits and Other Liabilities:
 
 

 
 

Deferred income taxes, net
 
1,333

 
1,261

Asset retirement obligations
 
578

 
568

Pension and other postretirement benefits
 
360

 
360

Unrecognized tax benefits
 
19

 
19

Regulatory liabilities
 
3,019

 
3,059

Other
 
192

 
198

Total Deferred Credits and Other Liabilities
 
5,501

 
5,465

Commitments and Contingencies (Note 10)
 
 
 


Total
 
$
18,901

 
$
18,739

 
See Notes to Condensed Consolidated Financial Statements.

8




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Millions of dollars, except per share amounts
 
2018
 
2017
 
2018
 
2017
Operating Revenues:
 
 

 
 

 
 

 
 

Electric
 
$
552

 
$
679

 
$
1,098

 
$
1,256

Gas - regulated
 
148

 
140

 
509

 
461

Gas - nonregulated
 
143

 
182

 
416

 
456

Total Operating Revenues
 
843

 
1,001

 
2,023

 
2,173

Operating Expenses:
 
 

 
 
 
 

 
 
Fuel used in electric generation
 
155

 
161

 
315

 
297

Purchased power
 
15

 
21

 
67

 
32

Gas purchased for resale
 
192

 
227

 
598

 
597

Other operation and maintenance
 
208

 
179

 
410

 
354

Impairment loss
 

 

 
4

 

Depreciation and amortization
 
100

 
95

 
199

 
189

Other taxes
 
70

 
67

 
140

 
133

Total Operating Expenses
 
740

 
750

 
1,733

 
1,602

Operating Income
 
103

 
251

 
290

 
571

Other Income, net
 
4

 
14

 
133

 
27

Interest charges, net of allowance for borrowed funds used during construction of $3, $7, $6 and $14
 
(95
)
 
(88
)
 
(192
)
 
(175
)
Income Before Income Tax Expense
 
12

 
177

 
231

 
423

Income Tax Expense
 
4

 
56

 
54

 
131

Net Income
 
$
8

 
$
121

 
$
177

 
$
292

 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock
 
$
0.06

 
$
0.85

 
$
1.24

 
$
2.04

Weighted Average Common Shares Outstanding (millions)
 
143

 
143

 
143

 
143

Dividends Declared Per Share of Common Stock
 
$
0.1237

 
$
0.6125

 
$
0.7362

 
$
1.225


See Notes to Condensed Consolidated Financial Statements.



9




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Millions of dollars
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
8

 
$
121

 
$
177

 
$
292

Other Comprehensive Income (Loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized Gains (Losses) on Cash Flow Hedging Activities:
 
 
 
 
 
 
 
 
Arising during period, net of tax of $-, $(2), $1, and $(3)
 
1

 
(3
)
 
4

 
(5
)
Reclassified as increases to interest expense, net of tax of $1, $1, 2, and $3
 
2

 
2

 
4

 
4

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
 
3

 
(1
)
 
10

 
(3
)
Deferred cost of employee benefit plans, net of tax of $-, $-, $-, and $-
 

 

 
1

 

      Other Comprehensive Income (Loss)
 
3

 
(1
)
 
11

 
(3
)
Total Comprehensive Income
 
$
11

 
$
120

 
$
188

 
$
289


See Notes to Condensed Consolidated Financial Statements.


10




SCANA Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited) 
 
 
Six Months Ended June 30,
Millions of dollars
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
177

 
$
292

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

 
 

Impairment loss
 
4

 

Deferred income taxes, net
 
69

 
93

Depreciation and amortization
 
215

 
200

Amortization of nuclear fuel
 
27

 
19

Allowance for equity funds used during construction
 
(7
)
 
(18
)
Carrying cost recovery
 
(3
)
 
(11
)
Changes in certain assets and liabilities:
 
 
 
 
Receivables
 
139

 
87

Income taxes receivable
 
(8
)
 
136

Inventories
 
(18
)
 
(36
)
Prepayments
 
(34
)
 
(47
)
Regulatory assets
 
(18
)
 
(30
)
Regulatory liabilities
 
(110
)
 
(1
)
Accounts payable
 
(48
)
 
(31
)
Revenue subject to refund
 
164

 

Unrecognized tax benefits
 

 
49

Taxes accrued
 
(91
)
 
(87
)
Derivative financial instruments
 
(1
)
 
(3
)
Other assets
 
(138
)
 
(26
)
Other liabilities
 
29

 
(73
)
Net Cash Provided From Operating Activities
 
348

 
513

Cash Flows From Investing Activities:
 
 

 
 

Property additions and construction expenditures
 
(597
)
 
(780
)
Proceeds from investments and sales of assets (including derivative collateral returned)
 
79

 
62

Purchase of investments (including derivative collateral posted)
 
(136
)
 
(66
)
Proceeds upon interest rate derivative contract settlements
 
115

 

Net Cash Used For Investing Activities
 
(539
)
 
(784
)
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from issuance of long-term debt
 
200

 
150

Repayment of long-term debt
 
(174
)
 
(14
)
Dividends
 
(173
)
 
(170
)
Short-term borrowings, net
 
167

 
188

Net Cash Provided From Financing Activities
 
20

 
154

Net Decrease In Cash and Cash Equivalents
 
(171
)
 
(117
)
Cash and Cash Equivalents, January 1
 
409

 
208

Cash and Cash Equivalents, June 30
 
$
238

 
$
91

Supplemental Cash Flow Information:
 
 

 
 

Cash for–Interest paid (net of capitalized interest of $6 and $14)
 
$
179

 
$
168

              –Income taxes paid
 
3

 
1

              –Income taxes received
 

 
123

Noncash Investing and Financing Activities:
 
 
 
 
Accrued construction expenditures
 
42

 
81

Capital leases
 
6

 
6


 See 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
 
 
 
 
 
 
177

 
 
 
 
 
 
 
177

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains arising during the period
 
 
 
 
 
 
 
 
4

 

 
4

 
4

Losses/amortization reclassified from AOCI
 
 
 
 
 
 
 
 
6

 
1

 
7

 
7

Total Comprehensive Income
 
 
 
 
 
 
177

 
10

 
1

 
11

 
188

Purchase of Treasury Stock

 

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Dividends Declared
 
 
 
 
 
 
(105
)
 
 
 
 
 
 
 
(105
)
Balance as of June 30, 2018
143

 
$
2,402


$
(13
)

$
2,987

 
$
(27
)

$
(12
)

$
(39
)
 
$
5,337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2017
143

 
$
2,402

 
$
(12
)
 
$
3,384

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

Net Income
 
 
 
 
 
 
292

 
 
 
 
 
 
 
292

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses arising during the period
 
 
 
 
 
 
 
 
(5
)
 

 
(5
)
 
(5
)
Losses/amortization reclassified from AOCI
 
 
 
 
 
 
 
 
2

 

 
2

 
2

Total Comprehensive Income
 
 
 
 
 
 
292

 
(3
)
 

 
(3
)
 
289

Purchase of Treasury Stock

 

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Dividends Declared
 
 
 
 
 
 
(175
)
 
 
 
 
 
 
 
(175
)
Balance as of June 30, 2017
143

 
$
2,402

 
$
(13
)
 
$
3,501

 
$
(39
)
 
$
(13
)
 
$
(52
)
 
$
5,838


Dividends declared per share of common stock were $0.7362 for the six months ended June 30, 2018 and were $1.225 for the six months ended June 30, 2017.

See Notes to Condensed Consolidated Financial Statements.


12





South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Balance Sheets
(Unaudited)
Millions of dollars
 
June 30,
2018
 
December 31,
2017
Assets
 
 

 
 

Utility Plant In Service
 
$
12,650

 
$
12,161

Accumulated Depreciation and Amortization
 
(4,488
)
 
(4,124
)
Construction Work in Progress
 
322

 
375

Nuclear Fuel, Net of Accumulated Amortization
 
193

 
208

Utility Plant, Net ($690 and $711 related to VIEs)
 
8,677

 
8,620

Nonutility Property and Investments:
 
 

 
 

Nonutility property, net of accumulated depreciation
 
73

 
71

Assets held in trust, net-nuclear decommissioning
 
136

 
136

Other investments
 
1

 
2

Nonutility Property and Investments, Net
 
210

 
209

Current Assets:
 
 

 
 

     Cash and cash equivalents
 
222

 
395

     Receivables:
 
 
 
 
          Customer, net of allowance for uncollectible accounts of $4 and $4
 
390

 
390

          Affiliated companies
 
161

 
32

          Income taxes
 
206

 
198

          Other
 
69

 
85

     Inventories (at average cost):
 
 

 
 

     Fuel
 
72

 
90

     Materials and supplies
 
154

 
149

     Prepayments
 
116

 
82

     Derivative financial instrument
 

 
54

     Other current assets
 
2

 
2

     Total Current Assets ($106 and $191 related to VIEs)
 
1,392

 
1,477

Deferred Debits and Other Assets:
 
 

 
 

Regulatory assets
 
5,644

 
5,476

Other
 
281

 
164

Other affiliate
 
71

 

     Total Deferred Debits and Other Assets ($36 and $50 related to VIEs)
 
5,996

 
5,640

Total
 
$
16,275

 
$
15,946


See Notes to Condensed Consolidated Financial Statements.

13




Millions of dollars
 
June 30,
2018
 
December 31,
2017
Capitalization and Liabilities
 
 
 
 
Common Stock - no par value, 40.3 million shares outstanding
 
$
2,860

 
$
2,860

Retained Earnings
 
2,060

 
1,982

Accumulated Other Comprehensive Loss
 
(4
)
 
(4
)
Total Common Equity
 
4,916

 
4,838

Noncontrolling Interest
 
169

 
142

Total Equity
 
5,085

 
4,980

Long-Term Debt, net
 
4,536

 
4,441

Total Capitalization
 
9,621

 
9,421

Current Liabilities:
 
 
 
 
Short-term borrowings
 
457

 
252

Current portion of long-term debt
 
564

 
723

Accounts payable
 
123

 
251

Affiliated payables
 
260

 
102

  Customer deposits and customer prepayments
 
119

 
70

 Revenue subject to refund
 
156

 

Taxes accrued
 
115

 
208

Interest accrued
 
68

 
67

Dividends declared
 

 
82

  Derivative financial instruments
 
1

 
2

Other
 
32

 
47

Total Current Liabilities
 
1,895

 
1,804

Deferred Credits and Other Liabilities:
 
 
 
 
Deferred income taxes, net
 
1,231

 
1,173

Asset retirement obligations
 
538

 
529

Pension and other postretirement benefits
 
216

 
217

Unrecognized tax benefits
 
19

 
19

Regulatory liabilities
 
2,627

 
2,667

Other
 
110

 
97

Other affiliate
 
18

 
19

Total Deferred Credits and Other Liabilities
 
4,759

 
4,721

 Commitments and Contingencies (Note 10)
 


 


Total
 
$
16,275

 
$
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
 
Six Months Ended
 
 
June 30,
 
June 30,
Millions of dollars
 
2018
 
2017
 
2018
 
2017
Operating Revenues:
 
 
 
 
 
 

 
 
Electric
 
$
552

 
$
678

 
$
1,098

 
$
1,256

Electric - nonconsolidated affiliate
 
1

 
2

 
2

 
3

Gas
 
79

 
75

 
234

 
216

Gas - nonconsolidated affiliate
 

 
1

 

 
1

Total Operating Revenues
 
632

 
756

 
1,334

 
1,476

Operating Expenses:
 
 
 
 
 
 

 
 
Fuel used in electric generation
 
126

 
126

 
255

 
239

Fuel used in electric generation - nonconsolidated affiliate
 
29

 
35

 
60

 
59

Purchased power
 
15

 
21

 
67

 
32

Gas purchased for resale
 
45

 
42

 
121

 
108

Other operation and maintenance
 
113

 
96

 
215

 
197

Other operation and maintenance - nonconsolidated affiliate
 
51

 
50

 
95

 
91

Impairment loss
 

 

 
4

 

Depreciation and amortization
 
81

 
77

 
161

 
154

Other taxes
 
64

 
60

 
126

 
120

Other taxes - nonconsolidated affiliate
 
1

 
2

 
3

 
3

Total Operating Expenses
 
525

 
509

 
1,107

 
1,003

Operating Income
 
107

 
247

 
227

 
473

Other Income, net
 
2

 
8

 
125

 
15

Interest charges, net of allowance for borrowed funds used during construction of $3, $7, $5 and $13
 
(76
)
 
(69
)
 
(152
)
 
(138
)
Income Before Income Tax Expense
 
33

 
186

 
200

 
350

Income Tax Expense
 
2

 
60

 
41

 
112

Net Income and Total Comprehensive Income
 
31

 
126

 
159

 
238

Less Net Income and Total Comprehensive Income Attributable to Noncontrolling Interest
 
5

 
3

 
9

 
7

Earnings and Comprehensive Income Available to Common Shareholder
 
$
26

 
$
123

 
$
150

 
$
231

 
 
 
 
 
 
 
 
 
Dividends Declared on Common Stock
 
$

 
$
81

 
$
74

 
$
160

 
See Notes to Condensed Consolidated Financial Statements.


15




South Carolina Electric & Gas Company and Affiliates
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
Millions of dollars
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
159

 
$
238

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

 

Deferred income taxes, net
 
58

 
65

Depreciation and amortization
 
165

 
157

Amortization of nuclear fuel
 
27

 
19

Allowance for equity funds used during construction
 
(4
)
 
(16
)
Carrying cost recovery
 
(3
)
 
(11
)
Changes in certain assets and liabilities:
 
 
 
 
Receivables
 

 
(5
)
Receivables - affiliate
 
(12
)
 
(1
)
Income tax receivable
 
(8
)
 
53

Inventories
 
(11
)
 
(22
)
Prepayments
 
(34
)
 
(38
)
Regulatory assets
 
(9
)
 
(26
)
Regulatory liabilities
 
(107
)
 
1

Accounts payable
 
(19
)
 
4

Accounts payable - affiliate
 
8

 
(12
)
Revenue subject to refund
 
156

 

Taxes accrued
 
(93
)
 
(83
)
Unrecognized tax benefit
 

 
153

Other assets
 
(131
)
 
(20
)
Other liabilities
 
55

 
(35
)
Net Cash Provided From Operating Activities
 
201

 
421

Cash Flows From Investing Activities:
 
 
 
 
Property additions and construction expenditures
 
(464
)
 
(650
)
Proceeds from investments and sales of assets (including derivative collateral returned)
 
31

 
47

Purchase of investments (including derivative collateral posted)
 
(17
)
 
(52
)
Purchase of investments - affiliate
 
(113
)
 

Proceeds from interest rate derivative contract settlement
 
115

 

Proceeds from investments - affiliate
 
42

 

Investment in affiliate
 
(117
)
 

Net Cash Used For Investing Activities
 
(523
)
 
(655
)
Cash Flows From Financing Activities:
 
 
 
 
Proceeds from issuance of debt
 
100

 

Repayment of long-term debt
 
(170
)
 
(10
)
Dividends
 
(156
)
 
(158
)
Money pool borrowings, net
 
150

 
(1
)
Contribution from parent
 
20

 

Short-term borrowings, net
 
205

 
275

Net Cash Provided From Financing Activities
 
149

 
106

Net Decrease In Cash and Cash Equivalents
 
(173
)
 
(128
)
Cash and Cash Equivalents, January 1
 
395

 
164

Cash and Cash Equivalents, June 30
 
$
222

 
$
36

 
 
 
 
 
 Supplemental Cash Flow Information:
 
 
 
 
Cash for–Interest (net of capitalized interest of $5 and $13)
 
$
135

 
$
129

              – Income taxes paid
 

 
3

              – Income taxes received
 

 
143

Noncash Investing and Financing Activities:
 
 
 
 
Accrued construction expenditures
 
19

 
61

Capital leases
 
6

 
6


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
 
 
 
 
 
150

 
 
 
9

 
159

Total Comprehensive Income
 
 
 
 
 
150

 

 
9

 
159

  Contribution from Parent
 
 
 
 
 
 
 
 
 
20

 
20

Cash dividend declared
 
 
 
 
 
(72
)
 
 
 
(2
)
 
(74
)
Balance at June 30, 2018
 
40

 
$
2,860

 
$
2,060

 
$
(4
)
 
$
169

 
$
5,085

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
40

 
$
2,860

 
$
2,481

 
$
(3
)
 
$
134

 
$
5,472

Earnings available to common shareholder
 
 
 
 
 
231

 
 
 
7

 
238

Total Comprehensive Income
 
 
 
 
 
231

 

 
7

 
238

Cash dividend declared
 
 
 
 
 
(155
)
 
 
 
(5
)
 
(160
)
Balance at June 30, 2017
 
40

 
$
2,860

 
$
2,557

 
$
(3
)
 
$
136

 
$
5,550


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 which are necessary for a fair statement of the results for the interim periods reported, and such adjustments are of a normal recurring nature. 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 $497 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, 41% and 39% of PSNC Energy’s natural gas inventory at June 30, 2018 and December 31, 2017, respectively, with a carrying value of $9.8 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 reported for 2017 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 or no significant 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.

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.

Increase (Decrease) Millions of dollars
 
The Company
 
Consolidated SCE&G
June 30, 2017
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
Other operation and maintenance
 
$
(2
)
 
$
(6
)
 
$
(1
)
 
$
(5
)
Total Operating Expenses
 
(2
)
 
(6
)
 
(1
)
 
(5
)
Operating Income
 
2

 
6

 
1

 
5

Other Income (Expense), Net
 
(2
)
 
(6
)
 
(1
)
 
(5
)

In addition, this guidance limits eligibility for capitalization of net periodic pension and postretirement benefit costs to only the service cost component, 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 which otherwise would have been capitalized to plant accounts under prior guidance are now being deferred within regulatory assets.


19




Guidance issued in January 2016 changed how entities measure certain equity investments and financial liabilities, among other things.

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.

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.

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,
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 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 intend to adopt, 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 have a material impact on 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 apply 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 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 and do not expect it to have a significant impact on their respective financial statements.


20




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 expect their respective commissions will take further action on this matter in 2018 but cannot determine what form those actions will take. As of June 30, 2018, estimates of income tax amounts charged through customer rates that relate to the effects of the Tax Act are being deferred as Revenue subject to refund on the condensed consolidated balance sheet. Such deferrals include the accrual of estimated carrying costs. Such estimates totaled $55.0 million for the Company, of which $46.2 million was attributable to Consolidated SCE&G. 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 - 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. The SCPSC has scheduled a hearing on the Joint Petition and two other dockets related to the Nuclear Project, namely the Request by the ORS and a June 2017 complaint filed by the Friends of the Earth and the Sierra Club, to begin November 1, 2018. This hearing schedule was established in response to legislation described below.

On June 27, 2018, the South Carolina General Assembly adopted Act 258, which became law June 28, 2018, to temporarily reduce the amount SCE&G can collect from customers under the BLRA. Act 258 requires the SCPSC to order a reduction in the portion of SCE&G's retail electric rates associated with the Nuclear Project from approximately 18% of the average residential electric customer’s bill to approximately 3.2%, or a reduction of approximately $31 million per month, retroactive to April 1, 2018. Absent an earlier ruling from the SCPSC, which could be issued only on the SCPSC’s own initiative, these lower rates are to be effective until the SCPSC renders a final decision on the merits of the Joint Petition. On July 2 and 3, 2018, the SCPSC issued orders implementing the rate reduction required by Act 258. Unless the relief discussed in the next paragraph is granted, the new rates and retroactive credits required by Act 258 are to be put into effect with the first billing cycle of August 2018. Retroactive credits for the period April 1, 2018 through June 30, 2018 total approximately $109.3 million, which amount has been deferred within Revenue subject to refund on the condensed consolidated balance sheet of the Company and Consolidated SCE&G. The initial recognition of such retroactive credits includes the effects of cycle billing on unbilled usage. In addition to the reduction of electric rates (which rates had been previously approved by the SCPSC), Act 258

21




also alters various procedures previously applicable under the BLRA, including redefining the standard of care required by the BLRA and supplying definitions of key terms that would affect the evidence required to establish SCE&G’s ability to recover its costs associated with the Nuclear Project.

On June 29, 2018, SCE&G filed a lawsuit in the District Court challenging the constitutionality of Act 258 along with joint resolution S. 954, which became law on July 2, 2018. Among other things, S. 954 prohibits the SCPSC from holding a hearing on the merits of the Joint Petition before November 1, 2018, and requires it to issue an order on the merits of the Joint Petition by December 21, 2018. In the lawsuit, which was subsequently amended, SCE&G seeks a declaration that the new laws are unconstitutional and asks the court to issue an injunction prohibiting the SCPSC from implementing Act 258. A hearing on SCE&G’s motion for the issuance of a preliminary injunction was held July 30-31, 2018. Dominion Energy and Sedona would not be obligated to complete the pending merger with SCANA if Act 258 remains in effect and is implemented.

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 cost recovery with the gains realized from the settlement of certain interest rate derivatives in early 2018. 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 - Other

On April 25, 2018, the SCPSC approved SCE&G's request 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. Changes in rates became effective beginning with the first billing cycle of May 2018.

Gas - SCE&G

On June 15, 2018, SCE&G filed with the SCPSC its monitoring report for the 12-month period ended March 31, 2018 and proposed an approximately $22.6 million, or 5.29%, overall decrease to its natural gas rates under the terms of the RSA including the impact of the lower corporate tax rate resulting from the Tax Act. The ORS is expected to issue an audit report by September 1, 2018, and the SCPSC is expected to issue its order by October 15, 2018. If approved, the rate adjustment will be effective for the first billing cycle of November 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.

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The Company
 
Consolidated SCE&G
Millions of dollars
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
Regulatory Assets:
 
 

 
 

 
 
 
 
Unrecovered Nuclear Project costs
 
$
4,142

 
$
3,976

 
$
4,142

 
$
3,976

AROs and related funding
 
451

 
434

 
426

 
410

Deferred employee benefit plan costs
 
296

 
305

 
266

 
273

Deferred losses on interest rate derivatives
 
449

 
456

 
449

 
456

Other unrecovered plant
 
99

 
105

 
99

 
105

DSM Programs
 
59

 
59

 
59

 
59

Pipeline integrity management costs
 
61

 
51

 
9

 
8

Environmental remediation costs
 
29

 
30

 
24

 
25

Deferred storm damage costs
 
24

 
24

 
24

 
24

Other
 
147

 
140

 
146

 
140

Total Regulatory Assets
 
$
5,757

 
$
5,580

 
$
5,644

 
$
5,476

Regulatory Liabilities:
 
 

 
 

 
 
 
 
Monetization of guaranty settlement
 
$
1,098

 
$
1,095

 
$
1,098

 
$
1,095

Accumulated deferred income taxes
 
1,074

 
1,076

 
915

 
914

Asset removal costs
 
768

 
757

 
535

 
527

Deferred gains on interest rate derivatives
 
78

 
131

 
78

 
131

Other
 
1

 

 
1

 

Total Regulatory Liabilities
 
$
3,019


$
3,059

 
$
2,627

 
$
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 above and 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 the cost of certain assets that have been or will be placed in service. See also Note 10.
    
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

23




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 continuing to defer pipeline integrity costs, and as of June 30, 2018 costs of $38.1 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 of $4.5 million are being recovered over a 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. The SCPSC is expected to determine how SCE&G's customers will realize the value of these proceeds in connection with its consideration of the Request by the ORS and the Joint Petition (see above and 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

24




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 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 described in Note 12. Such revenues arising from contracts with customers were not material for any period presented, and accordingly, detailed disclosures regarding these revenues are not provided.


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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 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 gas customer bills when weather is milder than normal and decrease gas 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 gas 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 operating 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:

26





The Company
 
Consolidated SCE&G
 
PSNC Energy
 
 
 
Gas-nonregulated
Millions of dollars
 
Electric
 
Gas-regulated
 
Gas-regulated
 
Total
 Gas-regulated
 
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Customer class:
 
 
 
 
 
 
 
 
 
 
  Residential
 
$
243

 
$
34

 
$
38

 
$
72

 
$
30

  Commercial
 
171

 
22

 
18

 
40

 
16

  Industrial
 
106

 
21

 
4

 
25

 
91

  Other
 
30

 
2

 
7

 
9

 
6

Revenues from contracts with customers
 
550

 
79

 
67

 
146

 
143

Other operating revenues
 
3

 

 
2

 
2

 

Total Operating Revenues
 
$
553

 
$
79

 
$
69

 
$
148

 
$
143