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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2019

OR

 

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

For the transition period from                      to                     

 

 

 

 

 

I.R.S. Employer

Commission File Number

 

Exact name of registrant as specified in its charter

 

Identification Number

 

 

 

 

 

001-3375

  

DOMINION ENERGY SOUTH CAROLINA, INC.

  

57-0248695

 

 

 

 

 

 

  

South Carolina

  

 

 

  

(State or other jurisdiction of incorporation or organization)

  

 

 

 

 

 

 

 

 

400 OTARRE PARKWAY

 

 

 

 

CAYCE, South Carolina

 

29033

 

 

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

 

 

(803) 217-9000

 

 

 

  

(Registrants’ telephone number)

  

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Series A Nonvoting Preferred Shares

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

    Yes  ☒   No      

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes      No  

 

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.

Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

 

 

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," “non-accelerated filer,” "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

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.

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes   No 

 

At February 15, 2020, Dominion Energy South Carolina, Inc. had 40,296,147 shares of common stock outstanding, all of which were held by SCANA Corporation, a wholly-owned subsidiary of Dominion Energy, Inc.

 

 

DOMINION ENERGY SOUTH CAROLINA, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS FILING THIS FORM 10-K UNDER THE REDUCED DISCLOSURE FORMAT.

 


Dominion Energy South Carolina, Inc.

 

Item

Number

Page

Number

 

Glossary of Terms

3

 

 

Part I

 

Item 1.

Business

5

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

11

Item 2.

Properties

11

Item 3.

Legal Proceedings

12

Item 4.

Mine Safety Disclosures

12

 

 

Part II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

Item 6.

Selected Financial Data

13

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 8.

Financial Statements and Supplementary Data

18

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

60

Item 9A.

Controls and Procedures

60

Item 9B.

Other Information

60

 

 

Part III

 

Item 10.

Directors, Executive Officers and Corporate Governance

61

Item 11.

Executive Compensation

61

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

61

Item 13.

Certain Relationships and Related Transactions, and Director Independence

61

Item 14.

Principal Accounting Fees and Services

61

 

 

Part IV

 

Item 15.

Exhibits and Financial Statement Schedules

62

Item 16.

Form 10-K Summary

63

 

 

 

 


Glossary of Terms

The following abbreviations or acronyms used in this Form 10-K are defined below:

 

Abbreviation or Acronym

 

Definition

2015 Task Order

 

Retail services agreement between DESC and the DOE, which includes a FERC jurisdictional lease of the DOE transmission facilities at the Savannah River Site

2017 Tax Reform 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

ACE Rule

 

Affordable Clean Energy Rule

AFUDC

 

Allowance for funds used during construction

AOCI

 

Accumulated other comprehensive income (loss)

ARO

 

Asset retirement obligation

BACT

 

Best available control technology

bcf

 

Billion cubic feet

BLRA

 

South Carolina Base Load Review Act

CAA

 

Clean Air Act

CCR

 

Coal combustion residual

CEO

 

Chief Executive Officer

CERCLA

 

Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as

   Superfund

CFO

 

Chief Financial Officer

CO2

 

Carbon dioxide

Consortium

 

A consortium consisting of Westinghouse and WECTEC

CWA

 

Clean Water Act

DECG

 

Dominion Energy Carolina Gas Transmission, LLC

DER

 

Distributed energy resource

DESC

 

The legal entity, Dominion Energy South Carolina, Inc. (formerly known as South Carolina Electric

   & Gas Company), one or more of its consolidated entities or operating segment, or the entirety of

   Dominion Energy South Carolina, Inc. and its consolidated entities

DESS

 

Dominion Energy Southeast Services, Inc. (formerly known as SCANA Services, Inc.)

Dominion Energy South Carolina

 

Dominion Energy South Carolina operating segment

Dodd-Frank Act

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

DOE

 

U.S. Department of Energy

Dominion Energy

 

The legal entity, Dominion Energy, Inc., one or more of its consolidated subsidiaries (other than

   DESC) or operating segments, or the entirety of Dominion Energy, Inc. and its

   consolidated subsidiaries

DSM

 

Demand-side management

ELG Rule

 

Effluent limitations guidelines for the steam electric power generating category

EMANI

 

European Mutual Association for Nuclear Insurance

EPA

 

U.S. Environmental Protection Agency

FASB

 

Financial Accounting Standards Board

FERC

 

Federal Energy Regulatory Commission

FILOT

 

Fee in lieu of taxes

Fuel Company

 

South Carolina Fuel Company, Inc.

GAAP

 

U.S. generally accepted accounting principles

GENCO

 

South Carolina Generating Company, Inc.

GHG

 

Greenhouse gas

IAA

 

Interim Assessment Agreement dated March 28, 2017, as amended, among DESC, Santee Cooper,

   Westinghouse and WECTEC

IRS

 

Internal Revenue Service

MATS

 

Utility Mercury and Air Toxics Standard Rule

MD&A

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MGD

 

Million gallons a day

MGP

 

Manufactured gas plant

MW

 

Megawatt

NAV

 

Net asset value

NEIL

 

Nuclear Electric Insurance Limited

NND Project

 

V.C. Summer Units 2 and 3 nuclear development project under which DESC and Santee Cooper

   undertook to construct two Westinghouse AP1000 Advanced Passive Safety nuclear units in

   Jenkinsville, South Carolina

NOX

 

Nitrogen oxide

NRC

 

U.S. Nuclear Regulatory Commission

NSPS

 

New Source Performance Standards

Order 1000

 

ORS

 

Order issued by FERC adopting requirements for electric transmission planning, cost allocation and development

South Carolina Office of Regulatory Staff

PGA

 

Purchased gas adjustment

3


PHMSA

 

U.S. Pipeline Hazardous Materials Safety Administration

Price-Anderson

 

Price-Anderson Amendments Act of 1988

PSD

 

Prevention of significant deterioration

Reorganization Plan

 

Modified Second Amended Joint Chapter 11 Plan or Reorganization, filed by Westinghouse

RICO

 

Racketeer Influenced and Corrupt Organizations Act

ROE

 

Return on equity

RSA

 

Natural Gas Rate Stabilization Act

Santee Cooper

 

South Carolina Public Service Authority

SCANA

 

The legal entity, SCANA Corporation, one or more of its consolidated subsidiaries (other than

   DESC) or the entirety of SCANA Corporation and its consolidated subsidiaries

SCANA Combination

 

Dominion Energy's acquisition of SCANA completed on January 1, 2019 pursuant to the terms of

   the SCANA Merger Agreement

SCANA Merger Agreement

 

Agreement and plan of merger entered on January 2, 2018 between Dominion Energy and SCANA

SCANA Merger Approval Order

 

Final order issued by the South Carolina Commission on December 21, 2018 setting forth its

   approval of the SCANA Combination

SCDHEC

 

South Carolina Department of Health and Environmental Control

SCDOR

 

South Carolina Department of Revenue

SEC

 

U.S. Securities and Exchange Commission

SO2

 

Sulfur dioxide

South Carolina Commission

 

Public Service Commission of South Carolina

Southern

 

The legal entity, The Southern Company, one or more of its consolidated subsidiaries, or the entirety of The Southern Company and its consolidated subsidiaries

Summer

 

V.C. Summer nuclear power station

Toshiba

 

Toshiba Corporation, parent company of Westinghouse

Toshiba Settlement

 

Settlement Agreement dated as of July 27, 2017, by and among Toshiba, DESC and Santee Cooper

VIE

 

Variable interest entity

VOC

 

Volatile organic compounds

WECTEC

 

WECTEC Global Project Services, Inc. (formerly known as Stone & Webster, Inc.), a wholly-owned

   subsidiary of Westinghouse

Westinghouse

 

Westinghouse Electric Company LLC

Westinghouse Subcontractors

 

Subcontractors and suppliers to the Consortium

WNA

 

Weather normalization adjustment

 

 

4


Part I

Item 1. Business

GENERAL

DESC, a public utility headquartered in Cayce, South Carolina, is a South Carolina corporation organized in 1924. DESC is a wholly-owned subsidiary of SCANA which, effective January 2019, is a wholly-owned subsidiary of Dominion Energy.

DESC is engaged in the generation, transmission and distribution of electricity to approximately 744,000 customers in the central, southern and southwestern portions of South Carolina. Additionally, DESC sells natural gas to approximately 392,000 residential, commercial and industrial customers in South Carolina. DESC’s business experiences seasonal fluctuations, with generally higher sales of electricity during the summer and winter months because of air conditioning and heating requirements, and generally higher sales of natural gas during the winter months due to heating requirements.

GENCO owns a coal-fired electric generating station with a 605 MW net generating capacity (summer rating). GENCO’s electricity is sold exclusively to DESC, pursuant to a FERC-approved power purchase agreement and related operating agreement. The effects of these transactions are eliminated in consolidation. Fuel Company acquires, owns and provides financing for DESC's nuclear fuel, certain fossil fuels and emission and other environmental allowances.

COMPETITION

There is no competition for electric distribution or generation service within DESC's retail electric service territory in South Carolina and no such competition is currently permitted. However, competition from third-party owners for development, construction and ownership of certain transmission facilities in DESC’s service territory is permitted pursuant to Order 1000, subject to state and local siting and permitting approvals. This could result in additional competition to build and own transmission infrastructure in DESC’s service area in the future.

Competition in DESC’s natural gas distribution operations is generally based on price and convenience. Large commercial and industrial customers often have the ability to switch from natural gas to an alternate fuel, such as propane or fuel oil. Natural gas competes with these alternate fuels based on price. As a result, any significant disparity between supply and demand, either of natural gas or of alternate fuels, and due either to production or delivery disruptions or other factors, will affect price and the ability to retain large commercial and industrial customers.

REGULATION

DESC’s electric distribution service, including the rates it may charge to jurisdictional customers, is subject to regulation by the South Carolina Commission. DESC’s electric generation operations are subject to regulation by the South Carolina Commission, FERC, the NRC, the EPA, the DOE and various other federal, state and local authorities. DESC’s electric transmission service is primarily regulated by FERC and the DOE. DESC’s gas distribution operations are subject to regulation by the South Carolina Commission, as well as PHMSA, the U.S. Department of Transportation and the ORS for enforcement of federal and state pipeline safety requirements in its service territories.

 

Electric Regulation in South Carolina

DESC’s retail electric base rates in South Carolina are regulated on a cost-of-service/rate-of-return basis subject to South Carolina statutes and the rules and procedures of the South Carolina Commission. South Carolina base rates are set by a process that allows DESC to recover its operating costs and a return on invested capital. If retail electric earnings exceed the authorized ROE established by the South Carolina Commission, retail electric rates may be subject to review and possible reduction, which may decrease DESC’s future earnings. Additionally, if the South Carolina Commission does not allow recovery of costs incurred in providing service on a timely basis, DESC’s future earnings could be negatively impacted. Fuel costs are reviewed annually by the South Carolina Commission, as required by statute, and fuel rates are subject to revision in these annual fuel proceedings.

 

DESC offers to its retail electric customers several DSM programs designed to assist customers in reducing their demand for electricity and improving their energy efficiency. DESC submits annual filings to the South Carolina Commission related to these programs. As actual DSM program costs are incurred, they are deferred as regulatory assets and recovered through a rider approved by the South Carolina Commission. The rider also provides for recovery of any net lost revenues and for a shared savings incentive.

 

In connection with the SCANA Combination, DESC agreed not to file a general rate case with the South Carolina Commission with a requested rate effective date earlier than January 2021. Rate adjustments are permitted prior to 2021 for fuel and environmental costs, DSM costs and other rates routinely adjusted on an annual or biennial basis.

 

Gas Regulation in South Carolina

DESC is subject to regulation of rates and other aspects of its natural gas distribution service by the South Carolina Commission.

DESC provides retail natural gas service to customers in areas in which it has received authorization from the South Carolina

Commission and in municipalities in which it holds a franchise. DESC’s base rates can be adjusted annually, pursuant to the RSA, for recovery of costs related to natural gas infrastructure. Base rates are set based on the cost-of-service by rate class approved by the

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South Carolina Commission in the latest general rate case. Base rates for DESC are based primarily on a rate design methodology in which the majority of operating costs are recovered through volumetric charges. DESC also utilizes a weather normalization adjustment to adjust its base rates during the winter billing months for residential and commercial customers to mitigate the effects of unusually cold or warm weather.

 

In addition, DESC’s natural gas tariffs include a purchased gas adjustment that provides for the recovery of prudently incurred gas costs, including transportation costs. DESC is authorized to adjust its purchased gas rates monthly and makes routine filings with the South Carolina Commission to provide notification of changes in these rates. Costs that are under or over recovered are deferred as regulatory assets or liabilities, respectively, and considered in subsequent purchased gas adjustments. The purchased gas adjustment filings generally cover a prospective twelve-month period. Increases or decreases in purchased gas costs can result in corresponding changes in purchased gas adjustment rates and the revenue generated by those rates. The South Carolina Commission annually reviews DESC’s gas purchasing policies and practices, including its administration of the purchased gas adjustment.

EMPLOYEES

At December 31, 2019, DESC had approximately 2,500 employees, of which approximately 750 were subject to collective bargaining agreements.

WHERE YOU CAN FIND MORE INFORMATION

DESC files their annual, quarterly and current reports and other information with the SEC. Their SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov.

DESC makes their SEC filings available, free of charge, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, through Dominion Energy’s website, http://www.dominionenergy.com, as soon as reasonably practicable after filing or furnishing the material to the SEC. Information contained on Dominion Energy’s website is not incorporated by reference in this report.

Item 1A. Risk Factors

DESC’s business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond its control. A number of these factors have been identified below. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in Item 7. MD&A.

Regulatory, Legislative and Legal Risks

The rates that DESC can charge are subject to regulatory review. Revenue provided by DESC’s operations is based primarily on rates approved by state regulatory agencies. The profitability of these businesses is dependent on their ability, through the rates that they are permitted to charge, to recover costs and earn a reasonable rate of return on their capital investment.

DESC’s retail electric base rates for services to customers in South Carolina are regulated on a cost-of-service/rate-of-return basis subject to South Carolina statutes and the rules and procedures of the South Carolina Commission. South Carolina base rates are set by a process that allows DESC to recover its operating costs and return on invested capital. If retail electric earnings exceed the returns established by the South Carolina Commission, retail electric rates may be subject to review and possible reduction by the South Carolina Commission, which may decrease DESC’s future earnings. If the South Carolina Commission does not allow recovery through base rates, on a timely basis, of costs incurred in providing service, DESC’s future earnings could be negatively impacted.

Under certain circumstances, the South Carolina Commission may impose a moratorium on increases to retail base rates for a specified period of time, which could delay recovery of costs incurred in providing service. Additionally, governmental officials, stakeholders and advocacy groups may challenge these regulatory reviews. Such challenges may lengthen the time, complexity and costs associated with such regulatory reviews. In addition, in February 2020, legislation was introduced in the South Carolina House of Representatives of the South Carolina General Assembly proposing to amend the Code of Laws of South Carolina so as to, among other things, prevent utilities from recovering certain expenditures from ratepayers; to allow the South Carolina Commission to evaluate utility operating expenses on a case-by-case basis; to provide penalties if a public utility submits a nonallowable expense for recovery from its ratepayers; and to require a utility to pay for the cost of an audit when the South Carolina Commission determines that the utility submitted a nonallowable expense. The legislation, if enacted, could further increase costs associated with regulatory reviews.

DESC is subject to numerous legal proceedings and ongoing governmental investigations and examinations. DESC is a defendant in numerous federal and state legal proceedings and governmental investigations relating to the decision to abandon construction at the NND Project. Among other things, the lawsuits and investigations allege misrepresentation, failure to properly manage the NND Project, unfair trade practices and violation of anti-trust laws. Additionally, DESC is a defendant in federal and state legal proceedings relating to the SCANA Combination. Among other things, the lawsuits allege breaches of various fiduciary duties.

The outcome of these legal proceedings, investigations and examinations, including settlements, is uncertain and may adversely affect DESC’s financial condition or results of operation.

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DESC is subject to complex governmental regulation, including tax regulation, that could adversely affect its results of operations and subject DESC to monetary penalties. DESC’s operations are subject to extensive federal, state and local regulation and require numerous permits, approvals and certificates from various governmental agencies. Such laws and regulations govern the terms and conditions of the services we offer, our relationships with affiliates, protection of our critical electric infrastructure assets and pipeline safety, among other matters. These operations are also subject to legislation governing taxation at the federal, state and local level. DESC must also comply with environmental legislation and associated regulations. Management believes that the necessary approvals have been obtained for existing operations and that the businesses are conducted in accordance with applicable laws. DESC’s business is subject to regulatory regimes which could result in substantial monetary penalties if DESC is found not to be in compliance, including mandatory reliability standards and interaction in the wholesale markets. New laws or regulations, the revision or reinterpretation of existing laws or regulations, changes in enforcement practices of regulators, or penalties imposed for non-compliance with existing laws or regulations may result in substantial additional expense. Recent legislative and regulatory changes that are impacting DESC include the 2017 Tax Reform Act.

Environmental Risks

DESC’s operations and construction activities are subject to a number of environmental laws and regulations which impose significant compliance costs on DESC. DESC’s operations and construction activities are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, and health and safety. Compliance with these legal requirements requires DESC to commit significant capital toward permitting, emission fees, environmental monitoring, installation and operation of environmental control equipment and purchase of allowances and/or offsets. Additionally, DESC could be responsible for expenses relating to remediation and containment obligations, including at sites where it has been identified by a regulatory agency as a potentially responsible party. Expenditures relating to environmental compliance have been significant in the past, and DESC expects that they will remain significant in the future. As a result of these requirements, certain facilities may become uneconomical to operate and may need to be shut down, converted to new fuel types or sold.

We expect that existing environmental laws and regulations may be revised and/or new laws may be adopted including regulation of GHG emissions which could have an impact on DESC’s business (risks relating to regulation of GHG emissions from existing fossil fuel-fired electric generating units are discussed in more detail below). In addition, further regulation of air quality and GHG emissions under the CAA have been imposed on the natural gas sector, including rules to limit methane leakage. DESC is also subject to federal water and waste regulations, including regulations concerning cooling water intake structures, coal combustion by-product handling and disposal practices, wastewater discharges from steam electric generating stations, management and disposal of hydraulic fracturing fluids and the potential further regulation of polychlorinated biphenyls.

Compliance costs cannot be estimated with certainty due to the inability to predict the requirements and timing of implementation of any new environmental rules or regulations. Other factors which affect the ability to predict future environmental expenditures with certainty include the difficulty in estimating clean-up costs and quantifying liabilities under environmental laws that impose joint and several liabilities on all responsible parties. However, such expenditures, if material, could make DESC’s facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect DESC’s results of operations, financial performance or liquidity.

Any additional federal and/or state requirements imposed on energy companies mandating limitations on GHG emissions or requiring efficiency improvements may result in compliance costs that alone or in combination could make some of DESC’s electric generation units or natural gas facilities uneconomical to maintain or operate. The ACE Rule, which became effective in September 2019, is targeted at reducing CO2 emissions from existing coal-fired power plants. The ACE Rule requires states to develop plans by July 2022 to implement CO2 performance standards. State plans must be approved by the EPA by January 2024. States are also contemplating regulations regarding GHG emissions. Compliance with the ACE Rule or other federal or state carbon regulations is expected to require increasing the energy efficiency of equipment at facilities, committing significant capital toward carbon reduction programs, purchase of allowances and/or emission offset credits, fuel switching, and/or retirement of high-emitting generation facilities and potential replacement with lower-emitting generation facilities. Given these developments and uncertainties, DESC cannot estimate the aggregate effect of such requirements on its results of operations, financial condition or its customers. However, such expenditures, if material, could make DESC’s generation facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect DESC’s results of operations, financial performance or liquidity.

There are also potential impacts on DESC’s natural gas businesses as federal or state GHG regulations may require GHG emission reductions from the natural gas sector which, in addition to resulting in increased costs, could affect demand for natural gas. Additionally, GHG requirements could result in increased demand for energy conservation and renewable products, which could impact the natural gas businesses.

Construction Risks

DESC’s infrastructure build and expansion plans often require regulatory approval, including environmental permits, before commencing construction and completing projects. DESC may not complete facility construction, electric transmission line, conversion or other infrastructure projects that it commences, or it may complete projects on materially different terms, costs or timing than initially estimated or anticipated, and it may not be able to achieve the intended benefits of any such project, if completed. Commencing construction on announced and future projects may require approvals from applicable state and federal agencies, and such approvals could include mitigation costs which may be material to DESC. Projects may not be able to be completed on time or in accordance with our estimated costs as a result of weather conditions, delays in obtaining or failure to obtain regulatory approvals, delays in obtaining key materials, labor difficulties, difficulties with partners or potential partners, a decline in the credit strength of counterparties or vendors, or other factors beyond DESC’s control. Even if facility construction, electric

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transmission line, conversion and other infrastructure projects are completed, the total costs of the projects may be higher than anticipated and the performance of the business of DESC following completion of the projects may not meet expectations. Start-up and operational issues can arise in connection with the commencement of commercial operations at our facilities. Such issues may include failure to meet specific operating parameters, which may require adjustments to meet or amend these operating parameters. Additionally, DESC may not be able to timely and effectively integrate the projects into its operations and such integration may result in unforeseen operating difficulties or unanticipated costs. Further, regulators may disallow recovery of some of the costs of a project if they are deemed not to be prudently incurred. Any of these or other factors could adversely affect DESC’s ability to realize the anticipated benefits from the facility construction, electric transmission line, conversion and other infrastructure projects.

Operational Risks

DESC’s financial performance and condition can be affected by changes in the weather, including the effects of global climate change. Fluctuations in weather can affect demand for DESC’s services. For example, milder than normal weather can reduce demand for electricity and gas distribution services. In addition, severe weather, including hurricanes, winter storms, earthquakes, floods and other natural disasters can stress systems, disrupt operation of DESC’s facilities and cause service outages, production delays and property damage that require incurring additional expenses. Changes in weather conditions can result in reduced water levels or changes in water temperatures that could adversely affect operations at some of DESC’s power stations. Furthermore, DESC’s operations could be adversely affected and its physical plant placed at greater risk of damage should changes in global climate produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in more intense, frequent and extreme weather events, abnormal levels of precipitation and, for operations located on or near coastlines, a change in sea level or sea temperatures. Due to the location of DESC’s electric utility service territories which are frequently in the path of hurricanes, we experience the consequences of these weather events to a greater degree than many of our industry peers.

DESC’s operations are subject to operational hazards, equipment failures, supply chain disruptions and personnel issues which could negatively affect DESC. Operation of DESC’s facilities involves risk, including the risk of potential breakdown or failure of equipment or processes due to aging infrastructure, fuel supply, pipeline integrity or transportation disruptions, accidents, labor disputes or work stoppages by employees, acts of terrorism or sabotage, construction delays or cost overruns, shortages of or delays in obtaining equipment, material and labor, operational restrictions resulting from environmental limitations and governmental interventions, changes to the environment and performance below expected levels. DESC’s business is dependent upon sophisticated information technology systems and network infrastructure, the failure of which could prevent them from accomplishing critical business functions. Because DESC’s transmission facilities, pipelines and other facilities are interconnected with those of third parties, the operation of our facilities and pipelines could be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties.

Operation of DESC’s facilities below expected capacity levels could result in lost revenues and increased expenses, including higher maintenance costs. Unplanned outages of DESC’s facilities and extensions of scheduled outages due to mechanical failures or other problems occur from time to time and are an inherent risk of DESC’s business. Unplanned outages typically increase DESC’s operation and maintenance expenses and may reduce its revenue as a result of selling less output or may require DESC to incur significant costs as a result of operating higher cost units or obtaining replacement output from third parties in the open market to satisfy forward energy and capacity or other contractual obligations. Moreover, if DESC is unable to perform its contractual obligations, penalties or liability for damages could result.

In addition, there are many risks associated with DESC’s operations and the transportation, storage and distribution of natural gas, including nuclear accidents, fires, explosions, uncontrolled release of natural gas and other environmental hazards, pole strikes, electric contact cases, the collision of third party equipment with pipelines and avian and other wildlife impacts. Such incidents could result in loss of human life or injuries among employees, customers or the public in general, environmental pollution, damage or destruction of facilities or business interruptions and associated public or employee safety impacts, loss of revenues, increased liabilities, heightened regulatory scrutiny and reputational risk. Further, the location of pipelines and storage facilities, or generation, transmission, substations and distribution facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

DESC’s financial results can be adversely affected by various factors driving supply and demand for electricity and gas and related services. Technological advances required by federal laws mandate new levels of energy efficiency in end-use devices, including lighting, furnaces and electric heat pumps and could lead to declines in per capita energy consumption. Additionally, certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date. Further, DESC’s business model is premised upon the cost efficiency of the production, transmission and distribution of large-scale centralized utility generation. However, advances in distributed generation technologies, such as solar cells, gas microturbines, battery storage and fuel cells, may make these alternative generation methods competitive with large-scale utility generation, and change how customers acquire or use our services. DESC has an exclusive franchise to serve retail electric customers in its South Carolina service territory. If regulatory conditions change, DESC’s exclusive franchise may erode.

Reduced energy demand or significantly slowed growth in demand due to customer adoption of energy efficient technology, conservation, distributed generation, regional economic conditions, or the impact of additional compliance obligations, unless substantially offset through regulatory cost allocations, could adversely impact the value of DESC’s business activities.

DESC may be materially adversely affected by negative publicity. From time to time, political and public sentiment in connection with significant transactions and infrastructure projects, such as the abandonment of the NND Project, may result in a significant amount of adverse press coverage and other adverse public statements affecting DESC. Additionally, any failure by DESC to realize voluntary targets set with respect to the reduction of GHG emissions or other long-term goals could lead to adverse press coverage and

8


other adverse public statements affecting DESC. Adverse press coverage and other adverse statements, whether or not driven by political or public sentiment, may also result in investigations by regulators, legislators and law enforcement officials or in legal claims.

Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time consuming and expensive and, regardless of the factual basis for the assertions being made, can have a negative impact on the reputation of DESC, on the morale and performance of its employees and on its relationships with its regulators, customers and commercial counterparties. It may also have a negative impact on DESC’s ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on DESC’s business, financial condition and results of operations.

Hostile cyber intrusions could severely impair DESC’s operations, lead to the disclosure of confidential information, damage the reputation of DESC and otherwise have an adverse effect on DESC’s business. DESC owns assets deemed as critical infrastructure, the operation of which is dependent on information technology systems. Further, the computer systems that run DESC’s facilities are not completely isolated from external networks. There appears to be an increasing level of activity, sophistication and maturity of threat actors, in particular nation state actors, that wish to disrupt the U.S. bulk power system and the U.S. gas transmission or distribution system. Such parties could view DESC’s computer systems, software or networks as attractive targets for cyber attack. For example, malware has been designed to target software that runs the nation’s critical infrastructure such as power transmission grids and gas pipelines. In addition, DESC’s business requires that it and its vendors collect and maintain sensitive customer data, as well as confidential employee information, which is subject to electronic theft or loss.

A successful cyber attack on the systems that control DESC’s electric generation and electric or gas transmission or distribution assets could severely disrupt business operations, preventing DESC from serving customers or collecting revenues. The breach of certain business systems could affect DESC’s ability to correctly record, process and report financial information. A major cyber incident could result in significant expenses to investigate and repair security breaches or system damage and could lead to litigation, fines, other remedial action, heightened regulatory scrutiny and damage to DESC’s reputation. In addition, the misappropriation, corruption or loss of personally identifiable information and other confidential data at DESC or one of its vendors could lead to significant breach notification expenses and mitigation expenses such as credit monitoring. If a significant breach were to occur, the reputation of DESC also could be adversely affected. While DESC maintains property and casualty insurance, along with other contractual provisions, that may cover certain damage caused by potential cyber incidents, all damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. For these reasons, a significant cyber incident could materially and adversely affect DESC’s business, financial condition and results of operations.

War, acts and threats of terrorism, intentional acts and other significant events could adversely affect DESC’s operations.  DESC cannot predict the impact that any future terrorist attacks or retaliatory military or other action may have on the energy industry in general or on DESC’s business in particular. Any such future attacks or retaliatory action may adversely affect DESC’s operations in a variety of ways, including by disrupting the power, fuel and other markets in which DESC operates or requiring the implementation of additional, more costly security guidelines and measures. DESC’s infrastructure facilities, including nuclear facilities and projects under construction, could be direct targets or indirect casualties of an act of terror or other physical attack. Any physical compromise of DESC’s facilities could adversely affect DESC’s ability to generate, purchase, transmit or distribute electricity, store, transmit or distribute natural gas, store liquefied natural gas or otherwise operate its facilities in the most efficient manner or at all. In addition, the amount and scope of insurance coverage maintained against losses resulting from any such attack may not be sufficient to cover such losses or otherwise adequately compensate for any business disruptions that could result.

Instability in financial markets as a result of terrorism, war, intentional acts, pandemic, credit crises, recession or other factors could result in a significant decline in the U.S. economy and/or increase the cost or limit the availability of insurance or adversely impact DESC’s ability to access capital on acceptable terms.

Failure to attract and retain key executive officers and an appropriately qualified workforce could have an adverse effect on DESC’s operations. DESC’s business strategy is dependent on its ability to recruit, retain and motivate employees. DESC’s key executive officers are the CEO, CFO and presidents and those responsible for financial, operational, legal, regulatory and accounting functions. Competition for skilled management employees in these areas of DESC’s business operations is high. Certain events, such as an aging workforce, mismatch of skill set, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge base and the length of time required for skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or future availability and cost of contract labor may adversely affect the ability to manage and operate DESC’s business. In addition, certain specialized knowledge is required of DESC’s technical employees for construction and operation of transmission, generation and distribution assets. DESC’s inability to attract and retain these employees could adversely affect its business and future operating results.

Nuclear Generation Risks

DESC has a substantial ownership interest in and operates a nuclear generating unit; as a result, DESC may incur substantial costs and liabilities. DESC’s nuclear facility is subject to operational, environmental, health and financial risks such as the on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, limitations on the amounts and types of insurance available, potential operational liabilities and extended outages, the costs of replacement power, the costs of maintenance and the costs of securing the facilities against possible terrorist attacks. DESC maintains a decommissioning trust and external insurance coverage to minimize the financial exposure to these risks; however,

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it is possible that future decommissioning costs could exceed amounts in the decommissioning trust and/or damages could exceed the amount of insurance coverage. If DESC’s decommissioning trust funds are insufficient, and it is not allowed to recover the additional costs incurred through insurance or regulatory mechanisms, its results of operations could be negatively impacted.

DESC’s nuclear facility is also subject to complex government regulation which could negatively impact its results of operations. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generating facilities. In the event of noncompliance, the NRC has the authority to impose fines, set license conditions, shut down a nuclear unit, or take some combination of these actions, depending on its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could require DESC to make substantial expenditures at its nuclear plant. In addition, although DESC has no reason to anticipate a serious nuclear incident at its plant, if an incident did occur, it could materially and adversely affect its results of operations and/or financial condition. A major incident at a nuclear facility anywhere in the world, such as the nuclear events in Japan in 2011, could cause the NRC to adopt increased safety regulations or otherwise limit or restrict the operation or licensing of domestic nuclear units.

Financial, Economic and Market Risks

Exposure to counterparty performance may adversely affect DESC’s financial results of operations. DESC is exposed to credit risks of its counterparties and the risk that one or more counterparties may fail or delay the performance of their contractual obligations, including but not limited to payment for services. Counterparties could fail or delay the performance of their contractual obligations for a number of reasons, including the effect of regulations on their operations. Defaults or failure to perform by customers, suppliers, contractors, joint venture partners, financial institutions or other third parties may adversely affect DESC’s financial results.

Changing rating agency requirements could negatively affect DESC’s growth and business strategy. In order to maintain appropriate credit ratings to obtain needed credit at a reasonable cost in light of existing or future rating agency requirements, DESC may find it necessary to take steps or change its business plans in ways that may adversely affect its growth and earnings. A reduction in DESC’s credit ratings could result in an increase in borrowing costs, loss of access to certain markets, or both, thus adversely affecting operating results and could require DESC to post additional collateral in connection with some of its price risk management activities.

An inability to obtain needed capital or financing on satisfactory terms, or at all, could have an adverse effect on our operations and ability to generate cash flow. DESC is dependent on certain financing arrangements with Dominion Energy for any borrowings necessary to meet our working capital and other financial needs. If Dominion Energy’s funding resources were to become unavailable to Dominion Energy, DESC’s access to funding would also be in jeopardy. In the future, an inability to obtain additional financing from other sources on acceptable terms could negatively affect our financial condition, cash flows, anticipated financial results or impair our ability to generate additional cash flows. The ability to obtain bank financing or to access the capital markets for future debt offerings may be limited by the financial condition of DESC at the time of any such financing or offering or other debt agreements in place at the time, adverse market conditions or other contingencies and uncertainties that are beyond our control.

DESC also relies on a credit facility with banks to meet short-term funding needs. Banks may be unable or unwilling to extend credit in the future. From time to time, DESC may use interest-rate derivatives to fix the rate on a portion of its variable-rate debt. A downgrade of credit ratings could increase the interest cost of debt and decrease future availability of capital from banks and other sources. While management believes it is important to maintain investment-grade credit ratings to conduct DESC’s businesses, DESC may not be able to keep investment-grade ratings.

Market performance, interest rates and other changes may decrease the value of DESC’s decommissioning trust fund and benefit plan assets or increase DESC’s liabilities, which could then require significant additional funding. The performance of the capital markets affects the value of the assets that are held in trust to satisfy future obligations to decommission DESC’s nuclear plant and under DESC’s pension and other postretirement benefit plans. DESC has significant obligations in these areas and holds significant assets in these trusts. These assets are subject to market fluctuation and will yield uncertain returns, which may fall below expected return rates.

With respect to the decommissioning trust fund, a decline in the market value of these assets may increase the funding requirements of the obligations to decommission DESC’s nuclear plant or require additional NRC-approved funding assurance.

A decline in the market value of the assets held in trusts to satisfy future obligations under DESC’s pension and other postretirement benefit plans may increase the funding requirements under such plans. Additionally, changes in interest rates will affect the liabilities under DESC’s pension and other postretirement benefit plans; as interest rates decrease, the liabilities increase, potentially requiring additional funding. Further, changes in demographics, including increased numbers of retirements or changes in mortality assumptions, may also increase the funding requirements of the obligations related to the pension and other postretirement benefit plans.

If the decommissioning trust fund and benefit plan assets are negatively impacted by market fluctuations or other factors, DESC’s results of operations, financial condition and/or cash flows could be negatively affected.

The use of derivative instruments could result in financial losses and liquidity constraints. DESC may use derivative instruments, including futures, swaps, forwards and options, to manage financial market risks. DESC could be required to provide cash collateral or

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recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities and financial contracts or if a counterparty fails to perform under a contract.

The Dodd-Frank Act was enacted into law in July 2010 in an effort to improve regulation of financial markets. The Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Act, requires certain over-the-counter derivatives, or swaps, to be cleared through a derivatives clearing organization and, if the swap is subject to a clearing requirement, to be executed on a designated contract market or swap execution facility. Non-financial entities that use swaps to hedge or mitigate commercial risk, often referred to as end users, may elect the end-user exception to the Commodity Exchange Act’s clearing requirements. DESC has elected to exempt its swaps from the Commodity Exchange Act’s clearing requirements. If, as a result of changes to the rulemaking process, DESC’s derivative activities are not exempted from the clearing, exchange trading or margin requirements, DESC could be subject to higher costs due to decreased market liquidity or increased margin payments. In addition, DESC’s swap dealer counterparties may attempt to pass-through additional trading costs in connection with changes to or the elimination of rulemaking that implements Title VII of the Dodd-Frank Act.

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

DESC has approximately 3,700 miles and 26,600 miles of electric transmission and distribution lines, respectively, exclusive of service level lines, in South Carolina. The grants for most of DESC’s electric lines contain rights-of-way that have been obtained from the apparent owners of real estate, but underlying property titles have not been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly-owned property, where permission to operate can be revoked. In addition, DESC owns 439 substations.

DESC’s natural gas system includes approximately 500 miles of transmission pipeline and approximately 18,400 miles of distribution mains and related service facilities.

DESC owns two liquefied natural gas facilities, one located near Charleston, South Carolina, and the other in Salley, South Carolina. The Charleston facility can store the liquefied equivalent of 1.0 bcf of natural gas, can regasify approximately 6% of its storage capacity per day and can liquefy less than 1% of its storage capacity per day. The Salley facility can store the liquefied equivalent of 0.9 bcf of natural gas and can regasify approximately 10% of its storage capacity per day. The Salley facility has no liquefying capabilities.

DESC’s bond indenture, which secures its first mortgage bonds, constitutes a direct mortgage lien on substantially all of its electric utility property.

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The following table lists DESC’s generating units and capability as of December 31, 2019.

 

Plant

 

Location

 

Net Summer

Capability

(MW)

 

 

 

 

 

Percentage

Net Summer

Capability

 

Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

Jasper (CC)(1)

 

Hardeeville, SC

 

 

852

 

 

 

 

 

 

 

 

Columbia Energy Center (CC)(1)

 

Gaston, SC

 

 

519

 

 

 

 

 

 

 

 

Urquhart (CC)(1)

 

Beech Island, SC

 

 

458

 

 

 

 

 

 

 

 

McMeekin

 

Irmo, SC

 

 

250

 

 

 

 

 

 

 

 

Hagood (CT)(1)

 

Charleston, SC

 

 

126

 

 

 

 

 

 

 

 

Urquhart Unit 3

 

Beech Island, SC

 

 

95

 

 

 

 

 

 

 

 

Urquhart (CT)

 

Beech Island, SC

 

 

87

 

 

 

 

 

 

 

 

Parr (CT)(1)

 

Jenkinsville, SC

 

 

60

 

 

 

 

 

 

 

 

Williams (CT)(1)

 

Goose Creek, SC

 

 

40

 

 

 

 

 

 

 

 

Coit (CT)(1)

 

Columbia, SC

 

 

26

 

 

 

 

 

 

 

 

Total Gas(2)

 

 

 

 

2,513

 

 

 

 

 

 

40

%

Coal

 

 

 

 

 

 

 

 

 

 

 

 

 

Wateree

 

Eastover, SC

 

 

684

 

 

 

 

 

 

 

 

Williams

 

Goose Creek, SC

 

 

605

 

 

 

 

 

 

 

 

Cope(3)

 

Cope, SC

 

 

415

 

 

 

 

 

 

 

 

Total Coal

 

 

 

 

1,704

 

 

 

 

 

 

27

 

Hydro

 

 

 

 

 

 

 

 

 

 

 

 

 

Fairfield

 

Jenkinsville, SC

 

 

576

 

 

 

 

 

 

 

 

Saluda

 

Irmo, SC

 

 

190

 

 

 

 

 

 

 

 

Other

 

Various

 

 

18

 

 

 

 

 

 

 

 

Total Hydro

 

 

 

 

784

 

 

 

 

 

 

13

 

Nuclear

 

 

 

 

 

 

 

 

 

 

 

 

 

Summer

 

Jenkinsville, SC

 

 

650

 

 

(4

)

 

 

 

 

Total Nuclear

 

 

 

 

650

 

 

 

 

 

 

10

 

Power Purchase Agreements

 

 

 

 

596

 

 

 

 

 

 

10

 

Total Utility Generation

 

 

 

 

6,247

 

 

 

 

 

 

100

%

 

Note: (CT) denotes combustion turbine and (CC) denotes combined cycle.

(1)

Capable of burning fuel oil as a secondary source.

(2)

Excludes the Hardeeville gas combustion turbine which currently does not have any net summer capability.

(3)

Capable of burning natural gas as a secondary source.

(4)

Excludes 33.3% undivided interest owned by Santee Cooper.

From time to time, DESC is alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by DESC, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, DESC is involved in various legal proceedings.

See Notes 3 and 12 to the Consolidated Financial Statements, which information is incorporated herein by reference, for a discussion of various legal, environmental and other regulatory proceedings to which DESC is a party.

Item 4. Mine Safety Disclosures

Not Applicable.

12


Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for DESC’s common stock, all of which is owned by SCANA. DESC intends to pay quarterly cash dividends in 2020 but is neither required to nor restricted, except as described in Note 5 to the Consolidated Financial Statements, from making such payments.

At December 31, 2019, DESC’s retained earnings are below the balance established by the Federal Power Act as a reserve on earnings attributable to hydroelectric generation plants. As a result, DESC is prohibited from the payment of dividends without regulatory approval until the balance of its retained earnings increases. 

Item 6. Selected Financial Data

Omitted pursuant to General Instructions I.(2)(a).

13


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MD&A discusses DESC’s results of operations and general financial condition. MD&A should be read in conjunction with Item 1. Business and the Financial Statements in Item 8. Financial Statements and Supplementary Data. DESC meets the conditions to file under the reduced disclosure format, and therefore has omitted certain sections of MD&A.

CONTENTS OF MD&A

MD&A consists of the following information:

 

Forward-Looking Statements

 

Results of Operations

 

Analysis of Operations

FORWARD-LOOKING STATEMENTS

This report contains statements concerning DESC’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “continue,” “target” or other similar words.

DESC makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:

 

Unusual weather conditions and their effect on energy sales to customers and energy commodity prices;

 

Extreme weather events and other natural disasters, including, but not limited to, hurricanes, high winds, severe storms, earthquakes, flooding, climate changes and changes in water temperatures and availability that can cause outages and property damage to facilities;

 

Federal, state and local legislative and regulatory developments, including changes in federal and state tax laws and regulations;

 

Risks of operating businesses in regulated industries that are subject to changing regulatory structures;

 

Changes to regulated rates collected;

 

Changes in future levels of domestic and international natural gas production, supply or consumption;

 

Timing and receipt of regulatory approvals necessary for planned construction or growth projects and compliance with conditions associated with such regulatory approvals;

 

The inability to complete planned construction, conversion or growth projects at all, or with the outcomes or within the terms and time frames initially anticipated, including as a result of increased public involvement, intervention or litigation in such projects;

 

Changes to federal, state and local environmental laws and regulations, including those related to climate change, the tightening of emission or discharge limits for GHGs and other substances, more extensive permitting requirements and the regulation of additional substances;

 

Cost of environmental compliance, including those costs related to climate change;

 

Changes in implementation and enforcement practices of regulators relating to environmental standards and litigation exposure for remedial activities;

 

Difficulty in anticipating mitigation requirements associated with environmental and other regulatory approvals or related appeals;

 

The impact of operational hazards, including adverse developments with respect to pipeline and plant safety or integrity, equipment loss, malfunction or failure, operator error, and other catastrophic events;

 

Risks associated with the operation of nuclear facilities, including costs associated with the disposal of spent nuclear fuel, decommissioning, plant maintenance and changes in existing regulations governing such facilities;

 

Changes in operating, maintenance and construction costs;

 

Domestic terrorism and other threats to DESC’s physical and intangible assets, as well as threats to cybersecurity;

 

Additional competition from the development and deployment of alternative energy sources, such as self-generation and distributed generation technologies;

14


 

Competition in the development, construction and ownership of certain electric transmission facilities in connection with Order 1000;

 

Changes in technology, particularly with respect to new, developing or alternative sources of generation and smart grid technologies;

 

Changes in demand for services, including industrial, commercial and residential growth or decline in service areas, changes in supplies of natural gas delivered, changes in customer growth or usage patterns, including as a result of energy conservation programs, the availability of energy efficient devices and the use of distributed generation methods;

 

Adverse outcomes in litigation matters or regulatory proceedings, including matters related to the NND Project;

 

Counterparty credit and performance risk;

 

Fluctuations in the value of investments held in nuclear decommissioning and benefit plan trusts;

 

Fluctuations in energy-related commodity prices and the effect these could have on DESC’s financial position and the underlying value of assets;

 

Fluctuations in interest rates;

 

Changes in rating agency requirements or credit ratings and their effect on availability and cost of capital;

 

Global capital market conditions, including the availability of credit and the ability to obtain financing on reasonable terms;

 

Political and economic conditions, including inflation and deflation;

 

Employee workforce factors including collective bargaining agreements and labor negotiations with union employees; and

 

Changes in financial or regulatory accounting principles or policies imposed by governing bodies.

Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors.

DESC’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. DESC cautions the reader not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. DESC undertakes no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

RESULTS OF OPERATIONS

Presented below is a summary of DESC’s results:

 

Year Ended December 31,

 

2019

 

 

$ Change

 

 

2018

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,222

)

 

$

(633

)

 

$

(589

)

15


 

Overview

2019 VS. 2018

Net loss increased $633 million, primarily due to charges for refunds of amounts previously collected from retail electric customers for the NND Project, certain regulatory assets and utility plant for which DESC committed to forgo recovery, litigation and a voluntary retirement program. These decreases were partially offset by the absence of an impairment charge related to the NND Project and increased earnings under the SCANA Merger Approval Order.

Analysis of Consolidated Operations

Presented below are selected amounts related to DESC’s results of operations:

 

Year Ended December 31,

 

2019

 

 

$ Change

 

 

2018

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

1,929

 

 

$

(833

)

 

$

2,762

 

Fuel used in electric generation

 

 

573

 

 

 

(98

)

 

 

671

 

Purchased power

 

 

54

 

 

 

(38

)

 

 

92

 

Gas purchased for resale

 

 

216

 

 

 

(23

)

 

 

239

 

Net revenue

 

 

1,086

 

 

 

(674

)

 

 

1,760

 

Other operations and maintenance

 

 

632

 

 

 

1

 

 

 

631

 

Impairment of assets and other charges

 

 

695

 

 

 

(681

)

 

 

1,376

 

Depreciation and amortization

 

 

450

 

 

 

123

 

 

 

327

 

Other taxes

 

 

250

 

 

 

(7

)

 

 

257

 

Other income (expense), net

 

 

(33

)

 

 

(162

)

 

 

129

 

Interest charges

 

 

260

 

 

 

(43

)

 

 

303

 

Income tax benefit

 

 

(12

)

 

 

404

 

 

 

(416

)

 

An analysis of DESC’s results of operations follows:

2019 VS. 2018

Net revenue decreased 38% primarily due to:

 

A $1.0 billion charge to electric revenue for refunds of amounts previously collected from retail electric customers for the NND Project;

 

A $17 million decrease in gas revenues due to lower South Carolina Commission approved rates and refunds of amounts previously collected from gas customers; partially offset by

 

Increased revenue under the SCANA Merger Approval Order issued by the South Carolina Commission in 2019 compared to revenue under South Carolina legislation enacted in the second quarter of 2018 to temporarily reduce the amount collected from customers under the BLRA ($247 million); and

 

A $114 million increase in electric revenue pursuant to a South Carolina Commission order whereby fuel cost recovery was substantially offset with gains realized upon the settlement of certain interest rate derivative contracts in 2018, as further described in other income (expense) below.

Other operations and maintenance was substantially consistent as a charge related to a voluntary retirement program ($51 million) was substantially offset by lower non-labor electric generation expenses ($19 million), lower legal and NND Project wind down costs ($17 million) and lower property insurance expenses ($4 million).

Impairment of assets and other charges decreased 49%, primarily due to the absence of $1.4 billion of impairment charges recorded in 2018 related to the NND Project, partially offset by $590 million of charges related to litigation and a $105 million charge for utility plant for which DESC committed to forgo recovery.

Depreciation and amortization increased 38%, primarily reflecting the amortization of NND Project costs.

Other income decreased $162 million, primarily due to the absence of gains realized upon the settlement of interest rate derivative contracts in 2018 ($115 million) that were mostly offset by downward adjustments to electric revenues pursuant to a previously received South Carolina Commission order related to fuel cost recovery, a charge related to a voluntary retirement program ($24 million), lower AFUDC ($10 million) and penalties related to unrecognized tax benefits in the current year ($7 million), partially offset by a gain on sale of certain warranty service contracts ($7 million).

Interest charges decreased 14%, primarily due to lower long-term debt principal balances primarily as a result of the debt tender offers completed in 2019 ($62 million), partially offset by interest charges on unrecognized tax benefits in the current year ($10 million).

16


Income tax benefit decreased $404 million, primarily due to a tax charge related to regulatory assets for which DESC committed to forgo recovery ($194 million), the absence of 2017 Tax Reform Act impacts ($176 million) and changes in unrecognized tax benefits ($66 million).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The matters discussed in this Item may contain “forward-looking statements” as described in the introductory paragraphs of Item 7. MD&A. The reader’s attention is directed to those paragraphs and Item 1A. Risk Factors for discussion of various risks and uncertainties that may impact DESC.

MARKET RISK SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

DESC’s financial instruments and related financial derivative instruments are exposed to potential losses due to adverse changes in interest rates as described below. Management believes that DESC is not subject to material commodity price risk. Interest rate risk is generally related to DESC’s outstanding debt and future issuances of debt. In addition, DESC is exposed to investment price risk through various portfolios of equity and debt securities.

The following sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% change in interest rates.

Interest Rate Risk

DESC manages its interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. For variable rate debt outstanding, a hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at December 31, 2019 or December 31, 2018.

DESC also uses interest rate derivatives, including forward-starting swaps and interest rate swaps to manage interest rate risk. As of December 31, 2019, DESC had $71 million in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of $2 million in the fair value of DESC’s interest rate derivatives at December 31, 2019. As of December 31, 2018, DESC had $71 million in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of $1 million in the fair value of DESC’s interest rate derivatives at December 31, 2018.

The impact of a change in interest rates on DESC’s interest rate-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net gains and/or losses from interest rate derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction.

Investment Price Risk

DESC is subject to investment price risk due to securities held as investments in nuclear decommissioning trust funds which primarily hold insurance contracts that are reported in the Consolidated Balance Sheets at fair value.

DESC recognized net investment gains (including investment income) on nuclear decommissioning trust investments of $24 million and less than $1 million for the year ended December 31, 2019 and 2018, respectively.

DESC participates in SCANA sponsored pension and other postretirement employee benefit plans that hold investments in trusts to fund employee benefit payments. DESC’s pension and other postretirement plan assets experienced aggregate actual returns (losses) $149 million and $(43) million in 2019 and 2018, respectively, versus expected returns of $40 million and $48 million, respectively. Differences between actual and expected returns on plan assets are accumulated and amortized during future periods. As such, any investment-related declines in these trusts will result in future increases in the net periodic cost recognized for such employee benefit plans and will be included in the determination of the amount of cash to be contributed to the employee benefit plans. A hypothetical 0.25% decrease in the assumed long-term rates of return on DESC’s plan assets would result in an increase in net periodic cost of $2 million at both December 31, 2019 and 2018, for pension benefits.

Risk Management Policies

DESC has established operating procedures with corporate management to ensure that proper internal controls are maintained. In addition, Dominion Energy has established an independent function at the corporate level to monitor compliance with the credit and commodity risk management policies of all subsidiaries, including DESC. Dominion Energy maintains credit policies that include the evaluation of a prospective counterparty’s financial condition, collateral requirements where deemed necessary and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. In addition, Dominion Energy also monitors the financial condition of existing counterparties on an ongoing basis. Based on these credit policies and DESC’s December 31, 2019 provision for credit losses, management believes that it is unlikely that a material adverse effect on DESC’s financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.

17


Item 8. Financial Statements and Supplementary Data

 

 

18


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

Dominion Energy South Carolina, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Dominion Energy South Carolina, Inc. (an indirect, wholly-owned subsidiary of Dominion Energy, Inc.) and affiliates (“DESC”) at December 31, 2019 and 2018, the related consolidated statements of comprehensive loss, changes in common equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of DESC at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The consolidated financial statements are the responsibility of DESC's management. Our responsibility is to express an opinion on DESC's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to DESC in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. DESC is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of DESC’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

February 28, 2020

We have served as DESC’s auditor since 1945.

19


Dominion Energy South Carolina, Inc.

Consolidated Balance Sheets

 

At December 31,

 

2019

 

 

2018

 

(millions)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Utility plant in service

 

$

13,208

 

 

$

12,803

 

Accumulated depreciation and amortization

 

 

(4,851

)

 

 

(4,581

)

Construction work in progress

 

 

339

 

 

 

350

 

Nuclear fuel, net of accumulated amortization

 

 

219

 

 

 

211

 

Utility plant, net ($727 and $711 related to VIEs)

 

 

8,915

 

 

 

8,783

 

Nonutility Property and Investments:

 

 

 

 

 

 

 

 

Nonutility property, net of accumulated depreciation

 

 

69

 

 

 

72

 

Assets held in trust, nuclear decommissioning

 

 

214

 

 

 

190

 

Other investments

 

 

 

 

 

1

 

Nonutility property and investments, net

 

 

283

 

 

 

263

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

4

 

 

 

377

 

Receivables:

 

 

 

 

 

 

 

 

Customer, net of allowance for uncollectible accounts of $3 and $4

 

 

320

 

 

 

331

 

Affiliated and related party

 

 

14

 

 

 

359

 

Other

 

 

119

 

 

 

68

 

Inventories (at average cost):

 

 

 

 

 

 

 

 

Fuel

 

 

104

 

 

 

89

 

Materials and supplies

 

 

168

 

 

 

158

 

Prepayments

 

 

91

 

 

 

82

 

Regulatory assets

 

 

271

 

 

 

224

 

Other current assets

 

 

27

 

 

 

1

 

Total current assets ($143 and $96 related to VIEs)

 

 

1,118

 

 

 

1,689

 

Deferred Debits and Other Assets:

 

 

 

 

 

 

 

 

Regulatory assets

 

 

3,892

 

 

 

4,060

 

Other

 

 

93

 

 

 

168

 

Total deferred debits and other assets ($32 and $34 related to VIEs)

 

 

3,985

 

 

 

4,228

 

Total assets

 

$

14,301

 

 

$

14,963

 

 

See Notes to Consolidated Financial Statements.

20


 

At December 31,

 

2019

 

 

2018

 

(millions)

 

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

 

 

 

 

 

Common Stock - no par value, 40.3 million shares outstanding

 

$

3,695

 

 

$

2,860

 

Retained earnings

 

 

20

 

 

 

1,279

 

Accumulated other comprehensive loss

 

 

(3

)

 

 

(3

)

Total common equity

 

 

3,712

 

 

 

4,136

 

Noncontrolling interest

 

 

180

 

 

 

179

 

Total Equity

 

 

3,892

 

 

 

4,315

 

Long-term debt, net

 

 

3,358

 

 

 

5,132

 

Affiliated long-term debt

 

 

230

 

 

 

 

Finance leases

 

 

20

 

 

 

 

Total long-term debt

 

 

3,608

 

 

 

5,132

 

Total capitalization

 

 

7,500

 

 

 

9,447

 

Current Liabilities:

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

 

 

 

73

 

Securities due within one year

 

 

7

 

 

 

14

 

Accounts payable

 

 

245

 

 

 

267

 

Affiliated and related party payables

 

 

624

 

 

 

347

 

Customer deposits and customer prepayments

 

 

76

 

 

 

73

 

Revenue subject to refund

 

 

4

 

 

 

77

 

Taxes accrued

 

 

218

 

 

 

228

 

Interest accrued

 

 

88

 

 

 

72

 

Regulatory liabilities

 

 

256

 

 

 

126

 

Reserves for litigation and regulatory proceedings

 

 

492

 

 

 

11

 

Other

 

 

56

 

 

 

42

 

Total current liabilities

 

 

2,066

 

 

 

1,330

 

Deferred Credits and Other Liabilities:

 

 

 

 

 

 

 

 

Deferred income taxes and investment tax credits