DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Text Block]

7. DERIVATIVE FINANCIAL INSTRUMENTS

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

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

Commodity Derivatives

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

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

Unrealized gains and losses on qualifying cash flow hedges of nonregulated operations are deferred in AOCI. When the hedged transactions affect earnings, previously recorded gains and losses are reclassified from AOCI to cost of gas. The effects of gains or losses resulting from these hedging activities are either offset by the recording of the related hedged transactions or are included in gas sales pricing decisions made by the business unit.

As an accommodation to certain customers, SCANA Energy, as part of its energy management services, offers fixed price supply contracts which are accounted for as derivatives. These sales contracts are offset by the purchase of supply futures and swaps which are also accounted for as derivatives. Neither the sales contracts nor the related supply futures and swaps are designated as hedges for accounting purposes.

Interest Rate Swaps

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

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

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

Cash payments made or received upon termination of these financial instruments are classified as investing activities for cash flow statement purposes.

Quantitative Disclosures Related to Derivatives

The Company was party to natural gas derivative contracts outstanding in the following quantities:



	Commodity and Other Energy Management Contracts (in MMBTU)
Hedge designation	Gas Distribution	Gas Marketing	Total
As of March 31, 2018
Commodity contracts	6,190,000	11,310,000	17,500,000
Energy management contracts (a)	—	34,281,713	34,281,713
Total (a)	6,190,000	45,591,713	51,781,713

As of December 31, 2017
Commodity contracts	6,430,000	13,433,000	19,863,000
Energy management contracts (a)	—	41,856,890	41,856,890
Total (a)	6,430,000	55,289,890	61,719,890

(a) Includes amounts related to basis swap contracts totaling 236,000 MMBTU in 2018 and 2,582,000 MMBTU in 2017.

The aggregate notional amounts of the interest rate swaps were as follows:



Interest Rate Swaps
	The Company				Consolidated SCE&G
Millions of dollars	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Designated as hedging instruments	$	111.2	$	111.2	$	36.4	$	36.4
Not designated as hedging instruments	35.0		735.0		35.0		735.0

The following table shows the fair value and balance sheet location of derivative instruments. Although derivatives subject to master netting arrangements are netted on the consolidated balance sheet, the fair values presented below are shown gross, and cash collateral on the derivatives has not been netted against the fair values shown.



Fair Values of Derivative Instruments
		The Company				Consolidated SCE&G
Millions of dollars	Balance Sheet Location	Asset		Liability		Asset		Liability
As of March 31, 2018
Designated as hedging instruments
Interest rate contracts
	Derivative financial instruments	—		$	2	—		$	1
	Other deferred credits and other liabilities	—		20		—		7
Commodity contracts
	Prepayments	—		1		—		—
Total		—		$	23	—		$	8

Not designated as hedging instruments
Interest rate contracts
	Other deferred credits and other liabilities	—		$	3	—		$	3
Commodity contracts
	Other current assets	$	1	—		—		—
Energy management contracts
	Prepayments	—		1		—		—
	Other current assets	2		—		—		—
	Other deferred debits and other assets	1		—		—		—
	Derivative financial instruments	—		2		—		—
Total		$	4	$	6	—		$	3

As of December 31, 2017
Designated as hedging instruments
Interest rate contracts
	Derivative financial instruments	—		$	3	—		$	1
	Other deferred credits and other liabilities	—		24		—		9
Commodity contracts
	Prepayments	—		2		—		—
	Other current assets	—		1		—		—
Total		—		$	30	—		$	10

Not designated as hedging instruments
Interest rate contracts
	Derivative financial instruments	$	54	$	1	$	54	$	1
	Other deferred credits and other liabilities	—		4		—		4
Commodity contracts
	Other current assets	1		—		—		—
Energy management contracts
	Prepayments	—		1		—		—
	Other current assets	3		—		—		—
	Other deferred debits and other assets	1		—		—		—
	Derivative financial instruments	—		2		—		—
Total		$	59	$	8	$	54	$	5

Derivatives Designated as Fair Value Hedges

The Company had no interest rate or commodity derivatives designated as fair value hedges for either period presented.

The effect of derivative instruments on the consolidated statements of income is as follows:

Derivatives in Cash Flow Hedging Relationships



The Company and Consolidated SCE&G:
	Gain Deferred in Regulatory Accounts				Loss Reclassified from Deferred Accounts into Income
	Gain Deferred in Regulatory Accounts				Loss Reclassified from Deferred Accounts into Income
Millions of dollars	2018		2017	Location	2018	2017
Three Months Ended March 31,
Interest rate contracts	$	2	—	Interest expense	—	$	(1	)



The Company:
	Gain (Loss) Recognized in OCI, net of tax						Gain (Loss) Reclassified from AOCI into Income, net of tax
	Gain (Loss) Recognized in OCI, net of tax						Gain (Loss) Reclassified from AOCI into Income, net of tax
Millions of dollars	2018		2017			Location	2018			2017
Three Months Ended March 31,
Interest rate contracts	$	2	—			Interest expense	$	(2	)	$	(2	)
Commodity contracts	1		$	(2	)	Gas purchased for resale	(2		)	2
Total	$	3	$	(2	)		$	(4	)	—

As of March 31, 2018, the Company expects that during the next 12 months reclassifications from AOCI to earnings arising from cash flow hedges will include approximately $0.6 million as an increase to gas cost, assuming natural gas markets remain at their current levels, and approximately $7.8 million as an increase to interest expense. As of March 31, 2018, all of the Company’s commodity cash flow hedges settle by their terms before the end of 2020.

As of March 31, 2018, each of the Company and Consolidated SCE&G expects that during the next 12 months reclassifications from regulatory accounts to earnings arising from cash flow hedges designated as hedging instruments will include approximately $1.2 million as an increase to interest expense.

Hedge Ineffectiveness

For the Company and Consolidated SCE&G, ineffectiveness on interest rate hedges designated as cash flow hedges was insignificant during all periods presented.



Derivatives Not designated as Hedging Instruments

The Company and Consolidated SCE&G:
	Gain Deferred in Regulatory Accounts					Gain (Loss) Reclassified from Deferred Accounts into Income
Millions of dollars	2018		2017		Location	2018		2017
Three Months Ended March 31,
Interest rate contracts	$	65	$	11	Interest Expense	—		$	(1	)
					Other Income	$	115	—

As of March 31, 2018, each of the Company and Consolidated SCE&G expects that during the next 12 months reclassifications from regulatory accounts to earnings arising from derivatives not designated as hedges will include $2.7 million as an increase to interest expense.

Credit Risk Considerations

Certain derivative contracts contain contingent credit features. These features may include (i) material adverse change clauses or payment acceleration clauses that could result in immediate payments or (ii) the posting of letters of credit or termination of the derivative contract before maturity if specific events occur, such as a credit rating downgrade below investment grade or failure to post collateral.



Derivative Contracts with Credit Contingent Features
	The Company					Consolidated SCE&G
Millions of dollars	March 31, 2018			December 31, 2017		March 31, 2018			December 31, 2017
in Net Liability Position
Aggregate fair value of derivatives in net liability position	$	26.2		$	33.7	$	10.8		$	14.7
Fair value of collateral already posted	27.1			28.9		10.9			10.1
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	$	(0.9	)	$	4.8	$	(0.1	)	$	4.6

in Net Asset Position
Aggregate fair value of derivatives in net asset position	—			$	53.5	—			$	53.5
Fair value of collateral already posted	—			—		—			—
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	—			$	53.5	—			$	53.5

In addition, for fixed price supply contracts offered to certain of SCANA Energy's customers, the Company could have called on letters of credit in the amount of $0.9 million related to $3.2 million in commodity derivatives that are in a net asset position at March 31, 2018, compared to letters of credit in the amount of $1.2 million related to derivatives of $4.0 million at December 31, 2017, if all the contingent features underlying these instruments had been fully triggered.

Information related to the offsetting of derivative assets follows:



Derivative Assets	The Company								Consolidated SCE&G
Millions of dollars	Interest Rate Contracts		Commodity Contracts		Energy Management Contracts		Total		Interest Rate Contracts
As of March 31, 2018
Gross Amounts of Recognized Assets	—		$	1	$	3	$	4	—
Gross Amounts Offset in Statement of Financial Position	—		—		—		—		—
Net Amounts Presented in Statement of Financial Position	—		1		3		4		—
Gross Amounts Not Offset - Financial Instruments	—		—		—		—		—
Gross Amounts Not Offset - Cash Collateral Received	—		—		—		—		—
Net Amount	—		$	1	$	3	$	4	—
Balance sheet location
Other current assets							$	3	—
Other deferred debits and other assets							1		—
Total							$	4	—

As of December 31, 2017
Gross Amounts of Recognized Assets	$	54	$	1	$	4	$	59	$	54
Gross Amounts Offset in Statement of Financial Position	—		—		—		—		—
Net Amounts Presented in Statement of Financial Position	54		1		4		59		54
Gross Amounts Not Offset - Financial Instruments	—		—		—		—		—
Gross Amounts Not Offset - Cash Collateral Received	—		—		—		—		—
Net Amount	$	54	$	1	$	4	$	59	$	54
Balance sheet location
Other current assets							$	58	$	54
Other deferred debits and other assets							1		—
Total							$	59	$	54

Information related to the offsetting of derivative liabilities follows:



Derivative Liabilities	The Company											Consolidated SCE&G
Millions of dollars	Interest Rate Contracts			Commodity Contracts		Energy Management Contracts			Total			Interest Rate Contracts
As of March 31, 2018
Gross Amounts of Recognized Liabilities	$	25		$	1	$	3		$	29		$	11
Gross Amounts Offset in Statement of Financial Position	—			—		—			—			—
Net Amounts Presented in Statement of Financial Position	25			1		3			29			11
Gross Amounts Not Offset - Financial Instruments	—			—		—			—			—
Gross Amounts Not Offset - Cash Collateral Posted	(26		)	—		(1		)	(27		)	(11		)
Net Amount	$	(1	)	$	1	$	2		$	2		$	—
Balance sheet location
Prepayments									$	2		—
Derivative financial instruments									4			$	1
Other deferred credits and other liabilities									23			10
Total									$	29		$	11

As of December 31, 2017
Gross Amounts of Recognized Liabilities	$	32		$	3	$	3		$	38		$	15
Gross Amounts Offset in Statement of Financial Position	—			—		(1		)	(1		)	—
Net Amounts Presented in Statement of Financial Position	32			3		2			37			15
Gross Amounts Not Offset - Financial Instruments	—			—		—			—			—
Gross Amounts Not Offset - Cash Collateral Posted	28			—		(1		)	27			—
Net Amount	$	60		$	3	$	1		$	64		$	15
Balance sheet location
Other current assets									$	2		—
Derivative financial instruments									7			$	2
Other deferred credits and other liabilities									28			13
Total									$	37		$	15

SCEG

Derivative [Line Items]