DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2011

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

6. DERIVATIVE FINANCIAL INSTRUMENTS

The Company recognizes all derivative instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value.  The Company recognizes changes in the fair value of derivative instruments either in earnings, as a component of other comprehensive income (loss) or, for regulated subsidiaries, within regulatory assets or regulatory liabilities, depending upon the intended use of the derivative and the resulting designation.  The fair value of derivative instruments is determined by reference to quoted market prices of listed contracts, published quotations or, for interest rate swaps, discounted cash flow models with independently sourced data.

Policies and procedures and risk limits are established to control the level of market, credit, liquidity and operational and administrative risks assumed by the Company.  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 Company’s Risk Management Officer and senior officers, apprises the Board of Directors with regard to the management of risk and brings to the Board’s attention any 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 and financial institutions.  Cash settlement of commodity derivatives are classified as an operating activity in the condensed consolidated statements of cash flows.

The Company’s regulated gas operations (SCE&G and PSNC Energy) hedge natural gas purchasing activities using over-the-counter options and swaps and NYMEX futures and options.  SCE&G’s tariffs include a PGA that provides for the recovery of actual gas costs incurred.  The SCPSC has ruled that the results of SCE&G’s hedging activities are to be included in the PGA.  As such, the cost of derivatives and gains and losses on such derivatives utilized to hedge gas purchasing activities are recoverable through the weighted average cost of gas calculation.  The offset to the change in fair value of these derivatives is recorded as a regulatory asset or liability.  PSNC Energy’s tariffs also include a provision for the recovery of actual gas costs incurred.  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 over- or under-recovery of gas costs.  These derivative financial instruments are not designated as hedges for accounting purposes.

The unrealized gains and losses on qualifying cash flow hedges of nonregulated operations are deferred in other comprehensive income.  When the hedged transactions affect earnings, the previously recorded gains and losses are reclassified from other comprehensive income 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, SEMI, 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.

Interest Rate Swaps

The Company uses interest rate swaps to manage interest rate risk and exposure to changes in the fair value attributable to changes in interest rates on certain debt issuances.  These swaps are designated as either fair value hedges or cash flow hedges.

The Company uses swaps to synthetically convert fixed rate debt to variable rate debt.  These swaps are designated as fair value hedges.  Periodic payments to or receipts from swap counterparties are recorded within interest expense and are classified as an operating activity in the condensed consolidated statements of cash flows.  In addition, gains on certain swaps that were terminated prior to maturity of the underlying debt instruments are being amortized to interest expense over the life of the debt they hedged.

The Company synthetically converts variable rate debt to fixed rate debt using swaps that are designated as cash flow hedges.  Periodic payments to or receipts from swap counterparties related to these derivatives are recorded within interest expense and are classified as an operating activity for cash flow purposes.

In anticipation of the issuance of debt, the Company may use treasury rate lock or forward starting swap agreements that are designated as cash flow hedges.  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, and for the holding company or nonregulated subsidiaries, are recorded in other comprehensive income.  Such amounts are amortized to interest expense over the term of the underlying debt and are classified as an operating activity for cash flow purposes.  Ineffective portions are recognized in income.  Cash payments made or received upon termination of these agreements are classified as an investing activity in the condensed consolidated statements of cash flows.

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 DT)
Hedge designation	Gas Distribution	Retail Gas Marketing	Energy Marketing	Total
As of September 30, 2011
Cash flow	-	9,060,000	22,850,325	31,910,325
Not designated (a)	10,118,000	-	24,215,870	34,333,870
Total (a)	10,118,000	9,060,000	47,066,195	66,244,195
As of December 31, 2010
Cash flow	-	5,715,000	17,190,351	22,905,351
Not designated (b)	10,677,000	-	20,588,581	31,265,581
Total (b)	10,677,000	5,715,000	37,778,932	54,170,932

(a)  Includes an aggregate 9,098,000 DT related to basis swap contracts in Energy Marketing.

(b)  Includes an aggregate 6,485,536 DT related to basis swap contracts in Energy Marketing.

At September 30, 2011 and December 31, 2010, the Company was party to interest rate swaps designated as fair value hedges with an aggregate notional amount of $253.2 million and $556.4 million, respectively, and was party to interest rate swaps designated as cash flow hedges with an aggregate notional amount of $572.6 million and $1.1 billion, respectively.

The fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheet as follows:

	Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet	Fair		Balance Sheet	Fair
Millions of dollars	Location (c)	Value		Location (c)	Value
As of September 30, 2011
Derivatives designated as hedging instruments
Interest rate contracts	Prepayments and other	$	1	Other current liabilities	$	45
				Other deferred credits	104
Commodity contracts				Prepayments and other	1
				Other current liabilities	7
				Other deferred credits	2
Total		$	1		$	159
Derivatives not designated as hedging instruments
Energy management contracts	Prepayments and other	$	9	Prepayments and other	$	3
	Other deferred debits	4		Other current liabilities	6
				Other deferred credits	4
Total		$	13		$	13

As of December 31, 2010
Derivatives designated as hedging instruments
Interest rate contracts	Other current assets	$	1	Other current liabilities	$	57
	Other deferred debits	7		Other deferred credits	25
Commodity contracts	Other current liabilities	1		Other current liabilities	5
				Other deferred credits	2
Total		$	9		$	89
Derivatives not designated as hedging instruments
Commodity contracts	Prepayments and other	$	3
Energy management contracts	Prepayments and other	7		Prepayments and other	$	1
	Other deferred debits	2		Other current liabilities	6
				Other deferred credits	2
Total		$	12		$	9

(c) Asset derivatives represent unrealized gains to the Company, and liability derivatives represent unrealized losses.  In the Company’s condensed consolidated balance sheets, unrealized gain and loss positions on commodity contracts with the same counterparty are reported as either a net asset or liability, and for purposes of the above disclosure they are reported on a gross basis.

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

Derivatives in Fair Value Hedging Relationships

With regard to the Company’s interest rate swaps designated as fair value hedges, the gains on those swaps and the losses on the hedged fixed rate debt are recognized in current earnings and included in interest expense.  These gains and losses, combined with the amortization of deferred gains on previously terminated swaps as discussed above, resulted in reductions to interest expense of $0.9 million and $4.9 million for the three and nine months ended September 30, 2011, respectively, and $2.5 million and $8.4 million for the three and nine months ended September 30, 2010, respectively.

Derivatives in Cash Flow Hedging Relationships

	Gain (Loss) Deferred			Gain (Loss) Reclassified from
Derivatives in Cash Flow	in Regulatory Accounts			Deferred Accounts into Income
Hedging Relationships	(Effective Portion)			(Effective Portion)
Millions of dollars				Location	Amount
Three Months Ended September 30, 2011
Interest rate contracts	$	(63	)	Interest expense	$	(1	)
Nine Months Ended September 30,  2011
Interest rate contracts	$	(72	)	Interest expense	$	(2	)

Three Months Ended September 30, 2010
Interest rate contracts	$	(36	)	Interest expense	$	(1	)
Nine Months Ended September 30,  2010
Interest rate contracts	$	(96	)	Interest expense	$	(2	)

	Gain (Loss)			Gain (Loss) Reclassified from
Derivatives in Cash Flow	Recognized in OCI,			Accumulated OCI into Income,
Hedging Relationships	net of tax			net of tax (Effective Portion)
Millions of dollars	(Effective Portion)			Location	Amount
Three Months Ended September 30, 2011
Interest rate contracts	$	(28	)	Interest expense	$	(1	)
Commodity contracts		(5	)	Gas purchased for resale		(1	)
Total	$	(33	)		$	(2	)

Nine Months Ended September 30, 2011
Interest rate contracts	$	(39	)	Interest expense	$	(3	)
Commodity contracts		(7	)	Gas purchased for resale		(5	)
Total	$	(46	)		$	(8	)
Three Months Ended September 30, 2010
Interest rate contracts	$	(20	)	Interest expense	$	(1	)
Commodity contracts		(6	)	Gas purchased for resale		(2	)
Total	$	(26	)		$	(3	)
Nine Months Ended September 30, 2010
Interest rate contracts	$	(53	)	Interest expense	$	(3	)
Commodity contracts		(13	)	Gas purchased for resale		(9	)
Total	$	(66	)		$	(12	)

As of September 30, 2011, the Company expects that during the next 12 months reclassifications from accumulated other comprehensive loss to earnings arising from cash flow hedges will include approximately $5.2 million as an increase to gas cost and approximately $3.4 million as an increase to interest expense, assuming natural gas and financial markets remain at their current levels.  As of September 30, 2011, all of the Company’s commodity cash flow hedges settle by their terms before the end of 2013.

	Gain (Loss) Recognized in Income
Derivatives not designated as
Hedging Instruments
Millions of dollars	Location	2011			2010
Third Quarter
Commodity contracts	Gas purchased for resale	$	-		$	-
Year to Date
Commodity contracts	Gas purchased for resale	$	(1	)	$	(2	)

Hedge Ineffectiveness

Other losses recognized in income representing ineffectiveness on interest rate hedges designated as cash flow hedges were $0.8 million and $1.1 million, net of tax, for the three and nine months ended September 30, 2011 and $0.1 million and $0.2 million, net of tax, for the three and nine months ended September 30, 2010.

Credit Risk Considerations

Certain of the Company’s derivative instruments contain contingent provisions that require the Company to provide collateral upon the occurrence of specific events, primarily credit downgrades.  As of September 30, 2011 and December 31, 2010, the Company has posted $109.7 million and $20.0 million, respectively, of collateral related to derivatives with contingent provisions that are in a net liability position.  If all of the contingent features underlying these instruments were fully triggered as of September 30, 2011 and December 31, 2010, the Company would be required to post an additional $58.3 million and $74.0 million, respectively, of collateral to its counterparties.  The aggregate fair value of all derivative instruments with contingent provisions that are in a net liability position as of September 30, 2011 and December 31, 2010 are $168.0 million and $94.0 million, respectively.