COMMITMENTS AND CONTINGENCIES - SCEG

9 Months Ended

Sep. 30, 2011

COMMITMENTS AND CONTINGENCIES

9. COMMITMENTS AND CONTINGENCIES

Nuclear Insurance

The Price-Anderson Indemnification Act deals with public liability for a nuclear incident and establishes the liability limit for third-party claims associated with any nuclear incident at $12.6 billion.  Each reactor licensee is currently liable for up to $117.5 million per reactor owned for each nuclear incident occurring at any reactor in the United States, provided that not more than $17.5 million of the liability per reactor would be assessed per year.  SCE&G’s maximum assessment, based on its two-thirds ownership of Summer Station, would be $78.3 million per incident, but not more than $11.7 million per year.

SCE&G currently maintains policies (for itself and on behalf of Santee Cooper, a one-third owner of Summer Station Unit 1) with Nuclear Electric Insurance Limited.  The policies, covering the nuclear facility for property damage, excess property damage and outage costs, permit retrospective assessments under certain conditions to cover insurer’s losses.  Based on the current annual premium, SCE&G’s portion of the retrospective premium assessment would not exceed $14.2 million.

To the extent that insurable claims for property damage, decontamination, repair and replacement and other costs and expenses arising from a nuclear incident at Summer Station exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, and to the extent that SCE&G rates would not recover the cost of any purchased replacement power, SCE&G will retain the risk of loss as a self-insurer.  SCE&G has no reason to anticipate a serious nuclear incident.  However, if such an incident were to occur, it likely would have a material impact on the Company’s results of operations, cash flows and financial position.

Environmental

SCE&G

In 2005, the EPA issued the CAIR, which required the District of Columbia and 28 states, including South Carolina, to reduce nitrogen oxide and sulfur dioxide emissions in order to attain mandated state levels.  CAIR set emission limits to be met in two phases beginning in 2009 and 2015, respectively, for nitrogen oxide and beginning in 2010 and 2015, respectively, for sulfur dioxide.  SCE&G and GENCO determined that additional air quality controls would be needed to meet the CAIR requirements.  On July 6, 2011 the EPA issued the Cross-State Air Pollution Rule.  This rule replaces CAIR and the Clean Air Transport Rule proposed in July 2010 and is aimed at addressing power plant emissions that may contribute to air pollution in other states.  The rule requires states in the eastern United States to reduce power plant emissions, specifically sulfur dioxide and nitrogen oxide.  Certain air quality control installations that SCE&G and GENCO have already completed should assist the Company in complying with the Cross-State Air Pollution Rule.  The Company will continue to pursue strategies to comply with all applicable environmental regulations.  Any costs incurred to comply with this rule or other rules issued by the EPA in the future are expected to be recoverable through rates.

In 2005, the EPA issued the CAMR which established a mercury emissions cap and trade program for coal-fired power plants. Numerous parties challenged the rule and, on February 8, 2008, the United States Circuit Court for the District of Columbia vacated the rule for electric utility steam generating units.  In March 2011, the EPA proposed new standards for mercury and other specified air pollutants.  The proposed rule provides up to four years for facilities to meet the standards once promulgated.  The EPA is expected to finalize the rule in November 2011.  The proposed rule is currently being evaluated by the Company. Any costs incurred to comply with this rule or other rules issued by the EPA in the future are expected to be recoverable through rates.

SCE&G maintains an environmental assessment program to identify and evaluate its current and former operations sites that could require environmental clean-up.  As site assessments are initiated, estimates are made of the amount of expenditures, if any, deemed necessary to investigate and remediate each site.  These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates.  Amounts estimated and accrued to date for site assessments and clean-up relate solely to regulated operations.  Under an SCPSC-approved cost recovery mechanism, SCE&G defers site assessment and cleanup costs associated with former gas MGP sites and recovers such costs through base rates.  Environmental assessment and remediation costs associated with electric operations are expensed as incurred or, if significant, appropriate regulatory treatment is sought.

SCE&G is responsible for four decommissioned MGP sites in South Carolina which contain residues of by-product chemicals.  These sites are in various stages of investigation, remediation and monitoring under work plans approved by DHEC.  SCE&G anticipates that major remediation activities at these sites will continue until 2014 and will cost an additional $8.6 million.  In addition, the National Park Service of the Department of the Interior made a demand to SCE&G for payment of $9.1 million for certain costs and damages relating to the MGP site in Charleston, South Carolina.  In May 2011, the parties agreed to settle for $3.75 million (which amount SCE&G had previously accrued).  The court approved the settlement on August 10, 2011, and all payments were made on August 15, 2011.  SCE&G expects to recover any cost arising from the remediation of MGP sites through rates.  At September 30, 2011, deferred amounts, net of amounts previously recovered through rates and insurance settlements, totaled $25.2 million and are included in regulatory assets.

PSNC Energy

PSNC Energy is responsible for environmental clean-up at five sites in North Carolina on which MGP residuals are present or suspected.  PSNC Energy’s actual remediation costs for these sites will depend on a number of factors, such as actual site conditions, third-party claims and recoveries from other PRPs.  PSNC Energy has recorded a liability and associated regulatory asset of $3.2 million, which reflects its estimated remaining liability at September 30, 2011. PSNC Energy expects to recover through rates any costs allocable to PSNC Energy arising from the remediation of these sites.

Nuclear Generation

SCE&G and Santee Cooper are parties to construction and operating agreements in which they agreed to be joint owners, and share operating costs and generation output, of two 1,117-MW nuclear generation units to be constructed at the site of Summer Station, with SCE&G responsible for 55 percent of the cost and receiving 55 percent of the output, and Santee Cooper responsible for and receiving the remaining 45 percent.  Under these agreements, SCE&G will have the primary responsibility for oversight of the construction of the New Units and will be responsible for the operation of the New Units as they come online. 

SCE&G, on behalf of itself and as agent for Santee Cooper, has entered into the EPC Contract with the Consortium, for the design and construction of the New Units.   Assuming timely receipt of federal approvals and construction proceeding as scheduled, the first unit is expected to be completed and in service in 2016, and the second in 2019.  SCE&G’s share of the estimated cash outlays (future value, excluding AFC) totals $5.5 billion for plant costs and related transmission infrastructure costs, which costs are projected based on historical one-year and five-year escalation rates as required by the SCPSC.

The parties to the EPC Contract have established both informal and formal dispute resolution procedures in order to resolve issues that arise during the course of constructing a project of this magnitude.  During the course of activities under the EPC Contract, issues have materialized that may impact project budget and schedule, including those related to design changes involved in the regulatory certification of the units’ nuclear technology.  Certain of these issues may result in claims or requests for change orders by members of the Consortium and assertions of contractual entitlement to recover additional costs.  SCE&G expects to resolve any such disputes through both the informal and formal procedures and anticipates that any additional costs that arise through such dispute resolution processes will be recoverable through rates.

SCE&G’s latest Integrated Resource Plan filed with the SCPSC in February 2011 continues to support SCE&G’s need for 55 percent of the output of the two units.  As previously reported, SCE&G has been advised by Santee Cooper that it is reviewing certain aspects of its capital improvement program and long-term power supply plan, including the level of its participation in the New Units.  Santee Cooper has indicated that it will seek to reduce its 45 percent ownership in the New Units.  Santee Cooper has disclosed that, in March 2011, it entered into a non-binding letter of intent with OUC that may result in the execution of a power purchase agreement with an option for OUC to acquire a portion of Santee Cooper’s ownership interest in the New Units.  Similarly, Santee Cooper announced in July 2011 that it has entered into separate letters of intent with Duke and FMPA that may result in either or both of them acquiring a portion of Santee Cooper’s ownership interest in the New Units.  Santee Cooper has advised us that, in a letter dated October 31, 2011, it received formal notice that OUC would not renew its letter of intent and that FMPA no longer wishes to pursue discussions.

In March 2011, a tsunami resulting from a massive earthquake severely damaged several nuclear generating units and their back-up cooling systems in Japan.  The impact of the disaster is being evaluated world-wide, and numerous political and regulatory bodies, including those in the United States, are seeking to determine if additional safety measures should be required at other existing nuclear facilities, as well as those planned for construction.  In particular, on July 12, 2011, the NRC’s Near-Term Task Force issued a report titled “Recommendations for Enhancing Reactor Safety in the 21st Century,” which SCE&G is evaluating.  SCE&G cannot predict what regulatory or other outcomes may be implemented in the United States, nor how such initiatives would impact SCE&G’s existing Summer Station or the licensing, construction or operation of the New Units.

In October 2011, the NRC conducted a mandatory hearing regarding the issuance of a COL for the New Units.  This hearing follows the August 2011 completion of the FSER, in which the NRC staff concluded there were no safety aspects that would preclude issuing the COL, and the April 2011 completion of the FEIS, in which the NRC and the USACE concluded there were no environmental impacts that would preclude issuing the COL.  SCE&G anticipates issuance of the COL for the New Units in late 2011 or early 2012.

Westinghouse and Stone and Webster, Inc. have recently performed an impact study, at SCE&G’s request, related to various cost and timing alternatives arising from the delay in the issuance date of the COL from mid-2011, which was the date assumed when the EPC Contract was signed in 2008, to the issuance date currently anticipated by SCE&G. The impact study analyzed three scenarios, including (1) compressing the construction schedule for the first New Unit but retaining the original commercial operation date set forth in the EPC Contract, (2) extending the commercial operation date for the first New Unit by six months, or (3) delaying the commercial operation date of the first New Unit and accelerating the commercial operation date for the second New Unit. SCE&G is currently negotiating with Westinghouse and Stone and Webster, Inc. to determine the preferred scenarios and does not anticipate a final decision with respect thereto until late 2011.

SOUTH CAROLINA ELECTRIC & GAS COMPANY

COMMITMENTS AND CONTINGENCIES

9. COMMITMENTS AND CONTINGENCIES

Nuclear Insurance

The Price-Anderson Indemnification Act deals with public liability for a nuclear incident and establishes the liability limit for third-party claims associated with any nuclear incident at $12.6 billion.  Each reactor licensee is currently liable for up to $117.5 million per reactor owned for each nuclear incident occurring at any reactor in the United States, provided that not more than $17.5 million of the liability per reactor would be assessed per year.  SCE&G’s maximum assessment, based on its two-thirds ownership of Summer Station, would be $78.3 million per incident, but not more than $11.7 million per year.

SCE&G currently maintains policies (for itself and on behalf of Santee Cooper, a one-third owner of Summer Station Unit 1) with Nuclear Electric Insurance Limited.  The policies, covering the nuclear facility for property damage, excess property damage and outage costs, permit retrospective assessments under certain conditions to cover insurer’s losses.  Based on the current annual premium, SCE&G’s portion of the retrospective premium assessment would not exceed $14.2 million.

To the extent that insurable claims for property damage, decontamination, repair and replacement and other costs and expenses arising from a nuclear incident at Summer Station exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, and to the extent that SCE&G rates would not recover the cost of any purchased replacement power, SCE&G will retain the risk of loss as a self-insurer.  SCE&G has no reason to anticipate a serious nuclear incident.  However, if such an incident were to occur, it likely would have a material impact on the Company’s results of operations, cash flows and financial position.

Environmental

In 2005, the EPA issued the CAIR, which required the District of Columbia and 28 states, including South Carolina, to reduce nitrogen oxide and sulfur dioxide emissions in order to attain mandated state levels.  CAIR set emission limits to be met in two phases beginning in 2009 and 2015, respectively, for nitrogen oxide and beginning in 2010 and 2015, respectively, for sulfur dioxide.  SCE&G and GENCO determined that additional air quality controls would be needed to meet the CAIR requirements.  On July 6, 2011 the EPA issued the Cross-State Air Pollution Rule.  This rule replaces CAIR and the Clean Air Transport Rule proposed in July 2010 and is aimed at addressing power plant emissions that may contribute to air pollution in other states.  The rule requires states in the eastern United States to reduce power plant emissions, specifically sulfur dioxide and nitrogen oxide.  Certain air quality control installations that SCE&G and GENCO have already completed should assist Consolidated SCE&G in complying with the Cross-State Air Pollution Rule.  Consolidated SCE&G will continue to pursue strategies to comply with all applicable environmental regulations.  Any costs incurred to comply with this rule or other rules issued by the EPA in the future are expected to be recoverable through rates.

In 2005, the EPA issued the CAMR which established a mercury emissions cap and trade program for coal-fired power plants. Numerous parties challenged the rule and, on February 8, 2008, the United States Circuit Court for the District of Columbia vacated the rule for electric utility steam generating units.  In March 2011, the EPA proposed new standards for mercury and other specified air pollutants.  The proposed rule provides up to four years for facilities to meet the standards once promulgated.  The EPA is expected to finalize the rule in November 2011.  The proposed rule is currently being evaluated by Consolidated SCE&G. Any costs incurred to comply with this rule or other rules issued by the EPA in the future are expected to be recoverable through rates.

SCE&G maintains an environmental assessment program to identify and evaluate its current and former operations sites that could require environmental clean-up.  As site assessments are initiated, estimates are made of the amount of expenditures, if any, deemed necessary to investigate and remediate each site.  These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates.  Amounts estimated and accrued to date for site assessments and clean-up relate solely to regulated operations.  Under an SCPSC-approved cost recovery mechanism, SCE&G defers site assessment and cleanup costs associated with former gas MGP sites and recovers such costs through base rates.  Environmental assessment and remediation costs associated with electric operations are expensed as incurred or, if significant, appropriate regulatory treatment is sought.

SCE&G is responsible for four decommissioned MGP sites in South Carolina which contain residues of by-product chemicals.  These sites are in various stages of investigation, remediation and monitoring under work plans approved by DHEC.  SCE&G anticipates that major remediation activities at these sites will continue until 2014 and will cost an additional $8.6 million.  In addition, the National Park Service of the Department of the Interior made a demand to SCE&G for payment of $9.1 million for certain costs and damages relating to the MGP site in Charleston, South Carolina.  In May 2011, the parties agreed to settle for $3.75 million (which amount SCE&G had previously accrued).  The court approved the settlement on August 10, 2011, and all payments were made on August 15, 2011.  SCE&G expects to recover any cost arising from the remediation of MGP sites through rates.  At September 30, 2011, deferred amounts, net of amounts previously recovered through rates and insurance settlements, totaled $25.2 million and are included in regulatory assets.

Nuclear Generation

SCE&G and Santee Cooper are parties to construction and operating agreements in which they agreed to be joint owners, and share operating costs and generation output, of two 1,117-MW nuclear generation units to be constructed at the site of Summer Station, with SCE&G responsible for 55 percent of the cost and receiving 55 percent of the output, and Santee Cooper responsible for and receiving the remaining 45 percent.  Under these agreements, SCE&G will have the primary responsibility for oversight of the construction of the New Units and will be responsible for the operation of the New Units as they come online.

SCE&G, on behalf of itself and as agent for Santee Cooper, has entered into the EPC Contract with the Consortium, for the design and construction of the New Units.   Assuming timely receipt of federal approvals and construction proceeding as scheduled, the first unit is expected to be completed and in service in 2016, and the second in 2019.  SCE&G’s share of the estimated cash outlays (future value, excluding AFC) totals $5.5 billion for plant costs and related transmission infrastructure costs, which costs are projected based on historical one-year and five-year escalation rates as required by the SCPSC.

The parties to the EPC Contract have established both informal and formal dispute resolution procedures in order to resolve issues that arise during the course of constructing a project of this magnitude.  During the course of activities under the EPC Contract, issues have materialized that may impact project budget and schedule, including those related to design changes involved in the regulatory certification of the units’ nuclear technology.  Certain of these issues may result in claims or requests for change orders by members of the Consortium and assertions of contractual entitlement to recover additional costs.  SCE&G expects to resolve any such disputes through both the informal and formal procedures and anticipates that any additional costs that arise through such dispute resolution processes will be recoverable through rates.

SCE&G’s latest Integrated Resource Plan filed with the SCPSC in February 2011 continues to support SCE&G’s need for 55 percent of the output of the two units.  As previously reported, SCE&G has been advised by Santee Cooper that it is reviewing certain aspects of its capital improvement program and long-term power supply plan, including the level of its participation in the New Units.  Santee Cooper has indicated that it will seek to reduce its 45 percent ownership in the New Units.  Santee Cooper has disclosed that, in March 2011, it entered into a non-binding letter of intent with OUC that may result in the execution of a power purchase agreement with an option for OUC to acquire a portion of Santee Cooper’s ownership interest in the New Units.  Similarly, Santee Cooper announced in July 2011 that it has entered into separate letters of intent with Duke and FMPA that may result in either or both of them acquiring a portion of Santee Cooper’s ownership interest in the New Units.  Santee Cooper has advised us that, in a letter dated October 31, 2011, it received formal notice that OUC would not renew its letter of intent and that FMPA no longer wishes to pursue discussions.

In March 2011, a tsunami resulting from a massive earthquake severely damaged several nuclear generating units and their back-up cooling systems in Japan.  The impact of the disaster is being evaluated world-wide, and numerous political and regulatory bodies, including those in the United States, are seeking to determine if additional safety measures should be required at other existing nuclear facilities, as well as those planned for construction.  In particular, on July 12, 2011, the NRC’s Near-Term Task Force issued a report titled “Recommendations for Enhancing Reactor Safety in the 21st Century,” which SCE&G is evaluating.  SCE&G cannot predict what regulatory or other outcomes may be implemented in the United States, nor how such initiatives would impact SCE&G’s existing Summer Station or the licensing, construction or operation of the New Units.

In October 2011, the NRC conducted a mandatory hearing regarding the issuance of a COL for the New Units.  This hearing follows the August 2011 completion of the FSER, in which the NRC staff concluded there were no safety aspects that would preclude issuing the COL, and the April 2011 completion of the FEIS, in which the NRC and the USACE concluded there were no environmental impacts that would preclude issuing the COL.  SCE&G anticipates issuance of the COL for the New Units in late 2011 or early 2012.

Westinghouse and Stone and Webster, Inc. have recently performed an impact study, at SCE&G’s request, related to various cost and timing alternatives arising from the delay in the issuance date of the COL from mid-2011, which was the date assumed when the EPC Contract was signed in 2008, to the issuance date currently anticipated by SCE&G. The impact study analyzed three scenarios, including (1) compressing the construction schedule for the first New Unit but retaining the original commercial operation date set forth in the EPC Contract, (2) extending the commercial operation date for the first New Unit by six months, or (3) delaying the commercial operation date of the first New Unit and accelerating the commercial operation date for the second New Unit. SCE&G is currently negotiating with Westinghouse and Stone and Webster, Inc. to determine the preferred scenarios and does not anticipate a final decision with respect thereto until late 2011.