DERIVATIVE FINANCIAL INSTRUMENTS - SCEG

12 Months Ended

Dec. 31, 2011

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 consolidated statement 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 rate 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. Ineffective portions are recognized in income. Cash payments made or received upon termination of these financial instruments are classified as an investing activity in the 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 December 31, 2011
Cash flow	—	6,566,000	29,861,763	36,427,763
Not designated(a)	9,080,000	—	31,943,563	41,023,563
Total(a)	9,080,000	6,566,000	61,805,326	77,451,326
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 9,626,000 DT related to basis swap contracts in Energy Marketing.

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

The Company was party to interest rate swaps designated as fair value hedges with aggregate notional amounts of $253.2 million and $556.4 million at December 31, 2011 and 2010, respectively, and was party to interest rate swaps designated as cash flow hedges with aggregate notional amounts of $822.6 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
Millions of dollars	Balance Sheet Location(c)	Fair Value		Balance Sheet Location(c)	Fair Value
As of December 31, 2011
Derivatives designated as hedging instruments
Interest rate contracts	Prepayments and other	$	2	Other current liabilities	$	55
				Other deferred credits and other liabilities	103
Commodity contracts	Other current liabilities	1		Prepayments and other	1
		$	3	Other current liabilities	10
				Other deferred credits and other liabilities	3
Total					$	172
As of December 31, 2010
Derivatives designated as hedging instruments
Interest rate contracts	Prepayments and other	$	1	Other current liabilities	$	57
	Other deferred debits and other assets	7		Other deferred credits and other liabilities	25
Commodity contracts	Other current liabilities	1		Other current liabilities	5
				Other deferred credits and other liabilities	2
Total		$	9		$	89
As of December 31, 2011
Derivatives not designated as hedging instruments
Energy management contracts	Prepayments and other	$	17	Prepayments and other	$	3
	Other deferred debits and other assets	10		Other current liabilities	13
				Other deferred credits and other liabilities	9
Total		$	27		$	25
As of December 31, 2010
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 and other assets	2		Other current liabilities	6
				Other deferred credits and other liabilities	2
Total		$	12		$	9

(c)Asset derivatives represent unrealized gains to the Company, and liability derivatives represent unrealized losses. In the Company’s consolidated balance sheet, 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 statement of income is as follows:

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 $5.8 million and $11.5 million for the years ended December 31, 2011 and 2010, respectively.

Derivatives in Cash Flow Hedging Relationships

Derivatives in Cash Flow Hedging Relationships	Gain or (Loss) Deferred in Regulatory Accounts			Gain or (Loss) Reclassified from Deferred Accounts into Income (Effective Portion)
Millions of dollars	(Effective Portion)			Location	Amount
Year Ended December 31, 2011
Interest rate contracts	$	(76	)	Interest expense	$	(3	)
Year Ended December 31, 2010
Interest rate contracts	$	(36	)	Interest expense	$	(2	)
Year Ended December 31, 2009
Interest rate contracts	$	42		Interest expense	$	(3	)

Derivatives in Cash Flow Hedging Relationships	Gain or (Loss) Recognized in OCI, net of tax			Gain or (Loss) Reclassified from Accumulated OCI into Income, net of tax (Effective Portion)
Millions of dollars	(Effective Portion)			Location	Amount
Year Ended December 31, 2011
Interest rate contracts	$	(42	)	Interest expense	$	(4	)
Commodity contracts	(16		)	Gas purchased for resale	(9		)
Total	$	(58	)		$	(13	)
Year Ended December 31, 2010
Interest rate contracts	$	(24	)	Interest expense	$	(4	)
Commodity contracts	(12		)	Gas purchased for resale	(13		)
Total	$	(36	)		$	(17	)
Year Ended December 31, 2009
Interest rate contracts	$	9		Interest expense	$	(3	)
Commodity contracts	(39		)	Gas purchased for resale	(67		)
Total	$	(30	)		$	(70	)

As of December 31, 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 $6.7 million, net of tax as an increase to gas cost and approximately $4.3 million, net of tax as an increase to interest expense, assuming natural gas and financial markets remain at their current levels. As of December 31, 2011, all of the Company’s commodity cash flow hedges settle by their terms before the end of 2016.

Derivatives Not Designated as Hedging Instruments	Gain or (Loss) Recognized in Income
Millions of dollars	Location	Amount
Year Ended December 31, 2011
Commodity contracts	Gas purchased for resale	$	(2	)
Year Ended December 31, 2010
Commodity contracts	Gas purchased for resale	(3		)
Year Ended December 31, 2009
Commodity contracts	Gas purchased for resale	(16		)

Hedge Ineffectiveness

Other gains (losses) recognized in income representing ineffectiveness on interest rate hedges designated as cash flow hedges were $(1.1) million, net of tax, in 2011 and were insignificant in 2010. These amounts are recorded within interest expense on the statement of income.

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 December 31, 2011 and 2010, the Company has posted $140.3 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 December 31, 2011 and 2010, the Company would be required to post an additional $50.7 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 December 31, 2011 and 2010, are $191.0 million and $94.0 million, respectively.

SOUTH CAROLINA ELECTRIC AND GAS COMPANY

DERIVATIVE FINANCIAL INSTRUMENTS

6.DERIVATIVE FINANCIAL INSTRUMENTS

Consolidated SCE&G recognizes all derivative instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Consolidated SCE&G recognizes changes in the fair value of derivative instruments either in earnings or 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 Consolidated SCE&G. 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, including Consolidated SCE&G. The Risk Management Committee, which is comprised of certain officers, including the Consolidated SCE&G’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

SCE&G 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. 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 consolidated statements of cash flows.

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 these 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. These derivative financial instruments are not designated as hedges for accounting purposes.

Interest Rate Swaps

Consolidated SCE&G 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, Consolidated SCE&G 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 are recorded in regulatory assets or regulatory liabilities.  Such amounts are amortized to interest expense over the term of the underlying debt.  Ineffective portions are recognized in income.  Cash payments made or received upon termination of these financial instruments are classified as an investing activity in the consolidated statements of cash flows.

The effective portion of settlement payments made or received upon termination are amortized to interest expense over the term of the underlying debt and are classified as a financing activity in the consolidated statements of cash flows.

Quantitative Disclosures Related to Derivatives

SCE&G was party to natural gas derivative contracts for 2,490,000 DT and 2,460,000 DT at December 31, 2011 and 2010, respectively.  Consolidated SCE&G was a party to interest rate swaps designated as cash flow hedges with aggregate notional amounts of $471.4 million and $421.4 million at December 31, 2011 and 2010, 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
Millions of dollars	Balance Sheet Location(a)	Fair Value		Balance Sheet Location(a)	Fair Value
As of December 31, 2011
Derivatives designated as hedging instruments
Interest rate contracts	Other current assets	$	1	Other current liabilities	$	2
				Other deferred credits	75
Total		$	1		$	77
As of December 31, 2010
Derivatives designated as hedging instruments
Interest rate contracts	Other deferred debits	$	4	Other current liabilities	$	34
				Other deferred credits	1
Total		$	4		$	35
Derivatives not designated as hedging instruments
Commodity contracts	Prepayments and other	$	1

(a)Asset derivatives represent unrealized gains to Consolidated SCE&G, and liability derivatives represent unrealized losses. In Consolidated SCE&G’s consolidated balance sheet, 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 statement of income is as follows:

Derivatives in Cash Flow Hedging Relationships	Gain or (Loss) Deferred in Regulatory Accounts			Gain or (Loss) Reclassified from Deferred Accounts into Income (Effective Portion)
Millions of dollars	(Effective Portion)			Location	Amount
Year Ended December 31, 2011
Interest rate contracts	$	(76	)	Interest expense	$	(3	)
Year Ended December 31, 2010
Interest rate contracts	$	(36	)	Interest expense	$	(2	)
Year Ended December 31, 2009
Interest rate contracts	$	42		Interest expense	$	(3	)

Derivatives Not Designated as Hedging Instruments	Gain or (Loss) Recognized in Income
Millions of dollars	Location	Amount
Year Ended December 31, 2011
Commodity contracts	Gas purchased for resale	$	(2	)
Year Ended December 31, 2010
Commodity contracts	Gas purchased for resale	$	(3	)
Year Ended December 31, 2009
Commodity contracts	Gas purchased for resale	$	(16	)

Hedge Ineffectiveness

Other gains (losses) recognized in income representing interest rate hedge ineffectiveness were $(1.1) million, net of tax, in 2011 and were insignificant in 2010. These amounts are recorded within interest expense on the statement of income.

Credit Risk Considerations

Certain of Consolidated SCE&G’s derivative instruments contain contingent provisions that require collateral to be provided upon the occurrence of specific events, primarily credit downgrades.  As of December 31, 2011 and 2010, Consolidated SCE&G has posted $45.0 million and $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 December 31, 2011 and 2010, Consolidated SCE&G would be required to post an additional $31.7 million and $34.9 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 December 31, 2011 and 2010, are $76.7 million and $34.9 million, respectively.