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Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments And Hedging Activities Disclosure [Abstract]

7. DERIVATIVE FINANCIAL INSTRUMENTS

DESC’s accounting policies, objectives, and strategies for using derivative instruments are discussed in Note 7 in the Consolidated Financial Statements in DESC’s Annual Report on Form 10-K for the year ended December 31, 2018. Derivative assets and liabilities are presented gross on the Consolidated Balance Sheets and are measured at fair value. See Note 8 for further information about fair value measurements and associated valuation methods for derivatives. Derivative contracts include over-the-counter transactions, which are bilateral contracts that are transacted directly with a third party. In general, most over-the-counter transactions are subject to collateral requirements.

Pursuant to regulatory orders, interest rate derivatives entered into by DESC after October 2013 have not been 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 generally have been amortized over the lives of subsequent debt issuances,

and gains have been amortized to interest expense or have been applied as otherwise directed by the South Carolina Commission. See Note 15 regarding the settlement gains realized in the first quarter of 2018.

The table below presents derivative balances by type of financial instrument, if the gross amounts recognized in the Consolidated Balance Sheets were netted with derivative instruments and cash collateral received or paid:

	September 30, 2019								December 31, 2018
	Gross Amounts Not Offset in the Consolidated Balance Sheet								Gross Amounts Not Offset in the Consolidated Balance Sheet
(millions)	Gross Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts		Gross Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts
Interest rate contracts:
Over-the-counter	$	23	$	—	$	23	$	—	$	11	$	—	$	11	$	—
Total derivatives	$	23	$	—	$	23	$	—	$	11	$	—	$	11	$	—

Volumes

The following table presents the volume of derivative activity at September 30, 2019. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions.

		Current				Noncurrent
Interest rate⁽¹⁾		$	—			$	71,400,000

(1)	^{Maturity is determined based on final settlement period.}

Fair Value and Gains and Losses on Derivative Instruments

The following tables present the fair values of derivatives and where they are presented in the Consolidated Balance Sheets:

(millions)	Fair Value - Derivatives under Hedge Accounting		Fair Value - Derivatives not under Hedge Accounting		Total Fair Value
At September 30, 2019
Current Liabilities
Interest rate	$	1	$	1	$	2
Total current derivative liabilities⁽¹⁾		1		1		2
Noncurrent Liabilities
Interest rate		13		8		21
Total noncurrent derivative liabilities⁽²⁾		13		8		21
Total derivative liabilities	$	14	$	9	$	23
At December 31, 2018
Current Liabilities
Interest rate	$	1	$	—	$	1
Total current derivative liabilities⁽¹⁾		1		—		1
Noncurrent Liabilities
Interest rate		7		3		10
Total noncurrent derivative liabilities⁽²⁾		7		3		10
Total derivative liabilities	$	8	$	3	$	11

(1)	Current derivative liabilities are presented in other current liabilities in the Consolidated Balance Sheets.

(2)	^{Noncurrent derivative liabilities are presented in other deferred credits and other liabilities in the Consolidated Balance Sheets.}

The following tables present the gains and losses on derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Comprehensive Income (Loss):

Derivatives in Cash Flow Hedging Relationships

(millions)	Gain (loss) Reclassified from Deferred Accounts into Income			Increase (Decrease) in Derivatives Subject to Regulatory Treatment⁽¹⁾
Three Months Ended September 30, 2019
Derivative type and location of gains (losses):
Interest rate⁽²⁾	$	—		$	(1	)
Total	$	—		$	(1	)
Three Months Ended September 30, 2018
Derivative type and location of gains (losses):
Interest rate⁽²⁾	$	—		$	—
Total	$	—		$	—
Nine Months Ended September 30, 2019
Derivative type and location of gains (losses):
Interest rate⁽²⁾	$	—		$	(3	)
Total	$	—		$	(3	)
Nine Months Ended September 30, 2018
Derivative type and location of gains (losses):
Interest rate⁽²⁾	$	(1	)	$	2
Total	$	(1	)	$	2

(1)	Represents net derivative activity deferred into and amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/ liabilities have no associated effect in the Consolidated Statements of Comprehensive Income (Loss).

(2)	Amounts recorded in DESC’s Consolidated Statements of Comprehensive Income (Loss) are classified in interest charges.

Derivatives Not designated as Hedging Instruments

(millions)	Increase (Decrease) in Derivatives Subject to Regulatory Treatment⁽¹⁾						Amount of Gain (Loss) Recognized in Income on Derivatives⁽²⁾
Three Months Ended September 30,	2019			2018		Location	2019			2018
Derivative type and location of gains (losses):
Interest rate contracts:						Interest charges	$	(1	)	$	(1	)
Total interest rate contracts	$	(2	)	$	1		$	(1	)	$	(1	)
Nine Months Ended September 30,
Derivative type and location of gains (losses):
Interest rate contracts:						Interest charges	$	(1	)	$	(2	)
						Other income		—			115
Total interest rate contracts	$	(5	)	$	66		$	(1	)	$	113

(1)	Represents net derivative activity deferred into and amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in the Consolidated Statements of Comprehensive Income (Loss).

(2)	^{Includes derivative activity amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in the Consolidated Statements of Comprehensive Income (Loss).}

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

(millions)	September 30, 2019		December 31, 2018
in Net Liability Position
Aggregate fair value of derivatives in net liability position	$	23	$	11
Fair value of collateral already posted		23		11
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	$	—	$	—