UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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I.R.S. Employer |
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Exact name of registrant as specified in its charter |
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Identification Number |
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(Address of principal executive offices) |
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(Registrants’ telephone number) |
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," “non-accelerated filer,” "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
Yes
At February 15, 2020, Dominion Energy South Carolina, Inc. had
DOMINION ENERGY SOUTH CAROLINA, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS FILING THIS FORM 10-K UNDER THE REDUCED DISCLOSURE FORMAT.
Dominion Energy South Carolina, Inc.
Item Number |
Page Number |
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Item 1. |
5 |
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Item 1A. |
6 |
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Item 1B. |
11 |
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Item 2. |
11 |
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Item 3. |
12 |
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Item 4. |
12 |
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Item 5. |
13 |
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Item 6. |
13 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 |
Item 7A. |
17 |
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Item 8. |
18 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
60 |
Item 9A. |
60 |
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Item 9B. |
60 |
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Item 10. |
61 |
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Item 11. |
61 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
61 |
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
61 |
Item 14. |
61 |
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Item 15. |
62 |
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Item 16. |
63 |
Glossary of Terms
The following abbreviations or acronyms used in this Form 10-K are defined below:
Abbreviation or Acronym |
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Definition |
2015 Task Order |
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Retail services agreement between DESC and the DOE, which includes a FERC jurisdictional lease of the DOE transmission facilities at the Savannah River Site |
2017 Tax Reform Act |
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An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (previously known as The Tax Cuts and Jobs Act) enacted on December 22, 2017 |
ACE Rule |
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Affordable Clean Energy Rule |
AFUDC |
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Allowance for funds used during construction |
AOCI |
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Accumulated other comprehensive income (loss) |
ARO |
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Asset retirement obligation |
BACT |
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Best available control technology |
bcf |
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Billion cubic feet |
BLRA |
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South Carolina Base Load Review Act |
CAA |
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Clean Air Act |
CCR |
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Coal combustion residual |
CEO |
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Chief Executive Officer |
CERCLA |
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Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as Superfund |
CFO |
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Chief Financial Officer |
CO2 |
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Carbon dioxide |
Consortium |
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A consortium consisting of Westinghouse and WECTEC |
CWA |
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Clean Water Act |
DECG |
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Dominion Energy Carolina Gas Transmission, LLC |
DER |
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Distributed energy resource |
DESC |
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The legal entity, Dominion Energy South Carolina, Inc. (formerly known as South Carolina Electric & Gas Company), one or more of its consolidated entities or operating segment, or the entirety of Dominion Energy South Carolina, Inc. and its consolidated entities |
DESS |
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Dominion Energy Southeast Services, Inc. (formerly known as SCANA Services, Inc.) |
Dominion Energy South Carolina |
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Dominion Energy South Carolina operating segment |
Dodd-Frank Act |
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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
DOE |
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U.S. Department of Energy |
Dominion Energy |
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The legal entity, Dominion Energy, Inc., one or more of its consolidated subsidiaries (other than DESC) or operating segments, or the entirety of Dominion Energy, Inc. and its consolidated subsidiaries |
DSM |
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Demand-side management |
ELG Rule |
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Effluent limitations guidelines for the steam electric power generating category |
EMANI |
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European Mutual Association for Nuclear Insurance |
EPA |
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U.S. Environmental Protection Agency |
FASB |
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Financial Accounting Standards Board |
FERC |
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Federal Energy Regulatory Commission |
FILOT |
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Fee in lieu of taxes |
Fuel Company |
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South Carolina Fuel Company, Inc. |
GAAP |
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U.S. generally accepted accounting principles |
GENCO |
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South Carolina Generating Company, Inc. |
GHG |
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Greenhouse gas |
IAA |
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Interim Assessment Agreement dated March 28, 2017, as amended, among DESC, Santee Cooper, Westinghouse and WECTEC |
IRS |
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Internal Revenue Service |
MATS |
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Utility Mercury and Air Toxics Standard Rule |
MD&A |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MGD |
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Million gallons a day |
MGP |
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Manufactured gas plant |
MW |
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Megawatt |
NAV |
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Net asset value |
NEIL |
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Nuclear Electric Insurance Limited |
NND Project |
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V.C. Summer Units 2 and 3 nuclear development project under which DESC and Santee Cooper undertook to construct two Westinghouse AP1000 Advanced Passive Safety nuclear units in Jenkinsville, South Carolina |
NOX |
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Nitrogen oxide |
NRC |
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U.S. Nuclear Regulatory Commission |
NSPS |
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New Source Performance Standards |
Order 1000
ORS |
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Order issued by FERC adopting requirements for electric transmission planning, cost allocation and development South Carolina Office of Regulatory Staff |
PGA |
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Purchased gas adjustment |
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PHMSA |
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U.S. Pipeline Hazardous Materials Safety Administration |
Price-Anderson |
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Price-Anderson Amendments Act of 1988 |
PSD |
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Prevention of significant deterioration |
Reorganization Plan |
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Modified Second Amended Joint Chapter 11 Plan or Reorganization, filed by Westinghouse |
RICO |
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Racketeer Influenced and Corrupt Organizations Act |
ROE |
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Return on equity |
RSA |
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Natural Gas Rate Stabilization Act |
Santee Cooper |
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South Carolina Public Service Authority |
SCANA |
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The legal entity, SCANA Corporation, one or more of its consolidated subsidiaries (other than DESC) or the entirety of SCANA Corporation and its consolidated subsidiaries |
SCANA Combination |
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Dominion Energy's acquisition of SCANA completed on January 1, 2019 pursuant to the terms of the SCANA Merger Agreement |
SCANA Merger Agreement |
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Agreement and plan of merger entered on January 2, 2018 between Dominion Energy and SCANA |
SCANA Merger Approval Order |
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Final order issued by the South Carolina Commission on December 21, 2018 setting forth its approval of the SCANA Combination |
SCDHEC |
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South Carolina Department of Health and Environmental Control |
SCDOR |
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South Carolina Department of Revenue |
SEC |
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U.S. Securities and Exchange Commission |
SO2 |
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Sulfur dioxide |
South Carolina Commission |
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Public Service Commission of South Carolina |
Southern |
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The legal entity, The Southern Company, one or more of its consolidated subsidiaries, or the entirety of The Southern Company and its consolidated subsidiaries |
Summer |
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V.C. Summer nuclear power station |
Toshiba |
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Toshiba Corporation, parent company of Westinghouse |
Toshiba Settlement |
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Settlement Agreement dated as of July 27, 2017, by and among Toshiba, DESC and Santee Cooper |
VIE |
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Variable interest entity |
VOC |
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Volatile organic compounds |
WECTEC |
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WECTEC Global Project Services, Inc. (formerly known as Stone & Webster, Inc.), a wholly-owned subsidiary of Westinghouse |
Westinghouse |
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Westinghouse Electric Company LLC |
Westinghouse Subcontractors |
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Subcontractors and suppliers to the Consortium |
WNA |
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Weather normalization adjustment |
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Part I
Item 1. Business
GENERAL
DESC, a public utility headquartered in Cayce, South Carolina, is a South Carolina corporation organized in 1924. DESC is a wholly-owned subsidiary of SCANA which, effective January 2019, is a wholly-owned subsidiary of Dominion Energy.
DESC is engaged in the generation, transmission and distribution of electricity to approximately 744,000 customers in the central, southern and southwestern portions of South Carolina. Additionally, DESC sells natural gas to approximately 392,000 residential, commercial and industrial customers in South Carolina. DESC’s business experiences seasonal fluctuations, with generally higher sales of electricity during the summer and winter months because of air conditioning and heating requirements, and generally higher sales of natural gas during the winter months due to heating requirements.
GENCO owns a coal-fired electric generating station with a 605 MW net generating capacity (summer rating). GENCO’s electricity is sold exclusively to DESC, pursuant to a FERC-approved power purchase agreement and related operating agreement. The effects of these transactions are eliminated in consolidation. Fuel Company acquires, owns and provides financing for DESC's nuclear fuel, certain fossil fuels and emission and other environmental allowances.
COMPETITION
There is no competition for electric distribution or generation service within DESC's retail electric service territory in South Carolina and no such competition is currently permitted. However, competition from third-party owners for development, construction and ownership of certain transmission facilities in DESC’s service territory is permitted pursuant to Order 1000, subject to state and local siting and permitting approvals. This could result in additional competition to build and own transmission infrastructure in DESC’s service area in the future.
Competition in DESC’s natural gas distribution operations is generally based on price and convenience. Large commercial and industrial customers often have the ability to switch from natural gas to an alternate fuel, such as propane or fuel oil. Natural gas competes with these alternate fuels based on price. As a result, any significant disparity between supply and demand, either of natural gas or of alternate fuels, and due either to production or delivery disruptions or other factors, will affect price and the ability to retain large commercial and industrial customers.
REGULATION
DESC’s electric distribution service, including the rates it may charge to jurisdictional customers, is subject to regulation by the South Carolina Commission. DESC’s electric generation operations are subject to regulation by the South Carolina Commission, FERC, the NRC, the EPA, the DOE and various other federal, state and local authorities. DESC’s electric transmission service is primarily regulated by FERC and the DOE. DESC’s gas distribution operations are subject to regulation by the South Carolina Commission, as well as PHMSA, the U.S. Department of Transportation and the ORS for enforcement of federal and state pipeline safety requirements in its service territories.
Electric Regulation in South Carolina
DESC’s retail electric base rates in South Carolina are regulated on a cost-of-service/rate-of-return basis subject to South Carolina statutes and the rules and procedures of the South Carolina Commission. South Carolina base rates are set by a process that allows DESC to recover its operating costs and a return on invested capital. If retail electric earnings exceed the authorized ROE established by the South Carolina Commission, retail electric rates may be subject to review and possible reduction, which may decrease DESC’s future earnings. Additionally, if the South Carolina Commission does not allow recovery of costs incurred in providing service on a timely basis, DESC’s future earnings could be negatively impacted. Fuel costs are reviewed annually by the South Carolina Commission, as required by statute, and fuel rates are subject to revision in these annual fuel proceedings.
DESC offers to its retail electric customers several DSM programs designed to assist customers in reducing their demand for electricity and improving their energy efficiency. DESC submits annual filings to the South Carolina Commission related to these programs. As actual DSM program costs are incurred, they are deferred as regulatory assets and recovered through a rider approved by the South Carolina Commission. The rider also provides for recovery of any net lost revenues and for a shared savings incentive.
In connection with the SCANA Combination, DESC agreed not to file a general rate case with the South Carolina Commission with a requested rate effective date earlier than January 2021. Rate adjustments are permitted prior to 2021 for fuel and environmental costs, DSM costs and other rates routinely adjusted on an annual or biennial basis.
Gas Regulation in South Carolina
DESC is subject to regulation of rates and other aspects of its natural gas distribution service by the South Carolina Commission.
DESC provides retail natural gas service to customers in areas in which it has received authorization from the South Carolina
Commission and in municipalities in which it holds a franchise. DESC’s base rates can be adjusted annually, pursuant to the RSA, for recovery of costs related to natural gas infrastructure. Base rates are set based on the cost-of-service by rate class approved by the
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South Carolina Commission in the latest general rate case. Base rates for DESC are based primarily on a rate design methodology in which the majority of operating costs are recovered through volumetric charges. DESC also utilizes a weather normalization adjustment to adjust its base rates during the winter billing months for residential and commercial customers to mitigate the effects of unusually cold or warm weather.
In addition, DESC’s natural gas tariffs include a purchased gas adjustment that provides for the recovery of prudently incurred gas costs, including transportation costs. DESC is authorized to adjust its purchased gas rates monthly and makes routine filings with the South Carolina Commission to provide notification of changes in these rates. Costs that are under or over recovered are deferred as regulatory assets or liabilities, respectively, and considered in subsequent purchased gas adjustments. The purchased gas adjustment filings generally cover a prospective twelve-month period. Increases or decreases in purchased gas costs can result in corresponding changes in purchased gas adjustment rates and the revenue generated by those rates. The South Carolina Commission annually reviews DESC’s gas purchasing policies and practices, including its administration of the purchased gas adjustment.
EMPLOYEES
At December 31, 2019, DESC had approximately 2,500 employees, of which approximately 750 were subject to collective bargaining agreements.
WHERE YOU CAN FIND MORE INFORMATION
DESC files their annual, quarterly and current reports and other information with the SEC. Their SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov.
DESC makes their SEC filings available, free of charge, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, through Dominion Energy’s website, http://www.dominionenergy.com, as soon as reasonably practicable after filing or furnishing the material to the SEC. Information contained on Dominion Energy’s website is not incorporated by reference in this report.
Item 1A. Risk Factors
DESC’s business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond its control. A number of these factors have been identified below. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in Item 7. MD&A.
Regulatory, Legislative and Legal Risks
The rates that DESC can charge are subject to regulatory review. Revenue provided by DESC’s operations is based primarily on rates approved by state regulatory agencies. The profitability of these businesses is dependent on their ability, through the rates that they are permitted to charge, to recover costs and earn a reasonable rate of return on their capital investment.
DESC’s retail electric base rates for services to customers in South Carolina are regulated on a cost-of-service/rate-of-return basis subject to South Carolina statutes and the rules and procedures of the South Carolina Commission. South Carolina base rates are set by a process that allows DESC to recover its operating costs and return on invested capital. If retail electric earnings exceed the returns established by the South Carolina Commission, retail electric rates may be subject to review and possible reduction by the South Carolina Commission, which may decrease DESC’s future earnings. If the South Carolina Commission does not allow recovery through base rates, on a timely basis, of costs incurred in providing service, DESC’s future earnings could be negatively impacted.
Under certain circumstances, the South Carolina Commission may impose a moratorium on increases to retail base rates for a specified period of time, which could delay recovery of costs incurred in providing service. Additionally, governmental officials, stakeholders and advocacy groups may challenge these regulatory reviews. Such challenges may lengthen the time, complexity and costs associated with such regulatory reviews. In addition, in February 2020, legislation was introduced in the South Carolina House of Representatives of the South Carolina General Assembly proposing to amend the Code of Laws of South Carolina so as to, among other things, prevent utilities from recovering certain expenditures from ratepayers; to allow the South Carolina Commission to evaluate utility operating expenses on a case-by-case basis; to provide penalties if a public utility submits a nonallowable expense for recovery from its ratepayers; and to require a utility to pay for the cost of an audit when the South Carolina Commission determines that the utility submitted a nonallowable expense. The legislation, if enacted, could further increase costs associated with regulatory reviews.
DESC is subject to numerous legal proceedings and ongoing governmental investigations and examinations. DESC is a defendant in numerous federal and state legal proceedings and governmental investigations relating to the decision to abandon construction at the NND Project. Among other things, the lawsuits and investigations allege misrepresentation, failure to properly manage the NND Project, unfair trade practices and violation of anti-trust laws. Additionally, DESC is a defendant in federal and state legal proceedings relating to the SCANA Combination. Among other things, the lawsuits allege breaches of various fiduciary duties.
The outcome of these legal proceedings, investigations and examinations, including settlements, is uncertain and may adversely affect DESC’s financial condition or results of operation.
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DESC is subject to complex governmental regulation, including tax regulation, that could adversely affect its results of operations and subject DESC to monetary penalties. DESC’s operations are subject to extensive federal, state and local regulation and require numerous permits, approvals and certificates from various governmental agencies. Such laws and regulations govern the terms and conditions of the services we offer, our relationships with affiliates, protection of our critical electric infrastructure assets and pipeline safety, among other matters. These operations are also subject to legislation governing taxation at the federal, state and local level. DESC must also comply with environmental legislation and associated regulations. Management believes that the necessary approvals have been obtained for existing operations and that the businesses are conducted in accordance with applicable laws. DESC’s business is subject to regulatory regimes which could result in substantial monetary penalties if DESC is found not to be in compliance, including mandatory reliability standards and interaction in the wholesale markets. New laws or regulations, the revision or reinterpretation of existing laws or regulations, changes in enforcement practices of regulators, or penalties imposed for non-compliance with existing laws or regulations may result in substantial additional expense. Recent legislative and regulatory changes that are impacting DESC include the 2017 Tax Reform Act.
Environmental Risks
DESC’s operations and construction activities are subject to a number of environmental laws and regulations which impose significant compliance costs on DESC. DESC’s operations and construction activities are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, and health and safety. Compliance with these legal requirements requires DESC to commit significant capital toward permitting, emission fees, environmental monitoring, installation and operation of environmental control equipment and purchase of allowances and/or offsets. Additionally, DESC could be responsible for expenses relating to remediation and containment obligations, including at sites where it has been identified by a regulatory agency as a potentially responsible party. Expenditures relating to environmental compliance have been significant in the past, and DESC expects that they will remain significant in the future. As a result of these requirements, certain facilities may become uneconomical to operate and may need to be shut down, converted to new fuel types or sold.
We expect that existing environmental laws and regulations may be revised and/or new laws may be adopted including regulation of GHG emissions which could have an impact on DESC’s business (risks relating to regulation of GHG emissions from existing fossil fuel-fired electric generating units are discussed in more detail below). In addition, further regulation of air quality and GHG emissions under the CAA have been imposed on the natural gas sector, including rules to limit methane leakage. DESC is also subject to federal water and waste regulations, including regulations concerning cooling water intake structures, coal combustion by-product handling and disposal practices, wastewater discharges from steam electric generating stations, management and disposal of hydraulic fracturing fluids and the potential further regulation of polychlorinated biphenyls.
Compliance costs cannot be estimated with certainty due to the inability to predict the requirements and timing of implementation of any new environmental rules or regulations. Other factors which affect the ability to predict future environmental expenditures with certainty include the difficulty in estimating clean-up costs and quantifying liabilities under environmental laws that impose joint and several liabilities on all responsible parties. However, such expenditures, if material, could make DESC’s facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect DESC’s results of operations, financial performance or liquidity.
Any additional federal and/or state requirements imposed on energy companies mandating limitations on GHG emissions or requiring efficiency improvements may result in compliance costs that alone or in combination could make some of DESC’s electric generation units or natural gas facilities uneconomical to maintain or operate. The ACE Rule, which became effective in September 2019, is targeted at reducing CO2 emissions from existing coal-fired power plants. The ACE Rule requires states to develop plans by July 2022 to implement CO2 performance standards. State plans must be approved by the EPA by January 2024. States are also contemplating regulations regarding GHG emissions. Compliance with the ACE Rule or other federal or state carbon regulations is expected to require increasing the energy efficiency of equipment at facilities, committing significant capital toward carbon reduction programs, purchase of allowances and/or emission offset credits, fuel switching, and/or retirement of high-emitting generation facilities and potential replacement with lower-emitting generation facilities. Given these developments and uncertainties, DESC cannot estimate the aggregate effect of such requirements on its results of operations, financial condition or its customers. However, such expenditures, if material, could make DESC’s generation facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect DESC’s results of operations, financial performance or liquidity.
There are also potential impacts on DESC’s natural gas businesses as federal or state GHG regulations may require GHG emission reductions from the natural gas sector which, in addition to resulting in increased costs, could affect demand for natural gas. Additionally, GHG requirements could result in increased demand for energy conservation and renewable products, which could impact the natural gas businesses.
Construction Risks
DESC’s infrastructure build and expansion plans often require regulatory approval, including environmental permits, before commencing construction and completing projects. DESC may not complete facility construction, electric transmission line, conversion or other infrastructure projects that it commences, or it may complete projects on materially different terms, costs or timing than initially estimated or anticipated, and it may not be able to achieve the intended benefits of any such project, if completed. Commencing construction on announced and future projects may require approvals from applicable state and federal agencies, and such approvals could include mitigation costs which may be material to DESC. Projects may not be able to be completed on time or in accordance with our estimated costs as a result of weather conditions, delays in obtaining or failure to obtain regulatory approvals, delays in obtaining key materials, labor difficulties, difficulties with partners or potential partners, a decline in the credit strength of counterparties or vendors, or other factors beyond DESC’s control. Even if facility construction, electric
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transmission line, conversion and other infrastructure projects are completed, the total costs of the projects may be higher than anticipated and the performance of the business of DESC following completion of the projects may not meet expectations. Start-up and operational issues can arise in connection with the commencement of commercial operations at our facilities. Such issues may include failure to meet specific operating parameters, which may require adjustments to meet or amend these operating parameters. Additionally, DESC may not be able to timely and effectively integrate the projects into its operations and such integration may result in unforeseen operating difficulties or unanticipated costs. Further, regulators may disallow recovery of some of the costs of a project if they are deemed not to be prudently incurred. Any of these or other factors could adversely affect DESC’s ability to realize the anticipated benefits from the facility construction, electric transmission line, conversion and other infrastructure projects.
Operational Risks
DESC’s financial performance and condition can be affected by changes in the weather, including the effects of global climate change. Fluctuations in weather can affect demand for DESC’s services. For example, milder than normal weather can reduce demand for electricity and gas distribution services. In addition, severe weather, including hurricanes, winter storms, earthquakes, floods and other natural disasters can stress systems, disrupt operation of DESC’s facilities and cause service outages, production delays and property damage that require incurring additional expenses. Changes in weather conditions can result in reduced water levels or changes in water temperatures that could adversely affect operations at some of DESC’s power stations. Furthermore, DESC’s operations could be adversely affected and its physical plant placed at greater risk of damage should changes in global climate produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in more intense, frequent and extreme weather events, abnormal levels of precipitation and, for operations located on or near coastlines, a change in sea level or sea temperatures. Due to the location of DESC’s electric utility service territories which are frequently in the path of hurricanes, we experience the consequences of these weather events to a greater degree than many of our industry peers.
DESC’s operations are subject to operational hazards, equipment failures, supply chain disruptions and personnel issues which could negatively affect DESC. Operation of DESC’s facilities involves risk, including the risk of potential breakdown or failure of equipment or processes due to aging infrastructure, fuel supply, pipeline integrity or transportation disruptions, accidents, labor disputes or work stoppages by employees, acts of terrorism or sabotage, construction delays or cost overruns, shortages of or delays in obtaining equipment, material and labor, operational restrictions resulting from environmental limitations and governmental interventions, changes to the environment and performance below expected levels. DESC’s business is dependent upon sophisticated information technology systems and network infrastructure, the failure of which could prevent them from accomplishing critical business functions. Because DESC’s transmission facilities, pipelines and other facilities are interconnected with those of third parties, the operation of our facilities and pipelines could be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties.
Operation of DESC’s facilities below expected capacity levels could result in lost revenues and increased expenses, including higher maintenance costs. Unplanned outages of DESC’s facilities and extensions of scheduled outages due to mechanical failures or other problems occur from time to time and are an inherent risk of DESC’s business. Unplanned outages typically increase DESC’s operation and maintenance expenses and may reduce its revenue as a result of selling less output or may require DESC to incur significant costs as a result of operating higher cost units or obtaining replacement output from third parties in the open market to satisfy forward energy and capacity or other contractual obligations. Moreover, if DESC is unable to perform its contractual obligations, penalties or liability for damages could result.
In addition, there are many risks associated with DESC’s operations and the transportation, storage and distribution of natural gas, including nuclear accidents, fires, explosions, uncontrolled release of natural gas and other environmental hazards, pole strikes, electric contact cases, the collision of third party equipment with pipelines and avian and other wildlife impacts. Such incidents could result in loss of human life or injuries among employees, customers or the public in general, environmental pollution, damage or destruction of facilities or business interruptions and associated public or employee safety impacts, loss of revenues, increased liabilities, heightened regulatory scrutiny and reputational risk. Further, the location of pipelines and storage facilities, or generation, transmission, substations and distribution facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.
DESC’s financial results can be adversely affected by various factors driving supply and demand for electricity and gas and related services. Technological advances required by federal laws mandate new levels of energy efficiency in end-use devices, including lighting, furnaces and electric heat pumps and could lead to declines in per capita energy consumption. Additionally, certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date. Further, DESC’s business model is premised upon the cost efficiency of the production, transmission and distribution of large-scale centralized utility generation. However, advances in distributed generation technologies, such as solar cells, gas microturbines, battery storage and fuel cells, may make these alternative generation methods competitive with large-scale utility generation, and change how customers acquire or use our services. DESC has an exclusive franchise to serve retail electric customers in its South Carolina service territory. If regulatory conditions change, DESC’s exclusive franchise may erode.
Reduced energy demand or significantly slowed growth in demand due to customer adoption of energy efficient technology, conservation, distributed generation, regional economic conditions, or the impact of additional compliance obligations, unless substantially offset through regulatory cost allocations, could adversely impact the value of DESC’s business activities.
DESC may be materially adversely affected by negative publicity. From time to time, political and public sentiment in connection with significant transactions and infrastructure projects, such as the abandonment of the NND Project, may result in a significant amount of adverse press coverage and other adverse public statements affecting DESC. Additionally, any failure by DESC to realize voluntary targets set with respect to the reduction of GHG emissions or other long-term goals could lead to adverse press coverage and
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other adverse public statements affecting DESC. Adverse press coverage and other adverse statements, whether or not driven by political or public sentiment, may also result in investigations by regulators, legislators and law enforcement officials or in legal claims.
Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time consuming and expensive and, regardless of the factual basis for the assertions being made, can have a negative impact on the reputation of DESC, on the morale and performance of its employees and on its relationships with its regulators, customers and commercial counterparties. It may also have a negative impact on DESC’s ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on DESC’s business, financial condition and results of operations.
Hostile cyber intrusions could severely impair DESC’s operations, lead to the disclosure of confidential information, damage the reputation of DESC and otherwise have an adverse effect on DESC’s business. DESC owns assets deemed as critical infrastructure, the operation of which is dependent on information technology systems. Further, the computer systems that run DESC’s facilities are not completely isolated from external networks. There appears to be an increasing level of activity, sophistication and maturity of threat actors, in particular nation state actors, that wish to disrupt the U.S. bulk power system and the U.S. gas transmission or distribution system. Such parties could view DESC’s computer systems, software or networks as attractive targets for cyber attack. For example, malware has been designed to target software that runs the nation’s critical infrastructure such as power transmission grids and gas pipelines. In addition, DESC’s business requires that it and its vendors collect and maintain sensitive customer data, as well as confidential employee information, which is subject to electronic theft or loss.
A successful cyber attack on the systems that control DESC’s electric generation and electric or gas transmission or distribution assets could severely disrupt business operations, preventing DESC from serving customers or collecting revenues. The breach of certain business systems could affect DESC’s ability to correctly record, process and report financial information. A major cyber incident could result in significant expenses to investigate and repair security breaches or system damage and could lead to litigation, fines, other remedial action, heightened regulatory scrutiny and damage to DESC’s reputation. In addition, the misappropriation, corruption or loss of personally identifiable information and other confidential data at DESC or one of its vendors could lead to significant breach notification expenses and mitigation expenses such as credit monitoring. If a significant breach were to occur, the reputation of DESC also could be adversely affected. While DESC maintains property and casualty insurance, along with other contractual provisions, that may cover certain damage caused by potential cyber incidents, all damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. For these reasons, a significant cyber incident could materially and adversely affect DESC’s business, financial condition and results of operations.
War, acts and threats of terrorism, intentional acts and other significant events could adversely affect DESC’s operations. DESC cannot predict the impact that any future terrorist attacks or retaliatory military or other action may have on the energy industry in general or on DESC’s business in particular. Any such future attacks or retaliatory action may adversely affect DESC’s operations in a variety of ways, including by disrupting the power, fuel and other markets in which DESC operates or requiring the implementation of additional, more costly security guidelines and measures. DESC’s infrastructure facilities, including nuclear facilities and projects under construction, could be direct targets or indirect casualties of an act of terror or other physical attack. Any physical compromise of DESC’s facilities could adversely affect DESC’s ability to generate, purchase, transmit or distribute electricity, store, transmit or distribute natural gas, store liquefied natural gas or otherwise operate its facilities in the most efficient manner or at all. In addition, the amount and scope of insurance coverage maintained against losses resulting from any such attack may not be sufficient to cover such losses or otherwise adequately compensate for any business disruptions that could result.
Instability in financial markets as a result of terrorism, war, intentional acts, pandemic, credit crises, recession or other factors could result in a significant decline in the U.S. economy and/or increase the cost or limit the availability of insurance or adversely impact DESC’s ability to access capital on acceptable terms.
Failure to attract and retain key executive officers and an appropriately qualified workforce could have an adverse effect on DESC’s operations. DESC’s business strategy is dependent on its ability to recruit, retain and motivate employees. DESC’s key executive officers are the CEO, CFO and presidents and those responsible for financial, operational, legal, regulatory and accounting functions. Competition for skilled management employees in these areas of DESC’s business operations is high. Certain events, such as an aging workforce, mismatch of skill set, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge base and the length of time required for skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or future availability and cost of contract labor may adversely affect the ability to manage and operate DESC’s business. In addition, certain specialized knowledge is required of DESC’s technical employees for construction and operation of transmission, generation and distribution assets. DESC’s inability to attract and retain these employees could adversely affect its business and future operating results.
Nuclear Generation Risks
DESC has a substantial ownership interest in and operates a nuclear generating unit; as a result, DESC may incur substantial costs and liabilities. DESC’s nuclear facility is subject to operational, environmental, health and financial risks such as the on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, limitations on the amounts and types of insurance available, potential operational liabilities and extended outages, the costs of replacement power, the costs of maintenance and the costs of securing the facilities against possible terrorist attacks. DESC maintains a decommissioning trust and external insurance coverage to minimize the financial exposure to these risks; however,
9
it is possible that future decommissioning costs could exceed amounts in the decommissioning trust and/or damages could exceed the amount of insurance coverage. If DESC’s decommissioning trust funds are insufficient, and it is not allowed to recover the additional costs incurred through insurance or regulatory mechanisms, its results of operations could be negatively impacted.
DESC’s nuclear facility is also subject to complex government regulation which could negatively impact its results of operations. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generating facilities. In the event of noncompliance, the NRC has the authority to impose fines, set license conditions, shut down a nuclear unit, or take some combination of these actions, depending on its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could require DESC to make substantial expenditures at its nuclear plant. In addition, although DESC has no reason to anticipate a serious nuclear incident at its plant, if an incident did occur, it could materially and adversely affect its results of operations and/or financial condition. A major incident at a nuclear facility anywhere in the world, such as the nuclear events in Japan in 2011, could cause the NRC to adopt increased safety regulations or otherwise limit or restrict the operation or licensing of domestic nuclear units.
Financial, Economic and Market Risks
Exposure to counterparty performance may adversely affect DESC’s financial results of operations. DESC is exposed to credit risks of its counterparties and the risk that one or more counterparties may fail or delay the performance of their contractual obligations, including but not limited to payment for services. Counterparties could fail or delay the performance of their contractual obligations for a number of reasons, including the effect of regulations on their operations. Defaults or failure to perform by customers, suppliers, contractors, joint venture partners, financial institutions or other third parties may adversely affect DESC’s financial results.
Changing rating agency requirements could negatively affect DESC’s growth and business strategy. In order to maintain appropriate credit ratings to obtain needed credit at a reasonable cost in light of existing or future rating agency requirements, DESC may find it necessary to take steps or change its business plans in ways that may adversely affect its growth and earnings. A reduction in DESC’s credit ratings could result in an increase in borrowing costs, loss of access to certain markets, or both, thus adversely affecting operating results and could require DESC to post additional collateral in connection with some of its price risk management activities.
An inability to obtain needed capital or financing on satisfactory terms, or at all, could have an adverse effect on our operations and ability to generate cash flow. DESC is dependent on certain financing arrangements with Dominion Energy for any borrowings necessary to meet our working capital and other financial needs. If Dominion Energy’s funding resources were to become unavailable to Dominion Energy, DESC’s access to funding would also be in jeopardy. In the future, an inability to obtain additional financing from other sources on acceptable terms could negatively affect our financial condition, cash flows, anticipated financial results or impair our ability to generate additional cash flows. The ability to obtain bank financing or to access the capital markets for future debt offerings may be limited by the financial condition of DESC at the time of any such financing or offering or other debt agreements in place at the time, adverse market conditions or other contingencies and uncertainties that are beyond our control.
DESC also relies on a credit facility with banks to meet short-term funding needs. Banks may be unable or unwilling to extend credit in the future. From time to time, DESC may use interest-rate derivatives to fix the rate on a portion of its variable-rate debt. A downgrade of credit ratings could increase the interest cost of debt and decrease future availability of capital from banks and other sources. While management believes it is important to maintain investment-grade credit ratings to conduct DESC’s businesses, DESC may not be able to keep investment-grade ratings.
Market performance, interest rates and other changes may decrease the value of DESC’s decommissioning trust fund and benefit plan assets or increase DESC’s liabilities, which could then require significant additional funding. The performance of the capital markets affects the value of the assets that are held in trust to satisfy future obligations to decommission DESC’s nuclear plant and under DESC’s pension and other postretirement benefit plans. DESC has significant obligations in these areas and holds significant assets in these trusts. These assets are subject to market fluctuation and will yield uncertain returns, which may fall below expected return rates.
With respect to the decommissioning trust fund, a decline in the market value of these assets may increase the funding requirements of the obligations to decommission DESC’s nuclear plant or require additional NRC-approved funding assurance.
A decline in the market value of the assets held in trusts to satisfy future obligations under DESC’s pension and other postretirement benefit plans may increase the funding requirements under such plans. Additionally, changes in interest rates will affect the liabilities under DESC’s pension and other postretirement benefit plans; as interest rates decrease, the liabilities increase, potentially requiring additional funding. Further, changes in demographics, including increased numbers of retirements or changes in mortality assumptions, may also increase the funding requirements of the obligations related to the pension and other postretirement benefit plans.
If the decommissioning trust fund and benefit plan assets are negatively impacted by market fluctuations or other factors, DESC’s results of operations, financial condition and/or cash flows could be negatively affected.
The use of derivative instruments could result in financial losses and liquidity constraints. DESC may use derivative instruments, including futures, swaps, forwards and options, to manage financial market risks. DESC could be required to provide cash collateral or
10
recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities and financial contracts or if a counterparty fails to perform under a contract.
The Dodd-Frank Act was enacted into law in July 2010 in an effort to improve regulation of financial markets. The Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Act, requires certain over-the-counter derivatives, or swaps, to be cleared through a derivatives clearing organization and, if the swap is subject to a clearing requirement, to be executed on a designated contract market or swap execution facility. Non-financial entities that use swaps to hedge or mitigate commercial risk, often referred to as end users, may elect the end-user exception to the Commodity Exchange Act’s clearing requirements. DESC has elected to exempt its swaps from the Commodity Exchange Act’s clearing requirements. If, as a result of changes to the rulemaking process, DESC’s derivative activities are not exempted from the clearing, exchange trading or margin requirements, DESC could be subject to higher costs due to decreased market liquidity or increased margin payments. In addition, DESC’s swap dealer counterparties may attempt to pass-through additional trading costs in connection with changes to or the elimination of rulemaking that implements Title VII of the Dodd-Frank Act.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
DESC has approximately 3,700 miles and 26,600 miles of electric transmission and distribution lines, respectively, exclusive of service level lines, in South Carolina. The grants for most of DESC’s electric lines contain rights-of-way that have been obtained from the apparent owners of real estate, but underlying property titles have not been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly-owned property, where permission to operate can be revoked. In addition, DESC owns 439 substations.
DESC’s natural gas system includes approximately 500 miles of transmission pipeline and approximately 18,400 miles of distribution mains and related service facilities.
DESC owns two liquefied natural gas facilities, one located near Charleston, South Carolina, and the other in Salley, South Carolina. The Charleston facility can store the liquefied equivalent of 1.0 bcf of natural gas, can regasify approximately 6% of its storage capacity per day and can liquefy less than 1% of its storage capacity per day. The Salley facility can store the liquefied equivalent of 0.9 bcf of natural gas and can regasify approximately 10% of its storage capacity per day. The Salley facility has no liquefying capabilities.
DESC’s bond indenture, which secures its first mortgage bonds, constitutes a direct mortgage lien on substantially all of its electric utility property.
11
The following table lists DESC’s generating units and capability as of December 31, 2019.
Plant |
|
Location |
|
Net Summer Capability (MW) |
|
|
|
|
|
Percentage Net Summer Capability |
|
||
Gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jasper (CC)(1) |
|
Hardeeville, SC |
|
|
852 |
|
|
|
|
|
|
|
|
Columbia Energy Center (CC)(1) |
|
Gaston, SC |
|
|
519 |
|
|
|
|
|
|
|
|
Urquhart (CC)(1) |
|
Beech Island, SC |
|
|
458 |
|
|
|
|
|
|
|
|
McMeekin |
|
Irmo, SC |
|
|
250 |
|
|
|
|
|
|
|
|
Hagood (CT)(1) |
|
Charleston, SC |
|
|
126 |
|
|
|
|
|
|
|
|
Urquhart Unit 3 |
|
Beech Island, SC |
|
|
95 |
|
|
|
|
|
|
|
|
Urquhart (CT) |
|
Beech Island, SC |
|
|
87 |
|
|
|
|
|
|
|
|
Parr (CT)(1) |
|
Jenkinsville, SC |
|
|
60 |
|
|
|
|
|
|
|
|
Williams (CT)(1) |
|
Goose Creek, SC |
|
|
40 |
|
|
|
|
|
|
|
|
Coit (CT)(1) |
|
Columbia, SC |
|
|
26 |
|
|
|
|
|
|
|
|
Total Gas(2) |
|
|
|
|
2,513 |
|
|
|
|
|
|
40 |
% |
Coal |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wateree |
|
Eastover, SC |
|
|
684 |
|
|
|
|
|
|
|
|
Williams |
|
Goose Creek, SC |
|
|
605 |
|
|
|
|
|
|
|
|
Cope(3) |
|
Cope, SC |
|
|
415 |
|
|
|
|
|
|
|
|
Total Coal |
|
|
|
|
1,704 |
|
|
|
|
|
|
27 |
|
Hydro |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairfield |
|
Jenkinsville, SC |
|
|
576 |
|
|
|
|
|
|
|
|
Saluda |
|
Irmo, SC |
|
|
190 |
|
|
|
|
|
|
|
|
Other |
|
Various |
|
|
18 |
|
|
|
|
|
|
|
|
Total Hydro |
|
|
|
|
784 |
|
|
|
|
|
|
13 |
|
Nuclear |
|
|
|
|
|
|
|
|
|
|
|
|
|
Summer |
|
Jenkinsville, SC |
|
|
650 |
|
|
(4 |
) |
|
|
|
|
Total Nuclear |
|
|
|
|
650 |
|
|
|
|
|
|
10 |
|
Power Purchase Agreements |
|
|
|
|
596 |
|
|
|
|
|
|
10 |
|
Total Utility Generation |
|
|
|
|
6,247 |
|
|
|
|
|
|
100 |
% |
Note: (CT) denotes combustion turbine and (CC) denotes combined cycle.
(1) |
Capable of burning fuel oil as a secondary source. |
(2) |
Excludes the Hardeeville gas combustion turbine which currently does not have any net summer capability. |
(3) |
Capable of burning natural gas as a secondary source. |
(4) |
Excludes 33.3% undivided interest owned by Santee Cooper. |
Item 3. Legal Proceedings
From time to time, DESC is alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by DESC, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, DESC is involved in various legal proceedings.
See Notes 3 and 12 to the Consolidated Financial Statements, which information is incorporated herein by reference, for a discussion of various legal, environmental and other regulatory proceedings to which DESC is a party.
Item 4. Mine Safety Disclosures
Not Applicable.
12
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for DESC’s common stock, all of which is owned by SCANA. DESC intends to pay quarterly cash dividends in 2020 but is neither required to nor restricted, except as described in Note 5 to the Consolidated Financial Statements, from making such payments.
At December 31, 2019, DESC’s retained earnings are below the balance established by the Federal Power Act as a reserve on earnings attributable to hydroelectric generation plants. As a result, DESC is prohibited from the payment of dividends without regulatory approval until the balance of its retained earnings increases.
Item 6. Selected Financial Data
Omitted pursuant to General Instructions I.(2)(a).
13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MD&A discusses DESC’s results of operations and general financial condition. MD&A should be read in conjunction with Item 1. Business and the Financial Statements in Item 8. Financial Statements and Supplementary Data. DESC meets the conditions to file under the reduced disclosure format, and therefore has omitted certain sections of MD&A.
CONTENTS OF MD&A
MD&A consists of the following information:
|
• |
Forward-Looking Statements |
|
• |
Results of Operations |
|
• |
Analysis of Operations |
FORWARD-LOOKING STATEMENTS
This report contains statements concerning DESC’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “continue,” “target” or other similar words.
DESC makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:
|
• |
Unusual weather conditions and their effect on energy sales to customers and energy commodity prices; |
|
• |
Extreme weather events and other natural disasters, including, but not limited to, hurricanes, high winds, severe storms, earthquakes, flooding, climate changes and changes in water temperatures and availability that can cause outages and property damage to facilities; |
|
• |
Federal, state and local legislative and regulatory developments, including changes in federal and state tax laws and regulations; |
|
• |
Risks of operating businesses in regulated industries that are subject to changing regulatory structures; |
|
• |
Changes to regulated rates collected; |
|
• |
Changes in future levels of domestic and international natural gas production, supply or consumption; |
|
• |
Timing and receipt of regulatory approvals necessary for planned construction or growth projects and compliance with conditions associated with such regulatory approvals; |
|
• |
The inability to complete planned construction, conversion or growth projects at all, or with the outcomes or within the terms and time frames initially anticipated, including as a result of increased public involvement, intervention or litigation in such projects; |
|
• |
Changes to federal, state and local environmental laws and regulations, including those related to climate change, the tightening of emission or discharge limits for GHGs and other substances, more extensive permitting requirements and the regulation of additional substances; |
|
• |
Cost of environmental compliance, including those costs related to climate change; |
|
• |
Changes in implementation and enforcement practices of regulators relating to environmental standards and litigation exposure for remedial activities; |
|
• |
Difficulty in anticipating mitigation requirements associated with environmental and other regulatory approvals or related appeals; |
|
• |
The impact of operational hazards, including adverse developments with respect to pipeline and plant safety or integrity, equipment loss, malfunction or failure, operator error, and other catastrophic events; |
|
• |
Risks associated with the operation of nuclear facilities, including costs associated with the disposal of spent nuclear fuel, decommissioning, plant maintenance and changes in existing regulations governing such facilities; |
|
• |
Changes in operating, maintenance and construction costs; |
|
• |
Domestic terrorism and other threats to DESC’s physical and intangible assets, as well as threats to cybersecurity; |
|
• |
Additional competition from the development and deployment of alternative energy sources, such as self-generation and distributed generation technologies; |
14
|
• |
Competition in the development, construction and ownership of certain electric transmission facilities in connection with Order 1000; |
|
• |
Changes in technology, particularly with respect to new, developing or alternative sources of generation and smart grid technologies; |
|
• |
Changes in demand for services, including industrial, commercial and residential growth or decline in service areas, changes in supplies of natural gas delivered, changes in customer growth or usage patterns, including as a result of energy conservation programs, the availability of energy efficient devices and the use of distributed generation methods; |
|
• |
Adverse outcomes in litigation matters or regulatory proceedings, including matters related to the NND Project; |
|
• |
Counterparty credit and performance risk; |
|
• |
Fluctuations in the value of investments held in nuclear decommissioning and benefit plan trusts; |
|
• |
Fluctuations in energy-related commodity prices and the effect these could have on DESC’s financial position and the underlying value of assets; |
|
• |
Fluctuations in interest rates; |
|
• |
Changes in rating agency requirements or credit ratings and their effect on availability and cost of capital; |
|
• |
Global capital market conditions, including the availability of credit and the ability to obtain financing on reasonable terms; |
|
• |
Political and economic conditions, including inflation and deflation; |
|
• |
Employee workforce factors including collective bargaining agreements and labor negotiations with union employees; and |
|
• |
Changes in financial or regulatory accounting principles or policies imposed by governing bodies. |
Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors.
DESC’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. DESC cautions the reader not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. DESC undertakes no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
RESULTS OF OPERATIONS
Presented below is a summary of DESC’s results:
Year Ended December 31, |
|
2019 |
|
|
$ Change |
|
|
2018 |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,222 |
) |
|
$ |
(633 |
) |
|
$ |
(589 |
) |
15
Overview
2019 VS. 2018
Net loss increased $633 million, primarily due to charges for refunds of amounts previously collected from retail electric customers for the NND Project, certain regulatory assets and utility plant for which DESC committed to forgo recovery, litigation and a voluntary retirement program. These decreases were partially offset by the absence of an impairment charge related to the NND Project and increased earnings under the SCANA Merger Approval Order.
Analysis of Consolidated Operations
Presented below are selected amounts related to DESC’s results of operations:
Year Ended December 31, |
|
2019 |
|
|
$ Change |
|
|
2018 |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
1,929 |
|
|
$ |
(833 |
) |
|
$ |
2,762 |
|
Fuel used in electric generation |
|
|
573 |
|
|
|
(98 |
) |
|
|
671 |
|
Purchased power |
|
|
54 |
|
|
|
(38 |
) |
|
|
92 |
|
Gas purchased for resale |
|
|
216 |
|
|
|
(23 |
) |
|
|
239 |
|
Net revenue |
|
|
1,086 |
|
|
|
(674 |
) |
|
|
1,760 |
|
Other operations and maintenance |
|
|
632 |
|
|
|
1 |
|
|
|
631 |
|
Impairment of assets and other charges |
|
|
695 |
|
|
|
(681 |
) |
|
|
1,376 |
|
Depreciation and amortization |
|
|
450 |
|
|
|
123 |
|
|
|
327 |
|
Other taxes |
|
|
250 |
|
|
|
(7 |
) |
|
|
257 |
|
Other income (expense), net |
|
|
(33 |
) |
|
|
(162 |
) |
|
|
129 |
|
Interest charges |
|
|
260 |
|
|
|
(43 |
) |
|
|
303 |
|
Income tax benefit |
|
|
(12 |
) |
|
|
404 |
|
|
|
(416 |
) |
An analysis of DESC’s results of operations follows:
2019 VS. 2018
Net revenue decreased 38% primarily due to:
|
• |
A $1.0 billion charge to electric revenue for refunds of amounts previously collected from retail electric customers for the NND Project; |
|
• |
A $17 million decrease in gas revenues due to lower South Carolina Commission approved rates and refunds of amounts previously collected from gas customers; partially offset by |
|
• |
Increased revenue under the SCANA Merger Approval Order issued by the South Carolina Commission in 2019 compared to revenue under South Carolina legislation enacted in the second quarter of 2018 to temporarily reduce the amount collected from customers under the BLRA ($247 million); and |
|
• |
A $114 million increase in electric revenue pursuant to a South Carolina Commission order whereby fuel cost recovery was substantially offset with gains realized upon the settlement of certain interest rate derivative contracts in 2018, as further described in other income (expense) below. |
Other operations and maintenance was substantially consistent as a charge related to a voluntary retirement program ($51 million) was substantially offset by lower non-labor electric generation expenses ($19 million), lower legal and NND Project wind down costs ($17 million) and lower property insurance expenses ($4 million).
Impairment of assets and other charges decreased 49%, primarily due to the absence of $1.4 billion of impairment charges recorded in 2018 related to the NND Project, partially offset by $590 million of charges related to litigation and a $105 million charge for utility plant for which DESC committed to forgo recovery.
Depreciation and amortization increased 38%, primarily reflecting the amortization of NND Project costs.
Other income decreased $162 million, primarily due to the absence of gains realized upon the settlement of interest rate derivative contracts in 2018 ($115 million) that were mostly offset by downward adjustments to electric revenues pursuant to a previously received South Carolina Commission order related to fuel cost recovery, a charge related to a voluntary retirement program ($24 million), lower AFUDC ($10 million) and penalties related to unrecognized tax benefits in the current year ($7 million), partially offset by a gain on sale of certain warranty service contracts ($7 million).
Interest charges decreased 14%, primarily due to lower long-term debt principal balances primarily as a result of the debt tender offers completed in 2019 ($62 million), partially offset by interest charges on unrecognized tax benefits in the current year ($10 million).
16
Income tax benefit decreased $404 million, primarily due to a tax charge related to regulatory assets for which DESC committed to forgo recovery ($194 million), the absence of 2017 Tax Reform Act impacts ($176 million) and changes in unrecognized tax benefits ($66 million).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The matters discussed in this Item may contain “forward-looking statements” as described in the introductory paragraphs of Item 7. MD&A. The reader’s attention is directed to those paragraphs and Item 1A. Risk Factors for discussion of various risks and uncertainties that may impact DESC.
MARKET RISK SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
DESC’s financial instruments and related financial derivative instruments are exposed to potential losses due to adverse changes in interest rates as described below. Management believes that DESC is not subject to material commodity price risk. Interest rate risk is generally related to DESC’s outstanding debt and future issuances of debt. In addition, DESC is exposed to investment price risk through various portfolios of equity and debt securities.
The following sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% change in interest rates.
Interest Rate Risk
DESC manages its interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. For variable rate debt outstanding, a hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at December 31, 2019 or December 31, 2018.
DESC also uses interest rate derivatives, including forward-starting swaps and interest rate swaps to manage interest rate risk. As of December 31, 2019, DESC had $71 million in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of $2 million in the fair value of DESC’s interest rate derivatives at December 31, 2019. As of December 31, 2018, DESC had $71 million in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of $1 million in the fair value of DESC’s interest rate derivatives at December 31, 2018.
The impact of a change in interest rates on DESC’s interest rate-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net gains and/or losses from interest rate derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction.
Investment Price Risk
DESC is subject to investment price risk due to securities held as investments in nuclear decommissioning trust funds which primarily hold insurance contracts that are reported in the Consolidated Balance Sheets at fair value.
DESC recognized net investment gains (including investment income) on nuclear decommissioning trust investments of $24 million and less than $1 million for the year ended December 31, 2019 and 2018, respectively.
DESC participates in SCANA sponsored pension and other postretirement employee benefit plans that hold investments in trusts to fund employee benefit payments. DESC’s pension and other postretirement plan assets experienced aggregate actual returns (losses) $149 million and $(43) million in 2019 and 2018, respectively, versus expected returns of $40 million and $48 million, respectively. Differences between actual and expected returns on plan assets are accumulated and amortized during future periods. As such, any investment-related declines in these trusts will result in future increases in the net periodic cost recognized for such employee benefit plans and will be included in the determination of the amount of cash to be contributed to the employee benefit plans. A hypothetical 0.25% decrease in the assumed long-term rates of return on DESC’s plan assets would result in an increase in net periodic cost of $2 million at both December 31, 2019 and 2018, for pension benefits.
Risk Management Policies
DESC has established operating procedures with corporate management to ensure that proper internal controls are maintained. In addition, Dominion Energy has established an independent function at the corporate level to monitor compliance with the credit and commodity risk management policies of all subsidiaries, including DESC. Dominion Energy maintains credit policies that include the evaluation of a prospective counterparty’s financial condition, collateral requirements where deemed necessary and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. In addition, Dominion Energy also monitors the financial condition of existing counterparties on an ongoing basis. Based on these credit policies and DESC’s December 31, 2019 provision for credit losses, management believes that it is unlikely that a material adverse effect on DESC’s financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.
17
Item 8. Financial Statements and Supplementary Data
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Dominion Energy South Carolina, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dominion Energy South Carolina, Inc. (an indirect, wholly-owned subsidiary of Dominion Energy, Inc.) and affiliates (“DESC”) at December 31, 2019 and 2018, the related consolidated statements of comprehensive loss, changes in common equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of DESC at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The consolidated financial statements are the responsibility of DESC's management. Our responsibility is to express an opinion on DESC's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to DESC in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. DESC is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of DESC’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 28, 2020
We have served as DESC’s auditor since 1945.
19
Dominion Energy South Carolina, Inc.
Consolidated Balance Sheets
At December 31, |
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2019 |
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2018 |
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(millions) |
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ASSETS |
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Utility plant in service |
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$ |
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$ |
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Accumulated depreciation and amortization |
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( |
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( |
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Construction work in progress |
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Nuclear fuel, net of accumulated amortization |
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Utility plant, net ($ |
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Nonutility Property and Investments: |
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Nonutility property, net of accumulated depreciation |
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Assets held in trust, nuclear decommissioning |
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Other investments |
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Nonutility property and investments, net |
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Current Assets: |
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Cash and cash equivalents |
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Receivables: |
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Customer, net of allowance for uncollectible accounts of $ |
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Affiliated and related party |
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Other |
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Inventories (at average cost): |
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Fuel |
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Materials and supplies |
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Prepayments |
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Regulatory assets |
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Other current assets |
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Total current assets ($ |
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Deferred Debits and Other Assets: |
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Regulatory assets |
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Other |
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Total deferred debits and other assets ($ |
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Total assets |
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
20
At December 31, |
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2019 |
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2018 |
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(millions) |
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CAPITALIZATION AND LIABILITIES |
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Common Stock - no par value, |
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$ |
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$ |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
) |
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( |
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Total common equity |
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Noncontrolling interest |
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Total Equity |
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Long-term debt, net |
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Affiliated long-term debt |
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Finance leases |
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Total long-term debt |
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Total capitalization |
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Current Liabilities: |
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Short-term borrowings |
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Securities due within one year |
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Accounts payable |
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Affiliated and related party payables |
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Customer deposits and customer prepayments |
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Revenue subject to refund |
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Taxes accrued |
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Interest accrued |
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Regulatory liabilities |
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Reserves for litigation and regulatory proceedings |
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Other |
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Total current liabilities |
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Deferred Credits and Other Liabilities: |
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Deferred income taxes and investment tax credits |
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Asset retirement obligations |
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Pension and other postretirement benefits |
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Regulatory liabilities |
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Affiliated liabilities |
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Other |
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Total deferred credits and other liabilities |
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Commitments and Contingencies (see Note 12) |
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Total capitalization and liabilities |
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
21
Dominion Energy South Carolina, Inc.
Consolidated Statements of Comprehensive Loss
Year Ended December 31, |
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2019 |
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2018 |
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2017 |
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(millions) |
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Operating Revenue(1) |
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$ |
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$ |
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$ |
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Operating Expenses: |
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Fuel used in electric generation(1) |
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Purchased power(1) |
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Gas purchased for resale(1) |
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Other operations and maintenance |
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Other operations and maintenance – affiliated suppliers |
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Impairment of assets and other charges |
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Depreciation and amortization |
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Other taxes(1) |
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Total operating expenses |
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Operating loss |
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( |
) |
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( |
) |
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( |
) |
Other income (expense), net |
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( |
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Interest charges, net of allowance for funds used during construction of $ |
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Loss before income tax benefit |
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( |
) |
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( |
) |
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( |
) |
Income tax benefit |
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( |
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( |
) |
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( |
) |
Net Loss |
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( |
) |
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( |
) |
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( |
) |
Other Comprehensive Income: |
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Deferred cost of employee benefit plans, net of tax of $ |
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Total Comprehensive Loss |
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( |
) |
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( |
) |
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( |
) |
Comprehensive Income Attributable to Noncontrolling Interest |
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Comprehensive Loss Attributable to Common Shareholder |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
(1) |
|
See Notes to Consolidated Financial Statements.
22
Dominion Energy South Carolina, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31, |
|
2019 |
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2018 |
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2017 |
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(millions) |
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Operating Activities |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Impairment of assets and other charges |
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Provision for refunds to electric customers |
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Gain on sale of assets |
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( |
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Deferred income taxes, net |
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( |
) |
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( |
) |
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( |
) |
Depreciation and amortization |
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Amortization of nuclear fuel |
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Other adjustments |
|
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( |
) |
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( |
) |
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( |
) |
Changes in certain assets and liabilities: |
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Receivables |
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( |
) |
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( |
) |
Receivables – affiliated and related party |
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( |
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Income tax receivable |
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( |
) |
Inventories |
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( |
) |
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( |
) |
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( |
) |
Prepayments |
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( |
) |
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Regulatory assets |
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( |
) |
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( |
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Regulatory liabilities |
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( |
) |
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Accounts payable |
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( |
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Accounts payable – affiliated and related party |
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( |
) |
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( |
) |
Revenue subject to refund |
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( |
) |
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Unrecognized tax benefits |
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( |
) |
Taxes accrued |
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( |
) |
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Pension and other postretirement benefits |
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( |
) |
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( |
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Other assets and liabilities |
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( |
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Net cash provided by operating activities |
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Investing Activities |
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Property additions and construction expenditures |
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( |
) |
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( |
) |
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( |
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Proceeds from monetization of guaranty settlement |
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Proceeds from investments and sales of assets |
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Purchase of investments |
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( |
) |
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( |
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( |
) |
Purchase of investments – affiliate |
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( |
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Payments upon interest rate derivative contract settlement |
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( |
) |
Proceeds from interest rate derivative contract settlement |
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Investment in affiliate, net |
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( |
) |
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( |
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Net cash provided by (used in) investing activities |
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( |
) |
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( |
) |
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Financing Activities |
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Proceeds from issuance of debt |
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Proceeds from issuance of affiliated debt |
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Repayment of long-term debt, including redemption premiums |
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( |
) |
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( |
) |
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( |
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Dividend to parent |
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( |
) |
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( |
) |
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( |
) |
Short-term borrowings, net |
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( |
) |
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( |
) |
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( |
) |
Short-term borrowings – affiliated, net |
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Money pool borrowings, net |
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Contribution from parent |
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Contribution returned to parent |
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( |
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Net cash used in financing activities |
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( |
) |
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( |
) |
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( |
) |
Net increase (decrease) in cash, restricted cash and equivalents |
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( |
) |
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( |
) |
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Cash, restricted cash and equivalents at beginning of period(1) |
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Cash, restricted cash and equivalents at end of period(1) |
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$ |
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$ |
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$ |
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Supplemental Cash Flow Information |
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Cash for: |
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Interest paid (net of capitalized interest of $ |
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Income taxes paid |
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Income taxes received |
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Noncash investing and financing activities:(2) |
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Accrued construction expenditures |
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Leases(3) |
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Contributed capital |
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(1) |
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(2) |
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(3) |
|
See Notes to Consolidated Financial Statements.
23
Dominion Energy South Carolina, Inc.
Consolidated Statements of Changes in Common Equity
|
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Common Stock |
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(millions) |
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Shares |
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Amount |
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Retained Earnings |
|
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Accumulated Other Comprehensive Income (Loss) |
|
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Non- controlling Interest |
|
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Total Equity |
|
||||||
December 31, 2016 |
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$ |
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|
$ |
|
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$ |
( |
) |
|
$ |
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$ |
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|
Total comprehensive income (loss) available (attributable) to common shareholder |
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|
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|
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|
( |
) |
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( |
) |
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( |
) |
Capital contribution from parent |
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Dividend to parent |
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|
|
|
|
|
( |
) |
|
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|
|
( |
) |
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( |
) |
December 31, 2017 |
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|
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|
|
|
|
( |
) |
|
|
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Total comprehensive income (loss) available (attributable) to common shareholder |
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|
|
|
|
|
|
( |
) |
|
|
|
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( |
) |
Capital contribution from parent |
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Dividend to parent |
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|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
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( |
) |
December 31, 2018 |
|
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|
|
|
( |
) |
|
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Cumulative-effect of change in accounting principle |
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|
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( |
) |
|
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|
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|
— |
|
Total comprehensive income (loss) available (attributable) to common shareholder |
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|
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( |
) |
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( |
) |
Capital contribution from parent |
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Capital contribution returned to parent |
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( |
) |
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( |
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Dividend to parent |
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( |
) |
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( |
) |
December 31, 2019 |
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$ |
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$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
See Notes to Consolidated Financial Statements.
24
Dominion Energy South Carolina, Inc.
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS
DESC is a wholly-owned subsidiary of SCANA which, effective January 2019, is a wholly-owned subsidiary of Dominion Energy.
DESC is engaged in the generation, transmission and distribution of electricity in the central, southern and southwestern portions of South Carolina. Additionally, DESC sells natural gas to residential, commercial and industrial customers in South Carolina.
Beginning in December 2019, DESC manages its daily operations through
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
DESC makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues, expenses and cash flows for the periods presented. Actual results may differ from those estimates.
DESC’s Consolidated Financial Statements include, after eliminating intercompany balances and transactions, the accounts of DESC, GENCO and Fuel Company. DESC has concluded that GENCO and Fuel Company are VIE’s due to the members lacking the characteristics of a controlling financial interest. DESC is the primary beneficiary of GENCO and Fuel Company and therefore is required to consolidate the VIE’s. The equity interests in GENCO and Fuel Company are held solely by SCANA, DESC’s parent. As a result, GENCO and Fuel Company’s equity and results of operations are reflected as noncontrolling interest in the Consolidated Financial Statements.
GENCO owns a coal-fired electric generating station with a
Additionally, DESC purchases shared services from DESS, an affiliated VIE that provides accounting, legal, finance and certain administrative and technical services to all SCANA subsidiaries, including DESC. DESC has determined that it is not the primary beneficiary of DESS as it does not have either the power to direct the activities that most significantly impact its economic performance or an obligation to absorb losses and benefits which could be significant to it. See Note 16 for amounts attributable to affiliates.
DESC reports certain contracts and instruments at fair value. See Note 9 for further information on fair value measurements.
DESC maintains pension and other postretirement benefit plans. See Note 11 for further information on these plans.
Certain amounts in the 2018 and 2017 Consolidated Financial Statements and Notes have been reclassified to conform to the 2019 presentation for comparative purposes; however, such reclassifications did not affect DESC’s net income, total assets, liabilities, equity or cash flows.
Utility Plant
Utility plant is stated at original cost. The costs of additions, replacements and betterments to utility plant, including direct labor, material and indirect charges for engineering, supervision and AFUDC, are added to utility plant accounts. The original cost of utility property retired or otherwise disposed of is removed from utility plant accounts and generally charged to accumulated depreciation. The costs of repairs and replacements of items of property determined to be less than a unit of property or that do not increase the asset’s life or functionality are charged to expense.
AFUDC is a noncash item that reflects the period cost of capital devoted to plant under construction. This accounting practice results in the inclusion of, as a component of construction cost, the costs of debt and equity capital dedicated to construction investment. AFUDC is included in rate base investment and depreciated as a component of plant cost in establishing rates for utility services. DESC calculated AFUDC using average composite rates of
25
For property subject to cost-of-service rate regulation that will be abandoned significantly before the end of its useful life, the net carrying value is reclassified from utility plant-in-service when it becomes probable it will be abandoned and recorded as a regulatory asset for amounts expected to be collected through future rates.
Provisions for depreciation and amortization are recorded using the straight-line method based on the estimated service lives of the various classes of property, and in most cases, include provisions for future cost of removal.
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2019 |
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2018 |
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Generation |
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% |
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% |
Transmission |
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% |
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% |
Distribution |
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% |
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% |
Storage |
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% |
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% |
General and other |
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% |
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% |
DESC records nuclear fuel amortization using the units-of-production method, which is included in fuel used in electric generation and recovered through the fuel cost component of retail electric rates.
Major Maintenance
Planned major maintenance costs related to certain fossil fuel turbine equipment and nuclear refueling outages are accrued in periods other than when incurred in accordance with approval by the South Carolina Commission for such accounting treatment and rate recovery of expenses accrued thereunder. The difference between such cumulative major maintenance costs and cumulative collections is classified as a regulatory asset or regulatory liability on the consolidated balance sheet. Other planned major maintenance is expensed when incurred.
DESC is authorized to collect $
Nuclear refueling outages are scheduled 18 months apart. As approved by the South Carolina Commission, DESC accrues $
Asset Retirement Obligations
DESC recognizes AROs at fair value as incurred or when sufficient information becomes available to determine a reasonable estimate of the fair value of future retirement activities to be performed, for which a legal obligation exists. These amounts are generally capitalized as costs of the related tangible long-lived assets. Since relevant market information is not available, fair value is estimated using discounted cash flow analyses. Periodically, DESC assesses its AROs to determine if circumstances indicate that estimates of the amounts or timing of future cash flows associated with retirement activities have changed. AROs are adjusted when significant changes in the amounts or timing of future cash flows are identified. DESC reports accretion of AROs and depreciation on asset retirement costs as an adjustment to regulatory assets.
Nuclear Decommissioning
Based on a decommissioning cost study completed in 2016, DESC’s two-thirds share of estimated site-specific nuclear decommissioning costs for Summer, including the cost of decommissioning plant components both subject to and not subject to radioactive contamination, totals $
Under DESC’s method of funding decommissioning costs, DESC transfers to an external trust fund the amounts collected through rates ($
26
Cash, Restricted Cash and Equivalents
Cash, restricted cash and equivalents include cash on hand, cash in banks and temporary investments purchased with an original maturity of three months or less. At December 31, 2019, there were
Receivables
Customer receivables reflect amounts due from customers arising from the delivery of energy or related services and include both billed and unbilled amounts earned pursuant to revenue recognition practices described in Note 4. Customer receivables are generally due within one month of receipt of invoices which are presented on a monthly cycle basis. Unbilled revenues totaled $
DESC sells electricity and natural gas and provides distribution and transmission services to customers in South Carolina. Management believes that this geographic concentration risk is mitigated by the diversity of DESC’s customer base, which includes a large number of residential, commercial and industrial customers. Credit risk associated with accounts receivable is limited due to the large number of customers. DESC’s exposure to potential concentrations of credit risk results primarily from amounts due from Santee Cooper related to the jointly owned nuclear generating facilities at Summer. Such receivables represented approximately
Inventories
Materials and supplies include the average cost of transmission, distribution, and generating plant materials. Materials are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, at weighted average cost when used. Fuel inventory includes the average cost of coal, natural gas, fuel oil and emission allowances. Fuel is charged to inventory when purchased and is expensed, at weighted average cost, as used and recovered through fuel cost recovery rates approved by the South Carolina Commission.
Income Taxes
A consolidated federal income tax return was filed for SCANA, including DESC for years through 2018. Beginning in 2019, SCANA and DESC are part of Dominion Energy’s consolidated federal income tax return. In addition, where applicable, combined income tax returns for Dominion Energy, including DESC, are filed in various states including South Carolina; otherwise, separate state income tax returns are filed.
DESC participated in intercompany tax sharing agreements with SCANA through the SCANA Combination, and currently participates in similar agreements with Dominion Energy. Under both SCANA and Dominion Energy’s tax sharing agreements, current income taxes are based on taxable income or loss and credits determined on a separate company basis.
Under the agreements, if a subsidiary incurs a tax loss or earns a credit, recognition of current income tax benefits is limited to refunds of prior year taxes obtained by the carryback of the net operating loss or credit or to the extent the tax loss or credit is absorbed by the taxable income of other SCANA or Dominion Energy consolidated group members. Otherwise, the net operating loss or credit is carried forward and is recognized as a deferred tax asset until realized.
The 2017 Tax Reform Act included a broad range of tax reform provisions affecting DESC, including changes in corporate tax rates and business deductions. The 2017 Tax Reform Act reduces the corporate income tax rate from
Accounting for income taxes involves an asset and liability approach. Deferred income tax assets and liabilities are provided, representing future effects on income taxes for temporary differences between the bases of assets and liabilities for financial reporting and tax purposes. Accordingly, deferred taxes are recognized for the future consequences of different treatments used for the reporting of transactions in financial accounting and income tax returns. DESC establishes a valuation allowance when it is more-likely-than-not that all, or a portion, of a deferred tax asset will not be realized. DESC did not have any valuation allowances recorded for the periods presented. Where the treatment of temporary differences is different for rate-regulated operations, a regulatory asset is recognized if it is probable that future revenues will be provided for the payment of deferred tax liabilities.
DESC recognizes positions taken, or expected to be taken, in income tax returns that are more-likely-than-not to be realized, assuming that the position will be examined by tax authorities with full knowledge of all relevant information. At December 31, 2019, DESC had $
27
If it is not more-likely-than-not that a tax position, or some portion thereof, will be sustained, the related tax benefits are not recognized in the financial statements. Unrecognized tax benefits may result in an increase in income taxes payable, a reduction of income tax refunds receivable or changes in deferred taxes. Also, when uncertainty about the deductibility of an amount is limited to the timing of such deductibility, the increase in income taxes payable (or reduction in tax refunds receivable) is accompanied by a decrease in deferred tax liabilities. Except when such amounts are presented net with amounts receivable from or amounts prepaid to tax authorities, noncurrent income taxes payable related to unrecognized tax benefits are classified in other deferred credits and other liabilities on the Consolidated Balance Sheets and current payables are included in taxes accrued on the Consolidated Balance Sheets.
DESC recognizes interest on underpayments and overpayments of income taxes in interest expense and interest income, respectively. Penalties are also recognized in other expenses.
Interest expense for DESC was $
At December 31, 2019, DESC had an income tax-related affiliated receivable of $
At DESC investment tax credits are deferred and amortized over the service lives of the properties giving rise to the credits. Production tax credits are recognized as energy is generated and sold.
Regulatory Assets and Liabilities
The accounting for DESC’s regulated gas and regulated electric operations differs from the accounting for nonregulated operations in that DESC is required to reflect the effect of rate regulation in its Consolidated Financial Statements. For regulated businesses subject to federal or state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by nonregulated companies. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, these costs that otherwise would be expensed by nonregulated companies are deferred as regulatory assets. Likewise, regulatory liabilities are recognized when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have yet to be incurred.
DESC evaluates whether or not recovery of its regulatory assets through future rates is probable as well as whether a regulatory liability due to customers is probable and makes various assumptions in its analyses. These analyses are generally based on:
|
• |
Orders issued by regulatory commissions, legislation and judicial actions; |
|
• |
Past experience; |
|
• |
Discussions with applicable regulatory authorities and legal counsel; |
|
• |
Forecasted earnings; and |
|
• |
Considerations around the likelihood of impacts from events such as unusual weather conditions, extreme weather events and other natural disasters and unplanned outages of facilities. |
Generally, regulatory assets and liabilities are amortized into income over the period authorized by the regulator. If recovery of a regulatory asset is determined to be less than probable, it will be written off in the period such assessment is made. A regulatory liability, if considered probable, will be recorded in the period such assessment is made or reversed into earnings if no longer probable. See Note 3 to the Consolidated Financial Statements for additional information.
Derivative Instruments
DESC uses derivative instruments such as swaps to manage interest rate risks of its business operations. Derivatives are required to be reported in the Consolidated Balance Sheets at fair value. Derivative contracts representing unrealized gain positions are reported as derivative assets. Derivative contracts representing unrealized losses are reported as derivative liabilities.
DESC does not offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. DESC had margin assets of $
Changes in the fair value of derivative instruments result in the recognition of regulatory assets or regulatory liabilities. Realized gains or losses on the derivative instruments are generally recognized when the related transactions impact earnings. All income statement activity, including amounts realized upon settlement, is presented in interest charges based on the nature of the underlying risk.
DERIVATIVE INSTRUMENTS DESIGNATED AS HEDGING INSTRUMENTS
In accordance with accounting guidance pertaining to derivatives and hedge accounting, DESC designates a portion of their derivative instruments as cash flow hedges for accounting purposes. For derivative instruments that are accounted for as cash flow hedges, the cash flows from the derivatives and from the related hedged items are classified in operating cash flows.
Cash Flow Hedges- DESC uses interest rate swaps to hedge its exposure to variable interest rates on long-term debt. For transactions in which the Company is hedging the variability of cash flows, changes in the fair value of the derivatives are reported in regulatory
28
assets or liabilities. Any derivative gains or losses reported in regulatory assets or liabilities are reclassified to earnings when the forecasted item is included in earnings. For cash flow hedge transactions, hedge accounting is discontinued if the occurrence of the forecasted transaction is no longer probable.
Pursuant to regulatory orders, interest rate derivatives entered into by DESC after October 2013 were 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 generally have been amortized over the lives of subsequent debt issuances, and gains have been amortized to interest charges or have been applied as otherwise directed by the South Carolina Commission. See Note 3 and Note 17 regarding the settlement gains realized in the first quarter of 2018.
Debt Issuance Costs
DESC defers and amortizes debt issuance costs and debt premiums or discounts over the expected lives of the respective debt issues, considering maturity dates and, if applicable, redemption rights held by others. Deferred debt issuance costs are recorded as a reduction in long-term debt in the Consolidated Balance Sheets. Amortization of the issuance costs is reported as interest charges. As permitted by regulatory authorities, gains or losses resulting from the refinancing or redemption of debt are deferred and amortized.
Environmental
An environmental assessment program is maintained to identify and evaluate 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. Environmental remediation liabilities are accrued when the criteria for loss contingencies are met. These estimates are refined as additional information becomes available; therefore, actual expenditures could differ significantly from the original estimates. Probable and estimable costs are accrued related to environmental sites on an undiscounted basis. Amounts estimated and accrued to date for site assessments and clean-up relate solely to regulated operations. Amounts expected to be recovered through rates are recorded in regulatory assets and, if applicable, amortized over approved amortization periods. Other environmental costs are expensed as incurred.
Statement of Operations Presentation
Revenues and expenses arising from regulated businesses are presented within Operating Income (Loss), and all other activities are presented within Other Income (Expense), net.
Operating Revenue
Operating revenue is recorded on the basis of services rendered, commodities delivered, or contracts settled and includes amounts yet to be billed to customers. DESC collects sales, consumption, consumer utility taxes and sales taxes; however, these amounts are excluded from revenue and are recorded as liabilities until they are remitted to the respective taxing authority.
The primary types of sales and service activities reported as operating revenue for DESC, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, are as follows:
Revenue from Contracts with Customers
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• |
Regulated electric sales consist primarily of state-regulated retail electric sales, and federally-regulated wholesale electric sales and electric transmission services; |
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• |
Regulated gas sales consist primarily of state-regulated natural gas sales and related distribution services; and |
|
• |
Other regulated revenue consists primarily of miscellaneous service revenue from electric and gas distribution operations and sales of excess electric capacity and other commodities. |
Other Revenue
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• |
Other revenue consists primarily of alternative revenue programs, gains and losses from derivative instruments not subject to hedge accounting and lease revenues. |
DESC records refunds to customers as required by the South Carolina Commission as a reduction to regulated electric sales or regulated gas sales, as applicable. Revenues from electric and gas sales are recognized over time, as the customers of DESC consume gas and electricity as it is delivered. Sales of products and services, typically transfer control and are recognized as revenue upon delivery of the product or service. The customer is able to direct the use of, and obtain substantially all of the benefits from, the product at the time the product is delivered. The contract with the customer states the final terms of the sale, including the description, quantity and price of each product or service purchased. Payment for most sales and services varies by contract type, but is typically due within a month of billing.
DESC customers subject to an electric fuel cost recovery component or a PGA are billed based on a fuel or cost of gas factor calculated in accordance with cost recovery procedures approved by the South Carolina Commission and subject to adjustment periodically. Any difference between actual costs and amounts contained in rates is adjusted through revenue and is deferred and included when making the next adjustment to the cost recovery factors.
29
Certain amounts deferred for the WNA arise under specific arrangements with regulators rather than customers and are accounted for as an alternative revenue program. This alternative revenue is included within Other operating revenues, separate from revenue arising from contracts with customers, in the month such adjustments are deferred within regulatory accounts. As permitted, DESC has elected to reduce the regulatory accounts in the period when such amounts are reflected on customer bills without affecting operating revenues.
Performance obligations which have not been satisfied by DESC relate primarily to demand or standby service for natural gas. Demand or standby charges for natural gas arise when an industrial customer reserves capacity on assets controlled by the service provider and may use that capacity to move natural gas it has acquired from other suppliers. For all periods presented, the amount of revenue recognized by DESC for these charges is equal to the amount of consideration DESC has a right to invoice and corresponds directly to the value transferred to the customer.
Leases
DESC leases certain assets including vehicles, real estate, office equipment and other assets under both operating and finance leases. For operating leases, rent expense is recognized on a straight-line basis over the term of the lease agreement, subject to regulatory framework. Rent expense associated with operating leases, short-term leases and variable leases is primarily recorded in other operations and maintenance expense in the Consolidated Statements of Comprehensive Loss. Rent expense associated with finance leases results in the separate presentation of interest expense on the lease liability and amortization expense of the related right-of-use asset in the Consolidated Statements of Comprehensive Loss. Amortization expense and interest charges associated with finance leases are recorded in depreciation and amortization and interest charges, respectively, in the Consolidated Statements of Comprehensive Loss or deferred within regulatory assets in the Consolidated Balance Sheets.
Certain leases include one or more options to renew, with renewal terms that can extend the lease from
The determination of the discount rate utilized has a significant impact on the calculation of the present value of the lease liability included in the Consolidated Balance Sheets. For DESC’s leased assets, the discount rate implicit in the lease is generally unable to be determined from a lessee perspective. As such, DESC uses internally-developed incremental borrowing rates as a discount rate in the calculation of the present value of the lease liability. The incremental borrowing rates are determined based on an analysis of DESC's publicly available secured borrowing rates over various lengths of time that most closely corresponds to DESC's lease maturities.
New Accounting Standards
REVENUE RECOGNITION
In May 2014, the FASB issued revised accounting guidance for revenue recognition from contracts with customers. DESC adopted this revised accounting guidance for interim and annual reporting periods beginning January 1, 2018 using the modified retrospective method. No cumulative effect adjustment was recognized upon adoption. For additional required disclosures, see Note 4.
LEASES
In February 2016, the FASB issued revised accounting guidance for the recognition, measurement, presentation and disclosure of leasing arrangements. The update requires that a liability and corresponding right-of-use asset are recorded on the balance sheet for all leases, including those leases classified as operating leases, while also refining the definition of a lease. In addition, lessees will be required to disclose key information about the amount, timing, and uncertainty of cash flows arising from leasing arrangements. Lessor accounting remains largely unchanged.
The guidance became effective for DESC's interim and annual reporting periods beginning January 1, 2019. DESC adopted this revised accounting guidance using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the date of adoption. Under this approach, DESC utilized the transition practical expedient to maintain historical presentation for periods before January 1, 2019. DESC also applied the other practical expedients, which required no reassessment of whether existing contracts are or contain leases, no reassessment of lease classification for existing leases and no evaluation of existing or expired land easements that were not previously accounted for as leases. In connection with the adoption of this revised accounting guidance, DESC recorded $
NET PERIODIC PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
In March 2017, the FASB issued revised accounting guidance for the presentation of net periodic pension and other postretirement benefit costs. This guidance became effective for DESC beginning January 1, 2018 and requires that the service cost component of net periodic pension and other postretirement benefit costs be classified in the same line item as other compensation costs arising from services rendered by employees, while all other components of net periodic pension and other postretirement costs are classified outside of income from operations. In addition, only the service cost component remains eligible for capitalization during construction. The standard also recognizes that in the event that a regulator continues to require capitalization of all net periodic
30
benefit costs prospectively, the difference would result in recognition of a regulatory asset or liability. For costs not capitalized for which regulators are expected to provide recovery, a regulatory asset will be established.
TAX REFORM
In February 2018, the FASB issued revised accounting guidance to provide clarification on the application of the 2017 Tax Reform Act for balances recorded within AOCI. The revised guidance provides for stranded amounts within AOCI from the impacts of the 2017 Tax Reform Act to be reclassified to retained earnings. DESC adopted this guidance for interim and annual reporting periods beginning January 1, 2019 on a prospective basis. In connection with the adoption of this guidance, DESC reclassified a benefit of $
3. RATE AND OTHER REGULATORY MATTERS
Regulatory Matters Involving Potential Loss Contingencies
As a result of issues generated in the ordinary course of business, DESC is involved in various regulatory matters. Certain regulatory matters may ultimately result in a loss; however, as such matters are in an initial procedural phase, involve uncertainty as to the outcome of pending reviews or orders, and/or involve significant factual issues that need to be resolved, it is not possible for DESC to estimate a range of possible loss. For regulatory matters that DESC cannot estimate, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the regulatory process such that DESC is able to estimate a range of possible loss. For regulatory matters that DESC is able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any estimated range is based on currently available information, involves elements of judgment and significant uncertainties and may not represent DESC’s maximum possible loss exposure. The circumstances of such regulatory matters will change from time to time and actual results may vary significantly from the current estimate. For current matters not specifically reported below, management does not anticipate that the outcome from such matters would have a material effect on DESC’s financial position, liquidity or results of operations.
FERC
In June 2019, DESC submitted the 2015 Task Order as a stand-alone rate schedule, which governs DESC’s provision of retail service to the DOE at the Savannah River Site. The 2015 Task Order also includes provisions that govern the operations and maintenance of certain transmission facilities, which DESC had determined to be services that are likely subject to FERC’s jurisdiction. DESC requested that FERC accept the 2015 Task Order for filing to become effective in August 2019 and accept the refund analysis included in the filing for amounts collected under the 2015 Task Order as well as under two prior task orders commencing in 1995 and each covering ten-year periods. During the second quarter of 2019, DESC recorded a $
2017 Tax Reform Act
The 2017 Tax Reform Act lowered the federal corporate tax rate from
As part of the SCANA Combination, the South Carolina Commission approved credits of approximately $
DESC’s provision of electric transmission service is pursuant to a FERC approved formula rate. In December 2019, FERC issued an order requiring transmission providers with transmission formula rates to account for the impacts of the 2017 Tax Reform Act on rates charged to customers. The order requires companies to include a mechanism to decrease or increase their income tax allowances to account for the 2017 Tax Reform Act and any other future changes in tax law, and to submit annual information reflecting the amortization of these excess deferred income taxes. DESC will make such changes to its formula rate as part of its annual update in May 2020.
31
In January 2020, GENCO filed to modify its formula rate to incorporate a mechanism to decrease or increase its income tax allowances by any excess deferred income taxes resulting from the 2017 Tax Reform Act, and future changes in tax laws. These modifications are expected to decrease charges to DESC for the power it purchases from GENCO.
Electric – BLRA
In July 2018, the South Carolina Commission issued orders implementing a legislatively-mandated temporary reduction in revenues that could be collected by DESC from customers under the BLRA. These orders reduced the portion of DESC’s retail electric rates associated with the NND Project from approximately
Other Regulatory Matters
Electric – Cost of Fuel
DESC’s retail electric rates include a cost of fuel component approved by the South Carolina Commission which may be adjusted periodically to reflect changes in the price of fuel purchased by DESC.
In February 2020, DESC filed with the South Carolina Commission a proposal to decrease the total fuel cost component of retail electric rates. DESC’s proposed decrease would reduce annual base fuel component recoveries by approximately $
In April 2019, the South Carolina Commission approved DESC’s proposal to decrease the total fuel cost component of retail electric rates. DESC's proposal included maintaining its base fuel component at the current level to produce a projected under-recovered balance of $
In April 2018, the South Carolina Commission approved DESC’s proposal to increase the total fuel cost component of retail electric rates. Petitions for rehearing and reconsideration were filed by various parties, and on October 30, 2018, the South Carolina Commission issued an order granting
Electric Transmission Projects
In 2020, DESC expects to begin several electric transmission projects in connection with
Electric – Other
DESC has approval for a DSM rider through which it recovers expenditures related to its DSM programs. In January 2019, DESC filed an application with the South Carolina Commission seeking approval to recover $
In January 2020, DESC submitted its annual DSM programs filing to the South Carolina Commission. If approved the filing would allow recovery of approximately $
DESC utilizes a pension costs rider approved by the South Carolina Commission which is designed to allow recovery of projected pension costs, including under-collected balances or net of over-collected balances, as applicable. The rider is typically reviewed for adjustment every 12 months with any resulting increase or decrease going into effect beginning with the first billing cycle in May. No adjustment was made in 2019. In 2020, DESC requested that the South Carolina Commission approve an adjustment to this rider to decrease annual revenue by approximately $
32
Gas
In June 2019, DESC filed with the South Carolina Commission its monitoring report for the 12-month period ended March 31, 2019 with a total revenue requirement of $
DESC's natural gas tariffs include a PGA that provides for the recovery of actual gas costs incurred, including transportation costs. DESC’s gas rates are calculated using a methodology which may adjust the cost of gas monthly based on a 12-month rolling average, and its gas purchasing policies and practices are reviewed annually by the South Carolina Commission.
Regulatory Assets and Regulatory Liabilities
Rate-regulated utilities recognize in their financial statements certain revenues and expenses in different periods than do other enterprises. As a result, DESC has recorded regulatory assets and regulatory liabilities which are summarized in the following table. Except for NND Project costs and certain other unrecovered plant costs, substantially all regulatory assets are either explicitly excluded from rate base or are effectively excluded from rate base due to their being offset by related liabilities.
At December 31, |
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2019 |
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2018 |
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(millions) |
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Regulatory assets: |
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|
|
NND Project costs(1) |
|
$ |
|
|
|
|
|
|
Deferred employee benefit plan costs(2) |
|
|
|
|
|
|
|
|
Other unrecovered plant(3) |
|
|
|
|
|
|
|
|
DSM programs(4) |
|
|
|
|
|
|
|
|
AROs(5) |
|
|
|
|
|
|
|
|
Cost of fuel under-collections(6) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Regulatory assets - current |
|
|
|
|
|
|
|
|
NND Project costs(1) |
|
|
|
|
|
|
|
|
AROs(5) |
|
|
|
|
|
|
|
|
Cost of reacquired debt(7)(8) |
|
|
|
|
|
|
|
|
Deferred employee benefit plan costs(2) |
|
|
|
|
|
|
|
|
Deferred losses on interest rate derivatives(9) |
|
|
|
|
|
|
|
|
Other unrecovered plant(3) |
|
|
|
|
|
|
|
|
DSM programs(4) |
|
|
|
|
|
|
|
|
Environmental remediation costs(10) |
|
|
|
|
|
|
|
|
Deferred storm damage costs(11) |
|
|
|
|
|
|
|
|
Deferred transmission operating costs(12) |
|
|
|
|
|
|
|
|
Other(13) |
|
|
|
|
|
|
|
|
Regulatory assets - noncurrent |
|
|
|
|
|
|
|
|
Total regulatory assets |
|
$ |
|
|
|
$ |
|
|
Regulatory liabilities: |
|
|
|
|
|
|
|
|
Monetization of guaranty settlement(14) |
|
$ |
|
|
|
|
|
|
Income taxes refundable through future rates(15) |
|
|
|
|
|
|
|
|
Reserve for refunds to electric utility customers(16) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Regulatory liabilities - current |
|
|
|
|
|
|
|
|
Monetization of guaranty settlement(14) |
|
|
|
|
|
|
|
|
Income taxes refundable through future rates(15) |
|
|
|
|
|
|
|
|
Asset removal costs(17) |
|
|
|
|
|
|
|
|
Deferred gains on interest rate derivatives(9) |
|
|
|
|
|
|
|
|
Reserve for refunds to electric utility customers(16) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Regulatory liabilities – noncurrent |
|
|
|
|
|
|
|
|
Total regulatory liabilities |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
33
(5) |
|
(6)
(7) |
|
(8)
(9) |
|
(10) |
|
(11) |
|
(12) |
|
(13) |
|
(14) |
|
(15) |
|
(16) |
|
(17) |
|
Regulatory assets have been recorded based on the probability of their recovery. All regulatory assets represent incurred costs that may be deferred under GAAP for regulated operations. The South Carolina Commission or the FERC has reviewed and approved through specific orders certain of the items shown as regulatory assets. In addition, regulatory assets include, but are not limited to, certain costs which have not been specifically approved for recovery by one of these regulatory agencies, including deferred transmission operating costs that are the subject of regulatory proceedings as discussed in Note 12. While such costs are not currently being recovered, management believes that they would be allowable under existing rate-making concepts embodied in rate orders or applicable state law and expects to recover these costs through rates in future periods.
4. OPERATING REVENUE
The Company’s operating revenue, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, consists of the following:
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
||||||||||
(millions) |
|
Electric |
|
|
Gas |
|
|
Electric |
|
|
Gas |
|
||||
Customer class: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contracts with customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has already been received from the customer. DESC had contract liability balances of $
Contract Costs
Costs to obtain contracts are generally expensed when incurred. In limited instances, DESC provides economic development grants intended to support economic growth within DESC’s electric service territory and defers such grants as regulatory assets on the Consolidated Balance Sheets. Whenever these grants are contingent on a customer entering into a long-term electric supply contract with DESC, they are considered costs to obtain that underlying contract. Such costs that exceed certain thresholds are deferred and amortized on a straight-line basis over the term of the related service contract, which generally ranges from
34
Balances and activity related to contract costs deferred as regulatory assets were as follows:
|
|
Regulatory Assets |
|
|||||
(millions) |
|
2019 |
|
|
2018 |
|
||
Beginning balance, January 1 |
|
$ |
|
|
|
$ |
|
|
Amortization |
|
|
( |
) |
|
|
( |
) |
Ending balance, December 31 |
|
$ |
|
|
|
$ |
|
|
5. EQUITY
For all periods presented, DESC's authorized shares of common stock, no par value, were
In 2019, DESC received equity contributions of $
DESC’s bond indenture under which it issues first mortgage bonds contains provisions that could limit the payment of cash dividends on its common stock. DESC's bond indenture permits the payment of dividends on DESC's common stock only either (1) out of its Surplus (as defined in the bond indenture) or (2) in case there is no Surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, the Federal Power Act requires the appropriation of a portion of certain earnings from hydroelectric projects. At both December 31, 2019 and 2018, retained earnings of $
At December 31, 2019, DESC’s retained earnings are below the balance established by the Federal Power Act as a reserve on earnings attributable to hydroelectric generation plants. As a result, DESC is prohibited from the payment of dividends without regulatory approval until the balance of its retained earnings increases.
6. LONG-TERM AND SHORT-TERM DEBT
Long-term debt by type with related weighted-average coupon rates and maturities at December 31, 2019 and 2018 is as follows:
At December 31, |
|
2019 Weighted- average Coupon(1) |
|
|
2019 |
|
|
2018 |
|
|||
(millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
DESC: |
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds, |
|
|
|
% |
|
$ |
|
|
|
$ |
|
|
Tax-Exempt Financings: |
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate due |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
Other |
|
|
|
% |
|
|
|
|
|
|
|
|
GENCO: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-Exempt Financing, variable rate due |
|
|
|
% |
|
|
|
|
|
|
|
|
Secured Senior Notes, |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated note, |
|
|
|
% |
|
|
|
|
|
|
|
|
Total principal |
|
|
|
|
|
|
|
|
|
|
|
|
Securities due within one year |
|
|
|
|
|
|
|
|
|
|
( |
) |
Unamortized discount, premium and debt issuance costs, net |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
Based on stated maturity dates rather than early redemption dates that could be elected by instrument holders, the scheduled principal payments of long-term debt at December 31, 2019, were as follows:
35
(millions, except percentages) |
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
Thereafter |
|
|
Total |
|
|||||||
First Mortgage Bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Tax-Exempt Financings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Weighted-average coupon |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
Substantially all of DESC’s electric utility plant is pledged as collateral in connection with long-term debt.
DESC is subject to a bond indenture dated April 1, 1993 (Mortgage) covering substantially all of its electric properties under which all of its first mortgage bonds (Bonds) have been issued. Bonds may be issued under the Mortgage in an aggregate principal amount not exceeding the sum of (1)
Long-Term Debt – Affiliate
In May 2019, GENCO issued a $
Short-Term Debt
In March 2019, DESC became a co-borrower under Dominion Energy's $
DESC's share of commercial paper and letters of credit outstanding under its joint credit facility with Dominion Energy, were as follows:
(millions) |
|
Facility Limit |
|
|
Outstanding Commercial Paper |
|
|
Outstanding Letters of Credit |
|
|||
At December 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
A maximum of $
Also in March 2019, DESC canceled its previous committed long-term facility which was a revolving line of credit under a credit agreement with a syndicate of banks. This previous credit agreement was used for general corporate purposes, including liquidity support for DESC's commercial paper program and working capital needs, and was set to expire in December 2020.
(millions) |
|
Facility Limit(1) |
|
|
Outstanding Commercial Paper |
|
|
Outstanding Letters of Credit |
|
|||
At December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
The weighted-average interest rate of the outstanding commercial paper supported by this credit facility was
In April 2019, DESC renewed its FERC authority through April 2020 to issue short-term indebtedness (pursuant to Section 204 of the Federal Power Act) in amounts not to exceed $
36
DESC is obligated with respect to an aggregate of $
DESC received FERC approval to enter into an inter-company credit agreement in April 2019 with Dominion Energy under which DESC may have short-term borrowings outstanding up to $
DESC participated in a utility money pool with SCANA and another regulated subsidiary of SCANA through April 2019. Fuel Company and GENCO remain in the utility money pool. Money pool borrowings and investments bear interest at short-term market rates. For the years ended December 31, 2019 and 2018, DESC recorded interest income from money pool transactions of $
7. INCOME TAXES
Judgment and the use of estimates are required in developing the provision for income taxes and reporting of tax-related assets and liabilities. The interpretation of tax laws involves uncertainty, since tax authorities may interpret the laws differently. DESC is routinely audited by federal and state tax authorities. Ultimate resolution of income tax matters may result in favorable or unfavorable impacts to net income and cash flows, and adjustments to tax-related assets and liabilities could be material.
The 2017 Tax Reform Act included a broad range of tax reform provisions. The 2017 Tax Reform Act reduced the corporate income tax rate from
As indicated in Note 2, DESC’s operations, including accounting for income taxes, are subject to regulatory accounting treatment. For regulated operations, many of the changes in deferred taxes represent amounts probable of collection from or refund to customers, and were recorded as either an increase to a regulatory asset or liability. The 2017 Tax Reform Act included provisions that stipulate how these excess deferred taxes may be passed back to customers for certain accelerated tax depreciation benefits. Potential sharing of other deferred taxes will be determined by our regulators. See Note 3 for more information.
DESC has completed the accounting for the effects of the 2017 Tax Reform Act, although changes could occur as additional guidance is issued and finalized, particularly as it relates to the deductibility of interest expense in consolidated groups such as Dominion Energy. In addition, the major states in which DESC operates have addressed conformity with some or all of the provisions of the 2017 Tax Reform Act, although they may have modified certain provisions.
Details of income tax expense for continuing operations including noncontrolling interests were as follows:
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
State |
|
|
|
|
|
|
|
|
|
|
( |
) |
Total current expense (benefit) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes before operating loss carryforwards, investment tax credits and tax reform |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
2017 Tax Reform Act impact |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Tax utilization expense of operating loss carryforwards |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total deferred expense (benefit) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Investment tax credit-amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total income tax expense (benefit) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The 2017 Tax Reform Act reduced the statutory federal income tax rate to
Subsequent to the SCANA Combination, DESC’s annual utilization of its net operating losses are restricted by the tax law, however in certain circumstances the utilization may be increased if SCANA recognizes built-in gains on certain sales of assets. In December 2019, SCANA recognized a gain on the sale of SCANA Energy Marketing, Inc.’s assets to Dominion Energy, which increased the amount of DESC’s 2019 net operating loss utilization by approximately $
37
For continuing operations including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to DESC’s effective income tax rate as follows:
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
U.S. statutory rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Increases (reductions) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit |
|
|
|
|
|
|
|
|
|
|
|
|
State investment tax credits |
|
|
|
|
|
|
|
|
|
|
|
|
AFUDC - equity |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of federal investment tax credits |
|
|
|
|
|
|
|
|
|
|
|
|
Production tax credits |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic production activities deduction |
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of excess deferred income taxes |
|
|
( |
) |
|
|
|
|
|
|
|
|
Federal legislative change |
|
|
|
|
|
|
|
|
|
|
|
|
NND Project impairment |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Write-off of regulatory asset |
|
|
( |
) |
|
|
|
|
|
|
|
|
Changes in unrecognized tax benefits |
|
|
( |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
( |
) |
|
|
|
|
Effective tax rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
At DESC, deferred taxes will reverse at the weighted average rate used to originate the deferred tax liability, which in some cases will be
In connection with the SCANA Combination, Dominion Energy committed to forgo, or limit, the recovery of certain income tax-related regulatory assets associated with the NND Project. DESC’s effective tax rate reflects deferred income tax expense of $
In connection with the remeasurement of federal deferred income tax assets and liabilities resulting from the lower federal income tax rate, DESC recorded a deferred income tax benefit of approximately $
DESC’s deferred income taxes consist of the following:
At December 31, |
|
2019 |
|
|
2018 |
|
||
(millions) |
|
|
|
|
|
|
|
|
Deferred income taxes: |
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
$ |
|
|
|
$ |
|
|
Total deferred income tax liabilities |
|
|
|
|
|
|
|
|
Total net deferred income tax liabilities |
|
$ |
|
|
|
$ |
|
|
Total deferred income taxes: |
|
|
|
|
|
|
|
|
Depreciation method and plant basis differences |
|
$ |
|
|
|
$ |
|
|
Excess deferred income taxes |
|
|
( |
) |
|
|
( |
) |
Unrecovered nuclear plant cost |
|
|
|
|
|
|
|
|
DESC rate refund |
|
|
( |
) |
|
|
( |
) |
Toshiba settlement |
|
|
( |
) |
|
|
( |
) |
Nuclear decommissioning |
|
|
( |
) |
|
|
( |
) |
Deferred state income taxes |
|
|
|
|
|
|
|
|
Federal benefit of deferred state income taxes |
|
|
( |
) |
|
|
( |
) |
Deferred fuel, purchased energy and gas costs |
|
|
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
|
|
Other postretirement benefits |
|
|
( |
) |
|
|
( |
) |
Loss and credit carryforwards |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
|
|
Total net deferred income tax liabilities |
|
$ |
|
|
|
$ |
|
|
Deferred Investment Tax Credits-Regulated Operations |
|
|
|
|
|
|
|
|
Total Deferred Taxes and Deferred Investment Tax Credits |
|
$ |
|
|
|
$ |
|
|
38
At December 31, 2019, DESC had the following deductible loss and credit carryforwards:
(millions) |
|
Deductible Amount |
|
|
Deferred Tax Asset |
|
|
Expiration Period |
||
Federal losses |
|
$ |
|
|
|
$ |
|
|
|
|
Federal production and other credits |
|
|
|
|
|
|
|
|
|
|
State losses |
|
|
|
|
|
|
|
|
|
|
State investment and other credits |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
A reconciliation of changes in DESC’s unrecognized tax benefits follows:
(millions) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
Balance at January 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Increases-prior period positions |
|
|
|
|
|
|
|
|
|
|
|
|
Decreases-prior period positions |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Increases-current period positions |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Throughout 2019, the evaluation of federal and state income tax positions taken in DESC’s tax returns prior to the SCANA Combination increased unrecognized tax benefits by $
Certain unrecognized tax benefits, or portions thereof, if recognized, would affect the effective tax rate. Changes in these unrecognized tax benefits may result from remeasurement of amounts expected to be realized, settlements with tax authorities and expiration of statutes of limitations. If recognized, all the unrecognized tax benefits would impact the effective tax rate.
It is reasonably possible that these unrecognized tax benefits may decrease by $
DESC is also obligated to report adjustments resulting from IRS settlements to state tax authorities. In addition, if DESC utilizes operating losses or tax credits generated in years for which the statute of limitations has expired, such amounts are generally subject to examination.
8. DERIVATIVE FINANCIAL INSTRUMENTS
See Note 2 for the Company’s accounting policies, objectives, and strategies for using derivative instruments. See Note 9 for further information about fair value measurements and associated valuation methods for derivatives.
Derivative assets and liabilities are presented gross on the Company’s Consolidated Balance Sheets. DESC’s derivative contracts include over-the-counter transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter contracts contain contractual rights of setoff through master netting arrangements and contract default provisions. In addition, the contracts are subject to conditional rights of setoff through counterparty nonperformance, insolvency, or other conditions.
In general, most over-the-counter transactions are subject to collateral requirements. Types of collateral for over-the-counter contracts include cash, letters of credit, and, in some cases, other forms of security, none of which are subject to restrictions. Cash collateral is used in the table below to offset derivative assets and liabilities.
Certain DESC derivative instruments contain credit-related contingent provisions. These provisions require DESC to provide collateral upon the occurrence of specific events, primarily a credit rating downgrade. DESC’s derivatives with credit-related contingent provisions that were in a liability position were fully collateralized with cash at December 31, 2019 and 2018.
39
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:
|
|
December 31, 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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total derivatives |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Volumes
The following table presents the volume of derivative activity at December 31, 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) |
|
$ |
|
|
|
$ |
|
|
(1) |
|
Fair Value and Gains and Losses on Derivative Instruments
The following table presents 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 December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total current derivative liabilities(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent derivative liabilities(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
At December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total current derivative liabilities(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent derivative liabilities(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
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):
40
Derivatives in Cash Flow Hedging Relationships
(millions) |
|
Gain (loss) Reclassified from Deferred Accounts into Income |
|
|
Increase (Decrease) in Derivatives Subject to Regulatory Treatment(1) |
|
||
Year Ended December 31, 2019 |
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses): |
|
|
|
|
|
|
|
|
Interest rate(2) |
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Year Ended December 31, 2018 |
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses): |
|
|
|
|
|
|
|
|
Interest rate(2) |
|
$ |
( |
) |
|
$ |
|
|
Total |
|
$ |
( |
) |
|
$ |
|
|
Year Ended December 31, 2017 |
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses): |
|
|
|
|
|
|
|
|
Interest rate(2) |
|
$ |
( |
) |
|
$ |
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
(1) |
|
(2) |
|
Derivatives Not designated as Hedging Instruments
(millions) |
|
Amount of Gain (Loss) Recognized in Income on Derivatives(1) |
|
|||||||||
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
Derivative type and location of gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest charges |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss |
|
|
|
|
|
|
|
|
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
(1) |
|
9. FAIR VALUE MEASUREMENTS, INCLUDING DERIVATIVES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of DESC’s own nonperformance risk on their liabilities. Fair value measurements assume that the transaction occurs in the principal market for the asset or liability (the market with the most volume and activity for the asset or liability from the perspective of the reporting entity), or in the absence of a principal market, the most advantageous market for the asset or liability (the market in which the reporting entity would be able to maximize the amount received or minimize the amount paid). DESC applies fair value measurements to interest rate assets and liabilities. DESC’s interest rate swap agreements are valued using discounted cash flow models with independently sourced data. DESC applies credit adjustments to its derivative fair values in accordance with the requirements described above.
Inputs and Assumptions
Fair value is based on actively-quoted market prices, if available. In the absence of actively-quoted market prices, price information is sought from external sources, including industry publications. The inputs and assumptions used in measuring fair value for interest rate derivative contracts include the following:
|
• |
Interest rate curves |
|
• |
Credit quality of counterparties and DESC |
|
• |
Notional value |
|
• |
Credit enhancements |
|
• |
Time value |
41
Levels
DESC utilizes the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
|
• |
Level 1-Quoted prices (unadjusted) in active markets for identical assets and liabilities that they have the ability to access at the measurement date. |
|
• |
Level 2-Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 include interest rate swaps. |
|
• |
Level 3-Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability. |
The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.
Recurring Fair Value Measurements
Fair value disclosures for assets held in DESC’s pension and other postretirement benefit plans are presented in Note 11.
The following table presents DESC’s liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
At December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Fair Value of Financial Instruments
Substantially all of DESC’s financial instruments are recorded at fair value, with the exception of the instruments described below, which are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of financial instruments classified within current assets and current liabilities are representative of fair value because of the short-term nature of these instruments.
At December 31, |
|
2019 |
|
|
2018 |
|
||||||||||
(millions) |
|
Carrying Amount |
|
|
Estimated Fair Value(1) |
|
|
Carrying Amount |
|
|
Estimated Fair Value(2) |
|
||||
Long-term debt(3) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Affiliated long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
(2) |
|
(3) |
|
10. ASSET RETIREMENT OBLIGATIONS
A liability for the present value of an ARO is recognized when incurred if the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional ARO is factored into the measurement of the liability when sufficient information exists, but such uncertainty is not a basis upon which to avoid liability recognition.
The legal obligations associated with the retirement of long-lived tangible assets that result from their acquisition, construction, development and normal operation relate primarily to DESC’s regulated utility operations. As of December 31, 2019, DESC has recorded AROs of $
42
recorded are based upon estimates which are subject to varying degrees of precision, particularly since such payments will be made many years in the future.
A reconciliation of the beginning and ending aggregate carrying amount of AROs is as follows:
(millions) |
|
2019 |
|
|
2018 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Liabilities settled |
|
|
( |
) |
|
|
( |
) |
Accretion expense |
|
|
|
|
|
|
|
|
Revisions in estimated cash flows(1) |
|
|
( |
) |
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
(1)
11. EMPLOYEE BENEFIT PLANS AND EQUITY COMPENSATION PLAN
Pension and Other Postretirement Benefit Plans
SCANA sponsors a noncontributory defined benefit pension plan covering regular, full-time employees hired before January 1, 2014. DESC participates in SCANA's pension plan. SCANA’s policy has been to fund the plan as permitted by applicable federal income tax regulations, as determined by an independent actuary.
The pension plan provides benefits under a cash balance formula for employees hired before January 1, 2000 who elected that option and all eligible employees hired subsequently. Under the cash balance formula, benefits accumulate as a result of compensation credits and interest credits. Employees hired before January 1, 2000 who elected to remain under the final average pay formula earn benefits based on years of credited service and the employee’s average annual base earnings received during the last three years of employment. Benefits under the cash balance formula will continue to accrue through December 31, 2020, after which date no benefits will be accrued except that participants under the cash balance formula will continue to earn interest credits. Benefits under the final average pay formula will continue to accrue through December 31, 2023, after which date no benefits will be accrued. Once the benefits under SCANA's pension plan no longer accrue, eligible participants will accrue benefits under a cash balance plan sponsored by Dominion Energy.
In addition to pension benefits, SCANA provides certain unfunded postretirement health care and life insurance benefits to certain active and retired employees. DESC participates in these programs. Retirees hired before January 1, 2011 share in a portion of their medical care cost, while employees hired subsequently are responsible for the full cost of retiree medical benefits elected by them. The costs of postretirement benefits other than pensions are accrued during the years the employees render the services necessary to be eligible for these benefits.
The same benefit formula applies to all SCANA subsidiaries participating in the parent sponsored plans and, with regard to the pension plan, there are no legally separate asset pools. The postretirement benefit plans are accounted for as multiple employer plans.
Voluntary Retirement Program
In March 2019, Dominion Energy announced a voluntary retirement program to employees, including employees of DESC, that meet certain age and service requirements. The voluntary retirement program will not compromise safety or DESC’s ability to comply with applicable laws and regulations. In 2019, upon the determinations made concerning the number of employees that elected to participate in the program, DESC recorded a charge of $
In the second quarter of 2019, DESC remeasured its pension and other postretirement benefit plans as a result of the voluntary retirement program. The remeasurement resulted in an increase in the pension benefit obligation of $
In the third quarter of 2019, DESC remeasured a pension plan as a result of a settlement from the voluntary retirement program. The settlement and related remeasurement resulted in an increase in the pension benefit obligation of $
43
Changes in Benefit Obligations
The measurement date used to determine pension and other postretirement benefit obligations is December 31. Data related to the changes in the projected benefit obligation for pension benefits and the accumulated benefit obligation for other postretirement benefits are presented below.
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
(millions) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Benefit obligation, January 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan participants’ contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Benefits paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Settlements |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
Curtailment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts funded to parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
Benefit obligation, December 31 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accumulated benefit obligation for pension benefits for DESC was $
Significant assumptions used to determine the above benefit obligations are as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Annual discount rate used to determine benefit obligation |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Assumed annual rate of future salary increases for projected benefit obligation |
|
|
|
% |
|
|
|
% |
|
N/A |
|
|
N/A |
|
A
A one percent increase in the assumed health care cost trend rate for DESC would increase the postretirement benefit obligation by less than $
Funded Status
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
At December 31, |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Amounts recognized on the consolidated balance sheets were as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
At December 31, |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
Noncurrent liability |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amounts recognized in accumulated other comprehensive loss were as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
At December 31, |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
44
Amounts recognized in regulatory assets were as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||
At December 31, |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Prior service cost |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
In connection with the joint ownership of Summer, costs related to pensions attributable to Santee Cooper as of December 31, 2019 and 2018 totaled $
Changes in Fair Value of Plan Assets
Pension Benefits |
|
|
|
|
|
|
|
|
(millions) |
|
2019 |
|
|
2018 |
|
||
Fair value of plan assets, January 1 |
|
$ |
|
|
|
$ |
|
|
Actual return (loss) on plan assets |
|
|
|
|
|
|
( |
) |
Benefits paid |
|
|
( |
) |
|
|
( |
) |
Settlements |
|
|
( |
) |
|
|
|
|
Fair value of plan assets, December 31 |
|
$ |
|
|
|
$ |
|
|
Investment Policies and Strategies
The assets of the pension plan are invested in accordance with the objectives of (1) fully funding the obligations of the pension plan, (2) overseeing the plan's investments in an asset-liability framework that considers the funding surplus (or deficit) between assets and liabilities, and overall risk associated with assets as compared to liabilities, and (3) maintaining sufficient liquidity to meet benefit payment obligations on a timely basis. DESC uses a dynamic investment strategy for the management of the pension plan assets. This strategy will lead to a reduction in equities and an increase in long duration fixed income allocations over time with the intention of reducing volatility of funded status and pension costs.
The pension plan operates with several risk and control procedures, including ongoing reviews of liabilities, investment objectives, levels of diversification, investment managers and performance expectations. The total portfolio is constructed and maintained to provide prudent diversification with regard to the concentration of holdings in individual issues, corporations, or industries.
Transactions involving certain types of investments are prohibited. These include, except where utilized by a hedge fund manager, any form of private equity; commodities or commodity contracts (except for unleveraged stock or bond index futures and currency futures and options); ownership of real estate in any form other than publicly traded securities; short sales, warrants or margin transactions, or any leveraged investments; and natural resource properties. Investments made for the purpose of engaging in speculative trading are also prohibited.
The pension plan asset allocation at December 31, 2019 and 2018 and the target allocation for 2020 are as follows:
|
|
Percentage of Plan Assets |
|
|||||||||
|
|
Target Allocation |
|
|
December 31, |
|
||||||
Asset Category |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Equity Securities |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Fixed Income |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Cash |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Hedge Funds |
|
|
— |
% |
|
|
|
% |
|
|
|
% |
For 2020, the expected long-term rate of return on assets will be
Fair Value Measurements
Assets held by the pension plan are measured at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
45
At December 31, |
|
2019 |
|
|
2018 |
|
||
(millions) |
|
|
|
|
|
|
|
|
Investments with fair value measure at Level 2: |
|
|
|
|
|
|
|
|
Mutual funds |
|
$ |
|
|
|
$ |
|
|
Short-term investment vehicles |
|
|
|
|
|
|
|
|
US Treasury securities |
|
|
|
|
|
|
|
|
Corporate debt instruments |
|
|
|
|
|
|
|
|
Government and other debt instruments |
|
|
|
|
|
|
|
|
Total assets in the fair value hierarchy |
|
|
|
|
|
|
|
|
Investments at net asset value: |
|
|
|
|
|
|
|
|
Common collective trust |
|
|
|
|
|
|
|
|
Joint venture interests |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
|
|
|
$ |
|
|
For all periods presented, assets with fair value measurements classified as Level 1 were insignificant, and there were no assets with fair value measurements classified as Level 3. There were
Mutual funds held by the plan are open-end mutual funds registered with the SEC. The price of the mutual funds' shares is based on its NAV, which is determined by dividing the total value of portfolio investments, less any liabilities, by the total number of shares outstanding. For purposes of calculating NAV, portfolio securities and other assets for which market quotes are readily available are valued at market value. Short-term investment vehicles are funds that invest in short-term fixed income instruments and are valued using observable prices of the underlying fund assets based on trade data for identical or similar securities. US Treasury securities are valued using quoted market prices or based on models using observable inputs from market sources such as external prices or spreads or benchmarked thereto. Corporate debt instruments and government and other debt instruments are valued based on recently executed transactions, using quoted market prices, or based on models using observable inputs from market sources such as external prices or spreads or benchmarked thereto. Common collective trust assets and limited partnerships are valued at NAV, which has been determined based on the unit values of the trust funds. Unit values are determined by the organization sponsoring such trust funds by dividing the trust funds’ net assets at fair value by the units outstanding at each valuation date. Joint venture interests are invested in a hedge fund of funds partnership that invests directly in multiple hedge fund strategies that are not traded on exchanges and not traded on a daily basis. The valuation of such multi-strategy hedge fund of funds is estimated based on the NAV of the underlying hedge fund strategies using consistent valuation guidelines that account for variations that may influence their fair value.
Expected Cash Flows
Total benefits expected to be paid from the pension plan or company assets for the other postretirement benefits plan (net of participant contributions), respectively, are as follows:
Expected Benefit Payments
(millions) |
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||
2020 |
|
$ |
|
|
|
$ |
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
2025 - 2029 |
|
|
|
|
|
|
|
|
Pension Plan Contributions
The pension trust is adequately funded under current regulations. No contributions have been required since 1997, and as a result of closing the plan to new entrants and freezing benefit accruals at the end of 2023,
Net Periodic Benefit Cost
Net periodic benefit cost is recorded utilizing beginning of the year assumptions. Disclosures required for these plans are set forth in the following tables.
46
Components of Net Periodic Benefit Cost
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||||||||||
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Prior service cost amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of actuarial losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Curtailment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
In connection with regulatory orders, DESC recovers current pension costs through a rate rider that may be adjusted annually for retail electric operations or through cost of service rates for gas operations. For retail electric operations, current pension expense is recognized based on amounts collected through a rate rider, and differences between actual pension expense and amounts recognized pursuant to the rider are deferred as a regulatory asset (for under-collections) or regulatory liability (for over-collections) as applicable. In addition, DESC amortizes certain previously deferred pension costs. See Note 3.
Other changes in plan assets and benefit obligations recognized in other comprehensive income (net of tax) were as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||||||||||
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year actuarial (gain) loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Other changes in plan assets and benefit obligations recognized in regulatory assets were as follows:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||||||||||
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year actuarial (gain) loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Amortization of actuarial losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Settlement loss |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total recognized in regulatory assets |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Significant assumptions used in determining net periodic benefit cost:
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||||||||||
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||||
Discount rate |
|
3.57/4.38% |
|
|
|
|
% |
|
|
|
% |
|
4.08/4.41% |
|
|
|
|
% |
|
|
|
% |
||
Expected return on plan assets |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
n/a |
|
|
n/a |
|
|
n/a |
|
|||
Rate of compensation increase |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
n/a |
|
|
n/a |
|
|
n/a |
|
|||
Health care cost trend rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
Ultimate health care cost trend rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
Year achieved |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amounts to be amortized from regulatory assets into net periodic benefit cost in 2020 are as follows:
(millions) |
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||
Actuarial loss |
|
$ |
|
|
|
$ |
|
|
Other postretirement benefit costs are subject to annual per capita limits pursuant to the plan's design. As a result, the effect of a one-percent increase or decrease in the assumed health care cost trend rate on total service and interest cost is not significant.
401(k) Retirement Savings Plan
SCANA sponsors a defined contribution plan in which eligible employees may defer up to
47
12. COMMITMENTS AND CONTINGENCIES
As a result of issues generated in the ordinary course of business, DESC is involved in legal proceedings before various courts and is periodically subject to governmental examinations (including by regulatory authorities), inquiries and investigations. Certain legal proceedings and governmental examinations involve demands for unspecified amounts of damages, are in an initial procedural phase, involve uncertainty as to the outcome of pending appeals or motions, or involve significant factual issues that need to be resolved, such that it is not possible for DESC to estimate a range of possible loss. For such matters that DESC cannot estimate, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the litigation or investigative processes such that DESC is able to estimate a range of possible loss. For legal proceedings and governmental examinations that DESC is able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any accrued liability is recorded on a gross basis with a receivable also recorded for any probable insurance recoveries. Estimated ranges of loss are inclusive of legal fees and net of any anticipated insurance recoveries. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent DESC’s maximum possible loss exposure. The circumstances of such legal proceedings and governmental examinations will change from time to time and actual results may vary significantly from the current estimate. For current proceedings not specifically reported below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on DESC’s financial position, liquidity or results of operations.
Environmental Matters
DESC is subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations.
From a regulatory perspective, DESC and GENCO continually monitor and evaluate their current and projected emission levels and strive to comply with all state and federal regulations regarding those emissions. DESC and GENCO participate in the SO2 and NOX emission allowance programs with respect to coal plant emissions and also have constructed additional pollution control equipment at their coal-fired electric generating plants. These actions are expected to address many of the rules and regulations discussed herein.
Air
CAA
The CAA, as amended, is a comprehensive program utilizing a broad range of regulatory tools to protect and preserve the nation's air quality. At a minimum, states are required to establish regulatory programs to address all requirements of the CAA. However, states may choose to develop regulatory programs that are more restrictive. Many of DESC’s facilities are subject to the CAA’s permitting and other requirements.
MATS
In February 2019, the EPA published a proposed rule to reverse its previous finding that it is appropriate and necessary to regulate toxic emissions from power plants. However, the emissions standards and other requirements of the MATS rule would remain in place as the EPA is not proposing to remove coal and oil-fired power plants from the list of sources that are regulated under MATS. Although litigation of the MATS rule and the outcome of the EPA’s rulemaking are still pending, the regulation remains in effect and DESC is complying with the applicable requirements of the rule and does not expect any adverse impacts to its operations at this time.
Ozone Standards
The EPA published final non-attainment designations for the October 2015 ozone standard in June 2018. States have until August 2021 to develop plans to address the new standard. Until the states have developed implementation plans for the standard, DESC is unable to predict whether or to what extent the new rules will ultimately require additional controls. The expenditures required to implement additional controls could have a material impact on DESC’s results of operations and cash flows.
ACE Rule
In July 2019, the EPA published the final rule informally referred to as the ACE Rule, as a replacement for the Clean Power Plan. The ACE Rule applies to existing coal-fired power plants. The final rule includes unit-specific performance standards based on the degree of emission reduction levels achievable from unit efficiency improvements to be determined by the permitting agency. The ACE Rule requires states to develop plans by July 2022 to implement these performance standards. These state plans must be approved by the EPA by January 2024. While the impacts of this rule could be material to DESC’s results of operations, financial condition and/or cash flows, the existing regulatory frameworks in South Carolina provide rate recovery mechanisms that could substantially mitigate any such impacts for DESC.
Carbon Regulations
In August 2016, the EPA issued a draft rule proposing to reaffirm that a source’s obligation to obtain a PSD or Title V permit for GHGs is triggered only if such permitting requirements are first triggered by non-GHG, or conventional, pollutants that are regulated by the New Source Review program, and to set a significant emissions rate at
48
In December 2018, the EPA proposed revised Standards of Performance for Greenhouse Gas Emissions from New, Modified, and Reconstructed Stationary Sources. The proposed rule would amend the previous determination that the best system of emission reduction for newly constructed coal-fired steam generating units is no longer partial carbon capture and storage. Instead, the proposed revised best system of emission reduction for this source category is the most efficient demonstrated steam cycle (e.g., supercritical steam conditions for large units and subcritical steam conditions for small units) in combination with the best operating practices.
Oil and Gas NSPS
In August 2012, the EPA issued an NSPS impacting new and modified facilities in the natural gas production and gathering sectors and made revisions to the NSPS for natural gas processing and transmission facilities. These rules establish equipment performance specifications and emissions standards for control of VOC emissions for natural gas production wells, tanks, pneumatic controllers, and compressors in the upstream sector. In June 2016, the EPA issued another NSPS regulation, for the oil and natural gas sector, to regulate methane and VOC emissions from new and modified facilities in transmission and storage, gathering and boosting, production and processing facilities. All projects which commenced construction after September 2015 are required to comply with this regulation. In October 2018, the EPA published a proposed rule reconsidering and amending portions of the 2016 rule, including but not limited to, the fugitive emissions requirements at well sites and compressor stations. The amended portions of the 2016 rule were effective immediately upon publication. Until the proposed rule regarding reconsideration is final, DESC is implementing the 2016 regulation. DESC is still evaluating whether potential impacts on results of operations, financial condition and/or cash flows related to this matter will be material.
Water
The CWA, as amended, is a comprehensive program requiring a broad range of regulatory tools including a permit program to authorize and regulate discharges to surface waters with strong enforcement mechanisms. DESC must comply with applicable aspects of the CWA programs at its operating facilities.
Regulation 316(b)
In October 2014, the final regulations under Section 316(b) of the CWA that govern existing facilities and new units at existing facilities that employ a cooling water intake structure and that have flow levels exceeding a minimum threshold became effective. The rule establishes a national standard for impingement based on seven compliance options,but forgoes the creation of a single technology standard for entrainment. Instead, the EPA has delegated entrainment technology decisions to state regulators. State regulators are to make case-by-case entrainment technology determinations after an examination of five mandatory facility-specific factors, including a social cost-benefit test, and six optional facility-specific factors. The rule governs all electric generating stations with water withdrawals above
Effluent Limitations Guidelines
In September 2015, the EPA released a final rule to revise the ELG Rule. The final rule establishes updated standards for wastewater discharges that apply primarily at coal and oil steam generating stations. Affected facilities are required to convert from wet to dry or closed cycle coal ash management, improve existing wastewater treatment systems and/or install new wastewater treatment technologies in order to meet the new discharge limits. In April 2017, the EPA granted two separate petitions for reconsideration of the final ELG Rule and stayed future compliance dates in the rule. Also in April 2017, the U.S. Court of Appeals for the Fifth Circuit granted the EPA’s request for a stay of the pending consolidated litigation challenging the rule while the EPA addresses the petitions for reconsideration. In September 2017, the EPA signed a rule to postpone the earliest compliance dates for certain waste streams regulations in the final ELG Rule from November 2018 to November 2020; however, the latest date for compliance for these regulations remains December 2023. While the impacts of this rule could be material to DESC’s results of operations, financial condition and/or cash flows, as DESC expects that wastewater treatment technology retrofits will be required at Williams and Wateree generating stations, the existing regulatory framework in South Carolina provides rate recovery mechanisms that could substantially mitigate any such impacts for DESC.
In December 2019, the EPA released proposed revisions to the ELG Rule that, if adopted, could extend the deadlines for compliance with certain standards at several facilities. While the impacts of this rule could be material to DESC’s results of operations, financial condition and/or cash flows, the existing regulatory frameworks in South Carolina provide rate recovery mechanisms that could substantially mitigate any such impacts for the regulated electric utilities.
Waste Management and Remediation
The operations of DESC are subject to a variety of state and federal laws and regulations governing the management and disposal of solid and hazardous waste, and release of hazardous substances associated with current and/or historical operations. The CERCLA, as amended, and similar state laws, may impose joint, several and strict liability for cleanup on potentially responsible parties who owned, operated or arranged for disposal at facilities affected by a release of hazardous substances. In addition, many states have
49
created programs to incentivize voluntary remediation of sites where historical releases of hazardous substances are identified and property owners or responsible parties decide to initiate cleanups.
From time to time, DESC may be identified as a potentially responsible party in connection with the alleged release of hazardous substances or wastes at a site. Under applicable federal and state laws, DESC could be responsible for costs associated with the investigation or remediation of impacted sites, or subject to contribution claims by other responsible parties for their costs incurred at such sites. DESC also may identify, evaluate and remediate other potentially impacted sites under voluntary state programs. Remediation costs may be subject to reimbursement under DESC’s insurance policies, rate recovery mechanisms, or both. Except as described below, DESC does not believe these matters will have a material effect on results of operations, financial condition and/or cash flows.
DESC has
Ash Pond and Landfill Closure Costs
In April 2015, the EPA enacted a final rule regulating CCR landfills, existing ash ponds that still receive and manage CCRs, and inactive ash ponds that do not receive, but still store, CCRs. DESC currently has inactive and existing CCR ponds and CCR landfills subject to the final rule at
In December 2016, legislation was enacted that creates a framework for EPA- approved state CCR permit programs. In August 2017, the EPA issued interim guidance outlining the framework for state CCR program approval. The EPA has enforcement authority until state programs are approved. The EPA and states with approved programs both will have authority to enforce CCR requirements under their respective rules and programs. In September 2017, the EPA agreed to reconsider portions of the CCR rule in response to two petitions for reconsideration. In March 2018, the EPA proposed certain changes to the CCR rule related to issues remanded as part of the pending litigation and other issues the EPA is reconsidering. Several of the proposed changes would allow states with approved CCR permit programs additional flexibilities in implementing their programs. In July 2018, the EPA promulgated the first phase of changes to the CCR rule. Until all phases of the CCR rule are promulgated, DESC cannot forecast potential incremental impacts or costs related to existing coal ash sites in connection with future implementation of the 2016 CCR legislation and reconsideration of the CCR rule. In August 2018, the U.S. Court of Appeals for the D.C. Circuit issued its decision in the pending challenges of the CCR rule, vacating and remanding to the EPA three provisions of the rule. Until regulatory action is taken to incorporate the U.S. Court of Appeals for the D.C. Circuit’s decision, DESC is unable to make an estimate of the potential financial statement impacts associated with any future changes to the CCR rule in connection with the court’s remand.
Abandoned NND Project
DESC, on behalf of itself and as agent for Santee Cooper, entered into an engineering, construction and procurement contract with the Consortium in 2008 for the design and construction of the NND Project. DESC’s ownership share in the NND Project is
Santee Cooper decided to suspend construction on the NND Project, on July 31, 2017, and in light of this decision and based on the results of SCANA and DESC’s analysis, SCANA and DESC determined to stop the construction of the units and to pursue recovery of costs incurred in connection with the construction under the abandonment provisions of the BLRA or through other means. This decision by SCANA became the focus of numerous legislative, regulatory and legal proceedings, and led to DESC recording pre-tax impairment charges in 2017 totaling approximately $
50
On January 2, 2018, SCANA and Dominion Energy entered into the SCANA Merger Agreement and sought the consents and approvals from governmental entities and the shareholders of SCANA required to consummate the merger. After all consents and approvals were obtained, the SCANA Combination was effective January 1, 2019.
SCANA Merger Approval Order
In accordance with the terms of the South Carolina Commission's SCANA Merger Approval Order, DESC adopted the Plan-B Levelized Customer Benefits Plan, effective February 2019, whereby the average bill for a DESC residential electric customer approximates that which resulted from the legislatively-mandated temporary reduction that had been put into effect by the South Carolina Commission in August 2018. DESC also recorded a significant impairment charge in the fourth quarter of 2018, which charge resulted from its conclusion that NND Project capital costs exceeding the amount established in the SCANA Merger Approval Order were probable of loss, regardless of whether the SCANA Combination was completed. In addition, in the first quarter of 2019, DESC recorded the following charges and liabilities which arose from or are related to provisions in the SCANA Merger Approval Order.
|
• |
A charge of $ |
|
• |
A regulatory liability for refunds and restitution of amounts previously collected from retail electric customers of $ |
|
• |
A regulatory liability for refunds to natural gas customers totaling $ |
|
• |
A tax charge of $ |
Further, except for rate adjustments for fuel and environmental costs, DSM costs, and other rates routinely adjusted on an annual or biannual basis, DESC will freeze retail electric base rates at current levels until January 1, 2021.
The South Carolina Commission order also approved the removal of DESC's investment in certain transmission assets that have not been abandoned from BLRA capital costs. As of December 31, 2019, such investment in these assets included $
Various parties filed petitions for rehearing or reconsideration of the SCANA Merger Approval Order. In January 2019, the South Carolina Commission issued an order (1) granting the request of various parties and finding that DESC was imprudent in its actions by not disclosing material information to the ORS and the South Carolina Commission with regard to costs incurred subsequent to March 2015 and (2) denying the petitions for rehearing or consideration as to other issues raised in the various petitions. The deadline to appeal the SCANA Merger Approval Order and the order on rehearing expired in April 2019, and no party has sought appeal.
Claims and Litigation
The following describes certain legal proceedings involving DESC relating to events occurring before closing of the SCANA Combination. Dominion Energy intends to vigorously contest the lawsuits, claims and assessments which have been filed or initiated against DESC. No reference to, or disclosure of, any proceeding, item or matter described below shall be construed as an admission or indication that such proceeding, item or matter is material. For certain of these matters, and unless otherwise noted therein, DESC is unable to estimate a reasonable range of possible loss and the related financial statement impacts, but for any such matter there could be a material impact to its results of operations, financial condition and/or cash flows. For the matters for which DESC is able to reasonably estimate a probable loss, the Consolidated Balance Sheets include reserves of $
Ratepayer Class Actions
In May 2018, a consolidated complaint against DESC, SCANA and the State of South Carolina was filed in the State Court of Common Pleas in Hampton County, South Carolina (the DESC Ratepayer Case). In September 2018, the court certified this case as a class action. The plaintiffs allege, among other things, that DESC was negligent and unjustly enriched, breached alleged fiduciary and contractual duties and committed fraud and misrepresentation in failing to properly manage the NND Project, and that DESC committed unfair trade practices and violated state anti-trust laws. The plaintiffs sought a declaratory judgment that DESC may not charge its customers for any past or continuing costs of the NND Project, sought to have SCANA and DESC’s assets frozen and all monies recovered from Toshiba and other sources be placed in a constructive trust for the benefit of ratepayers and sought specific performance of the alleged implied contract to construct the NND Project.
51
In December 2018, the State Court of Common Pleas in Hampton County entered an order granting preliminary approval of a class action settlement and a stay of pre-trial proceedings in the DESC Ratepayer Case. The settlement agreement, contingent upon the closing of the SCANA Combination, provided that SCANA and DESC would establish an escrow account and proceeds from the escrow account would be distributed to the class members, after payment of certain taxes, attorneys' fees and other expenses and administrative costs. The escrow account would include (1) up to $
In September 2017, a purported class action was filed by Santee Cooper ratepayers against Santee Cooper, DESC, Palmetto Electric Cooperative, Inc. and Central Electric Power Cooperative, Inc. in the State Court of Common Pleas in Hampton County, South Carolina (the Santee Cooper Ratepayer Case). The allegations are substantially similar to those in the DESC Ratepayer Case. The plaintiffs seek a declaratory judgment that the defendants may not charge the purported class for reimbursement for past or future costs of the NND Project. In March 2018, the plaintiffs filed an amended complaint including as additional named defendants certain then current and former directors of Santee Cooper and SCANA. In June 2018, Santee Cooper filed a Notice of Petition for Original Jurisdiction with the Supreme Court of South Carolina which was denied. In December 2018, Santee Cooper filed its answer to the plaintiffs' fourth amended complaint and filed cross claims against DESC. In October 2019, Santee Cooper voluntarily consented to stay its cross claims against DESC pending the outcome of the trial of the underlying case. In November 2019, DESC removed the case to the U.S. District Court for the District of South Carolina. In December 2019, the plaintiffs and Santee Cooper filed a motion to remand the case to state court. In January 2020, the case was remanded to state court. In February 2020, the parties executed a preliminary settlement term sheet relating to this matter as well as the Luquire Case and the Glibowski Case described below. The proposed settlement is expected to be $
In July 2019, a similar purported class action was filed by certain Santee Cooper ratepayers against DESC, SCANA, Dominion Energy and former directors and officers of SCANA in the State Court of Common Pleas in Orangeburg, South Carolina (the Luquire Case). In August 2019, DESC, SCANA and Dominion Energy were voluntarily dismissed from the case. The claims are similar to the Santee Cooper Ratepayer Case. In February 2020, the parties executed a preliminary settlement term sheet as described above relating to this matter as well as the Santee Cooper Ratepayer Case and the Glibowski Case. This case is pending.
RICO Class Action
In January 2018, a purported class action was filed, and subsequently amended, against SCANA, DESC and certain former executive officers in the U.S. District Court for the District of South Carolina (the Glibowski Case). The plaintiff alleges, among other things, that SCANA, DESC and the individual defendants participated in an unlawful racketeering enterprise in violation of RICO and conspired to violate RICO by fraudulently inflating utility bills to generate unlawful proceeds. The DESC Ratepayer Class Action settlement described previously contemplates dismissal of claims by DESC ratepayers in this case against DESC, SCANA and their officers. In August 2019, the individual defendants filed motions to dismiss. In February 2020, the parties executed a preliminary settlement term sheet as described above relating to this matter as well as the Santee Cooper Ratepayer Case and the Luquire Case. This case is pending.
SCANA Shareholder Litigation
In February 2018, a purported class action was filed against Dominion Energy and certain former directors of SCANA and DESC in the State Court of Common Pleas in Richland County, South Carolina (the Metzler Lawsuit). The plaintiff alleges, among other things, that defendants violated their fiduciary duties to shareholders by executing a merger agreement that would unfairly deprive plaintiffs of the true value of their SCANA stock, and that Dominion Energy aided and abetted these actions. Among other remedies, the plaintiff seeks to enjoin and/or rescind the merger. In February 2018, Dominion Energy removed the case to the U.S. District Court for the District of South Carolina and filed a Motion to Dismiss in March 2018. In August 2018, the case was remanded back to the State Court of Common Pleas in Richland County. Dominion Energy appealed the decision to remand to the U.S. Court of Appeals for the Fourth Circuit, where the appeal was consolidated with another lawsuit regarding the SCANA Merger Agreement to which DESC is not a party. In June 2019, the U.S. Court of Appeals for the Fourth Circuit reversed the order remanding the case to state court. The case is pending in the U.S. District Court for the District of South Carolina.
Employment Class Actions and Indemnification
In August 2017, a case was filed in the U.S. District Court for the District of South Carolina on behalf of persons who were formerly employed at the NND Project. In July 2018, the court certified this case as a class action. In February 2019, certain of these plaintiffs filed an additional case, which case has been dismissed and the plaintiffs have joined the case filed in August 2017. The plaintiffs allege, among other things, that SCANA, DESC, Fluor Corporation and Fluor Enterprises, Inc. violated the Worker Adjustment and Retraining Notification Act in connection with the decision to stop construction at the NND Project. The plaintiffs allege that the
52
defendants failed to provide adequate advance written notice of their terminations of employment and are seeking damages, which are estimated to be as much as $
In September 2018, a case was filed in the State Court of Common Pleas in Fairfield County, South Carolina by Fluor Enterprises, Inc. and Fluor Daniel Maintenance Services, Inc. against DESC and Santee Cooper. The plaintiffs make claims for indemnification, breach of contract and promissory estoppel arising from, among other things, the defendants' alleged failure and refusal to defend and indemnify the Fluor defendants in the aforementioned case. These cases are pending.
FILOT Litigation and Related Matters
In November 2017, Fairfield County filed a complaint and a motion for temporary injunction against DESC in the State Court of Common Pleas in Fairfield County, South Carolina, making allegations of breach of contract, fraud, negligent misrepresentation, breach of fiduciary duty, breach of implied duty of good faith and fair dealing and unfair trade practices related to DESC’s termination of the FILOT agreement between DESC and Fairfield County related to the NND Project. The plaintiff sought a temporary and permanent injunction to prevent DESC from terminating the FILOT agreement. The plaintiff withdrew the motion for temporary injunction in December 2017. This case is pending.
Governmental Proceedings and Investigations
In June 2018, DESC received a notice of proposed assessment of approximately $
In September and October 2017, SCANA was served with subpoenas issued by the U.S. Attorney’s Office for the District of South Carolina and the Staff of the SEC’s Division of Enforcement seeking documents related to the NND Project. In February 2020, the SEC filed a complaint against SCANA, two of its former executive officers and DESC in the U.S. District Court for the District of South Carolina alleging that the defendants violated federal securities laws by making false and misleading statements about the NND Project. In addition, the South Carolina Law Enforcement Division is conducting a criminal investigation into the handling of the NND Project by SCANA and DESC. These matters are pending. SCANA and DESC are cooperating fully with the investigations, including responding to additional subpoenas and document requests; however, Dominion Energy cannot currently predict whether or to what extent SCANA or DESC may incur a material liability.
Other Litigation
In December 2018, arbitration proceedings commenced between DESC and Cameco Corporation related to a supply agreement signed in May 2008. This agreement provides the terms and conditions under which DESC agreed to purchase uranium hexafluoride from Cameco Corporation over a period from 2010 to 2020. Cameco Corporation alleges that DESC violated this agreement by failing to purchase the stated quantities of uranium hexafluoride for the 2017 and 2018 delivery years. DESC denies that it is in breach of the agreement and believes that it has reduced its purchase quantity within the terms of the agreement. This matter is pending.
In September 2019, a South Carolina state court jury awarded a judgment to the estate of Jose Larios in a wrongful death suit filed in June 2017 against DESC, of which DESC was apportioned $
Contractor Bankruptcy Proceedings
Westinghouse’s Reorganization Plan became effective August 1, 2018. Initially, Westinghouse had projected that its Reorganization Plan would pay in full or nearly in full its pre-petition trade creditors, including several of the Westinghouse Subcontractors which have alleged non-payment by the Consortium for amounts owed for work performed on the NND Project and have filed liens on related property in Fairfield County, South Carolina. DESC is contesting approximately $
DESC and Santee Cooper were responsible for amounts owed to Westinghouse for valid work performed by Westinghouse Subcontractors on the NND Project after the Westinghouse bankruptcy filing (i.e., post-petition) until termination of the IAA (the IAA Period). In the Westinghouse bankruptcy proceeding, deadlines were established for creditors of Westinghouse to assert the amounts owed to such creditors prior to the Westinghouse bankruptcy filing and during the IAA Period. Many of the Westinghouse Subcontractors have filed such claims. In December 2019, DESC and Santee Cooper entered into a confidential settlement agreement with W Wind Down Co LLC resolving claims relating to the IAA.
53
Further, some Westinghouse Subcontractors who have made claims against Westinghouse in the bankruptcy proceeding also filed against DESC and Santee Cooper in South Carolina state court for damages. The Westinghouse Subcontractor claims in South Carolina state court include common law claims for pre-petition work, IAA Period work, and work after the termination of the IAA. Many of these claimants have also asserted construction liens against the NND Project site. While DESC cannot be assured that it will not have any exposure on account of unpaid Westinghouse Subcontractor claims, which claims DESC is presently disputing, DESC believes it is unlikely that it will be required to make payments on account of such claims.
Nuclear Insurance
Under Price-Anderson, DESC (for itself and on behalf of Santee-Cooper) maintains agreements of indemnity with the U.S. Nuclear Regulatory Commission that, together with private insurance, cover third-party liability arising from any nuclear incident occurring at Summer. Price-Anderson provides funds up to $
DESC currently maintains insurance policies (for itself and on behalf of Santee Cooper) with NEIL. The policies provide coverage to Summer for property damage and outage costs up to $
To the extent that insurable claims for property damage, decontamination, repair and replacement and other costs and expenses arising from an incident at Summer exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, and to the extent that DESC's rates would not recover the cost of any purchased replacement power, DESC will retain the risk of loss as a self-insurer. DESC has no reason to anticipate a serious nuclear or other incident. However, if such an incident were to occur, it likely would have a material impact on DESC's results of operations, cash flows and financial position.
Spent Nuclear Fuel
The Nuclear Waste Policy Act of 1982 required that the United States government accept and permanently dispose of high-level radioactive waste and spent nuclear fuel by January 31, 1998, and it imposed on utilities the primary responsibility for storage of their spent nuclear fuel until the repository is available. DESC entered into a Standard Contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste with the DOE in 1983. As of December 31, 2019, the federal government has not accepted any spent fuel from Summer, and it remains unclear when the repository may become available. DESC has constructed an independent spent fuel storage installation to accommodate the spent nuclear fuel output for the life of Summer. DESC may evaluate other technology as it becomes available.
Long-Term Purchase Agreements
At December 31, 2019, DESC had the following long-term commitments that are noncancelable or cancelable only under certain conditions, and that a third party that will provide the contracted goods or services has used to secure financing.
(millions) |
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
Thereafter |
|
|
Total |
|
|||||||
Purchased electric capacity(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
Commitments represent estimated amounts payable for energy under power purchase contracts with qualifying facilities which expire at various dates through 2046. Energy payments are generally based on fixed dollar amounts per month and totaled $
54
13. LEASES
At December 31, 2019, DESC had the following lease assets and liabilities recorded in the Consolidated Balance Sheets:
At December 31, |
|
2019 |
|
|
(millions) |
|
|
|
|
Lease assets: |
|
|
|
|
Operating lease assets(1) |
|
$ |
|
|
Finance lease assets(2) |
|
|
|
|
Total lease assets |
|
$ |
|
|
Lease liabilities: |
|
|
|
|
Operating lease - current(3) |
|
$ |
|
|
Operating lease - noncurrent(4) |
|
|
|
|
Finance lease - current(5) |
|
|
|
|
Finance lease - noncurrent |
|
|
|
|
Total lease liabilities |
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
(5) |
|
For the year ended December 31, 2019, total lease cost consisted of the following:
Year Ended December 31, |
|
2019 |
|
|
(millions) |
|
|
|
|
Finance lease cost: |
|
|
|
|
Amortization |
|
$ |
|
|
Interest |
|
|
|
|
Operating lease cost |
|
|
|
|
Short-term lease cost |
|
|
|
|
Total lease cost |
|
$ |
|
|
For the year ended December 31, 2019, cash paid for amounts included in the measurement of lease liabilities consisted of the following amounts, included in the Consolidated Statements of Cash Flows:
Year Ended December 31, |
|
2019 |
|
|
(millions) |
|
|
|
|
Operating cash flows from finance leases |
|
$ |
|
|
Operating cash flows from operating leases |
|
|
|
|
Financing cash flows from finance leases |
|
|
|
|
At December 31, 2019, the weighted average remaining lease term and weighted average discount rate for finance and operating leases were as follows:
At December 31, |
|
2019 |
|
|
Weighted average remaining lease term - finance leases |
|
|
|
|
Weighted average remaining lease term - operating leases |
|
|
|
|
Weighted average discount rate - finance leases |
|
|
|
% |
Weighted average discount rate - operating leases |
|
|
|
% |
Lease liabilities have the following scheduled maturities:
(millions) |
|
Operating |
|
|
Finance |
|
||
2020 |
|
$ |
|
|
|
$ |
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
After 2024 |
|
|
|
|
|
|
|
|
Total undiscounted lease payments |
|
|
|
|
|
|
|
|
Present value adjustment |
|
|
( |
) |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
|
$ |
|
|
55
14. OPERATING SEGMENTS
In December 2019, DESC realigned its segments which resulted in the formation of a primary operating segment. The historical information presented herein has been recast to reflect the current segment presentation.
The Corporate and Other Segment primarily includes specific items attributable to its operating segment that are not included in profit measures evaluated by executive management in assessing the segment’s performance or in allocating resources.
In 2019, DESC reported after-tax net expenses of $
The net expense for specific items attributable to DESC’s operating segment in 2019 primarily related to the impact of the following items:
|
• |
A $ |
|
• |
$ |
|
• |
A $ |
|
• |
A $ |
|
• |
$ |
|
• |
$ |
In 2018, DESC reported after-tax net expenses of $
The net expense for specific items attributable to DESC’s operating segment in 2018 primarily related to a $
In 2017, DESC reported after-tax net expenses of $
The net expense for specific items attributable to DESC’s operating segment in 2017 related to a $
56
The following table presents segment information pertaining to DESC’s operations:
Year Ended December 31, |
|
Dominion Energy South Carolina |
|
|
Corporate and Other |
|
|
Consolidated Total |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
External revenue |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Depreciation and amortization |
|
|
|
|
|
|
( |
) |
|
|
|
|
Interest and related charges |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Comprehensive income (loss) available (attributable) to common shareholder |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
External revenue |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related charges |
|
|
|
|
|
|
( |
) |
|
|
|
|
Income tax expense (benefit) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Comprehensive income (loss) available (attributable) to common shareholder |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
External revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related charges |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Comprehensive income (loss) available (attributable) to common shareholder |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
15. UTILITY PLANT AND NONUTILITY PROPERTY
Major classes of utility plant and other property and their respective balances at December 31, 2019 and 2018 were as follows:
At December 31, |
|
2019 |
|
|
2018 |
|
||
(millions) |
|
|
|
|
|
|
|
|
Gross utility plant: |
|
|
|
|
|
|
|
|
Generation |
|
$ |
|
|
|
$ |
|
|
Transmission |
|
|
|
|
|
|
|
|
Distribution |
|
|
|
|
|
|
|
|
Storage |
|
|
|
|
|
|
|
|
General and other |
|
|
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
|
|
Construction work in progress |
|
|
|
|
|
|
|
|
Nuclear fuel |
|
|
|
|
|
|
|
|
Total gross utility plant |
|
$ |
|
|
|
$ |
|
|
Gross nonutility property |
|
$ |
|
|
|
$ |
|
|
57
Jointly Owned Utility Plant
DESC jointly owns and is the operator of Summer. Each joint owner provides its own financing and shares the direct expenses and generation output in proportion to its ownership. DESC’s share of the direct expenses of Summer is included in the corresponding operating expenses on its income statement. The units associated with the NND Project have been reclassified from construction work in progress to a regulatory asset as a result of the decision to stop their construction. See additional discussion at Note 3. In May 2019, DESC and Santee Cooper entered into an agreement in which DESC agreed to purchase
At December 31, |
|
2019 |
|
2018 |
||||||
|
|
Summer Unit 1 |
|
Summer Unit 1 |
||||||
Percent owned |
|
|
|
|
||||||
Plant in service |
|
$ |
|
|
billion |
|
$ |
|
|
billion |
Accumulated depreciation |
|
$ |
|
|
million |
|
$ |
|
|
million |
Construction work in progress |
|
$ |
|
|
million |
|
$ |
|
|
million |
Included within other receivables on the balance sheet were amounts due to DESC from Santee Cooper for its share of direct expenses. These amounts totaled $
Sale of Warranty Service Contract Assets
In May 2019, DESC entered into an agreement to sell certain warranty service contract assets for total consideration of $
16. AFFILIATED AND RELATED PARTY TRANSACTIONS
DESC owns
DESC purchases natural gas and related pipeline capacity from SCANA Energy Marketing, Inc. to service its retail gas customers and to satisfy certain electric generation requirements. These purchases are included within gas purchased for resale or fuel used in electric generation, as applicable in the Consolidated Statements of Comprehensive Loss.
DESS, on behalf of itself and its parent company, provides the following services to DESC, which are rendered at direct or allocated cost: information systems, telecommunications, customer support, marketing and sales, human resources, corporate compliance, purchasing, financial, risk management, public affairs, legal, investor relations, gas supply and capacity management, strategic planning, general administrative, and retirement benefits. In addition, DESS processes and pays invoices for DESC and is reimbursed. Costs for these services include amounts capitalized.
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of coal from affiliate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Sales of coal to affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fuel used in electric generation from affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
Direct and allocated costs from services company affiliate(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues – Electric from sales to affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues – Gas from sales to affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses – Other taxes from affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, |
|
2019 |
|
|
2018 |
|
||
(millions) |
|
|
|
|
|
|
|
|
Receivable from Canadys Refined Coal, LLC |
|
$ |
|
|
|
$ |
|
|
Payable to Canadys Refined Coal, LLC |
|
|
|
|
|
|
|
|
Payable to SCANA Energy Marketing, Inc |
|
|
|
|
|
|
|
|
Payable to DESS |
|
|
|
|
|
|
|
|
Payable to Public Service Company of North Carolina, Incorporated |
|
|
|
|
|
|
|
|
In connection with the SCANA Combination, purchases from certain entities owned by Dominion Energy became affiliated transactions. During the year ended December 31, 2019, DESC purchased electricity generated by certain solar facilities, totaling $
58
had accounts payable balances to these affiliates totaling less than $
Borrowings from an affiliate are described in Note 6. Certain disclosures regarding DESC’s participation in SCANA's noncontributory defined benefit pension plan and unfunded postretirement health care and life insurance programs are included in Note 11.
17. OTHER INCOME (EXPENSE), NET
Components of other income (expense), net are as follows:
Year Ended December 31, |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
(millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contracts with customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Allowance for equity funds used during construction |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
The recording of revenue from contracts with customers within other income (expense) arose upon the adoption of related accounting guidance described in Note 1 and Note 4, and as permitted, periods prior to adoption have not been restated. Other income in 2018 includes gains from the settlement of interest rate derivatives of $
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of DESC’s quarterly results of operations for the years ended December 31, 2019 and 2018 follows. Amounts reflect all adjustments necessary in the opinion of management for a fair statement of the results for the interim periods. Results for interim periods may fluctuate as a result of weather conditions, changes in rates and other factors.
(millions) |
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First Quarter |
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Second Quarter |
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Third Quarter |
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Fourth Quarter |
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2019 |
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Operating revenue |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Operating income (loss) |
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( |
) |
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( |
) |
Total comprehensive income (loss) |
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( |
) |
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( |
) |
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( |
) |
Comprehensive income (loss) available (attributable) to common shareholder |
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( |
) |
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( |
) |
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( |
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2018 |
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Operating revenue |
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$ |
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$ |
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$ |
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$ |
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Operating income (loss) |
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( |
) |
Total comprehensive income (loss) |
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( |
) |
Comprehensive income (loss) available (attributable) to common shareholder |
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( |
) |
DESC’s 2019 results include the impact of the following significant items:
|
• |
Fourth quarter results include a $ |
|
• |
Second quarter results include a $ |
|
• |
First quarter results include a $ |
DESC’s 2018 results include the impact of the following significant item:
|
• |
Fourth quarter results include a $ |
59
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Senior management, including DESC’s CEO and CFO, evaluated the effectiveness of DESC’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, DESC’s CEO and CFO have concluded that DESC’s disclosure controls and procedures are effective. There were no changes in DESC’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, DESC’s internal control over financial reporting.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of DESC understands and accepts responsibility for DESC’s financial statements and related disclosures and the effectiveness of internal control over financial reporting (internal control). DESC continuously strives to identify opportunities to enhance the effectiveness and efficiency of internal control, just as DESC does throughout all aspects of its business.
DESC maintains a system of internal control designed to provide reasonable assurance, at a reasonable cost, that its assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed and recorded in accordance with established procedures. This system includes written policies, an organizational structure designed to ensure appropriate segregation of responsibilities, careful selection and training of qualified personnel and internal audits.
The Board of Directors also serves as DESC’s Audit Committee and has periodic communications with the independent registered public accounting firm, the internal auditors and management concerning DESC’s auditing, internal accounting control and financial reporting matters and to ensure that each is properly discharging its responsibilities.
SEC rules implementing Section 404 of the Sarbanes-Oxley Act require DESC’s 2019 Annual Report to contain a management’s report regarding the effectiveness of internal control. As a basis for the report, DESC tested and evaluated the design and operating effectiveness of internal controls. Based on its assessment as of December 31, 2019, DESC makes the following assertions:
Management is responsible for establishing and maintaining effective internal control over financial reporting of DESC.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management evaluated DESC’s internal control over financial reporting as of December 31, 2019. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that DESC maintained effective internal control over financial reporting as of December 31, 2019.
This annual report does not include an attestation report of DESC’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by DESC’s independent registered public accounting firm pursuant to a permanent exemption under the Dodd-Frank Act.
February 28, 2020
Item 9B. Other Information
None.
60
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instructions I.(2)(c).
Item 11. Executive Compensation
Omitted pursuant to General Instructions I.(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instructions I.(2)(c).
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instructions I.(2)(c).
Item 14. Principal Accountant Fees and Services
The following table presents fees paid to Deloitte & Touche LLP for services related to DESC for the fiscal years ended December 31, 2019 and 2018.
Type of Fees |
|
2019 |
|
|
2018 |
|
||
(millions) |
|
|
|
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|
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|
|
Audit fees |
|
$ |
1.92 |
|
|
$ |
2.62 |
|
Audit-related fees |
|
|
— |
|
|
|
0.10 |
|
Total Fees |
|
$ |
1.92 |
|
|
$ |
2.72 |
|
Audit fees represent fees of Deloitte & Touche LLP for the audit of DESC’s annual consolidated financial statements, the review of financial statements included in DESC’s quarterly Form 10-Q reports, and the services that an independent auditor would customarily provide in connection with subsidiary audits, statutory requirements, regulatory filings, and similar engagements for the fiscal year, such as comfort letters, attest services, consents, and assistance with review of documents filed with the SEC.
Audit-related fees consist of assurance and related services that are reasonably related to the performance of the audit or review of DESC’s consolidated financial statements or internal control over financial reporting. This category may include fees related to the performance of audits and attest services not required by statute or regulations, due diligence related to mergers, acquisitions, and investments, and accounting consultations about the application of GAAP to proposed transactions.
DESC’s Board of Directors has adopted the Dominion Energy Audit Committee pre-approval policy for its independent auditor’s services and fees and has delegated the execution of this policy to the Dominion Energy Audit Committee. In accordance with this delegation, each year the Dominion Energy Audit Committee pre-approved a schedule that details the services to be provided for the following year and an estimated charge for such services. At its December 2019 meeting, the Dominion Energy Audit Committee approved schedules of services and fees for 2020 inclusive of DESC. In accordance with the pre-approval policy, any changes to the pre-approved schedule may be pre-approved by the Dominion Energy Audit Committee or a delegated member of the Dominion Energy Audit Committee.
61
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) |
Certain documents are filed as part of this Form 10-K and are incorporated by reference and found on the pages noted. |
|
1. |
Financial Statements |
See Index on page 18.
|
2. |
All schedules are omitted because they are not applicable, or the required information is either not material or is shown in the financial statements or the related notes. |
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3. |
Exhibits (incorporated by reference unless otherwise noted) |
Exhibit |
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Number |
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Description |
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3.01 |
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3.02 |
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4.01 |
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Articles of Exchange of South Carolina Electric & Gas Company and SCANA Corporation (Filed as Exhibit 4-A to Post-Effective Amendment No. 1 to Registration Statement No. 2-90438 and incorporated by reference herein). (Filed on paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T). |
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4.02 |
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Indenture dated as of April 1, 1993 from South Carolina Electric & Gas Company to The Bank of New York Mellon Trust Company, N. A. (as successor to NationsBank of Georgia, National Association), as Trustee (Filed as Exhibit 4-F to Registration Statement No. 33-49421). (Filed on paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T). |
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4.03 |
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First Supplemental Indenture dated as of June 1, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-49421). (Filed on paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T). |
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4.04 |
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Second Supplemental Indenture dated as of June 15, 1993 (Filed as Exhibit 4-G to Registration Statement No. 33-57955). (Filed on paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T). |
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4.05 |
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4.06 |
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Description of Series A Nonvoting Preferred Shares (filed herewith). |
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10.01 |
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10.02 |
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10.03 |
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10.04 |
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10.05 |
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10.06 |
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62
10.07 |
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31.a |
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31.b |
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32.a |
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101 |
|
The following financial statements from Dominion Energy South Carolina, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 28, 2020, formatted in iXBRL (Inline eXtensible Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Loss; (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in Common Equity, and (v) the Notes to Consolidated Financial Statements. |
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104 |
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Cover Page Interactive Data File (formatted in iXBRL (Inline eXtensible Reporting Language) and contained in Exhibit 101). |
Item 16. Form 10-K Summary
None.
63
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
DOMINION ENERGY SOUTH CAROLINA, INC. |
|
BY: |
/s/ Thomas F. Farrell, II |
|
|
(Thomas F. Farrell, II, Chairman of the Board of Directors) |
|
|
|
DATE: February 28, 2020 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th day of February, 2020.
Signature |
|
Title |
/s/ Thomas F. Farrell, II |
|
Chairman of the Board of Directors |
Thomas F. Farrell, II |
|
|
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|
|
/s/ Diane Leopold |
|
Director and Chief Executive Officer |
Diane Leopold |
|
|
|
|
|
/s/ James R. Chapman |
|
Director, Executive Vice President and Chief Financial Officer |
James R. Chapman |
|
|
|
|
|
/s/ Michele L. Cardiff |
|
Vice President, Controller and Chief Accounting Officer |
Michele L. Cardiff |
|
|
64