Derivative Financial Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments And Hedging Activities Disclosure [Abstract]

7. DERIVATIVE FINANCIAL INSTRUMENTS

DESC’s accounting policies, objectives, and strategies for using derivative instruments are discussed in Note 2 in the Consolidated Financial Statements in DESC’s Annual Report on Form 10-K for the year ended December 31, 2020. DESC uses derivative instruments such as physical forwards to manage its commodity risk of its business operations. See Note 8 for further information about fair value measurements and associated valuation methods for derivatives.

Derivative assets and liabilities are presented gross on the 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, as presented in the table below, is used to offset derivative assets and liabilities.

Certain of DESC’s 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. If the credit-related contingent features underlying the instruments that are in a liability position and not fully collateralized with cash were fully triggered as of June 30, 2021 and December 31, 2020, DESC would have been required to post $11 million and $10 million, respectively, of additional collateral to its counterparties. The collateral that would be required to be posted includes the impacts of any amounts already posted for derivatives per contractual terms. DESC had posted $11 million and $1 million, respectively, of collateral at June 30, 2021 and December 31, 2020 related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The aggregate fair value of all derivative instruments with credit-related contingent provisions that are in a liability position and not fully collateralized with cash was $22 million and $11 million at June 30, 2021 and December 31, 2020, respectively.

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. DESC’s commodity derivative assets are not subject to a master netting agreement or similar arrangement.

	June 30, 2021								December 31, 2020
	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⁽¹⁾		Financial Instruments		Cash Collateral Paid		Net Amounts		Gross Liabilities Presented in the Consolidated Balance Sheet⁽¹⁾		Financial Instruments		Cash Collateral Paid		Net Amounts
Interest rate contracts:
Over-the-counter	$	22	$	—	$	11	$	11	$	27	$	—	$	17	$	10
Total derivatives	$	22	$	—	$	11	$	11	$	27	$	—	$	17	$	10
1) Excludes $28 million and $— million of derivative liabilities at June 30, 2021 and December 31, 2020, respectively, which are not subject to master netting or similar arrangements.

Volumes

The following table presents the volume of derivative activity at June 30, 2021. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions.

	Current		Noncurrent
Electricity (MWh):
Fixed price		1,642,960		23,508,146
Interest rate⁽¹⁾ (millions)	$	—	$	71

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

Fair Value and Gains and Losses on Derivative Instruments

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

(millions)	Fair Value - Derivatives under Hedge Accounting		Fair Value - Derivatives not under Hedge Accounting		Total Fair Value
At June 30, 2021
ASSETS
Current Assets
Commodity	$	—	$	5	$	5
Total current derivative assets⁽¹⁾		—		5		5
Noncurrent Assets
Commodity		—		10		10
Total noncurrent derivative assets⁽²⁾		—		10		10
Total derivative assets	$	—	$	15	$	15
LIABILITIES
Current Liabilities
Interest rate	$	1	$	1	$	2
Total current derivative liabilities⁽³⁾		1		1		2
Noncurrent Liabilities
Commodity		—		28		28
Interest rate		12		8		20
Total noncurrent derivative liabilities⁽⁴⁾		12		36		48
Total derivative liabilities	$	13	$	37	$	50
At December 31, 2020
LIABILITIES
Current Liabilities
Interest rate	$	1	$	1	$	2
Total current derivative liabilities⁽³⁾		1		1		2
Noncurrent Liabilities
Interest rate		15		10		25
Total noncurrent derivative liabilities⁽⁴⁾		15		10		25
Total derivative liabilities	$	16	$	11	$	27

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

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

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

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

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

Derivatives in Cash Flow Hedging Relationships

(millions)	Increase (Decrease) in Derivatives Subject to Regulatory Treatment⁽¹⁾
Three Months Ended June 30, 2021
Derivative type and location of gains (losses):
Interest rate	$	(1	)
Total	$	(1	)
Three Months Ended June 30, 2020
Derivative type and location of gains (losses):
Interest rate	$	2
Total	$	2
Six Months Ended June 30, 2021
Derivative type and location of gains (losses):
Interest rate	$	6
Total	$	6
Six Months Ended June 30, 2020
Derivative type and location of gains (losses):
Interest rate	$	(4	)
Total	$	(4	)

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

Derivatives Not Designated as Hedging Instrument

There were no gains and losses on derivatives not designated as hedging instruments for both the three months ended June 30, 2021 and June 30, 2020.

(millions)		Amount of Gain (Loss) Recognized in Income on Derivatives⁽¹⁾
Six Months Ended June 30,	Location	2021			2020
Derivative type and location of gains (losses):
Interest rate contracts:	Interest charges	$	(1	)	$	—
Total interest rate contracts		$	(1	)	$	—

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