SCANA CORP

INCOME TAXES

Components of income tax expense (benefit) are as follows:



	The Company									Consolidated SCE&G
Millions of dollars	2017			2016			2015			2017			2016			2015
Current taxes (benefit):
Federal	$	(414	)	$	36		$	382		$	(410	)	$	50		$	208
State	18			13			57			(18		)	13			32
Total current taxes (benefit)	(396		)	49			439			(428		)	63			240
Deferred tax (benefit) expense, net:
Federal	323			203			(36		)	261			167			(3		)
State	(37		)	21			(7		)	(2		)	20			(3		)
Total deferred taxes (benefit)	286			224			(43		)	259			187			(6		)
Investment tax credits:
Amortization of amounts deferred-state	—			—			(1		)	—			—			(1		)
Amortization of amounts deferred-federal	(2		)	(2		)	(2		)	(2		)	(2		)	(2		)
Total investment tax credits	(2		)	(2		)	(3		)	(2		)	(2		)	(3		)
Total income tax expense (benefit)	$	(112	)	$	271		$	393		$	(171	)	$	248		$	231

The difference between actual income tax expense and the amount calculated from the application of the statutory 35% federal income tax rate to pre-tax income is reconciled as follows:



	The Company									Consolidated SCE&G
Millions of dollars	2017			2016			2015			2017			2016			2015
Net income (loss)	$	(119	)	$	595		$	746		$	(185	)	$	513		$	466
Income tax expense (benefit)	(112		)	271			393			(171		)	248			231
Noncontrolling interest	—			—			—			13			13			14
Total pre-tax income (loss)	$	(231	)	$	866		$	1,139		$	(343	)	$	774		$	711

Income taxes (benefit) on above at statutory federal income tax rate	$	(81	)	$	303		$	399		$	(120	)	$	271		$	249
Increases (decreases) attributed to:
State income taxes (less federal income tax effect)	(7		)	27			38			(8		)	26			24
State investment tax credits (less federal income tax effect)	(5		)	(5		)	(6		)	(5		)	(5		)	(6		)
Allowance for equity funds used during construction	(8		)	(10		)	(9		)	(5		)	(9		)	(9		)
Deductible dividends—401(k) Retirement Savings Plan	(9		)	(10		)	(10		)	—			—			—
Amortization of federal investment tax credits	(2		)	(2		)	(2		)	(2		)	(2		)	(2		)
Section 45 tax credits	(8		)	(8		)	(9		)	(8		)	(8		)	(9		)
Domestic production activities deduction	(18		)	(23		)	(18		)	(18		)	(23		)	(18		)
Remeasurement of deferred taxes upon enactment of Tax Act	30			—			—			(1		)	—			—
Realization of basis differences upon sale of subsidiaries	—			—			7			—			—			—
Other differences, net	(4		)	(1		)	3			(4		)	(2		)	2
Total income tax expense (benefit)	$	(112	)	$	271		$	393		$	(171	)	$	248		$	231

The tax effects of significant temporary differences comprising net deferred tax liabilities are as follows:



	The Company				Consolidated SCE&G
Millions of dollars	2017		2016		2017		2016
Deferred tax assets:
Net operating loss and tax credit carryforward	$	600	—		$	541	—
Toshiba settlement	273		—		273		—
Nondeductible accruals	88		$	148	42		$	53
Asset retirement obligation, including nuclear decommissioning	141		213		132		200
Regulatory liability, non-property accumulated deferred income tax	54		—		54		—
Financial instruments	15		22		—		—
Unamortized investment tax credits	8		15		8		15
Deferred fuel costs	—		17		—		17
Other	6		10		5		8
Total deferred tax assets	1,185		425		1,055		293
Deferred tax liabilities:
Property, plant and equipment	1,220		2,159		1,035		1,856
Regulatory asset, unrecovered nuclear plant costs	962		—		962		—
Deferred employee benefit plan costs	60		105		53		93
Regulatory asset, asset retirement obligation	91		143		85		135
Regulatory asset, other unrecovered plant	27		45		27		45
Demand side management costs	16		23		16		23
Prepayments	21		32		19		30
Other	49		77		31		50
Total deferred tax liabilities	2,446		2,584		2,228		2,232
Net deferred tax liabilities	$	1,261	$	2,159	$	1,173	$	1,939

The federal and state tax credits and NOL carryforwards are presented below:



	December 31, 2017
Millions of dollars	The Company		Consolidated SCE&G		Expiration Year
Federal NOL Carryforwards	$	2,052	$	1,905	2037
Federal Tax Credits	35		35		2035	-	2037
Federal Charitable Carryforwards	7		5		2021	-	2022
State NOL Carryforwards	2,382		2,301		2037
State Charitable Carryforwards	3		2		2022
Total Tax Credits and NOL Carryforwards	$	4,479	$	4,248

A valuation allowance is needed when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining whether a valuation allowance is required, the Company and Consolidated SCE&G consider such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. Based on this evaluation, management has concluded that a valuation allowance is not needed.

In December 2017, the Tax Act was enacted, resulting in the remeasurement of all federal deferred income tax assets and liabilities to reflect a 21% federal statutory tax rate. Due to the regulated nature of the Company’s and Consolidated SCE&G’s operations, the effect of this remeasurement is primarily reflected in deferred income tax balances within regulatory liabilities (see Note 2). In connection with this remeasurement, however, the Company recorded additional deferred income tax expense of approximately $30 million, and Consolidated SCE&G recorded a deferred income tax benefit of approximately $1 million in their respective statements of operations for the year ended December 31, 2017. Upon the eventual filing of the Company’s 2017 consolidated income tax return, adjustments to deferred income taxes and deferred income taxes may be recorded; however, these adjustments are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The State of North Carolina lowered its corporate income tax rate from 6.0% to 5.0% in 2015, 4.0% in 2016, 3% in 2017 and 2.5% effective January 1, 2019. In connection with these changes in tax rates, related state deferred tax amounts were remeasured, with the change in their balances being credited to a regulatory liability. The changes in income tax rates did not and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The Company files consolidated federal income tax returns which includes Consolidated SCE&G, and the Company and its subsidiaries file various applicable state and local income tax returns.

The IRS has completed examinations of the Company’s federal returns through 2004, and the Company’s federal returns through 2009 are closed for additional assessment. The IRS is currently examining SCANA's open federal returns through 2015 as a result of claims discussed below. With few exceptions, the Company, including Consolidated SCE&G, is no longer subject to state and local income tax examinations by tax authorities for years before 2010.

Changes in Unrecognized Tax Benefits



	The Company								Consolidated SCE&G
Millions of dollars	2017			2016		2015			2017			2016		2015
Unrecognized tax benefits, January 1	$	350		$	49	$	16		$	350		$	49	$	16
Gross increases—uncertain tax positions in prior period	—			94		33			—			94		33
Gross decreases—uncertain tax positions in prior period	(273		)	—		(2		)	(273		)	—		(2		)
Gross increases—current period uncertain tax positions	21			207		2			21			207		2
Unrecognized tax benefits, December 31	$	98		$	350	$	49		$	98		$	350	$	49

During 2013 and 2014, the Company amended certain of its income tax returns to claim additional tax-defined research and experimentation deductions (under IRC Section 174) and credits (under IRC Section 41) and to reflect related impacts on other items such as domestic production activities deductions (under IRC Section 199). The Company also made similar claims in filing its original 2013 and 2014 returns in 2014 and 2015, respectively. In 2016 and 2017, the Company claimed significant research and experimentation deductions and credits (offset by reductions in its domestic production activities deductions), related to the design and construction activities of the Nuclear Project, in its 2015 and 2016 income tax returns. The Company expects to claim similar deductions and credits in its 2017 tax return when it is filed in 2018. These claims followed the issuance of final IRS regulations in 2014 regarding such treatment with respect to expenditures related to the design and construction of pilot models.

The IRS examined the claims in the amended returns, and as the examination progressed without resolution, the Company and Consolidated SCE&G evaluated and recorded adjustments to unrecognized tax benefits; however, none of these changes materially affected the Company's and Consolidated SCE&G's effective tax rate. In October 2016, the examination of the amended tax returns progressed to the IRS Office of Appeals. In addition, the IRS has begun an examination of SCANA's 2013 through 2015 income tax returns, and it is expected that the IRS will also examine later returns.

These IRC Section 174 income tax deductions and IRC Section 41 credits were considered to be uncertain tax positions, and under relevant accounting guidance, estimates of the amounts of related tax benefits which may not be sustained upon examination by the taxing authorities were recorded as unrecognized tax benefits in the financial statements. Following the abandonment of the Nuclear Project, the Company and Consolidated SCE&G anticipate that an abandonment loss deduction under IRC Section 165 will be claimed on the 2017 tax return. As such, certain of the IRC Section 174 deductions, to the extent they are denied, would instead be deductible in 2017 under IRC Section 165. The abandonment loss deduction is also considered an uncertain tax position; however, under relevant accounting guidance, no estimated unrecognized tax benefits were recorded as of December 31, 2017. The remaining unrecognized tax benefits include the impact of the IRC Section 174 deductions on domestic production activities deductions, credits, and certain unrecognized state tax benefits.

As of December 31, 2017, the Company and Consolidated SCE&G have recorded an unrecognized tax benefit of $98 million ($19 million net of the impact of state deductions on federal returns, net of NOL and credit carryforwards, and net of receivables related to the uncertain tax positions). If recognized, $98 million of the tax benefit would affect the Company’s and Consolidated SCE&G's effective tax rates. These unrecognized tax benefits are not expected to increase significantly within the next 12 months. It is also reasonably possible that these unrecognized tax benefits may decrease by $11 million within the next 12 months. No other material changes in the status of the Company’s or Consolidated SCE&G's tax positions have occurred through December 31, 2017.

In connection with the research and experimentation deduction and credit claims reflected on the 2015 and 2016 income tax returns and similar claims made in determining taxable income for 2017, and under the terms of an SCPSC order, the Company and Consolidated SCE&G recorded regulatory assets for estimated foregone domestic production activities deductions, offset by estimated tax credits, with the expectation that these deferred costs and related interest thereon would be recoverable through customer rates in future years (see Note 2). However, as further described in Note 10, as of December 31, 2017, an impairment loss with respect to such deferred regulatory asset was recorded. SCE&G's current customer rates reflect the availability of domestic production activities deductions.

Also under the terms of an SCPSC order, estimated interest expense accrued with respect to the unrecognized tax benefits related to the research and experimentation deductions in the 2015 and 2016 income tax returns was deferred as a regulatory asset and was expected to be recoverable through customer rates in future years. An impairment loss with respect to these deferred amounts was also recorded as of December 31, 2017 (see Note 10). Otherwise, the Company and Consolidated SCE&G recognize interest accrued related to unrecognized tax benefits within interest expense or interest income and recognize tax penalties within other expenses. Amounts recorded for such interest income, interest expense or tax penalties have not been material for any period presented.