Dominion Energy, Inc. Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC for the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Dominion Energy operates regulated electric generation, transmission and distribution businesses, gas transmission, storage and distribution operations, LNG facilities, merchant generation and related energy businesses.
Key financial metrics
| Dominion Energy consolidated | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $3,451 million | $3,179 million | $10,005 million | $9,376 million |
| Income from operations | $1,150 million | $1,152 million | $2,767 million | $2,984 million |
| Net income attributable to Dominion Energy | $854 million | $665 million | $1,806 million | $1,687 million |
| Diluted EPS | $1.30 | $1.03 | $2.77 | $2.66 |
| Dividends declared per share | $0.8350 | $0.7700 | $2.505 | $2.280 |
- Consolidated net margin was approximately 24.7% in Q3 and 18.1% year to date; operating margin was approximately 33.3% and 27.7%, respectively.
- Net cash provided by operating activities was $3.711 billion for the first nine months, versus $3.672 billion in 2017. Capital expenditures and other property additions were $3.111 billion, and net cash used in investing activities was $3.369 billion.
- Cash, restricted cash and equivalents increased to $387 million at September 30, 2018, from $185 million at December 31, 2017.
- Dominion Energy reported current liabilities of $9.212 billion, including $3.101 billion of securities due within one year and $2.935 billion of short-term debt. Long-term debt totaled $32.188 billion, compared with $30.948 billion at year-end 2017.
- The $6.0 billion joint revolving credit facility had approximately $2.940 billion of available capacity at September 30, 2018. The filing reports no changes to credit ratings, no material covenant changes and no defaults.
- Virginia Power generated Q3 net income of $520 million, up from $459 million; nine-month net income was $1.043 billion, down from $1.133 billion.
- Dominion Energy Gas generated Q3 net income of $136 million, up from $117 million; nine-month net income was $317 million, up from $302 million.
Material changes versus the prior comparable period
- Dominion Energy’s Q3 net income increased 28%, primarily from higher nuclear decommissioning trust investment earnings and the commencement of commercial operations at the Cove Point Liquefaction Project.
- Nine-month net income increased 7%. Benefits from Cove Point and investment earnings were partly offset by a $215 million charge associated with Virginia legislation requiring customer rate credits.
- Cove Point contributed approximately $181 million of Q3 net revenue and $324 million of year-to-date net revenue, including export terminaling and related transportation contracts.
- Other income increased by $252 million in Q3, including a $148 million increase in nuclear trust investment earnings and an $87 million gain on the sale of a 25% interest in Catalyst Old River Hydroelectric Limited Partnership.
- Income tax expense decreased to $485 million for the first nine months from $683 million, reflecting the 2017 Tax Reform Act and a lower federal statutory rate, partly offset by lower renewable energy investment tax credits.
- Operating cash flow was broadly stable, while investing cash use declined by $1.499 billion, primarily because of lower construction spending related to the Liquefaction Project and lower solar project acquisitions.
- New accounting standards adopted in 2018 affected revenue recognition, financial instruments, restricted cash, pension-cost presentation and accumulated other comprehensive income. The filing states that these changes did not affect total net income, assets, liabilities, equity or cash flows except for presentation and cumulative-effect adjustments.
Guidance, outlook, commentary and risks
- The filing does not provide a clear consolidated earnings-per-share or revenue guidance range for 2018.
- Dominion Energy expected to close the proposed SCANA acquisition by year-end 2018, subject to remaining approvals and closing conditions. The transaction contemplated issuing 0.669 Dominion Energy shares per SCANA share and retaining approximately $7.1 billion of SCANA debt. The proposed customer relief and V.C. Summer cost treatment remained subject to South Carolina regulatory approval.
- In October 2018, Dominion Energy agreed to sell its 50% Blue Racer interest for $1.05 billion of up-front cash, with an expected Q4 gain of approximately $380 million pretax, subject to closing conditions. Additional deferred and contingent consideration may be received but was not recognized.
- Dominion Energy expected to sell the Fairless and Manchester merchant generation facilities for approximately $1.2 billion and recognize an estimated Q4 gain of approximately $210 million pretax, subject to regulatory approvals.
- Atlantic Coast Pipeline project cost estimates increased from $6.0–$6.5 billion to $6.5–$7.0 billion, excluding financing costs, following a FERC stop-work order and permitting delays. The project was pursuing phased service, with key segments targeted for late 2019 and remaining segments for mid-2020.
- The Supply Header project cost estimate increased to $600–$650 million from $550–$600 million, excluding financing costs, with a late-2019 in-service target.
- Material risk areas include regulatory and tax-rate changes, environmental compliance and coal-ash remediation, nuclear operations and relicensing, commodity and interest-rate volatility, weather, construction delays, counterparty and credit exposure, litigation, cybersecurity and the outcome of the SCANA acquisition.
- Pending matters include a FERC audit of DETI, for which a $129 million pretax plant-disallowance charge was recorded in 2018 while the potential impact of a remaining finding could not be estimated; a FERC investigation of Virginia Power market offers; and environmental proceedings whose potential costs may be material but are not currently estimable.
- Virginia Power recorded an $81 million pretax charge related primarily to future ash pond and landfill closure costs. The filing states that actual asset-retirement obligations may vary substantially from current estimates.
Important facts for investors to verify
- Progress, final terms and regulatory approvals for the SCANA transaction, including customer credits, V.C. Summer liabilities and assumed debt.
- Closing and proceeds from the Blue Racer and Fairless/Manchester divestitures and the timing of related gains.
- Atlantic Coast Pipeline and Supply Header cost revisions, permitting status, financing needs and in-service dates.
- Potential additional liability from the DETI FERC audit and the Virginia Power FERC investigation.
- Coal-ash closure obligations, environmental regulations and related rate-recovery mechanisms.
- Impact of lower regulated rates and customer credits resulting from the 2017 Tax Reform Act and Virginia legislation.
- Debt maturities, variable-rate exposure, Cove Point term-loan restrictions and continued access to revolving-credit capacity.
- Volatility in nuclear decommissioning trust investments, commodity prices, interest rates and weather-sensitive electricity and gas demand.