Dominion Energy, Inc. — Q2 2018 Form 10-Q Summary
Business Context and Reporting Period
Combined quarterly filing for Dominion Energy, Inc., Virginia Electric and Power Company, and Dominion Energy Gas Holdings, LLC, covering the three and six months ended June 30, 2018. Dominion operates regulated electric generation, transmission and distribution, gas transmission, storage and distribution, merchant generation, LNG, and related energy businesses. The financial statements are unaudited.
Key Financial Metrics
| Dominion Energy consolidated | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $3,088 million | $2,813 million | $6,554 million | $6,197 million |
| Net income attributable to Dominion | $449 million | $390 million | $952 million | $1,022 million |
| Diluted EPS | $0.69 | $0.62 | $1.46 | $1.63 |
| Income from operations | $742 million | $753 million | $1,617 million | $1,832 million |
| Net margin | 14.5% | 13.9% | 14.5% | 16.5% |
| Operating margin | 24.0% | 26.8% | 24.7% | 29.6% |
| Dividends declared per share | $0.8350 | $0.7550 | $1.670 | $1.510 |
Second-quarter earnings increased 15%, while year-to-date earnings declined 7%. Revenue increased 10% in the quarter and 6% year to date, but operating expenses rose faster than revenue, reducing operating margins.
- Net cash provided by operating activities was $2,425 million versus $2,360 million in the first six months of 2017.
- Capital expenditures and other property additions were $2,046 million, compared with $2,748 million in the prior-year period.
- Net cash used in investing activities was $2,236 million; financing activities used $20 million.
- Cash, restricted cash and equivalents ended at $354 million, compared with $324 million at June 30, 2017.
- At June 30, 2018, total liabilities were $58,039 million, including $32,115 million of long-term debt and $5,695 million of securities due within one year and short-term debt.
- The $6.0 billion joint revolving credit facility had $3,185 million of capacity available after $2,743 million of commercial paper and $72 million of letters of credit.
- Dominion Energy had $78,075 million of total assets and $20,036 million of total equity at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- The Cove Point Liquefaction Project commenced commercial operations in April 2018, contributing approximately $143 million to second-quarter net revenue and increasing Gas Infrastructure earnings.
- Second-quarter earnings benefited from higher nuclear decommissioning trust investment earnings, favorable merchant-generation pricing, fewer planned outage days, warmer weather, and a $36 million after-tax benefit from retroactively applying lower depreciation rates to regulated nuclear plants.
- Year-to-date earnings were reduced by a $160 million after-tax charge for one-time customer rate credits required by Virginia legislation, an $89 million after-tax FERC-regulated plant disallowance charge, and a $60 million after-tax charge associated primarily with future ash pond and landfill closure costs.
- Dominion issued common stock for approximately $662 million during the first six months, including $495 million from January at-the-market issuances. It also entered into forward sale agreements covering approximately 22.1 million shares, with estimated physical-settlement proceeds of approximately $1.5 billion.
- Interest expense increased because of new debt, higher commercial paper balances and rates, and the cessation of capitalized interest following completion of the Liquefaction Project.
- The federal statutory tax rate declined to 21% under the 2017 Tax Reform Act. Dominion’s six-month effective tax rate was 18.1%, versus 27.5% in 2017.
- Virginia Power’s six-month net income fell to $523 million from $674 million, while Dominion Energy Gas’ net income was $181 million versus $185 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear consolidated EPS or revenue guidance range.
- Dominion targeted closing the proposed SCANA acquisition by the end of 2018, subject to shareholder, FERC, state commission, NRC and other approvals. The transaction involves issuing 0.6690 Dominion shares per SCANA share, providing an approximately $1.3 billion upfront customer rate credit, and assuming approximately $7.0 billion of SCANA debt. Termination fees may reach $280 million for Dominion or $240 million for SCANA under specified circumstances.
- Dominion announced plans to pursue up to $3 billion of Cove Point debt financing in the third quarter to repay parent-level debt and was evaluating divestitures, potentially including its Blue Racer interest.
- Dominion expects to contribute approximately $12 million to other postretirement benefit plans through VEBAs during the remainder of 2018.
- Significant exposures include regulatory recovery and rate proceedings, the FERC audit of DETI, environmental compliance and coal ash closure obligations, nuclear operations and spent-fuel costs, commodity and interest-rate volatility, weather, credit and liquidity risk, cybersecurity, litigation, and delays or cost increases on major projects.
- Virginia Power’s interim annual rate reduction was approximately $125 million beginning July 2018. Its proposed 2019–2021 grid-transformation plan included approximately $816 million of capital investment and $102 million of operating expenses, subject to approval.
- Management disclosed no material changes to previously reported risk factors, debt covenants, or controls. Disclosure controls and procedures were assessed as effective.
Most Important Facts for Investors to Verify
- Whether the SCANA transaction received all required approvals and closed on the targeted timetable, including the final customer-credit and cost-recovery terms.
- The ultimate financial impact and recoverability of the $129 million FERC plant disallowance charge and any remaining FERC audit findings.
- The final cost, regulatory treatment and cash requirements for coal ash, landfill closure and other environmental obligations.
- Cove Point’s sustained operating contribution, contract performance, start-up credits and planned debt-financing proceeds.
- Dominion’s post-quarter share issuance or settlement of the forward sale agreements and the resulting dilution.
- Available credit capacity, refinancing needs, debt maturities and compliance with the 67.5% total-debt-to-total-capital covenant.
- Regulatory effects of tax reform, Virginia rate credits, transmission proceedings and potential changes to natural-gas pipeline tax allowances.