Business Context and Reporting Period
Dominion Energy, Inc. filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2019, together with Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC. Dominion Energy operates regulated electric generation, transmission and distribution businesses, natural-gas transmission, storage, distribution and gathering operations, LNG infrastructure, merchant generation and renewable projects. The SCANA Combination closed January 1, 2019 and materially expanded the consolidated business.
Key Financial Metrics
| Dominion Energy consolidated | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Operating revenue | $3,970 million | $3,088 million | $7,828 million | $6,554 million |
| Income from operations | $461 million | $742 million | $(21) million | $1,617 million |
| Net income attributable to Dominion Energy | $54 million | $449 million | $(626) million | $952 million |
| Diluted EPS | $0.05 | $0.69 | $(0.78) | $1.46 |
| Net cash from operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $2,313 million | $2,425 million |
Second-quarter operating margin was approximately 11.6%, compared with 24.0% in the prior-year quarter. The six-month operating margin was approximately negative 0.3%, compared with 24.7% in 2018. Second-quarter net margin was approximately 1.4%, compared with 14.5%; the six-month net margin was approximately negative 8.0%, compared with 14.5%.
- June 30, 2019 cash and cash equivalents were $382 million; cash, restricted cash and equivalents used in the cash-flow statement totaled $560 million.
- Six-month investing cash flow was $(1,833) million, including $2,112 million of plant construction and other property additions and $152 million for solar development projects.
- Six-month financing cash flow was $(311) million. The company paid $1,469 million of common dividends, issued $1,582 million of 2019 Equity Units and repaid $3,378 million of long-term debt.
- At June 30, 2019, Dominion Energy had $31,853 million of long-term debt, $4,795 million of junior subordinated notes, $2,547 million of short-term debt and $2,364 million of securities due within one year. Total liabilities were $72,441 million and total equity was $28,381 million.
- The $6.0 billion joint revolving credit facility had $3,383 million of capacity available after $2,526 million of commercial paper and $91 million of letters of credit. The facility matures in March 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased 29% in the second quarter and 19% year to date, primarily from the SCANA Combination, higher rate-adjustment-clause revenue and the Cove Point Liquefaction Facility.
- Second-quarter net income declined $395 million, while year-to-date net income declined $1.578 billion, reflecting substantial acquisition-related, regulatory, retirement, impairment and litigation charges.
- The SCANA Combination added $909 million of second-quarter revenue and $1.1 billion of six-month revenue, but reduced Dominion Energy attributable net income by $102 million and $1.2 billion, respectively, after significant charges and customer-refund obligations.
- Operating expenses increased materially, including other operations and maintenance expense of $1,283 million for the quarter versus $873 million in 2018 and impairment and other charges of $312 million versus $134 million.
- Dominion Energy completed the acquisition of the public interest in Dominion Energy Midstream in January 2019, issued 95.6 million common shares for SCANA and issued approximately $1.6 billion of 2019 Equity Units.
- Virginia Power net income decreased to $100 million in the quarter and $120 million year to date, from $339 million and $523 million, respectively. Dominion Energy Gas earned $47 million in the quarter and $163 million year to date, compared with $15 million and $181 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear consolidated earnings guidance range. Management states that interim results are affected by seasonality and that operating cash flow is expected to support capital expenditures and dividends, subject to operational, regulatory and market risks.
- SCANA/NND Project: Dominion Energy recorded a $1.0 billion revenue reduction and regulatory liability for refunds of amounts previously collected from DESC customers. The SCANA approval order requires approximately $2.0 billion of refunds and restitution over 20 years, with related regulatory assets and liabilities collected or refunded over extended periods.
- Unusual charges: The voluntary retirement program generated a $423 million Dominion Energy charge, including $316 million after tax. Other significant items included early generation retirements, automated-meter infrastructure retirement, a non-utility generator contract termination, project abandonment and acquired SCANA litigation charges.
- Atlantic Coast Pipeline: Dominion Energy owns 48%. Estimated project cost increased to $7.0 billion-$7.5 billion excluding financing costs, with key segments expected in service in late 2020 or early 2021. If judicial issues persist, full service could extend to the end of 2021 and estimated cost could reach $7.25 billion-$7.75 billion. Delays could lead to additional costs, suspended AFUDC or impairment charges.
- Regulatory and environmental exposure: Material uncertainty remains around coal-combustion-residual closure costs, carbon and greenhouse-gas rules, environmental compliance, FERC matters, PJM market obligations, nuclear decommissioning and spent-fuel costs.
- Legal and tax contingencies: The filing identifies ongoing SCANA-related class actions, shareholder litigation, governmental investigations, a proposed South Carolina sales-and-use-tax assessment of approximately $410 million and other matters for which potential losses may be material or cannot yet be estimated.
- Capital structure and market risk: Interest-rate, commodity-price, investment-portfolio and credit risks remain significant. Dominion Energy reported $5.8 billion of interest-rate-derivative notional amounts and $166 million of gross energy-marketing credit exposure at June 30, 2019.
- Accounting change: The companies adopted the new lease standard on January 1, 2019, recording $504 million of operating lease right-of-use assets and liabilities at Dominion Energy.
Investor Verification Checklist
- Verify the final purchase-price allocation, goodwill and tax positions from the SCANA Combination, which remained subject to measurement-period adjustments.
- Assess the recurring earnings impact of SCANA operations separately from the $1.0 billion NND refund charge, litigation costs and other acquisition-related items.
- Review the sustainability and regulatory recovery of the large regulatory-asset balance, including $8.3 billion of Dominion Energy regulatory assets and $11.3 billion of regulatory liabilities at June 30, 2019.
- Monitor Atlantic Coast Pipeline permitting, litigation, cost estimates, ownership funding and potential impairment exposure.
- Evaluate debt maturities, short-term borrowings, credit-facility availability, dividend capacity and the settlement obligations associated with the 2019 Equity Units.
- Review pending SCANA litigation, the South Carolina tax assessment, environmental obligations and coal-ash closure estimates for changes in reserves or cash requirements.
- Confirm that management’s conclusion that disclosure controls were effective and that no material risk-factor changes occurred remains consistent with subsequent filings.