Dominion Energy, Inc. 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Combined quarterly report for Dominion Energy, Inc., Virginia Electric and Power Company, and Dominion Energy Gas Holdings, LLC, covering the three months ended March 31, 2019. Dominion Energy operates regulated electric and natural gas businesses, merchant generation, LNG infrastructure, pipelines, storage, and related energy services. The SCANA Combination closed in January 2019 and added regulated electric and gas operations in South Carolina and North Carolina.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $3.858 billion | $3.466 billion | +$392 million |
| Income from operations | $(482) million | $875 million | $(1.357) billion |
| Net income attributable to Dominion Energy | $(680) million | $503 million | $(1.183) billion |
| Diluted EPS | $(0.86) | $0.77 | $(1.63) |
| Net cash provided by operating activities | $1.171 billion | $1.232 billion | $(61) million |
| Capital expenditures and other property additions | $1.002 billion | $1.103 billion | $(101) million |
- Operating margin was approximately negative 12.5% in Q1 2019 versus approximately 25.2% in Q1 2018. Net margin was approximately negative 17.6% versus 14.5%.
- Other income increased to $388 million from $100 million, primarily because of higher nuclear decommissioning trust investment gains.
- Interest and related charges increased to $469 million from $314 million, reflecting debt acquired in the SCANA Combination and other financing effects.
- Cash, restricted cash, and equivalents totaled $627 million at March 31, 2019, compared with $391 million at December 31, 2018.
- Total debt, including current securities, long-term debt, junior subordinated notes, and remarketable subordinated notes, was approximately $42.3 billion at March 31, 2019, versus approximately $34.8 billion at year-end 2018.
- Dominion Energy had $3.517 billion of capacity available under its $6.0 billion joint revolving credit facility. Commercial paper outstanding was $2.393 billion and letters of credit were $90 million.
- Common stock outstanding increased to approximately 802 million shares from 681 million at year-end 2018, principally due to shares issued for the SCANA Combination and the Dominion Energy Midstream transaction.
Material Changes Versus the Prior Comparable Period
- Revenue increased with the addition of SCANA operations and the commencement of commercial operations at the Cove Point Liquefaction Facility, but was reduced by a $1.0 billion customer-refund charge related to the abandoned V.C. Summer nuclear project.
- Impairment of assets and other charges increased to $835 million from $1 million. Major items included $369 million for early retirement of electric generating units, $160 million for retiring automated meter-reading infrastructure, $169 million for a DESC ratepayer class-action settlement, and $105 million for SCANA-acquired property for which recovery was waived.
- Dominion Energy recorded a $198 million tax charge related to SCANA-acquired regulatory assets that it committed not to recover.
- Operating cash flow declined modestly despite the SCANA acquisition and higher noncash charges. Financing cash flow changed from a $100 million inflow to a $383 million outflow, reflecting debt repayments, dividends, and other financing activity.
- Virginia Power net income declined to $20 million from $184 million, primarily due to generation and meter infrastructure retirement charges. Dominion Energy Gas net income declined to $116 million from $166 million, primarily because Q1 2018 included $44 million of gains from shale-development-rights transactions.
- Dominion Energy Gas benefited from Cove Point export contracts, which increased its contribution by approximately $112 million after tax, but this was offset in part by higher interest expense and the absence of prior-year asset-sale gains.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a clear consolidated earnings guidance range for 2019. Management states that interim results are seasonal and not necessarily indicative of full-year results.
- The SCANA Combination requires DESC to provide approximately $2.0 billion of refunds and restitution over 20 years. Dominion Energy also committed to forgo recovery of certain V.C. Summer-related assets and income-tax regulatory assets.
- Atlantic Coast Pipeline cost estimates increased to $7.0 billion-$7.5 billion, excluding financing costs, from $6.0 billion-$6.5 billion. Key segments were expected in service in late 2020, with the remainder potentially extending into early 2021; full completion could extend to the end of 2021 and cost $7.25 billion-$7.75 billion if judicial issues persist.
- Dominion Energy guarantees 48% of Atlantic Coast Pipeline borrowings. The pipeline had borrowed $1.6 billion at March 31, 2019, implying potential exposure of approximately $768 million before considering collateral and other factors.
- Virginia Power recorded a $2.4 billion asset-retirement obligation related to coal-combustion-residual ash pond and landfill closure requirements. Actual costs may differ substantially from current estimates, although Virginia legislation provides a rate-recovery mechanism subject to limitations.
- DESC faces a proposed South Carolina sales-and-use tax assessment of approximately $410 million, excluding interest, related to the V.C. Summer project. DESC has protested the assessment and recorded a $20 million liability.
- Several SCANA-related ratepayer, shareholder, securities, merger, employment, and regulatory matters remain pending. The filing states that some could materially affect results, liquidity, financial condition, or cash flows, but loss amounts cannot currently be estimated.
- Other principal risks include regulatory and environmental changes, nuclear operations, commodity and interest-rate volatility, PJM obligations, litigation, construction delays, credit and counterparty risk, cybersecurity, weather, and access to capital markets.
- The Companies adopted the new lease accounting standard on January 1, 2019, recording operating lease right-of-use assets and liabilities of $504 million at Dominion Energy, $209 million at Virginia Power, and $64 million at Dominion Energy Gas.
Important Facts for Investors to Verify
- Underlying recurring earnings excluding the substantial SCANA-related refunds, asset impairments, retirement charges, tax charges, and litigation settlement costs.
- The final purchase-price allocation for SCANA, including potential changes to goodwill, regulatory assets, tax amounts, and acquired liabilities.
- Progress, permitting, cost, financing, and in-service timing for Atlantic Coast Pipeline.
- Regulatory treatment and recovery of V.C. Summer costs, customer refunds, coal-ash closure costs, and other large regulatory assets.
- Resolution and potential exposure from SCANA-related litigation, the proposed $410 million tax assessment, and outstanding construction liens or claims related to the abandoned nuclear project.
- Debt maturities, refinancing requirements, credit ratings, available revolver capacity, and the effect of the SCANA acquisition on leverage and interest expense.
- Whether nuclear decommissioning trust investment gains, weather conditions, and seasonal demand materially affect reported full-year earnings.
- The filing states that disclosure controls were effective and that there were no material changes to previously disclosed risk factors or debt covenants.