Dominion Energy, Inc. Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Dominion Energy, Inc. (formerly Dominion Resources), Virginia Electric and Power Company, and Dominion Energy Gas Holdings, LLC for the quarter and nine months ended September 30, 2017. Dominion operates regulated electric generation, transmission and distribution businesses; natural gas transmission, storage, distribution, gathering and processing businesses; merchant generation; LNG operations; and renewable energy projects.
The filing reflects the May 2017 corporate rebranding and includes the Dominion Energy Questar operations acquired in September 2016. Interim results are affected by weather, seasonality, fuel costs, rate adjustments and market conditions.
Key financial metrics
| Dominion Energy consolidated | Three months ended September 30, 2017 | Year-to-date 2017 |
|---|---|---|
| Operating revenue | $3,179 million | $9,376 million |
| Income from operations | $1,200 million | $3,126 million |
| Operating margin | 37.7% | 33.3% |
| Net income attributable to Dominion Energy | $665 million | $1,687 million |
| Net margin attributable to Dominion Energy | 20.9% | 18.0% |
| Diluted EPS | $1.03 | $2.66 |
| Dividends declared per common share | $0.7700 | $2.2800 |
Revenue increased 1% in the quarter and 8% year to date versus 2016. Net income attributable to Dominion Energy decreased 4% in the quarter but increased 1% year to date. Virginia Power reported net income of $459 million for the quarter and $1,133 million year to date. Dominion Energy Gas reported net income of $117 million for the quarter and $302 million year to date.
Cash flow, balance sheet, debt and liquidity
- Year-to-date operating cash flow was $3,664 million, compared with $3,386 million in 2016.
- Capital additions, including nuclear fuel, were $4,122 million; net cash used in investing activities was $4,873 million.
- Net cash provided by financing activities was $1,175 million, including $3,480 million of long-term debt issuance, $1,233 million of common-stock issuance and $1,435 million of common dividends.
- Cash and cash equivalents were $227 million at September 30, 2017, compared with $261 million at December 31, 2016.
- Total assets were $75.4 billion and total equity was $18.5 billion at September 30, 2017.
- Current liabilities included $2,788 million of securities due within one year and $3,060 million of short-term debt. Long-term debt was $30,886 million, including $3,980 million of junior subordinated notes and $1,377 million of remarketable subordinated notes.
- Dominion Energy had $5.5 billion of revolving credit facilities, $3.060 billion of commercial paper outstanding, $73 million of letters of credit outstanding and $2.367 billion of facility capacity available. The facilities mature in April 2020.
- Management stated that credit ratings were unchanged, there were no material debt-covenant changes or defaults, and the maximum debt-to-total-capital covenant reset to 65% in July 2017.
Material changes versus the prior comparable period
- Third-quarter consolidated earnings declined primarily because of lower renewable-energy investment tax credits, milder electric-utility weather and reduced Cove Point import-contract activity.
- Year-to-date earnings increased modestly because of the Questar acquisition, electric capacity benefits and the absence of 2016 organizational-design costs, partly offset by higher interest expense, milder weather and lower renewable tax credits.
- Gas Infrastructure earnings rose $52 million in the quarter and $130 million year to date, supported by Questar operations, shale-development-rights gains and transportation and storage growth projects.
- Power Generation earnings declined $281 million in the quarter and $196 million year to date, principally because of lower renewable-energy investment tax credits and weather-related effects.
- Power Delivery earnings decreased $1 million in the quarter but increased $27 million year to date.
- Depreciation, depletion and amortization increased to $485 million in the quarter and $1,421 million year to date, reflecting acquired operations and projects placed in service.
- Interest and related charges increased to $305 million in the quarter and $905 million year to date, primarily because of debt issued in 2016 and 2017 and debt assumed or incurred in connection with the Questar acquisition.
Guidance, outlook, management commentary and unusual items
- The filing does not provide a clear consolidated earnings-per-share or revenue guidance range for full-year 2017.
- Dominion expects continued investment in regulated infrastructure, solar projects, transmission, gas transportation and storage projects, and the Cove Point Liquefaction Project.
- In October 2017, Dominion agreed to sell certain nonregulated retail energy-marketing assets for $143 million. It expected to recognize approximately $78 million pretax of benefit in the fourth quarter of 2017 and approximately $65 million in 2018, subject to closing conditions.
- Dominion Energy Gas recognized a $56 million pretax gain in the third quarter from finalizing matters related to the conveyance of Marcellus Shale development rights. Additional gains of approximately $9 million and $65 million were expected in the fourth quarter of 2017 and third quarter of 2018, respectively.
- Virginia Power sold its electric-transmission-tower rental portfolio for $91 million. It recognized $10 million of other income year to date, with the remaining $36 million expected to be recognized ratably through 2023; half of the proceeds must be returned to customers under the applicable tariff.
- Virginia Power recognized a $16 million pretax charge in the second quarter related to a customer settlement. Dominion Energy Gas recognized a $15 million pretax write-off of a regulatory asset that was no longer considered probable of recovery.
- FERC audit staff identified preliminary matters involving Dominion Energy Transmission, Inc. that could result in material adjustments. A $15 million charge was recorded for one matter, while the potential impact of other recommendations could not be estimated.
- Virginia Power recorded a $223 million contingent liability related to the unresolved PJM transmission cost-allocation settlement, offset by a $215 million regulatory asset expected to be recovered through Virginia retail rates.
- Significant projects and contingencies include Atlantic Coast Pipeline, Cove Point Liquefaction, coal-ash closure obligations, environmental compliance, pending FERC and state regulatory proceedings, and litigation involving pipeline contractors, gas producers and wholesale-market conduct.
- Potentially material risks include weather and natural disasters, commodity and interest-rate volatility, environmental and climate regulation, nuclear operations, regulatory recovery, credit and counterparty risk, capital-market access, project execution, litigation, cybersecurity and changes in energy demand or technology.
Most important facts for an investor to verify
- Whether the expected 2017 and 2018 gains from retail-energy asset sales and shale-development-rights transactions are realized on schedule.
- The final financial impact of the DETI FERC audit and the PJM transmission cost-allocation proceeding.
- Progress, costs, approvals and in-service timing for Atlantic Coast Pipeline, Cove Point Liquefaction, solar projects and major transmission projects.
- The ultimate cost and regulatory treatment of coal-ash closure, wastewater, ozone, methane and other environmental requirements.
- The sustainability of operating cash flow relative to capital expenditures, dividends and debt maturities.
- Exposure to higher interest rates, commodity prices, credit-rating changes and refinancing needs given the company’s debt and derivative positions.
- The effect of weather normalization and reduced renewable tax credits on future Power Delivery and Power Generation earnings.
- Potential early-retirement risk for the Millstone nuclear facility and any resulting impairment, decommissioning or regulatory-recovery consequences.