Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc. (now known as Dominion Energy, Inc.), Virginia Electric and Power Company, and Dominion Gas Holdings, LLC for the fiscal year ended December 31, 2016. Dominion is an integrated U.S. electricity and natural-gas company with approximately 26,400 MW of generating capacity, 14,900 miles of gas transmission, gathering and storage pipelines, 51,300 miles of gas distribution pipeline, and more than 6 million utility and retail energy customers.
Dominion completed the $4.4 billion acquisition of Dominion Questar in September 2016, adding regulated gas distribution, gas production, and Rocky Mountain pipeline and storage operations. The principal operating segments are regulated electric distribution, generation, and gas-related energy infrastructure.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $11.737 billion | $11.683 billion | +0.5% |
| Income from operations | $3.627 billion | $3.536 billion | +2.6% |
| Net income attributable to Dominion | $2.123 billion | $1.899 billion | +11.8% |
| Diluted EPS | $3.44 | $3.20 | +7.5% |
| Net margin | 18.1% | 16.2% | Improved |
| Operating margin | 30.9% | 30.3% | Improved |
| Cash flow from operations | $4.127 billion | $4.475 billion | -7.8% |
| Capital expenditures | Approximately $6.1 billion | Approximately $5.6 billion | Higher |
| Total assets | $71.610 billion | $58.648 billion | +22.1% |
| Long-term debt | $30.231 billion | $23.468 billion | +28.8% |
| Cash and cash equivalents | $261 million | $607 million | Lower |
- Net revenue increased 10%, primarily from electric utility operations, higher rate-adjustment-clause revenue, the PJM capacity-performance market, and the Questar acquisition.
- Income tax expense decreased to $655 million from $905 million, primarily because of higher renewable-energy investment tax credits and a state legislative change. The reported 2016 effective tax rate was 22.9%, compared with 32.0% in 2015.
- Other operations and maintenance expense rose 18% to $3.064 billion, reflecting Questar transaction and transition costs, ash pond and landfill closure charges, organizational-design costs, and higher storm-restoration expenses.
- Net cash used in investing activities increased to $10.703 billion, including $4.381 billion for Dominion Questar and $6.085 billion for plant construction and other property additions.
- Net cash provided by financing activities was $6.230 billion, supported by debt and equity issuance used in part to finance the Questar acquisition and capital program.
- Dominion had $5.5 billion of revolving credit facilities, $3.155 billion of commercial paper outstanding, $85 million of letters of credit outstanding, and $2.260 billion of available facility capacity at year-end.
- Dominion's debt-to-total-capital ratio under its credit agreements was 61%, below the temporarily permitted maximum of 70%. No debt-covenant defaults were reported.
- Dividends declared increased to $2.80 per common share from $2.59. The board established a 2017 annual dividend rate of $3.02 per share, a 7.9% increase.
Material Changes Versus the Prior Comparable Period
- Dominion Generation net income increased to $1.397 billion from $1.120 billion, primarily from renewable-energy investment tax credits, improved electric-capacity revenue, and rate-adjustment-clause returns. Merchant-generation margins and share dilution were adverse factors.
- Dominion Energy net income increased to $726 million from $680 million, including $78 million of after-tax contribution from the Questar acquisition. This was partly offset by lower shale-development-right gains and weaker natural-gas transmission, NGL, and distribution results.
- DVP net income decreased modestly to $484 million from $490 million. Higher FERC transmission returns were more than offset by storm damage, service-restoration costs, higher depreciation, and other expenses.
- Dominion Gas net income declined to $392 million from $457 million. The primary driver was a reduction in gains from shale-development-right conveyances, together with lower NGL prices and volumes.
- Total assets increased substantially because of the Questar acquisition, increased property, plant and equipment, and $3.105 billion of goodwill recorded from the acquisition.
- Share count increased to approximately 628 million at year-end from 596 million, reflecting equity issuance, including shares issued under equity-unit purchase contracts and a $756 million public offering.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected 2017 net income per share to remain substantially consistent with 2016. Positive factors included a full year of Questar operations, lower ash-pond closure charges, approximately 1% weather-normalized electric-sales growth, and growth projects entering service. Offsetting factors included lower power prices, an additional Millstone refueling outage, declining Cove Point import-contract revenue, higher depreciation, a higher effective tax rate, and share dilution. Management expected 2018 earnings per share to benefit from a full year of the Cove Point Liquefaction Project.
- Dominion planned capital expenditures of approximately $5.8 billion in 2017, $5.0 billion in 2018, and $5.2 billion in 2019. The broader capital program includes Greensville County, Cove Point liquefaction, Atlantic Coast Pipeline, electric transmission and distribution, and gas infrastructure.
- The 2016 results included a $122 million after-tax charge for future ash pond and landfill closure costs. Dominion also recorded a $65 million pre-tax organizational-design charge and $74 million of Questar transaction and transition costs in operating and interest expenses.
- Coal ash closure and groundwater-remediation requirements remain uncertain and could materially exceed current estimates. Dominion recorded a $238 million increase in Virginia Power's ash-related asset-retirement obligation in 2016.
- The Clean Power Plan was stayed by the U.S. Supreme Court, and the potential financial effect of future greenhouse-gas requirements could not be estimated. Other environmental rules could require additional controls, capital spending, or plant retirements.
- Major project execution risks include permitting, litigation, cost overruns, construction delays, contractor performance, land acquisition, counterparty credit, and financing availability. Atlantic Coast Pipeline and Cove Point remain subject to regulatory and litigation risk.
- Virginia Power faces regulatory uncertainty regarding rate-adjustment clauses, FERC transmission cost allocation, coal-unit retirements, North Anna Unit 3, and a non-public FERC investigation into combustion-turbine offers in PJM markets.
- Other significant exposures include nuclear operations and decommissioning, spent-fuel disposal, commodity and power-price volatility, pension funding, cybersecurity, severe weather, pipeline integrity, labor negotiations, and counterparty performance.
- Dominion reported approximately $61.747 billion of future contractual cash payments, including $32.192 billion of debt principal and $20.186 billion of interest, based on stated maturities and contractual assumptions.
Most Important Facts for Investors to Verify
- Whether Questar integration delivers the expected earnings contribution without further material transaction, transition, or regulatory costs.
- Progress, final cost, financing, regulatory approvals, and commercial start date for Cove Point liquefaction, Atlantic Coast Pipeline, Greensville County, and other major projects.
- The ultimate cost and timing of coal ash pond and landfill closure, groundwater remediation, and related litigation.
- Dominion's ability to fund its high capital program while maintaining investment-grade credit ratings, dividend growth, and debt metrics.
- The sustainability of 2016 earnings growth given the unusually large renewable-energy tax credits and PJM capacity-performance benefit.
- Potential effects of power prices, natural-gas and NGL prices, weather, merchant-generation outages, and changes in regulated rates.
- Pending FERC, state commission, environmental, nuclear, pipeline, labor, and legal matters for which the filing states that a reliable range of loss or financial impact cannot currently be estimated.