Dominion Energy, Inc. — 2Q 2017 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 for the three and six months ended June 30, 2017. Dominion Energy operates regulated electric and natural gas businesses, merchant generation, gas transmission and storage, gas distribution, LNG infrastructure and renewable energy projects. The filing reflects the September 2016 acquisition of Dominion Energy Questar for the first full comparable reporting period in 2017.
Key financial metrics
| Dominion Energy consolidated | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $2,813 million | $2,598 million | $6,197 million | $5,519 million |
| Income from operations | $801 million | $781 million | $1,926 million | $1,663 million |
| Net income attributable to Dominion Energy | $390 million | $452 million | $1,022 million | $976 million |
| Diluted EPS | $0.62 | $0.73 | $1.63 | $1.61 |
| Operating margin | 28.5% | 30.1% | 31.1% | 30.1% |
| Net margin | 13.9% | 17.4% | 16.5% | 17.7% |
| Dividends declared per share | $0.7550 | $0.7000 | $1.5100 | $1.4000 |
- Operating cash flow for the six months was $2,352 million, compared with $2,018 million in 2016.
- Capital expenditures, including nuclear fuel, were $2,748 million, resulting in free cash flow before financing of approximately negative $396 million.
- Cash and cash equivalents were $260 million at June 30, 2017, versus $261 million at December 31, 2016.
- Total liabilities were $56.7 billion and total equity was $17.2 billion at June 30, 2017.
- Debt consisted of $2.8 billion of short-term debt, $4.1 billion of securities due within one year, $24.8 billion of long-term debt, $4.0 billion of junior subordinated notes and $1.4 billion of remarketable subordinated notes.
- Dominion Energy reported $2.6 billion of available capacity under joint revolving credit facilities with $2.8 billion of commercial paper and $72 million of letters of credit outstanding.
- Virginia Power generated six-month net income of $674 million, up from $543 million; Dominion Energy Gas generated $185 million, down from $203 million.
Material changes versus the prior comparable period
- Second-quarter net income attributable to Dominion Energy declined 14%, primarily because of unfavorable merchant-generation pricing, higher interest expense, lower Cove Point import-contract results and the absence of prior gains from shale-development-rights transactions.
- Six-month net income increased 5%, principally due to the Questar acquisition, electric-capacity benefits and the absence of 2016 organizational-design costs. These benefits were partly offset by higher interest expense, lower renewable-energy investment tax credits, weaker merchant-generation pricing and the absence of shale-rights gains.
- Revenue increased 8% in the quarter and 12% year to date. The Questar acquisition contributed approximately $204 million of second-quarter net revenue and $502 million year to date.
- Interest and related charges increased 29% in both the quarter and year-to-date period, reflecting debt issued in 2016 and 2017 and debt acquired in the Questar transaction.
- Depreciation, depletion and amortization increased 29% in the quarter and 31% year to date, primarily from Questar and growth projects placed into service.
- Power Delivery earnings increased $23 million in the quarter and $28 million year to date. Power Generation earnings increased $69 million and $85 million, respectively. Gas Infrastructure earnings increased $1 million in the quarter and $78 million year to date before the effects of corporate and other items.
- The company recorded a $15 million pre-tax charge to write off a regulatory asset at Dominion Energy Transmission that was no longer considered probable of recovery.
- Virginia Power recorded a $16 million pre-tax allowance increase related to a proposed customer settlement and received an $11 million interest benefit from settling state income-tax refund claims.
- Virginia Power revised depreciation rates, increasing six-month depreciation expense by $22 million and expected annual expense by approximately $40 million. Dominion Energy revised merchant-generation asset lives, reducing six-month depreciation by $13 million and expected annual expense by approximately $26 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Management states that operations are expected to provide a stable source of cash flow to fund planned capital expenditures and maintain or grow the common dividend, but results remain subject to seasonal and market factors.
- Dominion Energy is developing two 6 MW offshore wind turbines in Virginia, with estimated project cost of approximately $300 million and installation expected by the end of 2020.
- The Supply Header gas pipeline project is expected to enter service in late 2019 and cost approximately $550 million to $600 million, excluding financing costs.
- Virginia Power proposed approximately $1.6 billion of Virginia jurisdictional fuel expense recovery for the rate year beginning July 1, 2017; the Virginia Commission approved the proposed fuel rate.
- Virginia Power recorded a $215 million contingent liability related to the PJM transmission-cost-allocation matter, substantially offset by a $207 million regulatory asset expected to be recovered through retail rates.
- A FERC audit of Dominion Energy Transmission identified preliminary recommendations that could materially affect results, although the company could not estimate the potential impact beyond the recorded $15 million regulatory-asset write-off.
- Material exposure areas include regulatory and environmental compliance, coal-ash closure obligations, climate and emissions regulation, nuclear operations, pipeline and plant safety, commodity prices, weather, interest rates, credit risk, litigation and access to capital markets.
- Virginia Power faces continuing proceedings involving coal-ash facilities, PJM transmission rates, market offers under FERC review, and environmental permits. Certain matters could materially affect financial condition or cash flows, although amounts cannot currently be estimated.
- The company’s maximum exposure under subsidiary guarantees was $5.7 billion at June 30, 2017, excluding a corporate-office construction guarantee. Issued guarantees included $1.9 billion for commodity transactions, $1.9 billion for Cove Point and $1.1 billion for solar projects.
- Beginning July 1, 2017, Dominion Energy’s maximum debt-to-total-capital ratio under its credit agreements reverted from the temporary 70% limit to 65%. Management reported no material covenant changes or defaults.
Most important facts for investors to verify
- Whether the Questar acquisition’s contribution and associated debt costs support sustainable earnings growth after acquisition-related comparisons normalize.
- Whether merchant-generation pricing, Cove Point contract changes and renewable-energy tax credits create further pressure on earnings.
- The final outcome and recoverability of the FERC audit items and the $215 million PJM transmission liability.
- Capital spending requirements and funding needs for solar, offshore wind, pipeline, LNG and transmission projects relative to operating cash flow.
- Coal-ash remediation costs, environmental obligations and other legal contingencies that the filing states cannot yet be estimated.
- Liquidity after securities due within one year, commercial-paper borrowings, dividend payments and planned capital expenditures.
- Future rate decisions and recovery of regulatory assets, including $2.8 billion of Dominion Energy regulatory assets and $2.9 billion of regulatory liabilities at June 30, 2017.