Dominion Energy, Inc. 2018 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC for the year ended December 31, 2018. Dominion Energy operates regulated electric and natural gas utilities, power generation, gas transmission and storage, LNG infrastructure and selected merchant and energy-marketing businesses. At year-end, it served more than 5 million customers and owned approximately 26,000 MW of generating capacity, 14,800 miles of gas transmission, gathering and storage pipelines and 52,300 miles of gas distribution pipeline.
The filing predates the January 2019 completion of the $13.4 billion SCANA stock-for-stock combination. SCANA therefore was not included in 2018 consolidated results, but its acquisition materially affects 2019 outlook, leverage, litigation exposure and reported earnings.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $13.366 billion | $12.586 billion | +6% |
| Income from operations | $3.601 billion | $3.937 billion | -9% |
| Net income attributable to Dominion Energy | $2.447 billion | $2.999 billion | -18% |
| Diluted EPS | $3.74 | $4.72 | -$0.98 |
| Operating margin | Approximately 26.9% | Approximately 31.3% | Down |
| Net margin | Approximately 18.3% | Approximately 23.8% | Down |
| Cash flow from operations | $4.773 billion | $4.502 billion | +$271 million |
| Capital expenditures and property additions | $4.254 billion | $5.504 billion | -$1.250 billion |
| Total assets | $77.914 billion | $76.585 billion | +$1.329 billion |
| Total long-term debt | $31.144 billion | $30.948 billion | +$196 million |
Cash, restricted cash and equivalents increased to $391 million from $185 million. Dominion Energy had $5.588 billion of available capacity under its $6.0 billion revolving credit facility, against $324 million of commercial paper and $88 million of letters of credit. The reported debt-to-total-capital ratio under the credit agreement was 53.4%, versus a 67.5% maximum.
Dividends declared increased to $3.340 per share from $3.035. Management established a 2019 annual dividend rate of $3.67 per share, a 10% increase from 2018. Credit ratings from Fitch, Moody’s and Standard & Poor’s were investment grade with stable outlooks as of February 2019.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the first full-year contribution from the Cove Point Liquefaction Project, favorable weather, improved merchant-generation pricing, growth projects and higher Atlantic Coast Pipeline service revenue.
- Profit declined because 2017 included an $851 million tax benefit from deferred-tax remeasurement under the 2017 Tax Reform Act. Other 2018 pressures included a $219 million impairment of gathering and processing assets, a $135 million charge for disallowed FERC-regulated plant, a $215 million Virginia rate-credit charge, higher storm costs, ash-pond and landfill obligations, lower investment earnings and reduced renewable-energy tax credits.
- Offsetting 2018 benefits included a $546 million gain on the sale of Dominion Energy’s Blue Racer interest, a $210 million gain on the sale of Fairless and Manchester, a $87 million gain on the sale of a hydroelectric investment and the absence of 2017 wind-investment charges.
- Segment net income increased in Power Delivery to $587 million from $531 million, Power Generation to $1.254 billion from $1.181 billion and Gas Infrastructure to $1.214 billion from $898 million. Corporate and Other shifted to a $608 million loss from $389 million of income, primarily because of the absence of 2017 tax benefits and other unusual items.
- Dominion Energy issued approximately 36 million common shares and received $2.5 billion of proceeds in 2018. It did not repurchase shares other than employee shares tendered for tax withholding.
Guidance, outlook, risks and unusual items
Management expected 2019 earnings per share to decline from 2018. Expected headwinds included SCANA customer refunds and transaction costs, the absence of 2018 asset-sale gains, an automated-meter-reading retirement charge, normalized weather, higher pension expense and share dilution. Offsetting benefits were expected from the full-year operation of Cove Point Liquefaction, inclusion of SCANA operations, growth projects and the absence of certain 2018 impairments and Virginia charges.
- The SCANA transaction requires approximately $2.0 billion of customer refunds and restitution over 20 years, excludes $2.4 billion of abandoned nuclear-project costs and $180 million of Columbia Energy Center costs from rate recovery, and carries significant legal, regulatory and integration risks.
- Dominion Energy expected a first-quarter 2019 after-tax charge of approximately $756 million related to SCANA customer refunds, plus approximately $135 million after tax for a ratepayer settlement and additional charges for assets and regulatory assets not expected to be recovered.
- Atlantic Coast Pipeline cost estimates increased to $7.0 billion to $7.5 billion, excluding financing costs, from $6.0 billion to $6.5 billion. Key segments were expected in late 2020, with full service potentially extending into late 2021 and costs potentially reaching $7.25 billion to $7.75 billion.
- Planned capital expenditures were approximately $6.3 billion in 2019, $7.3 billion in 2020 and $6.9 billion in 2021. Funding was expected from operating cash flow, debt and equity issuance.
- Major ongoing risks include regulatory rate reductions or disallowances, environmental and coal-ash compliance, nuclear operations and decommissioning, severe weather, commodity and merchant-generation volatility, counterparty risk, cybersecurity, pension funding, capital-market access and project delays.
- Dominion Energy guaranteed 48% of Atlantic Coast Pipeline borrowings. Atlantic Coast Pipeline had borrowed $1.4 billion at December 31, 2018 and an additional $113 million in January and February 2019.
- The filing reports a $3.0 billion Cove Point term loan, $35.109 billion of total debt principal before certain adjustments and $64.565 billion of total contractual cash payments, including debt, interest, leases and purchase obligations.
Most important facts for an investor to verify
- Reconcile 2018 GAAP earnings with recurring operating earnings, particularly the Blue Racer and merchant-generation sale gains, impairment charges, Virginia rate credits, tax effects and investment losses.
- Review the final purchase-price allocation, goodwill, debt, customer-refund obligations and litigation exposure recorded after the SCANA combination.
- Assess Atlantic Coast Pipeline’s final permits, construction schedule, total cost, financing and Dominion Energy’s guarantee exposure.
- Evaluate 2019 liquidity, debt maturities, expected equity issuance, dividend coverage and the effect of SCANA debt and capital requirements on credit metrics.
- Monitor Virginia, FERC, North Carolina and South Carolina rate proceedings, including tax-reform refunds, potential rate resets and recovery of environmental and grid-modernization costs.
- Review nuclear decommissioning trust balances, pension losses, coal-ash liabilities and the adequacy of regulatory recovery mechanisms.
- Confirm the amount and timing of the planned automated-meter-reading retirement charge and other SCANA-related charges identified for 2019.