Dominion Energy, Inc. 2017 Form 10-K Summary
Business context and reporting period
Combined Form 10-K for Dominion Energy, Inc., Virginia Electric and Power Company, and Dominion Energy Gas Holdings, LLC, covering the fiscal year ended December 31, 2017. Dominion Energy is a regulated and contracted energy company with electric generation, transmission and distribution, natural gas transmission, storage, distribution and processing, LNG, renewable generation and merchant power operations. The company served nearly 6 million customers and had approximately 26,000 MW of generation capacity at year-end.
The primary operating segments were Power Delivery, Power Generation, and Gas Infrastructure. Dominion Energy stated that approximately 90% of earnings from its primary operating segments were expected to come from regulated or long-term contracted businesses.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $12.586 billion | $11.737 billion | +$849 million |
| Income from operations | $4.130 billion | $3.627 billion | +$503 million |
| Net income attributable to Dominion Energy | $2.999 billion | $2.123 billion | +41% |
| Diluted EPS | $4.72 | $3.44 | +$1.28 |
| Operating cash flow | $4.549 billion | $4.127 billion | +$422 million |
| Capital expenditures and property additions | $5.504 billion | $6.085 billion | -$581 million |
| Long-term debt | $30.948 billion | $30.231 billion | +$717 million |
| Cash and cash equivalents | $120 million | $261 million | -$141 million |
Calculated margins were approximately 32.8% for operating income and 23.8% for net income in 2017, compared with approximately 30.9% and 18.1%, respectively, in 2016. The 2017 net income and margin benefited materially from the remeasurement of deferred income taxes following the 2017 Tax Reform Act.
- Net revenue increased 8%, primarily from a full year of Dominion Energy Questar operations, growth projects, higher merchant solar output, electric capacity benefits, rate-adjustment clauses and Atlantic Coast Pipeline services.
- Operating and maintenance expense declined 6%, largely because 2016 ash-pond and landfill closure charges, organizational-design costs and certain storm-related expenses did not recur.
- Depreciation, depletion and amortization increased 22% to $1.905 billion, reflecting acquired operations and projects placed into service.
- Interest and related charges increased 19% to $1.205 billion, primarily due to debt issued in 2016 and 2017 and debt assumed in the Questar acquisition.
- Income tax expense was a $30 million benefit versus $655 million of expense in 2016. The benefit included an $851 million tax benefit from deferred-tax remeasurement.
- Segment net income was $531 million for Power Delivery, $1.181 billion for Power Generation, and $898 million for Gas Infrastructure. Corporate and Other reported a $389 million net benefit, principally reflecting tax-related specific items.
Cash flow, debt and liquidity
Operating cash flow of $4.549 billion funded most, but not all, of the $5.504 billion of plant construction and property additions. Investing activities used $5.993 billion, while financing activities provided $1.303 billion. Cash ended the year at $120 million.
Dominion Energy had $5.5 billion of revolving credit facilities, $3.298 billion of commercial paper outstanding, $76 million of letters of credit outstanding and $2.126 billion of available facility capacity at December 31, 2017. The reported debt-to-total-capital ratio under applicable covenants was 62%, versus a 65% maximum. Total contractual cash payments were estimated at $64.239 billion, including $34.293 billion of long-term debt principal and $20.215 billion of interest payments.
The company issued $2.4 billion of public long-term debt and additional private-placement debt during 2017, while repaying or repurchasing approximately $1.6 billion of long-term debt. Dividends declared increased to $3.035 per share from $2.80. The board established a 2018 annual dividend rate of $3.34 per share, a 10% increase.
Material changes versus the prior comparable period
- Dominion Energy Questar contributed a full year of revenue and earnings in 2017, compared with only part of 2016. The 2016 acquisition had total consideration of approximately $4.4 billion.
- The 2017 Tax Reform Act produced a significant noncash tax benefit and increased regulatory liabilities associated with amounts expected to be returned to customers.
- Power Generation earnings declined $216 million, primarily from lower renewable energy tax credits, lower merchant generation margins, higher depreciation and interest expense, and outage costs.
- Gas Infrastructure earnings increased $172 million, benefiting from the Questar combination, growth projects and the sale of certain retail energy marketing assets, partly offset by lower Cove Point import-contract revenue and noncontrolling interests.
- Dominion Energy acquired wholly owned merchant solar projects during 2017 for $356 million; the projects represented 259 MW of capacity.
- Dominion Energy sold or agreed to sell certain retail energy marketing assets. The first phase closed in December 2017 and generated a $48 million after-tax benefit; an additional approximately $48 million after-tax benefit was expected upon the second phase closing in 2018.
- Dominion Energy recorded $158 million of charges before tax, or $96 million after tax, related to equity-method investments in wind facilities, including a $126 million charge related to NedPower and a $32 million impairment charge related to Fowler Ridge.
Guidance, outlook, risks and unusual items
Management expected 2018 net income per share to decrease from 2017, primarily because the 2017 tax-reform benefit would not recur, solar investment tax credits would decline, interest and depreciation would increase, and share dilution would rise. Offsets were expected from Cove Point Liquefaction Project revenue, normalized weather, approximately 1.5% weather-normalized electric sales growth, new electric and gas projects, and a lower ongoing tax rate.
Planned capital expenditures were approximately $5.5 billion in 2018, $5.2 billion in 2019 and $4.8 billion in 2020. Major projects included the approximately $4.1 billion Cove Point Liquefaction Project, expected to begin commercial operations in March 2018; Greensville County generation; electric grid investments; gas transmission projects; and Dominion Energy’s share of the Atlantic Coast Pipeline.
Dominion Energy agreed in January 2018 to acquire SCANA in an all-stock transaction, subject to shareholder and regulatory approvals. The proposed transaction included substantial customer credits and refunds, exclusion from rate recovery of approximately $1.7 billion of V.C. Summer project costs, and assumption of approximately $7 billion of SCANA debt. Management expected the transaction to be accretive to forecasted operating EPS but warned that GAAP earnings would initially decline because of customer refunds, regulatory-asset write-offs and transaction costs.
- Key risks include regulatory rate reductions or delayed cost recovery, particularly following tax reform; environmental compliance and coal-ash liabilities; nuclear operations, decommissioning and spent-fuel obligations; severe weather and operational outages; commodity and merchant-generation price volatility; counterparty and credit risk; cybersecurity; capital-market access; project delays and cost overruns; and litigation.
- Atlantic Coast Pipeline had received FERC authorization, but appeals and other federal and state approvals remained outstanding. Dominion Energy owned 48% and had guaranteed 48% of borrowings under the project’s $3.4 billion revolving credit facility; the project had borrowed $664 million at year-end.
- FERC’s audit of DETI identified findings that could be material, although the ultimate impact could not be estimated. Dominion Energy recorded a $15 million pretax regulatory-asset write-off for one uncontested matter.
- Virginia Power faced coal-ash litigation and ongoing closure, monitoring and remediation requirements. Actual asset-retirement costs could differ substantially from recorded estimates.
- Moody’s and Standard & Poor’s maintained negative outlooks on Dominion Energy in early 2018, while Fitch maintained a stable outlook.
Most important facts for an investor to verify
- Separate recurring operating earnings and cash flow from the $851 million tax-remeasurement benefit and other specific items.
- The sustainability of the 2018 dividend increase given high capital spending, debt maturities, commercial paper usage and expected customer rate reductions.
- Progress, costs, commissioning and contracted cash flows from the Cove Point Liquefaction Project.
- Regulatory approvals, litigation, construction timing and financing requirements for the Atlantic Coast Pipeline.
- The final terms, regulatory conditions, customer-credit obligations, debt assumption and potential dilution associated with the proposed SCANA acquisition.
- Exposure to coal-ash closure costs, FERC proceedings, environmental rules, nuclear decommissioning and potential Millstone retirement.
- Credit-rating outlooks, refinancing needs and the company’s ability to maintain covenant compliance and adequate liquidity.