Dominion Energy, Inc. (formerly Dominion Resources, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017, compared with the three months ended March 31, 2016. The combined filing covers Dominion Resources, Inc., Virginia Electric and Power Company, and Dominion Gas Holdings, LLC. Dominion operates regulated electric generation, transmission and distribution businesses, natural gas transmission, storage, distribution, gathering and processing operations, merchant generation, LNG infrastructure and related energy investments.
Financial highlights
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $3.384 billion | $2.921 billion | +$463 million |
| Income from operations | $1.125 billion | $882 million | +$243 million |
| Net income attributable to Dominion | $632 million | $524 million | +$108 million, or 21% |
| Diluted EPS | $1.01 | $0.88 | +$0.13 |
| Dividends declared per common share | $0.7550 | $0.7000 | Higher year over year |
| Net cash provided by operating activities | $1.360 billion | $1.192 billion | +$168 million |
| Capital and other property additions | $1.435 billion | $1.497 billion | -$62 million |
| Cash and cash equivalents at March 31 | $486 million | $218 million | +$268 million |
Dominion’s approximate operating margin increased to 33.2% from 30.2%, based on income from operations divided by operating revenue. Net margin attributable to Dominion was approximately 18.7% versus 17.9% in the prior-year quarter. These margins are calculated from reported GAAP figures.
- Balance sheet: Total assets were $72.852 billion at March 31, 2017, compared with $71.610 billion at December 31, 2016. Total equity was $17.181 billion.
- Debt: Current liabilities included $2.391 billion of securities due within one year and $2.627 billion of short-term debt. Long-term debt was $25.742 billion, excluding $2.980 billion of junior subordinated notes and $2.374 billion of remarketable subordinated notes.
- Liquidity: Dominion reported $2.797 billion of available capacity under joint revolving credit facilities, against $2.627 billion of commercial paper and $76 million of letters of credit outstanding. The facilities mature in April 2020.
- Financing: Dominion issued $1.2 billion of senior notes during the quarter; Virginia Power issued $750 million of 3.50% senior notes due 2027.
- Investing: Net cash used in investing activities was $1.694 billion, including $1.435 billion of construction and property additions, $94 million for solar development projects and $146 million of contributions to equity-method affiliates.
- Segment earnings: Dominion Energy contributed $263 million, Dominion Generation $261 million and DVP $125 million of net income attributable to Dominion. Corporate and Other recorded a $17 million net expense.
Material changes versus Q1 2016
- Revenue increased primarily because the Dominion Questar Combination was included for a full comparable quarter, adding approximately $298 million of net revenue and $101 million of after-tax segment earnings.
- Net revenue increased 20%, helped by an $85 million electric capacity benefit, including approximately $73 million from the PJM capacity-performance market, higher customer usage and rate-adjustment-clause revenue.
- Operating and maintenance expense increased $35 million on a consolidated basis, but excluded the $69 million of organizational-design initiative costs recorded in Q1 2016.
- Depreciation, depletion and amortization increased $118 million, primarily from Questar and expansion projects placed in service.
- Interest expense increased $66 million because of debt issued in 2016 and 2017 and debt assumed in the Questar acquisition.
- Other income increased $62 million, including higher realized gains and investment income from nuclear decommissioning trusts, higher equity-method earnings and a $7 million gain associated with the Virginia Power transmission-tower rental portfolio assignment.
- Income tax expense rose $96 million. Dominion’s effective tax rate increased to 29.0% from 25.2%, principally because of lower renewable-energy investment tax credits; the 2017 rate also benefited from state tax audit settlements.
- Virginia Power net income increased 35% to $356 million, while Dominion Gas net income increased 10% to $108 million.
Guidance, outlook, commentary and unusual items
- The filing does not provide a clear full-year earnings or revenue guidance figure.
- Management described operations as a stable source of cash flow supporting planned capital expenditures and the common dividend, while noting that operating cash flows remain subject to weather, commodity prices, regulatory developments and operating risks.
- Virginia Power revised depreciation rates following a new depreciation study, increasing Q1 depreciation expense by $10 million and expected annual depreciation by approximately $40 million, or $25 million after tax.
- Dominion revised depreciable lives for certain merchant generation assets, reducing Q1 depreciation expense by $6 million and expected annual depreciation by approximately $26 million, or $16 million after tax.
- Virginia Power sold its electric transmission-tower rental portfolio for $91 million in cash. It recognized $7 million of other income, with the remaining $39 million to be recognized through 2023; half of the proceeds must be returned to customers under the applicable tariff.
- Dominion acquired solar projects in Virginia and California for $29 million and $77 million, respectively, and agreed to acquire a North Carolina project for $154 million, expected to close in Q2 2017.
- The filing identifies a $208 million contingent liability related to the PJM transmission-rate settlement, offset by a $200 million regulatory asset expected to be recovered through Virginia retail rates. The settlement had not yet been accepted by FERC.
- Virginia Power received approvals for additional solar and transmission projects and had multiple pending rate-adjustment-clause proceedings. The filing also discusses the Atlantic Coast Pipeline, Cove Point Liquefaction Project, Greensville County generation project and potential North Anna Unit 3 development.
- Key environmental and regulatory uncertainties include coal ash closure requirements, water and air regulations, methane and greenhouse-gas rules, nuclear licensing, FERC investigations and potential remediation costs. Management states that several matters cannot currently be quantified and could materially affect results or cash flows.
- Dominion’s maximum stated exposure under subsidiary guarantees was $5.582 billion, excluding certain additional guarantees. Dominion also had $138 million of surety bonds and $76 million of authorized letters of credit.
- The Companies reported no material changes to previously disclosed risk factors, no covenant defaults and no changes in credit ratings as of March 31, 2017. Disclosure controls were considered effective.
Most important facts for investors to verify
- Reconcile the 21% earnings increase for acquisition effects, PJM capacity benefits, investment gains, tax credits and the absence of prior-year restructuring costs.
- Assess leverage and refinancing needs, including securities due within one year, short-term borrowings, the temporary increase in Dominion’s permitted debt-to-total-capital ratio to 70% through the quarter ending June 30, 2017, and higher interest expense.
- Review the Questar acquisition contribution and integration effects, including the related debt and noncontrolling-interest impacts.
- Monitor regulatory recovery of the $208 million PJM-related liability and the associated $200 million regulatory asset.
- Evaluate capital requirements and execution risk for solar projects, Atlantic Coast Pipeline, Cove Point, Greensville County, transmission projects and other expansion programs.
- Review environmental and legal contingencies involving coal ash, Chesapeake and Possum Point, the FERC investigation, pipeline litigation, greenhouse-gas and water regulations, and potential North Anna development.
- Distinguish recurring operating performance from market-sensitive nuclear trust investment gains, weather effects, commodity-price movements and derivative valuations.
- Confirm the filing’s historical legal-entity name and subsequent corporate rebranding when comparing this quarter with later Dominion Energy filings.