Dominion Energy, Inc. — 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, covering the three months ended March 31, 2018. Dominion Energy operates regulated electric generation, transmission and distribution businesses, natural gas transmission, storage and distribution operations, merchant generation, LNG and related energy infrastructure.
Key financial metrics
| Dominion Energy consolidated | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $3.466 billion | $3.384 billion | +$82 million |
| Income from operations | $875 million | $1.079 billion | -$204 million |
| Operating margin | 25.2% | 31.9% | Down |
| Net income attributable to Dominion Energy | $503 million | $632 million | -$129 million |
| Diluted EPS | $0.77 | $1.01 | -$0.24 |
| Net margin | 14.5% | 18.7% | Down |
| Dividend declared per share | $0.835 | $0.755 | Higher |
| Cash flow from operations | $1.232 billion | $1.360 billion | -$128 million |
| Capital expenditures and other property additions | $1.103 billion | $1.435 billion | -$332 million |
| Cash, restricted cash and equivalents at quarter-end | $334 million | $540 million | -$206 million |
At March 31, 2018, Dominion Energy reported total assets of $77.354 billion and total liabilities of $57.312 billion. Debt consisted of $3.603 billion of securities due within one year, $2.713 billion of short-term debt and $31.120 billion of long-term debt, including junior subordinated and remarketable subordinated notes. The company had a $6.0 billion joint revolving credit facility, with $3.216 billion of capacity available after commercial paper and letters of credit.
Virginia Power reported Q1 2018 revenue of $1.748 billion and net income of $184 million, compared with $1.831 billion and $356 million, respectively, in Q1 2017. Dominion Energy Gas reported revenue of $526 million and net income of $166 million, compared with $490 million and $108 million, respectively.
Material changes versus the prior comparable period
- Consolidated net income declined 20%, primarily because of a Virginia legislative charge requiring one-time customer rate credits and lower nuclear decommissioning trust investment earnings.
- Virginia Power recorded a $215 million pre-tax charge, or $160 million after tax, associated with required customer rate credits. The charge reduced Dominion Energy’s net revenue and was the principal reason for the decline in Virginia Power earnings.
- Net revenue decreased $153 million. Negative factors included the Virginia rate-credit charge, a $66 million provision for refunds associated with the 2017 Tax Reform Act, higher PJM capacity costs and lower Cove Point import contract revenue.
- These effects were partly offset by an $81 million increase from merchant generation pricing, a $69 million increase in retail electric sales from colder weather, $27 million from growth projects and $15 million of additional Atlantic Coast Pipeline service revenue.
- Other income declined $62 million, primarily because nuclear decommissioning trust investment earnings decreased $75 million year over year.
- Dominion Energy Gas net income increased 54%, benefiting from gains on the conveyance of shale development rights, tax reform impacts, transmission growth projects and higher Atlantic Coast Pipeline services.
- Operating cash flow declined despite lower capital spending, primarily because of lower deferred fuel cost recoveries in Virginia and working-capital changes.
- The company adopted new revenue recognition, financial instruments, nonfinancial asset derecognition, pension-cost presentation and tax-reform-related accounting guidance. Financial-instrument adoption reclassified approximately $1.1 billion of unrealized gains from AOCI to retained earnings at Dominion Energy; this was primarily a presentation and equity classification change.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative full-year earnings guidance range.
- Dominion Energy targeted closing its proposed SCANA acquisition by the end of 2018, subject to shareholder, regulatory and other approvals. The transaction contemplated issuing 0.6690 Dominion shares for each SCANA share, customer credits and assumption of approximately $7.0 billion of SCANA debt. Termination fees could be $280 million for Dominion or $240 million for SCANA under specified circumstances.
- The company expects to pursue Cove Point LNG debt financing during 2018 and use proceeds to repay parent-level debt. Cove Point Liquefaction commenced commercial operations in April 2018.
- Dominion Energy completed $495 million of net at-the-market common-stock issuance proceeds in January 2018. It also entered forward sale agreements for 20 million shares, with an underwriters’ option for approximately 2.1 million additional shares exercised in April 2018. Expected net proceeds from full physical settlement were approximately $1.5 billion, subject to adjustments.
- Virginia legislation requires a $200 million one-time customer credit and an estimated $125 million annual base-rate reduction beginning July 2018 related to tax reform. The annual reduction remains subject to adjustment.
- Virginia Power estimated that legislation extending the coal-ash permit moratorium could increase compliance costs by approximately $100 million to $200 million; the filing states these costs will be recorded in the second quarter of 2018.
- Material uncertainties include the SCANA transaction, tax-reform-related rate proceedings, FERC proceedings, environmental and coal-ash compliance, potential changes to emissions rules, nuclear operations, commodity and interest-rate volatility, credit risk, severe weather, litigation and regulatory approvals.
- Virginia Power recorded a $239 million contingent liability for the PJM transmission cost-allocation matter, offset by a $229 million regulatory asset expected to be recovered through retail rates.
- Dominion Energy guaranteed 48% of Atlantic Coast Pipeline borrowings; the pipeline had borrowed $737 million at quarter-end, and Dominion Energy recorded a $27 million related liability. Dominion Energy also disclosed subsidiary guarantees with aggregate maximum exposure of $5.770 billion.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the SCANA acquisition receives all required approvals and closes on the targeted timetable and terms.
- The final financial effect and timing of Virginia customer credits, tax-reform rate reductions and related regulatory recovery.
- The ultimate cost and regulatory treatment of coal-ash closure, environmental compliance and other remediation obligations.
- Settlement terms and rate recovery related to the PJM transmission matter and the pending FERC audit of Dominion Energy Transmission.
- The settlement method and dilution impact of the forward equity sale agreements and the company’s planned debt financing.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends and debt maturities without increased reliance on external financing.
- Exposure to investment-market losses in nuclear decommissioning trusts, commodity-price changes, interest rates, weather and credit-counterparty performance.