Wednesday, December 19, 2018

Tax Breaks Spur Dominion Deleveraging

By Rory D. Sweeney

Dominion Energy CEO Thomas Farrell expressed confidence Monday that his company’s lobbying in Connecticut and Virginia are on track to benefit the company.

Executives speaking during the company’s fourth-quarter and year-end earnings call also outlined strategies to take advantage of the recently enacted federal tax breaks and spoke about the political uncertainty surrounding the company’s bid to take over SCANA, the South Carolina utility beleaguered by a failed nuclear project.

The company announced it performed right in the middle of its guidance for 2017, reporting operating earnings of $3.60/share. Mild weather throughout the year reduced earnings by $0.10/share, though weather-normalized electric sales for the year increased 1.7% over 2016, led by growth and sales to data centers and residential customers.

Unadjusted earnings were $4.93/share for the year, thanks primarily to tax reforms that created a $988 million gain from adjustments to a deferred tax liability. Revenues increased 4% for the year to $3.21 billion but fell short of a consensus forecast of $3.47 billion.

Regulatory Progress and a Mystery Bill

“We have worked with the regulatory agencies, including the sharing of confidential financial information, to convey the actual cost of operating two dissimilar units in a high regional labor market,” Farrell told analysts, referring to this month’s preliminary report from Connecticut state agencies that determined the profitability of Dominion’s Millstone nuclear facility in Waterford, Conn., can’t be confirmed without additional financial disclosures from the company.

Dominion Energy

Dominion expects Connecticut state agencies to acknowledge the financial instability of its Millstone nuclear generation station. | NRC

The report, jointly developed by the state Department of Energy and Environmental Protection and Public Utilities Regulatory Authority, recommends a statewide procurement of carbon-free electricity from new and existing sources. Without additional information proving Millstone’s instability, its bids would be analyzed on price alone. With that information, the bids could be evaluated on broader criteria. A final draft of the report is expected Feb. 1.

“We are looking forward to the opportunity to compete with other non-emitting generating resources in a state-sponsored solicitation for zero carbon electricity,” Farrell said.

Paul Koonce, who heads Dominion’s generation arm, sounded eager to shut down any speculation about how Millstone might be bid into the solicitation. After misinterpreting a question about whether the plant would be bid into the process as an inquiry into the amount of its bid, Koonce declined to specify, calling the information “obviously competitively sensitive.” He said the state’s final report will likely lead to a request for proposals issued around May “and then we will submit our bid as any others.”

Farrell also addressed the potential benefits of a bill advancing through the Virginia legislature but offered scarce details.

“Virginia moves legislation through in a very rapid pace normally, and I don’t think this will be an exception,” he said. “We think there are some very good things in it. There are some things that we will have to accommodate ourselves to, but overall we think it’s a constructive piece of legislation for our state and our customers.”

Farrell said it was “premature” to speak about it in any more detail because “there is still lots of work to be done on it,” but he assured analysts that “we’ll be in a position to talk about it, I think, more thoroughly on the next call” in three months.

Dominion Energy

Dominion’s Cove Point LNG terminal in Maryland will be online later this year, the company says. | Dominion Energy

Dominion’s executives said it’s hard to assess the impact of the federal tax cuts because the company operates in seven states. The company is assuming that the benefits will be passed through to customers for all of its state-regulated entities but acknowledged the improved profitability for all non-regulated and long-term-contracted businesses. However, the changes create “strong credit headwinds” for accrual-basis taxpayers like Dominion, and some of the benefit will be offset by delays in Dominion’s Cove Point LNG plant becoming operational, said Mark McGettrick, Dominion’s chief financial officer. He estimated the cuts will increase the company’s 2018 earnings by between $0.10/share and $0.15/share.

Tax Windfall

McGettrick confirmed that the federal tax breaks have allowed Dominion to begin plans to deleverage the holding company and clear away $800 million in debt. The cuts offset the delayed start at Cove Point, so the company could still issue $500 million in new shares earlier this month and reduce its capital expenditure budget by $1 billion while remaining committed to its current credit ratings, he said. He announced plans to increase the company’s credit facilities to $6 billion, which is in addition to a $500 million credit line being put together for its Dominion Energy Midstream Partners subsidiary in order to replace its existing credit line with the parent company.

“We’re committed to the ratings that we have. We will take the steps necessary to support that, and we took advantage of taxes to get a jump start,” he said.

While the credit expansion will increase liquidity, McGettrick assured the new shares were not issued to help finance the proposed SCANA takeover, which the company announced Jan. 3. The company will maintain a 6% to 8% growth rate through 2020, he said, and the SCANA deal could bump it above 8%.

“So with or without SCANA, we’re in terrific position with one of the best growth rates we believe in the industry and one of the highest dividend growth rates as well, but certainly SCANA would be a positive result for us,” he said.

Farrell said he expects SCANA’s shareholders to approve the deal in May and shrugged off what appeared to be a hostile hearing with South Carolina legislators earlier this month.

“We are optimistic that our proposal will be viewed favorably by lawmakers and regulators, and we can complete the transaction later this year,” he said.

Despite delays, executives were also upbeat about developments at Cove Point in Calvert County, Md. Construction is complete at the natural gas liquefaction plant, and the process to bring the cooling infrastructure online is underway. The plant will be in service by early March, Farrell said.

The company is also completing work on the $1.3-billion, 1,588-MW Greensville County Combined Cycle Power Station. The plant was 73% complete at the start of the year, with all major equipment in place, including the primary natural gas line. Metering and regulation controls are awaiting final approval, and the plant is expected to begin operating near the end of the year.