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Dominion to Trim $1B From Capex Over Next Two Years

Dominion Energy Inc. plans to cut $1 billion in capital expenditures (capex) over the next two years and recently issued $500 million of common equity to its aftermarket program in an effort to improve its negative credit rating and support its balance sheet, the company said Monday.

The largest component of the $1 billion capex decline, which would have no impact on its estimated 6-8% growth rate through 2020, would come from nine generating facilities in Virginia that would be put into cold storage.

“The timing of that over the next 12 months or so would have required a lot of maintenance at all those units,” but reductions will also come from other noncore maintenance activities to make up the $1 billion over the two-year period,” said CFO Mark McGettrick during a 4Q2017 earnings call Monday. “But, we have a very good line of sight on that.”

The Richmond, VA-based company is also securing up to $6 billion in upsized credit facilities too in addition to a $500 million credit facility planned at Dominion Energy Midstream Partners LP. Dominion has begun the process of de-levering the parent company, and on a net basis would reduce holding company debt by $800 million or more this year.

Moody’s Investors Service downgraded the company to a negative credit rating earlier this month following the Tax Cuts and Jobs Act enacted in December, and based on higher regulatory risks in South Carolina.

Dominion earlier in January said it plans to buy Scana Corp., a South Carolina-based public utility, in an all-stock deal described as a "strategic combination" of its natural gas businesses -- a merger that equates to $7.9 billion in stock, but with an overall value of about $14.6 billion.

The merger must also be approved by Scana shareholders, who are to decide in May, and pass the scrutiny of federal regulators, specifically, the Federal Trade Commission, the Department of Justice, the Nuclear Regulatory Commission and the Federal Energy Regulatory Commission. Regulators in Georgia, North Carolina and South Carolina must also approve the deal, which is expected to close this year.

McGettrick said the company’s growth rates were not dependent on the Scana deal, but it certainly “would be a positive for us.”

Meanwhile, work on Dominion’s Atlantic Coast Pipeline (ACP) and related Supply Header Project continues and the company is “making excellent progress, particularly in the mountainous areas,” Dominion CEO Tom Ferrell said. Last Friday, North Carolina issued ACP a water quality permit, and the West Virginia Department of Environmental Protection (WVDEP) approved the project’s erosion and sediment control permit.

The company expects all remaining major permits “any day,” Ferrell said, noting that during the cold weather periods earlier in January, power prices in Virginia and North Carolina surpassed the highest daily power price average in New England by 10%, “underscoring the urgent need for the increased regional gas transportation the Atlantic Coast Pipeline and Supply Header Project will provide.”

As for the delayed Dominion Cove Point liquefied natural gas (LNG) facility, Ferrell said construction is complete and the company is in the final stages of commissioning. The company is in the process of cooling down to liquefying temperatures to make LNG.

“While commissioning has taken longer than we originally planned we are progressing toward an in-service date in early March,” Ferrell said. “This is an enormously complicated process, our contractors are ensuring that all the work is done safely fairly and correctly.”

Ferrell noted the absence of earnings coming from Cove Point for the first three months of the year would offset some of the earnings benefits expected from lower income taxes. Cove Point was originally expected to be in service in December.

On tax reform, Dominion benefited from a lower tax rate that resulted in a dramatic increases in reported earnings for the quarter. Dominion announced reported earnings for 4Q2017 of $1.4 billion ($2.25/share), compared with $457 million (73 cents) for the same period in 2016, largely due to tax reform. For all of 2017, Dominion’s reported earnings were $1 billion higher than full-year reported earnings in 2016.

The Tax Cuts and Jobs Act reduced the corporate income tax rate from 35% to 21%. Dominion recognized $988 million of tax benefits resulting from re-measuring deferred income taxes to the new corporate income tax rate.

Operating earnings in 4Q2017 were $585 million, a drop of $33 million from the year-ago period. For the year, operating earnings decreased $58 million as compared to full‐year 2016 operating earnings, resulting from milder weather in Dominion’s regulated service territory, a step down in solar investment tax credits, a second refueling outage at the Millstone nuclear generating unit and a reduction of Cove Point import contract revenues.

Some of that decrease was offset by growth in regulated gas and electric businesses, the addition of Dominion Energy Questar Pipeline LLC and lower operating expenses.

On the whole, McGettrick said “assessing the impact of tax reform is a difficult process for a multifaceted company like Dominion, operating in seven different states” and estimating the ongoing impact on tax reform, the company has assumed that the benefits of lower tax rates will be passed through to customers in all of our state regulated businesses.”

Lower tax rates should improve the profitability of Dominion’s nonregulated and long-term contracted businesses, while the normalization amortization of excess deferred income taxes will provide incremental growth to rate base in our regulated businesses. However, tax reform creates some credit headwinds, particularly for companies like Dominion that are currently noncash taxpayers, McGettrick said.

“We are taking aggressive steps to strengthen our balance sheet to offset the credit impact of tax reform,” he said.

Dominion Energy expects 2018 operating earnings in the range of $3.80-$4.25/share,  compared to full‐year 2017 operating earnings of $3.60/share. The increase would likely be driven by a return to normal weather in the regulated service territories, one fewer Millstone refueling outage, revenues from Cove Point export contracts and the benefit of a lower tax rate due to tax reform.

The company expects negative factors for the year to include a step down in solar investment tax credits, as well as higher financing costs and share dilution.

Dominion maintains its earnings growth rate estimate of 6-8% through 2020, but said it could improve to 8%-plus if the Scana deal is successful. For 1Q2018, Dominion’s operating earnings guidance is 95 cents to $1.15/share, compared to 97 cents for 3Q2017.

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