10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

 

Commission File Number

   Exact name of registrants as specified in their charters   

I.R.S. Employer

Identification Number

001-08489    DOMINION ENERGY, INC.    54-1229715
000-55337    VIRGINIA ELECTRIC AND POWER COMPANY    54-0418825
001-37591    DOMINION ENERGY GAS HOLDINGS, LLC    46-3639580
  

VIRGINIA

(State or other jurisdiction of incorporation or organization)

  
  

120 TREDEGAR STREET

RICHMOND, VIRGINIA

(Address of principal executive offices)

  

23219

(Zip Code)

    

(804) 819-2000

(Registrants’ telephone number)

    

Securities registered pursuant to Section 12(b) of the Act:

 

Registrant

 

Title of Each Class

 

Name of Each Exchange

on Which Registered

DOMINION ENERGY, INC.   Common Stock, no par value   New York Stock Exchange
  2016 Series A 6.75% Corporate Units   New York Stock Exchange
  2016 Series A 5.25% Enhanced Junior Subordinated Notes   New York Stock Exchange

DOMINION ENERGY GAS

HOLDINGS, LLC

  2014 Series C 4.6% Senior Notes   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

VIRGINIA ELECTRIC AND POWER COMPANY

Common Stock, no par value

DOMINION ENERGY GAS HOLDINGS, LLC

Limited Liability Company Membership Interests

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Dominion Energy, Inc.    Yes  ☒    No  ☐        Virginia Electric and Power Company    Yes  ☒    No  ☐        Dominion Energy Gas Holdings, LLC    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Dominion Energy, Inc.    Yes  ☐    No  ☒        Virginia Electric and Power Company    Yes   ☐    No  ☒        Dominion Energy Gas Holdings, LLC    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Dominion Energy, Inc.    Yes  ☒    No  ☐    Virginia Electric and Power Company    Yes  ☒    No  ☐     Dominion Energy Gas Holdings, LLC     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Dominion Energy, Inc.    Yes  ☒    No  ☐        Virginia Electric and Power Company    Yes  ☒    No  ☐        Dominion Energy Gas Holdings, LLC    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Dominion Energy, Inc.    ☒        Virginia Electric and Power Company    ☒        Dominion Energy Gas Holdings, LLC    ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Dominion Energy, Inc.

 

Large accelerated filer  ☒   Accelerated filer  ☐   Non-accelerated filer  ☐       Smaller reporting company  ☐
      Emerging growth company  ☐

Virginia Electric and Power Company

 

Large accelerated filer  ☐   Accelerated filer  ☐   Non-accelerated filer  ☒       Smaller reporting company  ☐
      Emerging growth company  ☐

Dominion Energy Gas Holdings, LLC

 

Large accelerated filer  ☐   Accelerated filer  ☐   Non-accelerated filer  ☒       Smaller reporting company  ☐
      Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Dominion Energy, Inc.    Yes  ☐    No  ☒        Virginia Electric and Power Company    Yes  ☐    No  ☒        Dominion Energy Gas Holdings, LLC    Yes  ☐    No  ☒

The aggregate market value of Dominion Energy, Inc. common stock held by non-affiliates of Dominion Energy was approximately $44.4 billion based on the closing price of Dominion Energy’s common stock as reported on the New York Stock Exchange as of the last day of Dominion Energy’s most recently completed second fiscal quarter. Dominion Energy is the sole holder of Virginia Electric and Power Company common stock. At February 15, 2019, Dominion Energy had 799,314,079 shares of common stock outstanding and Virginia Power had 274,723 shares of common stock outstanding. Dominion Energy, Inc. holds all of the membership interests of Dominion Energy Gas Holdings, LLC.

DOCUMENT INCORPORATED BY REFERENCE.

Portions of Dominion Energy’s 2019 Proxy Statement are incorporated by reference in Part III.

This combined Form 10-K represents separate filings by Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC make no representations as to the information relating to Dominion Energy, Inc.’s other operations.

VIRGINIA ELECTRIC AND POWER COMPANY AND DOMINION ENERGY GAS HOLDINGS, LLC MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND ARE FILING THIS FORM 10-K UNDER THE REDUCED DISCLOSURE FORMAT.

 

 

 


Dominion Energy, Inc., Virginia Electric and

Power Company and Dominion Energy Gas Holdings, LLC

 

 

Item

Number

         

Page

Number

 

 

  

Glossary of Terms

     3  

Part I

  

1.

  

Business

     8  

1A.

  

Risk Factors

     29  

1B.

  

Unresolved Staff Comments

     37  

2.

  

Properties

     38  

3.

  

Legal Proceedings

     43  

4.

  

Mine Safety Disclosures

     43  
  

Executive Officers of Dominion Energy

     44  

Part II

  

5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     45  

6.

  

Selected Financial Data

     46  

7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47  

7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     66  

8.

  

Financial Statements and Supplementary Data

     69  

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     192  

9A.

  

Controls and Procedures

     192  

9B.

  

Other Information

     195  

Part III

  

10.

  

Directors, Executive Officers and Corporate Governance

     196  

11.

  

Executive Compensation

     196  

12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     196  

13.

  

Certain Relationships and Related Transactions, and Director Independence

     196  

14.

  

Principal Accountant Fees and Services

     197  

Part IV

  

15.

  

Exhibits and Financial Statement Schedules

     198  

16.

  

Form 10-K Summary

     205  

 

2        


Glossary of Terms

 

The following abbreviations or acronyms used in this Form 10-K are defined below:

 

Abbreviation or Acronym    Definition

2013 Equity Units

  

Dominion Energy’s 2013 Series A Equity Units and 2013 Series B Equity Units issued in June 2013

2014 Equity Units

  

Dominion Energy’s 2014 Series A Equity Units issued in July 2014

2016 Equity Units

  

Dominion Energy’s 2016 Series A Equity Units issued in August 2016

2017 Tax Reform Act

  

An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (previously known as The Tax Cuts and Jobs Act) enacted on December 22, 2017

2019 Proxy Statement

  

Dominion Energy 2019 Proxy Statement, File No. 001-08489

ABO

  

Accumulated benefit obligation

AFUDC

  

Allowance for funds used during construction

Align RNG

  

Align RNG, LLC, a joint venture between Dominion Energy and Smithfield Foods, Inc.

AMI

  

Advanced Metering Infrastructure

AMR

  

Automated meter reading program deployed by East Ohio

AOCI

  

Accumulated other comprehensive income (loss)

ARO

  

Asset retirement obligation

Atlantic Coast Pipeline

  

Atlantic Coast Pipeline, LLC, a limited liability company owned by Dominion Energy, Duke and Southern Company Gas

Atlantic Coast Pipeline Project

  

The approximately 600-mile natural gas pipeline running from West Virginia through Virginia to North Carolina which will be owned by Dominion Energy, Duke and Southern Company Gas and constructed and operated by DETI

BACT

  

Best available control technology

Bankruptcy Court

  

U.S. Bankruptcy Court for the Southern District of New York

bcf

  

Billion cubic feet

bcfe

  

Billion cubic feet equivalent

Bear Garden

  

A 590 MW combined-cycle, natural gas-fired power station in Buckingham County, Virginia

BGEPA

Blue Racer

  

Bald and Golden Eagle Protection Act

Blue Racer Midstream, LLC, a joint venture between Caiman and FR BR Holdings, LLC effective December 2018

BP

  

BP Wind Energy North America Inc.

Brunswick County

  

A 1,376 MW combined-cycle, natural gas-fired power station in Brunswick County, Virginia

CAA

  

Clean Air Act

Caiman

  

Caiman Energy II, LLC

CAISO

  

California ISO

CAO

  

Chief Accounting Officer

CCR

  

Coal combustion residual

CEA

  

Commodity Exchange Act

CEO

  

Chief Executive Officer

CERCLA

  

Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as Superfund

CFO

  

Chief Financial Officer

CGN Committee

  

Compensation, Governance and Nominating Committee of Dominion Energy’s Board of Directors

Clean Power Plan

  

Regulations issued by the EPA in August 2015 for states to follow in developing plans to reduce CO2 emissions from existing fossil fuel-fired electric generating units, stayed by the U.S. Supreme Court in February 2016 pending resolution of court challenges by certain states

CNG

  

Consolidated Natural Gas Company

CO2

  

Carbon dioxide

Colonial Trail West

  

An approximately 142 MW proposed utility-scale solar power station located in Surry County, Virginia

Companies

  

Dominion Energy, Virginia Power and Dominion Energy Gas, collectively

Cooling degree days

  

Units measuring the extent to which the average daily temperature is greater than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day

Corporate Unit

  

A stock purchase contract and 1/20 or 1/40 interest in a RSN issued by Dominion Energy

Cove Point

  

Dominion Energy Cove Point LNG, LP

Cove Point Holdings

  

Cove Point GP Holding Company, LLC

Cove Point LNG Facility

  

An LNG terminalling and storage facility located on the Chesapeake Bay in Lusby, Maryland owned by Cove Point

Cove Point Pipeline

  

A 136-mile natural gas pipeline owned by Cove Point that connects the Cove Point LNG Facility to interstate natural gas pipelines

CPCN

  

Certificate of Public Convenience and Necessity

CWA

  

Clean Water Act

DECG

  

Dominion Energy Carolina Gas Transmission, LLC

DES

  

Dominion Energy Services, Inc.

DETI

  

Dominion Energy Transmission, Inc.

DGI

  

Dominion Generation, Inc.

 

        3


 

Abbreviation or Acronym    Definition

DGP

  

Dominion Gathering and Processing, Inc.

Dodd-Frank Act

  

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

DOE

  

U.S. Department of Energy

Dominion Energy

  

The legal entity, Dominion Energy, Inc., one or more of its consolidated subsidiaries (other than Virginia Power and Dominion Energy Gas) or operating segments, or the entirety of Dominion Energy, Inc. and its consolidated subsidiaries

Dominion Energy Direct®

  

A dividend reinvestment and open enrollment direct stock purchase plan

Dominion Energy Gas

  

The legal entity, Dominion Energy Gas Holdings, LLC, one or more of its consolidated subsidiaries or operating segment, or the entirety of Dominion Energy Gas Holdings, LLC and its consolidated subsidiaries

Dominion Energy Midstream

  

The legal entity, Dominion Energy Midstream Partners, LP, one or more of its consolidated subsidiaries, Cove Point Holdings, Iroquois GP Holding Company, LLC, DECG and Dominion Energy Questar Pipeline (beginning December 1, 2016), or the entirety of Dominion Energy Midstream Partners, LP and its consolidated subsidiaries

Dominion Energy Questar

  

The legal entity, Dominion Energy Questar Corporation, one or more of its consolidated subsidiaries, or the entirety of Dominion Energy Questar Corporation and its consolidated subsidiaries

Dominion Energy Questar Combination

  

Dominion Energy’s acquisition of Dominion Energy Questar completed on September 16, 2016 pursuant to the terms of the agreement and plan of merger entered on January 31, 2016

Dominion Energy Questar Pipeline

  

Dominion Energy Questar Pipeline, LLC, one or more of its consolidated subsidiaries, or the entirety of Dominion Energy Questar Pipeline, LLC and its consolidated subsidiaries

Dominion Iroquois

  

Dominion Iroquois, Inc., which, effective May 2016, holds a 24.07% noncontrolling partnership interest in Iroquois

DSM

  

Demand-side management

Dth

  

Dekatherm

Duke

  

The legal entity, Duke Energy Corporation, one or more of its consolidated subsidiaries or operating segments, or the entirety of Duke Energy Corporation and its consolidated subsidiaries

Eagle Solar

  

Eagle Solar, LLC, a wholly-owned subsidiary of DGI

East Ohio

  

The East Ohio Gas Company, doing business as Dominion Energy Ohio

Eastern Market Access Project

  

Project to provide 294,000 Dths/day of transportation service to help meet demand for natural gas for Washington Gas Light Company, a local gas utility serving customers in D.C., Virginia and Maryland, and Mattawoman Energy, LLC for its new electric power generation facility to be built in Maryland

Energy Choice

  

Program authorized by the Ohio Commission which provides energy customers with the ability to shop for energy options from a group of suppliers certified by the Ohio Commission

EPA

  

U.S. Environmental Protection Agency

EPACT

  

Energy Policy Act of 2005

EPS

  

Earnings per share

ERISA

  

Employee Retirement Income Security Act of 1974

ERO

  

Electric Reliability Organization

ESA

Excess Tax Benefits

  

Endangered Species Act

Benefits of tax deductions in excess of the compensation cost recognized for stock-based compensation

Fairless

  

Fairless power station

FASB

  

Financial Accounting Standards Board

FERC

  

Federal Energy Regulatory Commission

FILOT

  

Fee in lieu of taxes

Fitch

  

Fitch Ratings Ltd.

Four Brothers

  

Four Brothers Solar, LLC, a limited liability company owned by Dominion Energy and Four Brothers Holdings, LLC, a subsidiary of GIP effective August 2018

Fowler Ridge

  

Fowler I Holdings LLC, a wind-turbine facility joint venture with BP in Benton County, Indiana

FTRs

  

Financial transmission rights

GAAP

  

U.S. generally accepted accounting principles

Gal

  

Gallon

Gas Infrastructure

  

Gas Infrastructure Group operating segment

GENCO

  

South Carolina Generating Company, Inc.

GHG

  

Greenhouse gas

GIP

  

The legal entity, Global Infrastructure Partners, one or more of its consolidated subsidiaries (including, effective August 2018, Four Brothers Holdings, LLC, Granite Mountain Renewables, LLC, and Iron Springs Renewables, LLC) or operating segments, or the entirety of Global Infrastructure Partners and its consolidated subsidiaries

Granite Mountain

  

Granite Mountain Holdings, LLC, a limited liability company owned by Dominion Energy and Granite Mountain Renewables, LLC, a subsidiary of GIP effective August 2018

Green Mountain

  

Green Mountain Power Corporation

GreenHat

  

GreenHat Energy, LLC

 

4        


 

Abbreviation or Acronym    Definition

Greensville County

  

A 1,588 MW combined-cycle, natural gas-fired power station in Greensville County, Virginia

GTSA

  

Virginia Grid Transformation and Security Act of 2018

Hastings

  

A natural gas processing and fractionation facility located near Pine Grove, West Virginia

Heating degree days

  

Units measuring the extent to which the average daily temperature is less than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day

Hope

  

Hope Gas, Inc., doing business as Dominion Energy West Virginia

Idaho Commission

  

Idaho Public Utilities Commission

IRCA

  

Intercompany revolving credit agreement

Iron Springs

  

Iron Springs Holdings, LLC, a limited liability company owned by Dominion Energy and Iron Springs Renewables, LLC, a subsidiary of GIP effective August 2018

Iroquois

  

Iroquois Gas Transmission System, L.P.

IRS

  

Internal Revenue Service

ISO

  

Independent system operator

ISO-NE

  

ISO New England

July 2016 hybrids

  

Dominion Energy’s 2016 Series A Enhanced Junior Subordinated Notes due 2076

June 2006 hybrids

  

Dominion Energy’s 2006 Series A Enhanced Junior Subordinated Notes due 2066

Kewaunee

  

Kewaunee nuclear power station

kV

  

Kilovolt

Liability Management Exercise

  

Dominion Energy exercise in 2014 to redeem certain debt and preferred securities

LIBOR

  

London Interbank Offered Rate

LIFO

  

Last-in-first-out inventory method

Liquefaction Project

  

A natural gas export/liquefaction facility at Cove Point

LNG

  

Liquefied natural gas

Local 50

  

International Brotherhood of Electrical Workers Local 50

Local 69

  

Local 69, Utility Workers Union of America, United Gas Workers

LTIP

  

Long-term incentive program

Manchester

  

Manchester power station

Massachusetts Municipal

  

Massachusetts Municipal Wholesale Electric Company

MATS

  

Utility Mercury and Air Toxics Standard Rule

MBTA

mcf

  

Migratory Bird Treaty Act of 1918

Thousand cubic feet

mcfe

  

Thousand cubic feet equivalent

MD&A

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MGD

  

Million gallons a day

Millstone

  

Millstone nuclear power station

Moody’s

  

Moody’s Investors Service

Mtpa

  

Million metric tons per annum

MW

  

Megawatt

MWh

  

Megawatt hour

Natural Gas Rate Stabilization Act

  

Legislation effective February 16, 2005 designed to improve and maintain natural gas service infrastructure to meet the needs of customers in South Carolina

NAV

  

Net asset value

NedPower

  

NedPower Mount Storm LLC, a wind-turbine facility joint venture between Dominion Energy and Shell in Grant County, West Virginia

NEIL

  

Nuclear Electric Insurance Limited

NERC

  

North American Electric Reliability Corporation

NG

  

Collectively, North East Transmission Co., Inc. and National Grid IGTS Corp.

NGL

  

Natural gas liquid

NJNR

  

NJNR Pipeline Company

NND Project

  

V.C. Summer units 2 and 3 new nuclear development project under which SCANA and Santee Cooper undertook to construct two Westinghouse AP1000 Advanced Passive Safety nuclear units in Jenkinsville, South Carolina

North Anna

  

North Anna nuclear power station

North Carolina Commission

  

North Carolina Utilities Commission

Northern System

  

Collection of 131 miles of various diameter natural gas pipelines in Ohio

NOX

  

Nitrogen oxide

NRC

  

U.S. Nuclear Regulatory Commission

NRG

  

The legal entity, NRG Energy, Inc., one or more of its consolidated subsidiaries (including, effective November 2016 through August 2018, Four Brothers Holdings, LLC, Granite Mountain Renewables, LLC and Iron Springs Renewables, LLC) or operating segments, or the entirety of NRG Energy, Inc. and its consolidated subsidiaries

 

        5


Abbreviation or Acronym    Definition

NSPS

  

New Source Performance Standards

NYSE

  

New York Stock Exchange

October 2014 hybrids

  

Dominion Energy’s 2014 Series A Enhanced Junior Subordinated Notes due 2054

ODEC

  

Old Dominion Electric Cooperative

Ohio Commission

  

Public Utilities Commission of Ohio

Order 1000

  

Order issued by FERC adopting new requirements for electric transmission planning, cost allocation and development

Philadelphia Utility Index

  

Philadelphia Stock Exchange Utility Index

PHMSA

  

Pipeline and Hazardous Materials Safety Administration

PIPP

  

Percentage of Income Payment Plan deployed by East Ohio

PIR

  

Pipeline Infrastructure Replacement program deployed by East Ohio

PJM

  

PJM Interconnection, L.L.C.

Power Delivery

  

Power Delivery Group operating segment

Power Generation

  

Power Generation Group operating segment

ppb

  

Parts-per-billion

PREP

  

Pipeline Replacement and Expansion Program, a program of replacing, upgrading and expanding natural gas utility infrastructure deployed by Hope

PSD

  

Prevention of significant deterioration

PSNC

  

Public Service Company of North Carolina, Incorporated

Questar Gas

  

Questar Gas Company, doing business as Dominion Energy Utah, Dominion Energy Wyoming and Dominion Energy Idaho

RCC

  

Replacement Capital Covenant

Regulation Act

  

Legislation effective July 1, 2007, that amended the Virginia Electric Utility Restructuring Act and fuel factor statute, which legislation is also known as the Virginia Electric Utility Regulation Act, as amended in 2015 and 2018

RGGI

  

Regional Greenhouse Gas Initiative

RICO

  

Racketeer Influenced and Corrupt Organizations Act

Rider B

  

A rate adjustment clause associated with the recovery of costs related to the conversion of three of Virginia Power’s coal-fired power stations to biomass

Rider BW

  

A rate adjustment clause associated with the recovery of costs related to Brunswick County

Rider E

  

A rate adjustment clause associated with the recovery of costs related to certain capital projects at Virginia Power’s electric generating stations to comply with federal and state environmental laws and regulations

Rider GV

  

A rate adjustment clause associated with the recovery of costs related to Greensville County

Rider R

  

A rate adjustment clause associated with the recovery of costs related to Bear Garden

Rider S

  

A rate adjustment clause associated with the recovery of costs related to the Virginia City Hybrid Energy Center

Rider T1

  

A rate adjustment clause to recover the difference between revenues produced from transmission rates included in base rates, and the new total revenue requirement developed annually for the rate years effective September 1

Rider U

  

A rate adjustment clause associated with the recovery of costs of new underground distribution facilities

Rider US-2

  

A rate adjustment clause associated with the recovery of costs related to Woodland, Scott Solar and Whitehouse

Rider US-3

  

A rate adjustment clause associated with the recovery of costs related to Colonial Trail West and Spring Grove 1

Rider W

  

A rate adjustment clause associated with the recovery of costs related to Warren County

Riders C1A and C2A

  

Rate adjustment clauses associated with the recovery of costs related to certain DSM programs approved in DSM cases

ROE

  

Return on equity

ROIC

  

Return on invested capital

RSN

  

Remarketable subordinated note

RTEP

  

Regional transmission expansion plan

RTO

  

Regional transmission organization

SAFSTOR

  

A method of nuclear decommissioning, as defined by the NRC, in which a nuclear facility is placed and maintained in a condition that allows the facility to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use

SAIDI

  

System Average Interruption Duration Index, metric used to measure electric service reliability

SBL Holdco

  

SBL Holdco, LLC, a wholly-owned subsidiary of DGI

Santee Cooper

  

South Carolina Public Service Authority

SCANA

  

The legal entity, SCANA Corporation, one or more of its consolidated subsidiaries or operating segments, or the entirety of SCANA Corporation and its consolidated subsidiaries

 

6        


 

Abbreviation or Acronym    Definition

SCANA Combination

  

Dominion Energy’s acquisition of SCANA completed on January 1, 2019 pursuant to the terms of the SCANA Merger Agreement

SCANA Merger Agreement

  

Agreement and plan of merger entered on January 2, 2018 between Dominion Energy and SCANA

SCANA Merger Approval Order

  

Final order issued by the South Carolina Commission on December 21, 2018 setting forth its approval of the SCANA Combination

SCDHEC

  

South Carolina Department of Health and Environmental Control

SCDOR

  

South Carolina Department of Revenue

SCE&G

  

The legal entity, South Carolina Electric & Gas Company, its consolidated subsidiaries or operating segments, or the entirety of South Carolina Electric & Gas Company and its consolidated subsidiaries

Scott Solar

  

A 17 MW utility-scale solar power station in Powhatan County, VA

SEC

  

U.S. Securities and Exchange Commission

SEMI

  

SCANA Energy Marketing, Inc.

September 2006 hybrids

  

Dominion Energy’s 2006 Series B Enhanced Junior Subordinated Notes due 2066

SERC

  

Southeast Electric Reliability Council

Shell

  

Shell WindEnergy, Inc.

SO2

  

Sulfur dioxide

Southeast Energy

  

Southeast Energy Group operating segment

South Carolina Commission

  

South Carolina Public Service Commission

Spring Grove 1

  

An approximately 98 MW proposed utility-scale solar power station located in Surry County, Virginia

Standard & Poor’s

  

Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.

Summer

  

V.C. Summer nuclear power station

SunEdison

  

The legal entity, SunEdison, Inc., one or more of its consolidated subsidiaries (including, through November 2016, Four Brothers Holdings, LLC, Granite Mountain Renewables, LLC and Iron Springs Renewables, LLC) or operating segments, or the entirety of SunEdison, Inc. and its consolidated subsidiaries

Surry

  

Surry nuclear power station

Terra Nova Renewable Partners

  

A partnership comprised primarily of institutional investors advised by J.P. Morgan Asset Management—Global Real Assets

Three Cedars

  

Granite Mountain and Iron Springs, collectively

TransCanada

  

The legal entity, TransCanada Corporation, one or more of its consolidated subsidiaries or operating segments, or the entirety of TransCanada Corporation and its consolidated subsidiaries

Transco

  

Transcontinental Gas Pipe Line Company, LLC

TSR

  

Total shareholder return

UEX Rider

  

Uncollectible Expense Rider deployed by East Ohio

Utah Commission

  

Public Service Commission of Utah

VDEQ

  

Virginia Department of Environmental Quality

VEBA

  

Voluntary Employees’ Beneficiary Association

VIE

  

Variable interest entity

Virginia City Hybrid Energy Center

  

A 610 MW baseload carbon-capture compatible, clean coal powered electric generation facility in Wise County, Virginia

Virginia Commission

  

Virginia State Corporation Commission

Virginia Power

  

The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments, or the entirety of Virginia Electric and Power Company and its consolidated subsidiaries

VOC

  

Volatile organic compounds

Warren County

  

A 1,350 MW combined-cycle, natural gas-fired power station in Warren County, Virginia

WECTEC

  

WECTEC Global Project Services, Inc. (formerly known as Stone & Webster, Inc.), a wholly-owned subsidiary of Westinghouse

West Virginia Commission

  

Public Service Commission of West Virginia

Western System

  

Collection of 212 miles of various diameter natural gas pipelines and three compressor stations in Ohio

Westinghouse

  

Westinghouse Electric Company LLC

Wexpro

  

The legal entity, Wexpro Company, one or more of its consolidated subsidiaries, or the entirety of Wexpro Company and its consolidated subsidiaries

Wexpro Agreement

  

An agreement effective August 1981, which sets forth the rights of Questar Gas to receive certain benefits from Wexpro’s operations, including cost-of-service gas

Wexpro II Agreement

  

An agreement with the states of Utah and Wyoming modeled after the Wexpro Agreement that allows for the addition of properties under the cost-of-service methodology for the benefit of Questar Gas customers

Whitehouse

  

A 20 MW utility-scale solar power station in Louisa County, VA

White River Hub

  

White River Hub, LLC

Woodland

  

A 19 MW utility-scale solar power station in Isle of Wight County, VA

Wyoming Commission

  

Wyoming Public Service Commission

 

        7


Part I

 

 

 

Item 1. Business

GENERAL

Dominion Energy, headquartered in Richmond, Virginia and incorporated in Virginia in 1983, is one of the nation’s largest producers and transporters of energy. Dominion Energy’s strategy is to be a leading sustainable provider of electricity, natural gas and related services to customers primarily in the eastern and Rocky Mountain regions of the U.S. As of December 31, 2018, Dominion Energy’s portfolio of assets included approximately 26,000 MW of electric generating capacity, 6,700 miles of electric transmission lines, 58,300 miles of electric distribution lines, 14,800 miles of natural gas transmission, gathering and storage pipelines and 52,300 miles of gas distribution pipeline, exclusive of service lines. As of December 31, 2018, Dominion Energy served more than 5 million utility and retail energy customers and operated one of the nation’s largest underground natural gas storage systems, with approximately 1 trillion cubic feet of storage capacity.

In January 2019, Dominion Energy completed the SCANA Combination in a stock-for-stock merger valued at $13.4 billion. SCANA is primarily engaged in the generation, transmission and distribution of electricity in the central, southern and southwestern portions of South Carolina and in the distribution of natural gas in North Carolina and South Carolina. In addition, SCANA markets natural gas to retail customers in the southeast U.S. Following the completion of the SCANA Combination, Dominion Energy’s portfolio of assets includes approximately 32,000 MW of electric generating capacity, 10,200 miles of electric transmission lines, 84,800 miles of electric distribution lines, 15,900 miles of natural gas transmission, gathering and storage pipelines and 92,900 miles of gas distribution pipeline, exclusive of service lines. Dominion Energy operates approximately 1 trillion cubic feet of natural gas storage capacity and serves nearly 7.5 million utility and retail energy customers. SCANA operates as a wholly-owned subsidiary of Dominion Energy. SCANA and one of its wholly-owned subsidiaries, SCE&G, are currently SEC registrants. SCANA and SCE&G file a combined Form 10-K, which is not combined herein.

Dominion Energy continues to focus on expanding and improving its regulated and long-term contracted electric and natural gas businesses while transitioning to a cleaner energy future. The capital investment program for 2019 through 2023 includes a focus on upgrading the electric grid in Virginia through investments in additional renewable generation facilities, strategic undergrounding, energy conservation programs and smart-grid devices. Renewable generation facilities are expected to include investments in utility-scale solar and offshore wind projects. In addition, Dominion Energy is currently seeking, or intends to seek, license extensions for its regulated nuclear power stations in Virginia. Other drivers for the capital investment program include the construction of infrastructure to handle the increase in natural gas production from the Marcellus and Utica Shale formations, including investing in Atlantic Coast Pipeline which is focused on constructing an approximately 600-mile natural gas pipeline running from West Virginia through Virginia to North Carolina, to increase natural gas supplies in the region. Dominion Energy also plans to upgrade its gas and electric transmission and distribution networks and meet environmental requirements and standards set by various regulatory bodies.

Dominion Energy has transitioned over the past decade to a more regulated, less volatile earnings mix as evidenced by its capital investments in regulated infrastructure, including the SCANA Combination and Dominion Energy Questar Combination, and in infrastructure whose output is sold under long-term purchase agreements, as well as the sales of certain merchant generating facilities and equity method investments in 2018 and the electric retail energy marketing business in March 2014. Dominion Energy expects approximately 95% of earnings from its primary operating segments to come from regulated and long-term contracted businesses. Dominion Energy’s nonregulated operations include merchant generation, energy marketing and price risk management activities and natural gas retail energy marketing operations. Dominion Energy’s operations are conducted through various subsidiaries, including Virginia Power and Dominion Energy Gas.

Virginia Power, headquartered in Richmond, Virginia and incorporated in Virginia in 1909 as a Virginia public service corporation, is a wholly-owned subsidiary of Dominion Energy and a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and North Carolina. In Virginia, Virginia Power conducts business under the name “Dominion Energy Virginia” and primarily serves retail customers. In North Carolina, it conducts business under the name “Dominion Energy North Carolina” and serves retail customers located in the northeastern region of the state, excluding certain municipalities. In addition, Virginia Power sells and transmits electricity at wholesale prices to rural electric cooperatives, municipalities and into wholesale electricity markets. All of Virginia Power’s stock is owned by Dominion Energy.

Dominion Energy Gas, a limited liability company formed in September 2013, is a wholly-owned subsidiary of Dominion Energy and a holding company. It serves as the intermediate parent company for certain of Dominion Energy’s regulated natural gas operating subsidiaries, which conduct business activities through a regulated interstate natural gas transmission pipeline and underground storage system in the Northeast, mid-Atlantic and Midwest states, regulated gas transportation and distribution operations in Ohio, and gas gathering and processing activities primarily in West Virginia, Ohio and Pennsylvania. Dominion Energy Gas’ principal wholly-owned subsidiaries are DETI, East Ohio, DGP and Dominion Iroquois. DETI is an interstate natural gas transmission pipeline company serving a broad mix of customers such as local gas distribution companies, marketers, interstate and intrastate pipelines, electric power generators and natural gas producers. The DETI system links to other major pipelines and markets in the mid-Atlantic, Northeast, and Midwest including Dominion Energy’s Cove Point Pipeline. DETI also operates one of the largest underground natural gas storage systems in the U.S. In August 2016, DETI transferred its gathering and processing facilities to DGP. East Ohio is a regulated natural gas distribution operation serving residential, commercial and industrial gas sales and transportation customers. Its service territory includes Cleveland, Akron, Canton, Youngstown and other eastern and western Ohio communities. At December 31, 2018, Dominion Energy Gas holds a 24.07% noncontrolling partnership interest in Iroquois, a FERC-regulated interstate natural gas pipeline in New York and Connecticut. All of Dominion Energy Gas’ membership interests are owned by Dominion Energy.

 

 

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Amounts and information disclosed for Dominion Energy are inclusive of Virginia Power and/or Dominion Energy Gas, where applicable.

 

 

EMPLOYEES

Immediately following the SCANA Combination, Dominion Energy had approximately 21,300 full-time employees, of which approximately 6,200 are subject to collective bargaining agreements, including approximately 6,800 full-time employees at Virginia Power, of which approximately 2,900 are subject to collective bargaining agreements and approximately 3,100 full-time employees at Dominion Energy Gas, of which approximately 2,100 are subject to collective bargaining agreements.

 

 

WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANIES

The Companies file their annual, quarterly and current reports, proxy statements and other information with the SEC. Their SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov.

The Companies make their SEC filings available, free of charge, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, through Dominion Energy’s website, http://www.dominionenergy.com, as soon as reasonably practicable after filing or furnishing the material to the SEC. Information contained on Dominion Energy’s website, including but not limited to reports mentioned in Environmental Strategy, is not incorporated by reference in this report.

 

 

ACQUISITIONS AND DISPOSITIONS

The following are significant acquisitions and divestitures by the Companies during the last five years.

ACQUISITION OF SCANA

In January 2019, Dominion Energy and SCANA completed a stock-for-stock merger valued at $13.4 billion, inclusive of SCANA’s outstanding debt, which totaled $6.9 billion at closing. Following completion of the SCANA Combination, SCANA operates as a wholly-owned subsidiary of Dominion Energy. In connection with the SCANA Combination, SCE&G will provide refunds and restitution of $2.0 billion over 20 years with capital support from Dominion Energy that, along with the benefit of the 2017 Tax Reform Act, is expected to result in an approximate 15% reduction to SCE&G electric service customers’ bills, compared to May 2017, as well as exclude from rate recovery $2.4 billion of costs related to the NND Project and $180 million of costs associated with the purchase of the Columbia Energy Center power station. See Note 3 to the Consolidated Financial Statements for additional information.

PURCHASE OF DOMINION ENERGY MIDSTREAM UNITS

In January 2019, Dominion Energy acquired all outstanding partnership interests of Dominion Energy Midstream not owned

by Dominion Energy through the issuance of 22.5 million common shares. See Note 19 to the Consolidated Financial Statements for additional information.

SALE OF CERTAIN MERCHANT GENERATION FACILITIES

In December 2018, Dominion Energy completed the sale of Fairless and Manchester for total consideration of $1.2 billion, subject to customary closing adjustments. See Note 10 to the Consolidated Financial Statements for additional information.

SALE OF INTEREST IN BLUE RACER

In December 2018, Dominion Energy completed the sale of its 50% limited partner interest in Blue Racer for total consideration of $1.2 billion. In addition, the purchaser agreed to pay additional consideration contingent upon the achievement of certain financial performance milestones of Blue Racer from 2019 through 2021. See Note 9 to the Consolidated Financial Statements for additional information.

ACQUISITION OF DOMINION ENERGY QUESTAR

In September 2016, Dominion Energy completed the Dominion Energy Questar Combination for total consideration of $4.4 billion and Dominion Energy Questar became a wholly-owned subsidiary of Dominion Energy. See Note 3 to the Consolidated Financial Statements for additional information.

ACQUISITION OF WHOLLY-OWNED MERCHANT SOLAR PROJECTS

Throughout 2017, Dominion Energy completed the acquisition of various wholly-owned merchant solar projects in California, North Carolina and Virginia for $356 million. The projects cost $541 million to construct, including the initial acquisition cost, and generate 259 MW.

Throughout 2016, Dominion Energy completed the acquisition of various wholly-owned merchant solar projects in North Carolina, South Carolina and Virginia for $32 million. The projects cost $421 million to construct, including the initial acquisition cost, and generate 221 MW.

Throughout 2015, Dominion Energy completed the acquisition of various wholly-owned merchant solar projects in California and Virginia for $381 million. The projects cost $588 million to construct, including the initial acquisition cost, and generate 182 MW.

Throughout 2014, Dominion Energy completed the acquisition of various wholly-owned solar development projects in California for $200 million. The projects cost $578 million to construct, including the initial acquisition cost, and generate 179 MW.

See Note 3 to the Consolidated Financial Statements for additional information.

ACQUISITION OF VIRGINIA POWER SOLAR PROJECTS

In 2018, Virginia Power entered into agreements to acquire two solar development projects in North Carolina and Virginia. The projects are expected to close in 2019 and 2020 with a total expected cost of $250 million once constructed, including the initial acquisition cost, and will generate approximately 155 MW combined.

In 2017, Virginia Power entered into agreements to acquire two solar development projects in North Carolina. The first proj-

 

 

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ect closed in 2018 and the second is expected to close in 2019 with a total expected cost of $280 million once constructed, including the initial acquisition cost, and will generate approximately 155 MW combined.

See Note 10 to the Consolidated Financial Statements for additional information.

SALE OF CERTAIN RETAIL ENERGY MARKETING ASSETS

In October 2017, Dominion Energy entered into an agreement to sell certain assets associated with its nonregulated retail energy marketing operations for total consideration of $143 million, subject to customary approvals and certain adjustments. In December 2017, the first phase of the agreement closed for $79 million. In October 2018, the second phase of the agreement closed for $63 million. Pursuant to the agreement, Dominion Energy entered into a commission agreement with the buyer upon the first closing in December 2017, under which the buyer will pay a commission in connection with the right to use Dominion Energy’s brand in marketing materials and other services over a ten-year term. See Note 10 to the Consolidated Financial Statements for additional information.

ASSIGNMENT OF TOWER RENTAL PORTFOLIO

Virginia Power rents space on certain of its electric transmission towers to various wireless carriers for communications antennas and other equipment. In March 2017, Virginia Power sold its rental portfolio to Vertical Bridge Towers II, LLC for $91 million in cash. See Note 10 to the Consolidated Financial Statements for additional information.

ACQUISITION OF NON-WHOLLY-OWNED MERCHANT SOLAR PROJECTS

In 2015, Dominion Energy acquired 50% of the units in Four Brothers and Three Cedars from SunEdison for $107 million. In November 2016, NRG acquired the 50% of units in Four Brothers and Three Cedars previously held by SunEdison. In August 2018, NRG’s ownership in Four Brothers and Three Cedars was transferred to GIP. The facilities began commercial operations in the third quarter of 2016, with generating capacity of 530 MW, at a cost of $1.1 billion. See Note 3 to the Consolidated Financial Statements for additional information.

SALE OF INTEREST IN MERCHANT SOLAR PROJECTS

In September 2015, Dominion Energy signed an agreement to sell a noncontrolling interest (consisting of 33% of the equity interests) in all of its then wholly-owned merchant solar projects, 24 solar projects totaling 425 MW, to SunEdison. In December 2015, the sale of interest in 15 of the solar projects closed for $184 million with the sale of interest in the remaining projects completed in January 2016 for $117 million. Upon closing, SunEdison sold its interest in these projects to Terra Nova Renewable Partners. See Note 3 to the Consolidated Financial Statements for additional information.

DOMINION ENERGY MIDSTREAM ACQUISITION OF INTEREST IN IROQUOIS

In September 2015, Dominion Energy Midstream acquired from NG and NJNR a 25.93% noncontrolling partnership interest in Iroquois. The investment was recorded at $216 million based on

the value of Dominion Energy Midstream’s common units at closing. The common units issued to NG and NJNR are reflected as noncontrolling interest in Dominion Energy’s Consolidated Financial Statements.

ACQUISITION OF DECG

In January 2015, Dominion Energy completed the acquisition of 100% of the equity interests of DECG from SCANA for $497 million in cash, as adjusted for working capital.

ASSIGNMENTS OF SHALE DEVELOPMENT RIGHTS

In December 2013, Dominion Energy Gas closed on agreements with natural gas producers to convey over time approximately 100,000 acres of Marcellus Shale development rights underneath several natural gas storage fields. The agreements provided for payments to Dominion Energy Gas, subject to customary adjustments, of up to approximately $200 million over a period of nine years, and an overriding royalty interest in gas produced from that acreage. In March 2015, Dominion Energy Gas and a natural gas producer closed on an amendment to a December 2013 agreement, which included the immediate conveyance of approximately 9,000 acres of Marcellus Shale development rights and a two-year extension of the term of the original agreement. The conveyance of development rights resulted in the recognition of $43 million of previously deferred revenue. In April 2016, Dominion Energy Gas and the natural gas producer closed on an amendment to the agreement, which included the immediate conveyance of a 32% partial interest in the remaining approximately 70,000 acres. This conveyance resulted in the recognition of the remaining $35 million of previously deferred revenue. In August 2017, Dominion Energy Gas and a natural gas producer signed an amendment to the agreement, which included the finalization of contractual matters on previous conveyances, the conveyance of Dominion Energy Gas’ remaining 68% interest in approximately 70,000 acres and the elimination of Dominion Energy Gas’ overriding royalty interest in gas produced from all acreage. As a result of this amendment, Dominion Energy Gas received total consideration of $130 million, with $65 million received in November 2017 and $65 million received in September 2018 in connection with the final conveyance.

In March 2015, Dominion Energy Gas conveyed to a natural gas producer approximately 11,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields and received proceeds of $27 million and an overriding royalty interest in gas produced from the acreage.

In September 2015, Dominion Energy Gas closed on an agreement with a natural gas producer to convey approximately 16,000 acres of Utica and Point Pleasant Shale development rights underneath one of its natural gas storage fields. The agreement provided for a payment to Dominion Energy Gas, subject to customary adjustments, of $52 million and an overriding royalty interest in gas produced from the acreage.

In November 2014, Dominion Energy Gas closed on an agreement with a natural gas producer to convey over time approximately 24,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields. The agreement provided for payments to Dominion Energy Gas, subject to customary adjustments, of approximately $120 million over a period of four years, and an overriding royalty interest in gas

 

 

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produced from the acreage. In January 2018, Dominion Energy Gas and the natural gas producer closed on an amendment to the agreement, which included the conveyance of Dominion Energy Gas’ remaining 50% interest in approximately 18,000 acres and the elimination of Dominion Energy Gas’ overriding royalty interest in gas produced from all acreage for proceeds of $28 million.

See Note 10 to the Consolidated Financial Statements for additional information on certain of these sales of Marcellus acreage.

SALE OF ELECTRIC RETAIL ENERGY MARKETING BUSINESS

In March 2014, Dominion Energy completed the sale of its electric retail energy marketing business. The proceeds were $187 million, net of transaction costs.

SALE OF PIPELINES AND PIPELINE SYSTEMS

In March 2014, Dominion Energy Gas sold the Northern System to an affiliate that subsequently sold the Northern System to Blue Racer for consideration of $84 million. Dominion Energy Gas’ consideration consisted of $17 million in cash proceeds and the extinguishment of affiliated current borrowings of $67 million and Dominion Energy’s consideration consisted of cash proceeds of $84 million.

 

 

OPERATING SEGMENTS

Effective January 2019, Dominion Energy manages its daily operations through four primary operating segments: Power Delivery, Power Generation, Gas Infrastructure and Southeast Energy. Dominion Energy also reports a Corporate and Other segment, which includes its corporate, service company and other functions (including unallocated debt). In addition, Corporate and Other includes specific items attributable to Dominion Energy’s other operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or in allocating resources.

Virginia Power manages its daily operations through two primary operating segments: Power Delivery and Power Generation. It also reports a Corporate and Other segment that primarily includes specific items attributable to its operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or in allocating resources.

Dominion Energy Gas manages its daily operations through its primary operating segment: Gas Infrastructure. It also reports a Corporate and Other segment that primarily includes specific items attributable to its operating segment that are not included in profit measures evaluated by executive management in assessing the segment’s performance or in allocating resources and the effect of certain items recorded at Dominion Energy Gas as a result of Dominion Energy’s basis in the net assets contributed.

While daily operations are managed through the operating segments previously discussed, assets remain wholly-owned by the Companies and their respective legal subsidiaries.

A description of the operations included in the Companies’ primary operating segments is as follows:

 

Primary Operating
Segment
  Description of Operations   Dominion
Energy
    Virginia
Power
    Dominion
Energy Gas
 

Power Delivery

 

Regulated electric distribution

    X       X    
   

Regulated electric transmission

    X       X          

Power Generation

 

Regulated electric generation fleet

    X       X    
   

Merchant electric generation fleet

    X                  

Gas Infrastructure

 

Gas transmission and storage

    X (1)         X  
 

Gas distribution and storage

    X         X  
 

Gas gathering and processing

    X         X  
 

LNG terminalling and storage

    X      
   

Nonregulated retail energy marketing

    X                  

Southeast Energy(2)

 

Regulated electric distribution

    X      
 

Regulated electric transmission

    X      
 

Regulated electric generation fleet

    X      
 

Gas distribution and storage

    X      
   

Nonregulated retail energy marketing

    X                  

 

(1)

Includes remaining producer services activities.

(2)

Consists of the operations of SCANA.

Power Delivery

The Power Delivery Operating Segment of Dominion Energy and Virginia Power includes Virginia Power’s regulated electric transmission and distribution (including customer service) operations, which serve approximately 2.6 million residential, commercial, industrial and governmental customers in Virginia and North Carolina.

Power Delivery’s investment plan includes spending approximately $10.0 billion from 2019 through 2023 to upgrade or add new transmission, including RTEP projects, and distribution lines, substations and other facilities to meet growing electricity demand within its service territory and maintain reliability and regulatory compliance. The proposed electric delivery infrastructure projects are intended to address both continued customer growth and increases in electricity consumption which are partially driven by new and larger data center customers. Additionally, Power Delivery has created a ten-year plan to transform its electric grid into a smarter, stronger and greener grid. This plan will address the structural limitations of Virginia Power’s distribution grid in a systematic manner in order to recognize and accommodate fundamental changes and requirements in the energy industry. The objective is to address both customer and system needs by (i) achieving even higher levels of reliability and resiliency against natural and man-made threats, (ii) leveraging technology to enhance the customer experience and improve the

 

 

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operation of the system and (iii) safely and effectively integrating new utility-scale renewable generation and storage as well as customer–level distributed energy resources such as rooftop solar and battery storage.

Revenue provided by electric distribution operations is based primarily on rates established by state regulatory authorities and state law. Approximately 85% of revenue comes from serving Virginia jurisdictional customers. Variability in earnings is driven primarily by changes in rates, weather, customer growth and other factors impacting consumption such as the economy and energy conservation, in addition to operating and maintenance expenditures. Operationally, electric distribution continues to focus on improving service levels while striving to reduce costs and link investments to operational results. SAIDI performance results, excluding major events, were 134 minutes for the three- year average ending 2018, up from the previous three-year average of 125 minutes primarily due to increased storm activity during the year. In the future, safety, electric service reliability, outage durations and customer service will remain key focus areas for electric distribution.

Revenue provided by Virginia Power’s electric transmission operations is based primarily on rates approved by FERC. The profitability of this business is dependent on its ability, through the rates it is permitted to charge, to recover costs and earn a reasonable return on its capital investments. Variability in earnings primarily results from changes in rates and the timing of property additions, retirements and depreciation.

Virginia Power is a member of PJM, an RTO, and its electric transmission facilities are integrated into PJM wholesale electricity markets. Consistent with the increased authority given to NERC by EPACT, Virginia Power’s electric transmission operations are committed to meeting NERC standards, modernizing its infrastructure and maintaining superior system reliability. Virginia Power’s electric transmission operations will continue to focus on safety, operational performance, NERC compliance and execution of PJM’s RTEP.

COMPETITION

There is no competition for electric distribution service within Virginia Power’s service territory in Virginia and North Carolina and no such competition is currently permitted. Historically, since its electric transmission facilities are integrated into PJM and electric transmission services are administered by PJM, there was no competition in relation to transmission service provided to customers within the PJM region. However, competition from non-incumbent PJM transmission owners for development, construction and ownership of certain transmission facilities in Virginia Power’s service territory is permitted pursuant to Order 1000, subject to state and local siting and permitting approvals. This could result in additional competition to build and own transmission infrastructure in Virginia Power’s service area in the future and could allow Dominion Energy to seek opportunities to build and own facilities in other service territories.

REGULATION

Virginia Power’s electric distribution service, including the rates it may charge to jurisdictional customers, is subject to regulation by the Virginia and North Carolina Commissions. Virginia Power’s wholesale electric transmission rates, tariffs and terms of service

are subject to regulation by FERC. Electric transmission siting authority remains the jurisdiction of the Virginia and North Carolina Commissions. However, EPACT provides FERC with certain backstop authority for transmission siting. See State Regulations and Federal Regulations in Regulation and Note 13 to the Consolidated Financial Statements for additional information.

PROPERTIES

For a description of Dominion Energy and Virginia Power’s existing transmission facilities see Item 2. Properties.

As a part of PJM’s RTEP process, PJM authorized the following material reliability projects (including Virginia Power’s estimated cost):

    Surry-to-Skiffes Creek-to-Whealton ($435 million);
    Idylwood substation ($110 million);
    Dooms-to-Lexington ($130 million);
    Warrenton (including Remington CT-to-Warrenton, Vint Hill-to-Wheeler-to-Gainesville, and Vint Hill and Wheeler switching stations) ($120 million);
    Remington/Gordonsville/Pratts Area Improvement (including Remington-to-Gordonsville, and new Gordonsville substation transformer) ($115 million);
    Gainesville-to-Haymarket ($180 million);
    Cunningham-to-Dooms ($65 million);
    Carson-to-Rogers Road ($55 million);
    Dooms-to-Valley ($65 million);
    Mt. Storm-to-Valley ($285 million);
    Glebe substation and North Potomac Yard terminal station underground ($125 million); and
    Idylwood-to-Tysons ($125 million).

In addition, in December 2017, the Virginia Commission granted Virginia Power a CPCN to rebuild and operate in Lancaster County, Virginia and Middlesex County, Virginia, approximately 2 miles of existing 115 kV transmission lines to be constructed under the Rappahannock River between Harmony Village Substation and White Stone Substation. The total estimated cost of the project is approximately $105 million.

Virginia Power is investing in transmission substation physical security and expects to invest an additional $150 million to $200 million through 2023 to strengthen its electrical system to better protect critical equipment, enhance its spare equipment process and create multiple levels of security.

For a description of Dominion Energy and Virginia Power’s existing distribution facilities see Item 2. Properties.

Virginia legislation provides for the recovery of costs, subject to approval by the Virginia Commission, for Virginia Power to move approximately 4,000 miles of electric distribution lines underground. The program is designed to reduce restoration outage time by moving Virginia Power’s most outage-prone overhead distribution lines underground, has an annual investment cap of approximately $175 million and is expected to be completed by 2028. The Virginia Commission has approved three phases of the program encompassing approximately 1,100 miles of converted lines and $422 million in capital spending (with $404 million recoverable through Rider U).

See Note 13 to the Consolidated Financial Statements for more information.

 

 

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SOURCES OF ENERGY SUPPLY

Power Delivery’s supply of electricity to serve Virginia Power customers is produced or procured by Power Generation. See Power Generation for additional information.

SEASONALITY

Power Delivery’s earnings vary seasonally as a result of the impact of changes in temperature, the impact of storms and other catastrophic weather events, and the availability of alternative sources for heating on demand by residential and commercial customers. Generally, the demand for electricity peaks during the summer and winter months to meet cooling and heating needs, respectively. An increase in heating degree days for Power Delivery’s electric utility-related operations does not produce the same increase in revenue as an increase in cooling degree days, due to seasonal pricing differentials and because alternative heating sources are more readily available.

Power Generation

The Power Generation Operating Segment of Virginia Power includes the generation operations of the Virginia Power regulated electric utility and its related energy supply operations. Virginia Power’s utility generation operations primarily serve the supply requirements for Power Delivery’s utility customers. Virginia Power’s non-jurisdictional operations serve certain large-scale customers.

The Power Generation Operating Segment of Dominion Energy includes Virginia Power’s generation facilities and its related energy supply operations as well as the generation operations of Dominion Energy’s merchant fleet and energy marketing and price risk management activities for these assets.

Power Generation’s investment plan includes spending approximately $10.3 billion from 2019 through 2023 to maintain existing and construct new generation capacity to meet growing electricity demand within its service territory and maintain reliability. The most significant investments are expanding the renewable generation asset portfolio and the subsequent license renewal projects seeking 20-year license extensions for the regulated nuclear power stations in Virginia. See Properties and Environmental Strategy for additional information on this and other utility projects.

In addition, Dominion Energy’s merchant generation fleet includes numerous renewable generation facilities, including solar generation and wind facilities in operation or development in ten states, including Virginia. The output of these facilities is primarily sold under long-term power purchase agreements with terms generally ranging from 15 to 25 years. See Notes 3 and 10 to the Consolidated Financial Statements for additional information regarding certain solar projects.

Earnings for the Power Generation Operating Segment of Virginia Power primarily result from the sale of electricity generated by its utility fleet. Revenue is based primarily on rates established by state regulatory authorities and state law. Approximately 76% of revenue comes from serving Virginia jurisdictional customers. Base rates for the Virginia jurisdiction are set using a modified cost-of-service rate model, and are generally designed to allow an opportunity to recover the cost of providing utility service and earn a reasonable return on investments used to provide that service. Earnings variability may arise when revenues are impacted by

factors not reflected in current rates, such as the impact of weather on customers’ demand for services. Likewise, earnings may reflect variations in the timing or nature of expenses as compared to those contemplated in current rates, such as labor and benefit costs, capacity expenses, and the timing, duration and costs of scheduled and unscheduled outages. The cost of fuel and purchased power is generally collected through fuel cost-recovery mechanisms established by regulators and does not materially impact net income. The cost of new generation facilities is generally recovered through rate adjustment clauses in Virginia. Variability in earnings from rate adjustment clauses reflects changes in the authorized ROE and the carrying amount of these facilities, which are largely driven by the timing and amount of capital investments, as well as depreciation. See Note 13 to the Consolidated Financial Statements for additional information.

The Power Generation Operating Segment of Dominion Energy derives its earnings primarily from the sale of electricity generated by Virginia Power’s utility and Dominion Energy’s merchant generation assets, as well as from associated capacity and ancillary services. Variability in earnings provided by Dominion Energy’s nonrenewable merchant assets relates to changes in market-based prices received for electricity and capacity. Market-based prices for electricity are largely dependent on commodity prices and the demand for electricity. Capacity prices are dependent upon resource requirements in relation to the supply available (both existing and new) in the forward capacity auctions, which are held approximately three years in advance of the associated delivery year. Dominion Energy manages the electric price volatility of its merchant generation fleet by hedging a substantial portion of its expected near-term energy sales with derivative instruments. Variability also results from changes in weather, the cost of fuel consumed, labor and benefits and the timing, duration and costs of scheduled and unscheduled outages.

COMPETITION

Power Generation Operating Segment—Dominion Energy and Virginia Power

Virginia Power’s generation operations are not subject to significant competition as only a limited number of its Virginia jurisdictional electric utility customers have retail choice. See Electric under State Regulations in Regulation for more information. Currently, North Carolina does not offer retail choice to electric customers.

Virginia Power’s non-jurisdictional operations are not currently subject to significant competition as the output from these facilities is primarily sold under long-term power purchase agreements with terms generally ranging from 16 to 25 years. However, in the future, such operations may compete with other power generation facilities to serve certain large-scale customers after the power purchase agreements expire.

Power Generation Operating Segment—Dominion Energy

Power Generation’s renewable generation projects are not currently subject to significant competition as the output from these facilities is primarily sold under long-term power purchase agreements with terms generally ranging from 15 to 25 years. Competition for the merchant fleet is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets and transmission capacity, technological

 

 

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advances in power generation, the actions of environmental and other regulatory authorities and other factors. These competitive factors may negatively impact the merchant fleet’s ability to profit from the sale of electricity and related products and services.

Unlike Power Generation’s regulated generation fleet, its merchant generation fleet is dependent on its ability to operate in a competitive environment and does not have a predetermined rate structure that provides for a rate of return on its capital investments. Power Generation’s nonrenewable merchant assets operate within functioning RTOs and primarily compete on the basis of price. Competitors include other generating assets bidding to operate within the RTOs. Power Generation’s nonrenewable merchant units compete in the wholesale market with other generators to sell a variety of products including energy, capacity and ancillary services. It is difficult to compare various types of generation given the wide range of fuels, fuel procurement strategies, efficiencies and operating characteristics of the fleet within any given RTO. However, Dominion Energy applies its expertise in operations, dispatch and risk management to maximize the degree to which its nonrenewable merchant fleet is competitive compared to similar assets within the region.

In November 2017, Connecticut adopted the Act Concerning Zero Carbon Solicitation and Procurement, which allows nuclear generating facilities to compete for power purchase agreements in a state sponsored procurement for electricity. In February 2018, Connecticut regulators recommended pursuing the procurement and, in May 2018, issued a request for proposals. Millstone participated in the state sponsored procurement for electricity. In December 2018, Connecticut’s Public Utility Regulatory Authority confirmed that Millstone should be considered an “existing resource confirmed at risk” in the state’s Department of Energy and Environmental Protection zero carbon procurement. Being considered “at risk” allows the Department of Energy and Environmental Protection to consider factors other than price, such as environmental and economic benefits, when evaluating Dominion Energy’s bids. Also in December 2018, Millstone was awarded the right to negotiate a ten-year agreement for nine million MWh per year. Dominion Energy continues to engage with applicable parties in Connecticut to ensure pricing that recognizes Millstone’s environmental and economic benefits.

REGULATION

Virginia Power and Dominion Energy’s generation fleet are subject to regulation by FERC, the NRC, the EPA, the DOE, the Army Corps of Engineers and other federal, state and local authorities. Virginia Power’s utility generation fleet is also subject to regulation by the Virginia and North Carolina Commissions. See Regulation, Future Issues and Other Matters in Item 7. MD&A and Notes 13 and 22 to the Consolidated Financial Statements for more information.

PROPERTIES

For a listing of Dominion Energy and Virginia Power’s existing generation facilities, see Item 2. Properties.

Virginia Power is developing, financing and constructing new generation capacity to meet growing electricity demand within its service territory. Significant projects under construction or development are set forth below:

  Virginia Power plans to acquire or construct certain solar facilities in Virginia and North Carolina. See Notes 10 and 13 to the Consolidated Financial Statements for more information.
  Virginia Power continues to consider the construction of a third nuclear unit at a site located at North Anna. See Future Issues and Other Matters in Item 7 for more information on this project.
  Virginia Power is considering the construction of an up to $2 billion hydroelectric pumped storage facility in Southwest Virginia.
  In November 2018, Virginia Power received approval from the Virginia Commission to develop two 6 MW wind turbines off the coast of Virginia for the Coastal Virginia Offshore Wind project. The project is expected to cost approximately $300 million and to be in service in late 2020.

SOURCES OF ENERGY SUPPLY

Power Generation Operating Segment—Dominion Energy and Virginia Power

Power Generation uses a variety of fuels to power its electric generation and purchases power for utility system load requirements and to satisfy physical forward sale requirements, as described below. Some of these agreements have fixed commitments and are included as contractual obligations in Future Cash Payments for Contractual Obligations and Planned Capital Expenditures in Item 7. MD&A.

Nuclear Fuel—Power Generation primarily utilizes long-term contracts to support its nuclear fuel requirements. Worldwide market conditions are continuously evaluated to ensure a range of supply options at reasonable prices which are dependent on the market environment. Current agreements, inventories and spot market availability are expected to support current and planned fuel supply needs. Additional fuel is purchased as required to ensure optimal cost and inventory levels.

Fossil Fuel—Power Generation primarily utilizes natural gas and coal in its fossil fuel plants. All recent fossil fuel plant construction for Power Generation involves natural gas generation.

Power Generation’s natural gas and oil supply is obtained from various sources including purchases from major and independent producers in the Mid-Continent and Gulf Coast regions, purchases from local producers in the Appalachian area and Marcellus and Utica regions, purchases from gas marketers and withdrawals from underground storage fields owned by Dominion Energy or third parties. Power Generation manages a portfolio of natural gas transportation contracts (capacity) that provides for reliable natural gas deliveries to its gas turbine fleet, while minimizing costs.

Power Generation’s coal supply is obtained through long-term contracts and short-term spot agreements from domestic suppliers.

Biomass—Power Generation’s biomass supply is obtained through long-term contracts and short-term spot agreements from local suppliers.

Purchased Power—Power Generation purchases electricity from the PJM spot market and through power purchase agree-

 

 

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ments with other suppliers to provide for utility system load requirements.

Power Generation also occasionally purchases electricity from the ISO-NE spot market to satisfy physical forward sale requirements as part of its merchant generation operations.

Power Generation Operating Segment—Virginia Power

Presented below is a summary of Virginia Power’s actual system output by energy source:

 

Source    2018     2017     2016  

Natural gas

     33     32     31

Nuclear(1)

     29       32       31  

Purchased power, net

     19       14       8  

Coal(2)

     13       17       24  

Other(3)

     6       5       6  

Total

     100     100     100

 

(1)

Excludes ODEC’s 11.6% ownership interest in North Anna.

(2)

Excludes ODEC’s 50.0% ownership interest in the Clover power station.

(3)

Includes oil, hydro, biomass and solar.

SEASONALITY

Power Generation Operating Segment—Dominion Energy and Virginia Power

Sales of electricity for Power Generation typically vary seasonally as a result of the impact of changes in temperature and the availability of alternative sources for heating on demand by residential and commercial customers. See Power Delivery-Seasonality above for additional considerations that also apply to Power Generation.

NUCLEAR DECOMMISSIONING

Power Generation Operating Segment—Dominion Energy and Virginia Power

Virginia Power has a total of four licensed, operating nuclear reactors at Surry and North Anna in Virginia.

Decommissioning involves the decontamination and removal of radioactive contaminants from a nuclear power station once operations have ceased, in accordance with standards established by the NRC. Amounts collected from ratepayers are placed into trusts and are invested to fund the expected future costs of decommissioning the Surry and North Anna units.

Virginia Power believes that the decommissioning funds and their expected earnings for the Surry and North Anna units will be sufficient to cover expected decommissioning costs, particularly when combined with future ratepayer collections and contributions to these decommissioning trusts, if such future collections and contributions are required. This reflects the long-term investment horizon, since the units will not be decommissioned for decades, and a positive long-term outlook for trust fund investment returns. Virginia Power will continue to monitor these trusts to ensure they meet the NRC minimum financial

assurance requirements, which may include, if needed, the use of parent company guarantees, surety bonding or other financial instruments recognized by the NRC.

The estimated cost to decommission Virginia Power’s four nuclear units is reflected in the table below and is primarily based upon site-specific studies completed in 2014. These cost studies are generally completed every four to five years. The current cost estimates assume decommissioning activities will begin shortly after cessation of operations, which will occur when the operating licenses expire.

Under the current operating licenses, Virginia Power is scheduled to decommission the Surry and North Anna units during the period 2032 to 2078. NRC regulations allow licensees to apply for extension of an operating license in up to 20-year increments. Virginia Power has filed an application with the NRC to renew operating licenses for Surry for an additional 20 years. Under its current licenses, the two nuclear units are allowed to generate electricity through 2032 and 2033. A relicensing would extend their lives through 2052 and 2053. Virginia Power expects to submit a license extension application for the two units at North Anna in 2020. Between the four units, Virginia Power estimates that it could spend approximately $3 billion to $4 billion over the next several years on the relicensing process. The existing regulatory framework in Virginia provides rate recovery mechanisms for such costs.

Power Generation Operating Segment—Dominion Energy

In addition to the four nuclear units discussed above, Dominion Energy has two licensed, operating nuclear reactors at Millstone in Connecticut. A third Millstone unit ceased operations before Dominion Energy acquired the power station. In May 2013, Dominion Energy ceased operations at its single Kewaunee unit in Wisconsin and commenced decommissioning activities using the SAFSTOR methodology. The planned decommissioning completion date is 2073, which is within the NRC allowed 60-year window.

As part of Dominion Energy’s acquisition of both Millstone and Kewaunee, it acquired decommissioning funds for the related units. Any funds remaining in Kewaunee’s trust after decommissioning is completed are required to be refunded to Wisconsin ratepayers. Dominion Energy believes that the amounts currently available in the decommissioning trusts and their expected earnings will be sufficient to cover expected decommissioning costs for the Millstone and Kewaunee units. Dominion Energy will continue to monitor these trusts to ensure they meet the NRC minimum financial assurance requirements, which may include, if needed, the use of parent company guarantees, surety bonding or other financial instruments recognized by the NRC. The estimated cost to decommission Dominion Energy’s eight units is reflected in the table below and is primarily based upon site-specific studies completed for Surry, North Anna and Millstone in 2014 and for Kewaunee in 2018.

 

 

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The estimated decommissioning costs and license expiration dates for the nuclear units owned by Dominion Energy and Virginia Power are shown in the following table:

 

      NRC
license
expiration
year
     Most
recent
cost
estimate
(2018
dollars)(1)
     Funds in
trusts at
December 31,
2018
     2018
contributions
to trusts
 
(dollars in millions)                            

Surry

           

Unit 1

     2032      $ 624        $   669        $  —  

Unit 2

     2033        646        660         

North Anna

           

Unit 1(2)

     2038        534        536         

Unit 2(2)

     2040        547        504         

Total (Virginia Power)

        2,351        2,369         

Millstone

           

Unit 1(3)

     N/A        381        509         

Unit 2

     2035        587        672         

Unit 3(4)

     2045        713        664         

Kewaunee

           

Unit 1(5)

     N/A        574        724         

Total (Dominion Energy)

            $ 4,606        $4,938        $  —  

 

(1)

The cost estimates shown above reflect reductions for the expected future recovery of certain spent fuel costs based on Dominion Energy and Virginia Power’s contracts with the DOE for disposal of spent nuclear fuel consistent with the reductions reflected in Dominion Energy and Virginia Power’s nuclear decommissioning AROs.

(2)

North Anna is jointly owned by Virginia Power (88.4%) and ODEC (11.6%). However, Virginia Power is responsible for 89.26% of the decommissioning obligation. Amounts reflect 89.26% of the decommissioning cost for both of North Anna’s units.

(3)

Unit 1 permanently ceased operations in 1998, before Dominion Energy’s acquisition of Millstone.

(4)

Millstone Unit 3 is jointly owned by Dominion Energy Nuclear Connecticut, Inc., with a 6.53% undivided interest in Unit 3 owned by Massachusetts Municipal and Green Mountain. Decommissioning cost is shown at Dominion Energy’s ownership percentage. At December 31, 2018, the minority owners held $41 million of trust funds related to Millstone Unit 3 that are not reflected in the table above.

(5)

Permanently ceased operations in 2013.

Also see Notes 14 and 22 to the Consolidated Financial Statements for further information about AROs and nuclear decommissioning, respectively, and Note 9 to the Consolidated Financial Statements for information about nuclear decommissioning trust investments.

Gas Infrastructure

The Gas Infrastructure Operating Segment of Dominion Energy Gas includes certain of Dominion Energy’s regulated natural gas operations. DETI, the gas transmission pipeline and storage business, serves gas distribution businesses and other customers in the Northeast, mid-Atlantic and Midwest. East Ohio, the primary gas distribution business of Dominion Energy Gas, serves residential, commercial and industrial gas sales, transportation and gathering service customers primarily in Ohio. DGP conducts gas gathering and processing activities, which include the sale of extracted products at market rates, primarily in West Virginia, Ohio and Pennsylvania. Dominion Iroquois holds a 24.07% noncontrolling partnership interest in Iroquois, which provides service to local gas distribution companies, electric utilities and electric power

generators, as well as marketers and other end users, through interconnecting pipelines and exchanges primarily in New York.

The Gas Infrastructure Operating Segment of Dominion Energy includes Dominion Energy Gas’ regulated natural gas operations as well as LNG operations, Dominion Energy Questar operations, Hope’s gas distribution operations in West Virginia, DECG’s FERC-regulated interstate natural gas transportation services in South Carolina and southeastern Georgia and nonregulated retail natural gas marketing, as well as Dominion Energy’s investments in Atlantic Coast Pipeline and Iroquois. See Properties and Investments below for additional information regarding the Atlantic Coast Pipeline investment. Dominion Energy’s LNG operations involve the import, export and storage of LNG at Cove Point, transportation of regasified LNG to the interstate pipeline grid and mid-Atlantic and Northeast markets and liquefaction of natural gas for export as LNG.

In September 2016, Dominion Energy completed the Dominion Energy Questar Combination and Dominion Energy Questar, a Rockies-based integrated natural gas company consisting of Questar Gas, Wexpro and Dominion Energy Questar Pipeline, became a wholly-owned subsidiary of Dominion Energy. Questar Gas’ regulated gas distribution operations serves customers in Utah, southwestern Wyoming and southeastern Idaho. Wexpro develops and produces natural gas from reserves supplied to Questar Gas under a cost-of-service framework. Dominion Energy Questar Pipeline provides FERC-regulated interstate natural gas transportation and storage services in Utah, Wyoming and western Colorado. See Acquisitions and Dispositions above and Note 3 to the Consolidated Financial Statements for a description of the Dominion Energy Questar Combination.

Gas Infrastructure’s investment plan includes spending approximately $8.5 billion from 2019 through 2023 to upgrade existing or add new infrastructure to meet growing energy needs within its service territory and maintain reliability. Demand for natural gas is expected to continue to grow as initiatives to transition to gas from more carbon-intensive fuels are implemented. This plan includes Dominion Energy’s portion of spending for the Atlantic Coast Pipeline Project.

Earnings for the Gas Infrastructure Operating Segment of Dominion Energy Gas primarily result from rates established by FERC and the Ohio Commission. The profitability of this business is dependent on Dominion Energy Gas’ ability, through the rates it is permitted to charge, to recover costs and earn a reasonable return on its capital investments. Variability in earnings results from changes in operating and maintenance expenditures, as well as changes in rates and the demand for services, which are dependent on weather, changes in commodity prices and the economy.

Approximately 92% of DETI’s transmission capacity is subscribed including 86% under long-term contracts (two years or greater) and 6% on a year-to-year basis. DETI’s storage services are 100% subscribed with long-term contracts.

Revenue from processing and fractionation operations largely results from the sale of commodities at market prices. For DGP’s processing plants, Dominion Energy Gas receives the wet gas product from producers and may retain the extracted NGLs as compensation for its services. This exposes Dominion Energy Gas to commodity price risk for the value of the spread between the NGL products and natural gas. In addition, Dominion Energy

 

 

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Gas has volumetric risk as the majority of customers receiving these services are not required to deliver minimum quantities of gas.

East Ohio utilizes a straight-fixed-variable rate design for a majority of its customers. Under this rate design, East Ohio recovers a large portion of its fixed operating costs through a flat monthly charge accompanied by a reduced volumetric base delivery rate. Accordingly, East Ohio’s revenue is less impacted by weather-related fluctuations in natural gas consumption than under the traditional rate design.

Earnings for the Gas Infrastructure Operating Segment of Dominion Energy primarily include the results of rates established by FERC and the Ohio, West Virginia, Utah, Wyoming and Idaho Commissions. Additionally, Dominion Energy receives revenue from firm fee-based contractual arrangements, including negotiated rates, for certain LNG storage and terminalling services. The Liquefaction Project has a firm contracted capacity for LNG loading onto ships of approximately 4.6 Mtpa (0.66 Bcfe/day), under normal operating conditions and after accounting for maintenance downtime and other losses. Dominion Energy Questar Pipeline and DECG’s revenues are primarily derived from reservation charges for firm transportation and storage services as provided for in their FERC-approved tariffs. Revenue provided by Questar Gas’ operations is based primarily on rates established by the Utah and Wyoming Commissions. The Idaho Commission has contracted with the Utah Commission for rate oversight of Questar Gas operations in a small area of southeastern Idaho. Hope’s gas distribution operations in West Virginia serve residential, commercial, sale for resale and industrial gas sales, transportation and gathering service customers. Revenue provided by Hope’s operations is based primarily on rates established by the West Virginia Commission. The profitability of these businesses is dependent on their ability, through the rates they are permitted to charge, to recover costs and earn a reasonable return on their capital investments. Variability in earnings results from changes in operating and maintenance expenditures, as well as changes in rates and the demand for services, which are dependent on weather, changes in commodity prices and the economy.

COMPETITION

Gas Infrastructure Operating Segment—Dominion Energy and Dominion Energy Gas

Dominion Energy Gas’ natural gas transmission operations compete with domestic and Canadian pipeline companies. Dominion Energy Gas also competes with gas marketers seeking to provide or arrange transportation, storage and other services. Alternative fuel sources, such as oil or coal, provide another level of competition. Although competition is based primarily on price, the array of services that can be provided to customers is also an important factor. The combination of capacity rights held on certain long-line pipelines, a large storage capability and the availability of numerous receipt and delivery points along its own pipeline system enable Dominion Energy to tailor its services to meet the needs of individual customers.

DGP’s processing and fractionation operations face competition in obtaining natural gas supplies for its processing and related

services. Numerous factors impact any given customer’s choice of processing services provider, including the location of the facilities, efficiency and reliability of operations, and the pricing arrangements offered.

In Ohio, there has been no legislation enacted to require supplier choice for natural gas distribution consumers. However, East Ohio has offered an Energy Choice program to residential and commercial customers since October 2000. East Ohio has since taken various steps approved by the Ohio Commission toward exiting the merchant function, including restructuring its commodity service and placing Energy Choice-eligible customers in a direct retail relationship with participating suppliers. Further, in April 2013, East Ohio fully exited the merchant function for its nonresidential customers, which are now required to choose a retail supplier or be assigned to one at a monthly variable rate set by the supplier. At December 31, 2018, approximately 1.1 million of East Ohio’s 1.2 million Ohio customers were participating in the Energy Choice program.

Gas Infrastructure Operating Segment—Dominion Energy

Questar Gas and Hope do not currently face direct competition from other distributors of natural gas for residential and commercial customers in their service territories as state regulations in Utah, Wyoming and Idaho for Questar Gas, and West Virginia for Hope, do not allow customers to choose their provider at this time. See State Regulations in Regulation for additional information.

Cove Point’s gas transportation, LNG import and storage operations, as well as the Liquefaction Project’s capacity are contracted primarily under long-term fixed reservation fee agreements. However, in the future Cove Point may compete with other independent terminal operators as well as major oil and gas companies on the basis of terminal location, services provided and price. Competition from terminal operators primarily comes from refiners and distribution companies with marketing and trading arms. In addition, Cove Point’s Liquefaction Project may face competition on a global scale as international customers explore other options to meet their energy needs.

Dominion Energy Questar Pipeline and DECG’s pipeline systems generate a substantial portion of their revenue from long-term firm contracts for transportation services and are therefore insulated from competitive factors during the terms of the contracts. When these long-term contracts expire, Dominion Energy Questar Pipeline’s pipeline system faces competitive pressures from similar facilities that serve the Rocky Mountain region and DECG’s pipeline system faces competitive pressures from similar facilities that serve the South Carolina and southeastern Georgia area in terms of location, rates, terms of service, and flexibility and reliability of service.

Dominion Energy’s retail energy marketing operations compete against incumbent utilities and other energy marketers in nonregulated energy markets for natural gas, and provides service to approximately 380,000 customer accounts in five states. The heaviest concentration of customers in these markets is located in states where utilities have the advantage of long-standing commitment to customer choice, primarily Ohio and Pennsylvania.

 

 

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REGULATION

Gas Infrastructure Operating Segment—Dominion Energy and Dominion Energy Gas

Dominion Energy Gas’ natural gas transmission and storage operations are regulated primarily by FERC. East Ohio’s gas distribution operations, including the rates that it may charge to customers, are regulated by the Ohio Commission. See State Regulations and Federal Regulations in Regulation for more information.

Gas Infrastructure Operating Segment—Dominion Energy

Cove Point’s transportation, LNG import and storage operations and Dominion Energy Questar Pipeline and DECG’s operations are regulated primarily by FERC. Questar Gas’ distribution operations, including the rates it may charge customers, are regulated by the Utah, Wyoming and Idaho Commissions. Hope’s gas distribution operations, including the rates that it may charge customers, are regulated by the West Virginia Commission. See State Regulations and Federal Regulations in Regulation for more information.

PROPERTIES

For a description of Dominion Energy and Dominion Energy Gas’ existing facilities see Item 2. Properties.

Gas Infrastructure Operating Segment—Dominion Energy and Dominion Energy Gas

Dominion Energy Gas has the following significant projects under construction or development to better serve customers or expand its service offerings within its service territory.

In August 2018, DETI executed a binding precedent agreement with a customer for the West Loop project. The project is expected to cost approximately $95 million and provide 150,000 Dths per day of firm transportation service from Pennsylvania to Ohio for delivery to a proposed combined-cycle, natural gas-fired electric power generation facility to be located in Columbiana County, Ohio. In December 2018, DETI filed an application to request FERC authorization to construct, operate and maintain the project facilities, which are expected to be in service by the end of 2021.

In January 2018, DETI filed an application to request FERC authorization to construct and operate certain facilities located in Ohio and Pennsylvania for the Sweden Valley project. The project is expected to cost approximately $50 million and provide 120,000 Dths per day of firm transportation service from Pennsylvania to Ohio for delivery to Transco. The project’s capacity is fully subscribed pursuant to a precedent agreement with one customer and is expected to be placed into service in the fourth quarter of 2019.

In December 2014, DETI entered into a precedent agreement with Atlantic Coast Pipeline for the Supply Header project, a project to provide approximately 1,500,000 Dths per day of firm transportation service to various customers. During the third and fourth quarters of 2018, a FERC stop work order together with delays in obtaining permits necessary for construction and delays in construction due to judicial actions impacted the cost and schedule for the project. As a result, project cost estimates have increased from between $550 million to $600 million to between

$650 million to $700 million, excluding financing costs. DETI anticipates a late 2020 in-service date.

In 2008, East Ohio began PIR, aimed at replacing approximately 4,100 miles of its pipeline system at a cost of $2.7 billion. In 2011, approval was obtained to include an additional 1,450 miles and to increase annual capital investment to meet the program goal. The program will replace approximately 25% of the pipeline system and is anticipated to take place over a total of 25 years. In September 2016, East Ohio received approval to extend the PIR program for an additional five years and to increase its annual capital expenditures to $200 million by 2018 and 3% per year thereafter subject to the cost recovery rate increase caps proposed by East Ohio. Costs associated with calendar year 2016 investment will be recovered under the existing terms. In April 2018, the Ohio Commission approved East Ohio’s application to adjust the PIR cost recovery rates for 2017 costs. The filing reflects gross plant investment for 2017 of $204 million, cumulative gross plant investment of $1.4 billion and a revenue requirement of $165 million.

Gas Infrastructure Operating Segment—Dominion Energy

Dominion Energy has the following significant projects under construction or development.

Cove Point—In June 2015, Cove Point executed binding agreements with two customers for the approximately $150 million Eastern Market Access Project. In January 2018, Cove Point received FERC authorization to construct and operate the project facilities, which are expected to be placed into service in the second half of 2019. In October 2018, Cove Point announced it was evaluating alternatives to a proposed Charles County, Maryland compressor station that was initially part of this project and in December 2018, after working with project customers for alternative solutions, decided not to pursue further construction at this location resulting in a revised project cost estimate of approximately $45 million.

Questar Gas—In 2010, Questar Gas began replacing aging high pressure infrastructure under a cost-tracking mechanism that allows it to place into rate base and earn a return on capital expenditures associated with a multi-year natural gas infrastructure-replacement program upon the completion of each project. At that time, the commission-allowed annual spending in the replacement program was approximately $55 million.

In its 2014 Utah general rate case, Questar Gas received approval to include intermediate high pressure infrastructure in the replacement program and increase the annual spending limit to approximately $65 million, adjusted annually using a gross domestic product inflation factor. At that time, 420 miles of high pressure pipe and 70 miles of intermediate high pressure pipe were identified to be replaced in the program over a 17-year period. Questar Gas has spent about $65 million each year through 2018 under this program. The program is evaluated in each Utah general rate case. The next Utah general rate case is anticipated to occur in 2019.

INVESTMENTS

Iroquois—In September 2015, Dominion Energy, through Dominion Energy Midstream, acquired an additional 25.93% interest in Iroquois. Dominion Energy Gas holds a 24.07% interest with TransCanada holding a 50% interest. Iroquois owns and

 

 

18        


 

 

operates a 416-mile FERC regulated interstate natural gas pipeline providing service to local gas distribution companies, electric utilities and electric power generators, as well as marketers and other end-users, through interconnecting pipelines and exchanges. Iroquois’ pipeline extends from the U.S.-Canadian border at Waddington, New York through the state of Connecticut to South Commack, Long Island, New York and continuing on from Northport, Long Island, New York through the Long Island Sound to Hunts Point, Bronx, New York. See Note 9 to the Consolidated Financial Statements for further information about Dominion Energy’s equity method investment in Iroquois.

Atlantic Coast Pipeline—In September 2014, Dominion Energy, along with Duke and Southern Company Gas, announced the formation of Atlantic Coast Pipeline. The Atlantic Coast Pipeline partnership agreement includes provisions to allow Dominion Energy an option to purchase additional ownership interest in Atlantic Coast Pipeline to maintain a leading ownership percentage. The members hold the following membership interests: Dominion Energy, 48%; Duke, 47%; and Southern Company Gas, 5%. Atlantic Coast Pipeline is focused on constructing an approximately 600-mile natural gas pipeline running from West Virginia through Virginia to North Carolina. See Future Issues and Other Matters in Item 7 for information on estimated project costs and in-service date and Note 9 to the Consolidated Financial Statements for further information about Dominion Energy’s equity method investment in Atlantic Coast Pipeline.

Align RNG—In November 2018, Dominion Energy announced the formation of Align RNG, an equal partnership with Smithfield Foods, Inc. Align RNG expects to invest $250 million to develop assets to capture methane from hog farms across Virginia, North Carolina and Utah and convert it into pipeline quality natural gas.

SOURCES OF ENERGY SUPPLY

Dominion Energy and Dominion Energy Gas’ natural gas supply is obtained from various sources including purchases from major and independent producers in the Mid-Continent and Gulf Coast regions, local producers in the Appalachian area, gas marketers and, for Questar Gas specifically, from Wexpro and other producers in the Rocky Mountain region. Wexpro’s gas development and production operations serve the majority of Questar Gas’ gas supply requirements in accordance with the Wexpro Agreement and the Wexpro II Agreement, comprehensive agreements with the states of Utah and Wyoming. Dominion Energy and Dominion Energy Gas’ large underground natural gas storage network and the location of their pipeline systems are a significant link between the country’s major interstate gas pipelines and large markets in the Northeast, mid-Atlantic and Rocky Mountain regions. Dominion Energy and Dominion Energy Gas’ pipelines are part of an interconnected gas transmission system, which provides access to supplies nationwide for local distribution companies, marketers, power generators and industrial and commercial customers.

Dominion Energy and Dominion Energy Gas’ underground storage facilities play an important part in balancing gas supply with consumer demand and are essential to serving the Northeast, mid-Atlantic, Midwest and Rocky Mountain regions. In addition,

storage capacity is an important element in the effective management of both gas supply and pipeline transmission capacity.

The supply of gas to serve Dominion Energy’s retail energy marketing customers is procured through Dominion Energy’s energy marketing group and market wholesalers.

SEASONALITY

Gas Infrastructure’s natural gas distribution business earnings vary seasonally, as a result of the impact of changes in temperature on demand by residential and commercial customers for gas to meet heating needs. Historically, the majority of these earnings have been generated during the heating season, which is generally from November to March; however, implementation of rate mechanisms in Ohio for East Ohio, and Utah, Wyoming and Idaho for Questar Gas and transportation services provided to gas producers and electric power generators at East Ohio have reduced the earnings impact of weather-related fluctuations. Demand for services at Dominion Energy’s gas transmission and storage business can also be weather sensitive. Earnings are also impacted by changes in commodity prices driven by seasonal weather changes, the effects of unusual weather events on operations and the economy.

The earnings of Dominion Energy’s retail energy marketing operations also vary seasonally. Generally, the demand for gas peaks during the winter months to meet heating needs.

Southeast Energy

The Southeast Energy Operating Segment of Dominion Energy, established in January 2019, includes the generation, transmission and distribution of electricity through SCE&G, the distribution of natural gas through SCE&G and PSNC and the marketing of natural gas to retail customers through SEMI.

SCE&G is engaged in the generation, transmission and distribution of electricity to approximately 730,000 customers in the central, southern and southwestern portions of South Carolina. Additionally, SCE&G and PSNC sell natural gas to approximately 960,000 residential, commercial and industrial customers in South Carolina and North Carolina. SEMI markets natural gas and provides energy-related services, selling natural gas to approximately 420,000 customers in the southeast U.S.

Southeast Energy’s investment plan includes spending approximately $4.6 billion from 2019 through 2023 to upgrade or add new equipment and infrastructure in response to increasing customer growth and demand and an effort to maintain reliability for customers.

Revenue provided by SCE&G’s electric distribution operations is based primarily on rates established by state regulatory authorities and state law. Variability in earnings is driven primarily by changes in rates, weather, customer growth and other factors impacting consumption such as the economy and energy conservation, in addition to operating and maintenance expenditures.

SCE&G’s electric transmission operations serve its electric distribution operations as well as certain wholesale customers. Revenue provided by such electric transmission operations is primarily based on a FERC-approved formula rate mechanism under SCE&G’s open access transmission tariff.

Revenue provided by SCE&G’s electric generation operations is primarily derived from the sale of electricity generated by its utility generation assets and is based on rates established by state regulatory authorities and state law. Variability in earnings may arise when revenues are impacted by factors not reflected in current rates, such as the impact of weather, or the timing and nature of expenses or outages.

 

 

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Revenue provided by SCE&G and PSNC’s natural gas distribution operations primarily results from rates established by the South Carolina and North Carolina Commissions, respectively. Variability in earnings results from changes in operating and maintenance expenditures, as well as changes in rates and the demand for services, the availability and prices of alternative fuels and the economy.

SCE&G is a member of the Virginia-Carolinas Reliability Group, one of several geographic divisions within the SERC Reliability Corporation. The SERC Reliability Corporation is one of seven regional entities with delegated authority from NERC for the purpose of proposing and enforcing reliability standards approved by NERC.

COMPETITION

There is no competition for electric distribution or generation service within SCE&G’s service territory in South Carolina and no such competition is currently permitted. However, competition from third-party owners for development, construction and ownership of certain transmission facilities in SCE&G’s service territory is permitted pursuant to Order 1000, subject to state and local siting and permitting approvals. This could result in additional competition to build and own transmission infrastructure in SCE&G’s service area in the future.

Competition in Southeast Energy’s natural gas distribution operations is generally based on price and convenience. Large commercial and industrial customers often have the ability to switch from natural gas to an alternate fuel, such as propane or fuel oil. Natural gas competes with these alternate fuels based on price. As a result, any significant disparity between supply and demand, either of natural gas or of alternate fuels, and due either to production or delivery disruptions or other factors, will affect price and the ability to retain large commercial and industrial customers.

Southeast Energy’s marketing services for natural gas and other energy-related services face competition from affiliates of large energy companies and electric membership cooperatives, among others. The ability of Southeast Energy to maintain its market share primarily depends on the prices it charges customers relative to the prices charged by its competitors and its ability to provide high levels of customer service.

REGULATION

SCE&G’s electric distribution service, including the rates it may charge to jurisdictional customers, is subject to regulation by the South Carolina Commission. SCE&G’s electric generation operations are subject to regulation by the South Carolina Commission, FERC, the NRC, the EPA, the DOE and various other federal, state and local authorities. SCE&G’s electric transmission service is primarily regulated by FERC and the DOE. SCE&G and PSNC’s gas distribution operations are subject to regulation by the South Carolina and North Carolina Commissions, respectively, as well as PHMSA, the U.S. Department of Transportation, the South Carolina Office of Regulatory Staff and the North Carolina Commission for enforcement of federal and state pipeline safety requirements in their respective service territories. SEMI’s energy marketing activities are subject to regulation by the Georgia Public Service Commission as to retail prices for customers served under regulated provider contracts and FERC.

See State Regulations and Federal Regulations in Regulation for more information.

PROPERTIES

For a listing of existing property and facilities associated with Southeast Energy at January 1, 2019, see Item 2. Properties.

The following material reliability projects are currently under construction or development at SCE&G:

In response to revised Effluent Limitations Guidelines mandated by the EPA, SCE&G intends to upgrade the wastewater discharge filtration systems at the Williams and Wateree coal-fired generation facilities. The scope and scheduling of these projects is dependent on the finalization of the Effluent Limitations Guidelines, but is expected to cost approximately $250 million and be placed into service by the end of 2025.

In an effort to maintain the reliability and safety of the baghouse at its Cope coal-fired generation facility, SCE&G is currently replacing the existing carbon steel baghouse structure with a corrosion resistant material to address corrosion issues resulting from the dry scrubber system. The project is estimated to cost approximately $40 million and be placed into service by the end of 2020.

The following material reliability projects are currently under construction or development at PSNC:

PSNC plans to construct approximately 38 miles of transmission pipeline between Franklinton, North Carolina and Clayton, North Carolina, which will improve system reliability and provide the capacity necessary to support the growing natural gas demand in PSNC’s service territory. The project is expected to cost approximately $130 million and provide approximately 170,000 Dths per day. The project is expected to be placed into service in 2020.

PSNC is constructing a high-pressure distribution pipeline that will ultimately span 35 miles between Forest City, North Carolina and Marion, North Carolina, which will provide enhanced system reliability and safety. The project is expected to cost approximately $60 million and provide approximately 60,000 Dths per day. The project is expected to be placed into service in late 2019.

SOURCES OF ENERGY SUPPLY

Southeast Energy uses a variety of fuels to power its electric generation and purchases power for utility system load requirements. Presented below is a summary of SCANA’s actual system output by energy source :

 

Source    2018  

Natural gas

     37

Coal

     35  

Nuclear(1)

     20  

Other(2)

     8  

Total

     100

 

(1)

Excludes Santee Cooper’s 33.3% undivided ownership interest in Summer.

(2)

Includes hydro, biomass and solar.

Natural gas—SCE&G purchases natural gas under contracts with producers and marketers on both a short-term and long-term basis at market-based prices. The gas is delivered to South Carolina through firm transportation agreements with various

 

 

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counterparties, which expire between 2019 and 2084. PSNC purchases natural gas under contracts with producers and marketers on a short-term basis at market-based prices and on a long-term basis for reliability assurance at first of the month index prices plus a reservation charge in certain cases. The gas is delivered to North Carolina through transportation agreements with Transco, which expire at various dates through 2031.

Coal—Southeast Energy primarily obtains coal through short-term and long-term contracts with suppliers located in eastern Kentucky, Tennessee, Virginia and West Virginia. These contracts provide for approximately 2.1 million tons annually. These contracts expire at various times through 2020. Spot market purchases may occur when needed or when prices are believed to be favorable.

Nuclear—Southeast Energy primarily utilizes long-term contracts to support its nuclear fuel requirements. SCE&G, for itself and as agent for Santee Cooper, and Westinghouse are parties to a fuel alliance agreement and contracts for fuel fabrication and related services. Under these contracts, SCE&G supplies enriched products to Westinghouse, who in turn supplies nuclear fuel assemblies for Summer. Westinghouse is SCE&G’s exclusive provider of such fuel assemblies on a cost-plus basis. The fuel assemblies to be delivered under the contracts are expected to supply the nuclear fuel requirements through 2033.

In addition, SCE&G has contracts covering its nuclear fuel needs for uranium, conversion services and enrichment services. These contracts have varying expiration dates through 2024. SCE&G believes that it will be able to renew these contracts as they expire or enter into similar contractual arrangements with other suppliers of nuclear fuel materials and services and that sufficient capacity for nuclear fuel supplies and processing exists to allow for normal operations of its nuclear generating unit. Current agreements, inventories and spot market availability are expected to support current and planned fuel supply needs. Additional fuel is purchased as required to ensure optimal fuel and inventory levels.

SEASONALITY

Southeast Energy’s electric operations vary seasonally as a result of the impact of changes in temperature, the impact of storms and other catastrophic weather events and the availability of alternative sources for heating on demand by residential and commercial customers. Generally, the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. An increase in heating degree days does not produce the same increase in revenue as an increase in cooling degree days, due to seasonal pricing differentials and because alternative heating sources are more readily available.

Southeast Energy’s gas operations vary seasonally as a result of the impact of changes in temperature on demand by residential and commercial customers for gas to meet heating needs. The majority of these earnings are generated during the heating season, which is generally from November to March; however, North Carolina and South Carolina have certain mechanisms designed to reduce the impact of weather-related fluctuations.

The earnings of Southeast Energy’s natural gas marketing operations also vary seasonally, and generally peak during the winter months to meet heating needs.

NUCLEAR DECOMMISSIONING

SCE&G has a two-thirds interest in one licensed, operating nuclear reactor at Summer in South Carolina.

Decommissioning involves the decontamination and removal of radioactive contaminants from a nuclear power station once operations have ceased, in accordance with standards established by the NRC. Amounts collected by ratepayers are placed into trusts and are invested to fund the expected future costs of decommissioning Summer.

SCE&G believes that the decommissioning funds and their expected earnings will be sufficient to cover expected decommissioning costs, particularly when combined with future ratepayer collections and contributions to this trust, if such future collections and contributions are required. SCE&G will continue to monitor this trust to ensure that it meets the NRC minimum financial assurance requirements, which may include, if needed, the use of Dominion Energy guarantees, surety bonding or other financial instruments recognized by the NRC.

The current estimated cost to SCE&G to decommission Summer is $626 million (stated in 2018 dollars), which is primarily based upon site-specific studies completed in 2016. These cost studies are generally completed every four to five years. Santee Cooper is responsible for the remaining 33.3% of decommissioning costs, proportionate with its ownership in Summer. The current cost estimates assume decommissioning activities will begin shortly after cessation of operations, which will occur when the operating license expires. The cost estimate reflects reductions for the expected future recovery of certain spent nuclear fuel costs based on SCE&G’s contracts with the DOE for disposal of spent nuclear fuel consistent with the reductions reflected in SCANA’s nuclear decommissioning ARO. Currently, SCE&G has $190 million in a trust for its proportionate share of these decommissioning activities.

Under the current operating license, SCE&G is scheduled to decommission Summer in 2042. NRC regulations allow licensees to apply for extension of an operating license in up to 20-year increments. SCE&G is considering an operating license renewal for Summer.

Corporate and Other

Corporate and Other Segment-Virginia Power and Dominion Energy Gas

Virginia Power and Dominion Energy Gas’ Corporate and Other segments primarily include certain specific items attributable to their operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or in allocating resources.

Corporate and Other Segment-Dominion Energy

Dominion Energy’s Corporate and Other segment includes its corporate, service company and other functions (including unallocated debt). In addition, Corporate and Other includes specific items attributable to Dominion Energy’s operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or in allocating resources.

 

 

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REGULATION

The Companies are subject to regulation by various federal, state and local authorities, including the state commissions of Virginia, North Carolina, South Carolina, Ohio, West Virginia, Georgia, Utah, Wyoming and Idaho, SEC, FERC, EPA, DOE, NRC, Army Corps of Engineers and the U.S. Department of Transportation.

State Regulations

ELECTRIC

Virginia Power and SCE&G’s electric utility retail services are subject to regulation by the Virginia and North Carolina Commissions and the South Carolina Commission, respectively.

Virginia Power and SCE&G hold CPCNs which authorize them to maintain and operate their electric facilities now in operation and to sell electricity to customers. However, Virginia Power and SCE&G may not construct generating facilities or large capacity transmission lines without the prior approval of various state and federal government agencies. In addition, the Virginia Commission and the North Carolina Commission regulate Virginia Power’s and the South Carolina Commission regulates SCE&G’s transactions with affiliates and transfers of certain facilities. The Virginia, North Carolina and South Carolina Commissions also regulate the issuance of certain securities.

Electric Regulation in Virginia

The Regulation Act instituted a cost-of-service rate model, ending Virginia’s planned transition to retail competition for electric supply service to most classes of customers.

The Regulation Act authorizes stand-alone rate adjustment clauses for recovery of costs for new generation projects, including pumped hydroelectricity generation and storage facilities as well as extensions of operating licenses of nuclear power generation facilities, FERC-approved transmission costs, underground distribution lines, environmental compliance, conservation and energy efficiency programs and renewable energy programs, and also contains statutory provisions directing Virginia Power to file annual fuel cost recovery cases with the Virginia Commission. As amended, it provides for enhanced returns on capital expenditures on specific newly-proposed generation projects.

In March 2018, the GTSA reinstated base rate reviews on a triennial basis other than the first review, which will be a quadrennial review, occurring for Virginia Power in 2021 for the four successive 12-month test periods beginning January 1, 2017 and ending December 31, 2020. This review for Virginia Power will occur one year earlier than under the Regulation Act legislation enacted in February 2015.

In the triennial review proceedings, earnings that are more than 70 basis points above the utility’s authorized return on equity that might have been refunded to customers and served as the basis for a reduction in future rates, may be reduced by approved investment amounts in qualifying solar or wind generation facilities or electric distribution grid transformation projects that Virginia Power elects to include in a customer credit reinvestment offset. The legislation declares that electric distribution grid transformation projects are in the public interest and provides that the costs of such projects may be recovered through a rate adjustment clause if not the subject of a customer credit reinvestment offset. Any costs that are the subject of a customer credit reinvestment offset may not be recovered in base

rates for the service life of the projects and may not be included in base rates in future triennial review proceedings. In any triennial review in which the Virginia Commission determines that the utility’s earnings are more than 70 basis points above its authorized return on equity, base rates are subject to reduction prospectively and customer refunds would be due unless the total customer credit reinvestment offset elected by the utility equals or exceeds the amount of earnings in excess of the 70 basis points. In the 2021 review, any such rate reduction is limited to $50 million.

The legislation also included provisions requiring Virginia Power to provide current customers one-time rate credits totaling $200 million and to reduce base rates to reflect reductions in income tax expense resulting from the 2017 Tax Reform Act. In addition, Virginia Power reduced base rates on an annual basis by $125 million effective July 2018, to reflect the estimated effect of the 2017 Tax Reform Act, which is subject to adjustment effective April 2019. In May and June 2018, Virginia Power submitted filings detailing the implementation plan for interim reductions in rates for generation and distribution services pursuant to the GTSA.

If the Virginia Commission’s future rate decisions, including actions relating to Virginia Power’s rate adjustment clause filings, differ materially from Virginia Power’s expectations, it may adversely affect its results of operations, financial condition and cash flows.

See Futures Issues and Other Matters in Item 7. MD&A and Note 13 to the Consolidated Financial Statements for additional information, which is incorporated herein by reference.

Electric Regulation in North Carolina

Virginia Power’s retail electric base rates in North Carolina are regulated on a cost-of-service/rate-of-return basis subject to North Carolina statutes and the rules and procedures of the North Carolina Commission. North Carolina base rates are set by a process that allows Virginia Power to recover its operating costs and an ROIC. If retail electric earnings exceed the authorized ROE established by the North Carolina Commission, retail electric rates may be subject to review and possible reduction by the North Carolina Commission, which may decrease Virginia Power’s future earnings. Additionally, if the North Carolina Commission does not allow recovery of costs incurred in providing service on a timely basis, Virginia Power’s future earnings could be negatively impacted. Fuel rates are subject to revision under annual fuel cost adjustment proceedings.

Virginia Power’s transmission service rates in North Carolina are regulated by the North Carolina Commission as part of Virginia Power’s bundled retail service to North Carolina customers. See Note 13 to the Consolidated Financial Statements for additional information, which is incorporated herein by reference.

Electric Regulation in South Carolina

SCE&G’s retail electric base rates in South Carolina are regulated on a cost-of-service/rate-of-return basis subject to South Carolina statutes and the rules and procedures of the South Carolina Commission. South Carolina base rates are set by a process that allows SCE&G to recover its operating costs and an ROIC. If retail electric earnings exceed the authorized ROE established by the South Carolina Commission, retail electric rates may by sub-

 

 

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ject to review and possible reduction, which may decrease SCE&G’s future earnings. Additionally, if the South Carolina Commission does not allow recovery of costs incurred in providing service on a timely basis, SCE&G’s future earnings could be negatively impacted. Fuel costs are reviewed annually by the South Carolina Commission, as required by statute, and fuel rates are subject to revision in these annual fuel proceedings.

SCE&G offers to its retail electric customers several DSM programs designed to assist customers in reducing their demand for electricity and improving their energy efficiency. SCE&G submits annual filings to the South Carolina Commission related to these programs. As actual DSM program costs are incurred, they are deferred as regulatory assets and recovered through a rider approved by the South Carolina Commission. The rider also provides for recovery of any net lost revenues and for a shared savings incentive.

In connection with the SCANA Combination, SCE&G agreed not to file a general rate case with the South Carolina Commission with a requested rate effective date earlier than January 2021. Rate adjustments are permitted prior to 2021 for fuel and environmental costs, DSM costs and other rates routinely adjusted on an annual or biennial basis.

See Note 3 to the Consolidated Financial Statements for additional information, which is incorporated herein by reference.

GAS

Dominion Energy Questar’s natural gas development, production, transportation, and distribution services, including the rates it may charge its customers, are regulated by the state commissions of Utah, Wyoming and Idaho. East Ohio’s natural gas distribution services, including the rates it may charge its customers, are regulated by the Ohio Commission. Hope’s natural gas distribution services are regulated by the West Virginia Commission. SCE&G and PSNC’s natural gas distribution services are regulated by the South Carolina Commission and North Carolina Commission, respectively.

Gas Regulation in Utah, Wyoming and Idaho

Questar Gas is subject to regulation of rates and other aspects of its business by the Utah, Wyoming and Idaho Commissions. The Idaho Commission has contracted with the Utah Commission for rate oversight of Questar Gas’ operations in a small area of southeastern Idaho. When necessary, Questar Gas seeks general base rate increases to recover increased operating costs and a fair return on rate base investments. Base rates are set based on the cost-of-service by rate class. Base rates for Questar Gas are designed primarily based on rate design methodology in which the majority of operating costs are recovered through volumetric charges. The volumetric charges for the residential and small commercial customers in Utah and Wyoming are subject to revenue decoupling and adjusted for changes in usage per customer.

In addition to general rate increases, Questar Gas makes routine separate filings with the Utah and Wyoming Commissions to reflect changes in the costs of purchased gas. The majority of these purchased gas costs are subject to rate recovery through the Wexpro Agreement and Wexpro II Agreement. Costs that are expected to be recovered in future rates are deferred as regulatory assets. The purchased gas recovery filings generally cover a prospective twelve-month period. Approved increases or decreases in

gas cost recovery rates result in increases or decreases in revenues with corresponding increases or decreases in net purchased gas cost expenses.

In connection with the Dominion Energy Questar Combination, Questar Gas withdrew its general rate case filed in July 2016 with the Utah Commission and agreed not to file a general rate case with the Utah Commission to adjust its base distribution non-gas rates prior to July 2019, unless otherwise ordered by the Utah Commission. In addition Questar Gas agreed not to file a general rate case with the Wyoming Commission with a requested rate effective date earlier than January 2020. This does not impact Questar Gas’ ability to adjust rates through various riders. See Notes 3 and 13 to the Consolidated Financial Statements for additional information.

Gas Regulation in Ohio

East Ohio is subject to regulation of rates and other aspects of its business by the Ohio Commission. When necessary, East Ohio seeks general base rate increases to recover increased operating costs and a fair return on rate base investments. Base rates are set based on the cost-of-service by rate class. A straight-fixed-variable rate design, in which the majority of operating costs are recovered through a monthly charge rather than a volumetric charge, is utilized to establish rates for a majority of East Ohio’s customers pursuant to a 2008 rate case settlement.

In addition to general base rate increases, East Ohio makes routine filings with the Ohio Commission to reflect changes in the costs of gas purchased for operational balancing on its system. These purchased gas costs are subject to rate recovery through a mechanism that ensures dollar for dollar recovery of prudently incurred costs. Costs that are expected to be recovered in future rates are deferred as regulatory assets. The rider filings cover unrecovered gas costs plus prospective annual demand costs. Increases or decreases in gas cost rider rates result in increases or decreases in revenues with corresponding increases or decreases in net purchased gas cost expenses.

The Ohio Commission has also approved several stand-alone cost recovery mechanisms to recover specified costs and a return for infrastructure projects and certain other costs that vary widely over time; such costs are excluded from general base rates. See Note 13 to the Consolidated Financial Statements for additional information.

Gas Regulation in West Virginia

Hope is subject to regulation of rates and other aspects of its business by the West Virginia Commission. When necessary, Hope seeks general base rate increases to recover increased operating costs and a fair return on rate base investments. Base rates are set based on the cost-of-service by rate class. Base rates for Hope are designed primarily based on rate design methodology in which the majority of operating costs are recovered through volumetric charges.

In addition to general rate increases, Hope makes routine separate filings with the West Virginia Commission to reflect changes in the costs of purchased gas. The majority of these purchased gas costs are subject to rate recovery through a mechanism that ensures dollar for dollar recovery of prudently incurred costs. Costs that are expected to be recovered in future rates are deferred as regulatory assets. The purchased gas cost recovery filings gen-

 

 

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erally cover a prospective twelve-month period. Approved increases or decreases in gas cost recovery rates result in increases or decreases in revenues with corresponding increases or decreases in net purchased gas cost expenses.

Legislation was passed in West Virginia authorizing a stand-alone cost recovery mechanism to recover specified costs and a return for infrastructure upgrades, replacements and expansions between general base rate cases. See Note 13 to the Consolidated Financial Statements for additional information.

Gas Regulation in North Carolina

PSNC is subject to regulation of rates and other aspects of its business by the North Carolina Commission. PSNC’s base rates are set in a general rate case based on the cost-of-service by rate class. Such rates are designed primarily based on a rate design methodology in which the majority of operating costs are recovered through volumetric charges.

PSNC has certain riders to its tariff that allow it to make periodic rate adjustment filings with the North Carolina Commission outside of a general rate case. PSNC’s purchased gas adjustment allows it to recover from customers all prudently incurred gas costs and certain related uncollectible expenses. The purchased gas adjustment provides for a benchmark cost of gas rate component and a fixed gas cost component, both of which may be periodically adjusted to reflect changes in the costs of purchased gas, including transportation costs. In addition, PSNC utilizes a customer usage tracker, a decoupling mechanism, which allows it to adjust rates semi-annually for residential and commercial customers based on average customer consumption. PSNC also utilizes an integrity management tracker, which provides for semi-annual rate adjustments to recover the incurred capital investment and associated costs of complying with federal standards for pipeline integrity and safety requirements that are not in current base rates. All of these riders utilize deferral accounting to track over- and under-collected costs for subsequent rate consideration.

In connection with the SCANA Combination, PSNC agreed not to file a general rate case with the North Carolina Commission with a requested rate effective date earlier than November 2021 other than for rate adjustments pursuant to the customer usage tracker, the integrity management tracker and the purchased gas adjustment.

See Note 3 to the Consolidated Financial Statements for additional information, which is incorporated herein by reference.

Gas Regulation in South Carolina

SCE&G is subject to regulation of rates and other aspects of its natural gas distribution service by the South Carolina Commission. SCE&G provides retail natural gas service to customers in areas in which it has received authorization from the South Carolina Commission and in municipalities in which it holds a franchise. SCE&G’s base rates can be adjusted annually, pursuant to the Natural Gas Rate Stabilization Act, for recovery of costs related to natural gas infrastructure. Base rates are set based on the cost-of-service by rate class approved by the South Carolina Commission in the latest general rate case. Base rates for SCE&G are designed primarily based on a rate design methodology in which the majority of operating costs are recovered through volumetric charges. SCE&G also utilizes a weather normalization adjustment to adjust its base rates during the winter billing

months for residential and commercial customers to mitigate the effects of unusually cold or warm weather.

In addition, SCE&G’s natural gas tariffs include a purchased gas adjustment that provides for the recovery of prudently incurred gas costs, including transportation costs. SCE&G is authorized to adjust its purchased gas rates monthly and makes routine filings with the South Carolina Commission to provide notification of changes in these rates. Costs that are under or over recovered are deferred as regulatory assets or liabilities, respectively, and considered in subsequent purchased gas adjustments. The purchased gas adjustment filings generally cover a prospective twelve-month period. Increases or decreases in purchased gas costs can result in corresponding changes in purchased gas adjustment rates and the revenue generated by those rates. The South Carolina Commission reviews SCE&G’s gas purchasing policies and practices, including its administration of the purchased gas adjustment, annually.

See Note 3 to the Consolidated Financial Statements for additional information, which is incorporated herein by reference.

Status of Competitive Retail Gas Services

The states of Ohio and West Virginia, in which Dominion Energy and Dominion Energy Gas have gas distribution operations, have considered legislation regarding a competitive deregulation of natural gas sales at the retail level.

Ohio—Since October 2000, East Ohio has offered the Energy Choice program, under which residential and commercial customers are encouraged to purchase gas directly from retail suppliers or through a community aggregation program. In October 2006, East Ohio restructured its commodity service by entering into gas purchase contracts with selected suppliers at a fixed price above the New York Mercantile Exchange month-end settlement and passing that gas cost to customers under the Standard Service Offer program. Starting in April 2009, East Ohio buys natural gas under the Standard Service Offer program only for customers not eligible to participate in the Energy Choice program and places Energy Choice-eligible customers in a direct retail relationship with selected suppliers, which is designated on the customers’ bills.

In January 2013, the Ohio Commission granted East Ohio’s motion to fully exit the merchant function for its nonresidential customers, beginning in April 2013, which requires those customers to choose a retail supplier or be assigned to one at a monthly variable rate set by the supplier. At December 31, 2018, approximately 1.1 million of Dominion Energy Gas’ 1.2 million Ohio customers were participating in the Energy Choice program. Subject to the Ohio Commission’s approval, East Ohio may eventually exit the gas merchant function in Ohio entirely and have all customers select an alternate gas supplier. East Ohio continues to be the provider of last resort in the event of default by a supplier. Large industrial customers in Ohio also source their own natural gas supplies.

West Virginia—At this time, West Virginia has not enacted legislation allowing customers to choose providers in the retail natural gas markets served by Hope. However, the West Virginia Commission has issued regulations to govern pooling services, one of the tools that natural gas suppliers may utilize to provide retail customers a choice in the future and has issued rules requiring competitive gas service providers to be licensed in West Virginia.

 

 

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Federal Regulations

FEDERAL ENERGY REGULATORY COMMISSION

Electric

Under the Federal Power Act, FERC regulates wholesale sales and transmission of electricity in interstate commerce by public utilities. Virginia Power purchases and sells electricity in the PJM wholesale market and sells electricity to wholesale purchasers in Virginia and North Carolina. Dominion Energy’s merchant generators sell electricity in the PJM, CAISO and ISO-NE wholesale markets, and to wholesale purchasers in the states of Virginia, North Carolina, Indiana, Connecticut, Tennessee, Georgia, California, South Carolina and Utah, under Dominion Energy’s market-based sales tariffs authorized by FERC or pursuant to FERC authority to sell as a qualified facility. In addition, Virginia Power and SCE&G have FERC approval of a tariff to sell wholesale power at capped rates based on their respective embedded cost of generation. This cost-based sales tariff could be used to sell to loads within or outside Virginia Power and SCE&G’s service territories. Any such sales would be voluntary.

Dominion Energy and Virginia Power are subject to FERC’s Standards of Conduct that govern conduct between transmission function employees of interstate gas and electricity transmission providers and the marketing function employees of their affiliates. The rule defines the scope of transmission and marketing-related functions that are covered by the standards and is designed to prevent transmission providers from giving their affiliates undue preferences.

Dominion Energy and Virginia Power are also subject to FERC’s affiliate restrictions that (1) prohibit power sales between merchant plants and utility plants without first receiving FERC authorization, (2) require the merchant and utility plants to conduct their wholesale power sales operations separately, and (3) prohibit utilities from sharing market information with merchant plant operating personnel. The rules are designed to prohibit utilities from giving the merchant plants a competitive advantage.

EPACT included provisions to create an ERO. The ERO is required to promulgate mandatory reliability standards governing the operation of the bulk power system in the U.S. FERC has certified NERC as the ERO and also issued an initial order approving many reliability standards that went into effect in 2007. Entities that violate standards will be subject to fines of up to $1.2 million per day, per violation and can also be assessed non-monetary penalties, depending upon the nature and severity of the violation.

Dominion Energy and Virginia Power plan and operate their facilities in compliance with approved NERC reliability requirements. Dominion Energy and Virginia Power employees participate on various NERC committees, track the development and implementation of standards, and maintain proper compliance registration with NERC’s regional organizations. Dominion Energy and Virginia Power anticipate incurring additional compliance expenditures over the next several years as a result of the implementation of new cybersecurity programs. In addition, NERC has redefined critical assets which expanded the number of assets subject to NERC reliability standards, including cybersecurity assets. NERC continues to develop additional requirements specifically regarding supply chain standards and control centers

that impact the bulk electric system. While Dominion Energy and Virginia Power expect to incur additional compliance costs in connection with NERC requirements and initiatives, such expenses are not expected to significantly affect results of operations.

In April 2008, FERC granted an application for Virginia Power’s electric transmission operations to establish a forward-looking formula rate mechanism that updates transmission rates on an annual basis and approved an ROE effective as of January 1, 2008. The formula rate is designed to recover the expected revenue requirement for each calendar year and is updated based on actual costs. The FERC-approved formula method, which is based on projected costs, allows Virginia Power to earn a current return on its growing investment in electric transmission infrastructure.

Gas

FERC regulates the transportation and sale for resale of natural gas in interstate commerce under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, as amended. Under the Natural Gas Act, FERC has authority over rates, terms and conditions of services performed by Dominion Energy Questar Pipeline, DETI, DECG, Iroquois and certain services performed by Cove Point. The design, construction and operation of Cove Point’s LNG facility, including associated natural gas pipelines, the Liquefaction Project and the import and export of LNG are also regulated by FERC.

Dominion Energy and Dominion Energy Gas’ interstate gas transmission and storage activities are conducted on an open access basis, in accordance with certificates, tariffs and service agreements on file with FERC and FERC regulations.

Dominion Energy and Dominion Energy Gas operate in compliance with FERC standards of conduct, which prohibit the sharing of certain non-public transmission information or customer specific data by its interstate gas transmission and storage companies with non-transmission function employees. Pursuant to these standards of conduct, Dominion Energy and Dominion Energy Gas also make certain informational postings available on Dominion Energy’s website.

See Note 13 to the Consolidated Financial Statements for additional information.

Safety Regulations

Dominion Energy and Dominion Energy Gas are also subject to the Pipeline Safety Improvement Act of 2002 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, which mandate inspections of interstate and intrastate natural gas transmission and storage pipelines, particularly those located in areas of high-density population. Dominion Energy and Dominion Energy Gas have evaluated their natural gas transmission and storage properties, as required by the U.S. Department of Transportation regulations under these Acts, and have implemented a program of identification, testing and potential remediation activities. These activities are ongoing.

The Companies are subject to a number of federal and state laws and regulations, including Occupational Safety and Health Administration, and comparable state statutes, whose purpose is to protect the health and safety of workers. The Companies have an internal safety, health and security program designed to mon-

 

 

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itor and enforce compliance with worker safety requirements, which is routinely reviewed and considered for improvement. The Companies believe that they are in material compliance with all applicable laws and regulations related to worker health and safety. Notwithstanding these preventive measures, incidents may occur that are outside of the Companies’ control.

Environmental Regulations

Each of the Companies’ operating segments faces substantial laws, regulations and compliance costs with respect to environmental matters. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. The cost of complying with applicable environmental laws, regulations and rules is expected to be material to the Companies. If compliance expenditures and associated operating costs are not recoverable from customers through regulated rates (in regulated businesses) or market prices (in unregulated businesses), those costs could adversely affect future results of operations and cash flows. The Companies have applied for or obtained the necessary environmental permits for the construction and operation of their facilities. Many of these permits are subject to reissuance and continuing review. For a discussion of significant aspects of these matters, including current and planned capital expenditures relating to environmental compliance required to be discussed in this Item, see Environmental Matters in Future Issues and Other Matters in Item 7. MD&A, which information is incorporated herein by reference. Additional information can also be found in Item 3. Legal Proceedings and Note 22 to the Consolidated Financial Statements, which information is incorporated herein by reference.

AIR

The CAA is a comprehensive program utilizing a broad range of regulatory tools to protect and preserve the nation’s air quality. Regulated emissions include, but are not limited to, carbon, methane, VOC, other GHGs, mercury, other toxic metals, hydrogen chloride, NOX, SO2 and particulate matter. At a minimum, delegated states are required to establish regulatory programs to address all requirements of the CAA. However, states may choose to develop regulatory programs that are more restrictive. Many of the Companies’ facilities are subject to the CAA’s permitting and other requirements.

GLOBAL CLIMATE CHANGE

The Companies support national climate change legislation that would provide a consistent, economy-wide approach to addressing this issue and are currently taking action to protect the environment and reduce GHG emissions while meeting the growing needs of their customers. Dominion Energy’s CEO and operating segment CEOs are responsible for compliance with the laws and regulations governing environmental matters, including GHG emissions, and Dominion Energy’s Board of Directors receives periodic updates on these matters. See Environmental Strategy below, Environmental Matters in Future Issues and Other Matters in Item 7. MD&A and Note 22 to the Consolidated Financial Statements for information on climate change legislation and regulation, which information is incorporated herein by reference.

WATER

The CWA is a comprehensive program requiring a broad range of regulatory tools including a permit program to authorize and regulate discharges to surface waters with strong enforcement mechanisms. The CWA and analogous state laws impose restrictions and strict controls regarding discharges of effluent into surface waters and require permits to be obtained from the EPA or the analogous state agency for those discharges. Containment berms and similar structures may be required to help prevent accidental releases. Dominion Energy must comply with applicable CWA requirements at its current and former operating facilities. Stormwater related to construction activities is also regulated under the CWA and by state and local stormwater management and erosion and sediment control laws. From time to time, Dominion Energy’s projects and operations may impact tidal and non-tidal wetlands. In these instances, Dominion Energy must obtain authorization from the appropriate federal, state and local agencies prior to impacting wetlands. The authorizing agency may impose significant direct or indirect mitigation costs to compensate for such impacts to wetlands.

WASTE AND CHEMICAL MANAGEMENT

Dominion Energy is subject to various federal and state laws and implementing regulations governing the management, storage, treatment, reuse and disposal of waste materials and hazardous substances, including the Resources Conservation and Recovery Act of 1976, CERCLA, the Emergency Planning and Community Right-to-Know Act of 1986 and the Toxic Substance Control Act of 1976. Dominion Energy’s operations and construction activities, including activities associated with oil and gas production and gas storage wells, generate waste. Across Dominion Energy, completion water is disposed at commercial disposal facilities. Produced water is either hauled for disposal, evaporated or injected into company and third-party owned underground injection wells. Wells drilled in tight-gas-sand and shale reservoirs require hydraulic-fracture stimulation to achieve economic production rates and recoverable reserves. The majority of Wexpro’s current and future production and reserve potential is derived from reservoirs that require hydraulic-fracture stimulation to be commercially viable. Currently, all well construction activities, including hydraulic-fracture stimulation and management and disposal of hydraulic fracturing fluids, are regulated by federal and state agencies that review and approve all aspects of gas- and oil-well design and operation.

PROTECTED SPECIES

The ESA and analogous state laws prohibit activities that can result in harm to specific species of plants and animals, as well as impacts to the habitat on which those species depend. In addition to ESA programs, the MBTA and BGEPA establish broader prohibitions on harm to protected birds. Many of the Companies’ facilities are subject to requirements of the ESA, MBTA and BGEPA. The ESA and BGEPA require potentially lengthy coordination with the state and federal agencies to ensure potentially affected species are protected. Ultimately, the suite of species protections may restrict company activities to certain times of year, project modifications may be necessary to avoid harm, or a permit may be needed for unavoidable taking of the species. The authorizing agency may impose mitigation requirements and costs

 

 

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to compensate for harm of a protected species or habitat loss. These requirements and time of year restrictions can result in adverse impacts on project plans and schedules such that the Companies’ businesses may be materially affected.

OTHER REGULATIONS

Other significant environmental regulations to which the Companies are subject include federal and state laws protecting graves, sacred sites, historic sites and cultural resources, including those of American Indian tribal nations and tribal communities. These can result in compliance and mitigation costs as well as potential adverse effects on project plans and schedules such that the Companies’ businesses may be materially affected.

Nuclear Regulatory Commission

All aspects of the operation and maintenance of Dominion Energy and Virginia Power’s nuclear power stations are regulated by the NRC. Operating licenses issued by the NRC are subject to revocation, suspension or modification, and the operation of a nuclear unit may be suspended if the NRC determines that the public interest, health or safety so requires.

From time to time, the NRC adopts new requirements for the operation and maintenance of nuclear facilities. In many cases, these new regulations require changes in the design, operation and maintenance of existing nuclear facilities. If the NRC adopts such requirements in the future, it could result in substantial increases in the cost of operating and maintaining Dominion Energy and Virginia Power’s nuclear generating units. See Note 22 to the Consolidated Financial Statements for further information.

The NRC also requires Dominion Energy and Virginia Power to decontaminate their nuclear facilities once operations cease. This process is referred to as decommissioning, and Dominion Energy and Virginia Power are required by the NRC to be financially prepared. For information on decommissioning trusts, see Power Generation-Nuclear Decommissioning and Southeast Energy-Nuclear Decommissioning above and Notes 3 and 9 to the Consolidated Financial Statements. See Notes 3 and 22 to the Consolidated Financial Statements for information on spent nuclear fuel.

 

 

ENVIRONMENTAL STRATEGY

The Companies’ environmental strategy is a component of the overall long-term strategic planning overseen by the CEO and Board of Directors, including oversight by the sustainability and corporate responsibility board committee which was formed in 2018. The Companies are committed to continuing to be an industry leader, delivering safe, reliable, clean and affordable energy while fully complying with all applicable environmental laws and regulations. Additionally, the Companies seek to build partnerships and engage with local communities, stakeholders and customers on environmental issues important to them, including environmental justice considerations such as fair treatment, inclusive involvement and effective communication. The Companies believe in being transparent about their environmental commitments, policies, including the Environmental Justice Policy adopted in 2018, and initiatives which have been

disclosed in reports included on Dominion Energy’s website. The Companies are dedicated to meeting their customers’ growing energy needs with innovative, sustainable solutions. It is the Companies’ belief that sustainable solutions should strive to balance the interdependent goals of environmental stewardship and economic effects. The integrated strategy to meet these objectives consists of three major elements:

  Reduction of GHG emissions;
  Energy infrastructure modernization, including natural gas and electric operations; and
  Conservation and energy efficiency.

Reduction of GHG Emissions

The Companies’ integrated strategy has resulted in a reduction in GHG emission intensity. Over the past two decades, the Companies have made changes to the generation mix and to natural gas operations which have significantly improved environmental performance. For example, Power Generation has reduced both its carbon emissions and its carbon intensity while generating electricity with an increasingly clean portfolio. From 2000 through 2017, Dominion Energy’s carbon intensity decreased by 50%. This strategy has also resulted in measurable reductions of other air pollutants such as NOX, SO2 and mercury and also reduced the amount of coal ash generated and the amount of water withdrawn. The principal components of the strategy include initiatives that address electric energy production and delivery, natural gas storage, transmission and delivery and energy management.

See Operating Segments for more information on certain of the projects described above.

CLEANER GENERATION

Renewable energy is an important component of a diverse and reliable energy mix that helps to mitigate the environmental aspects of energy production. Dominion Energy has nearly 2,600 MW of solar generating capacity in operation or under development in nine states, including offtake agreements for Virginia Power’s utility customers. Virginia, North Carolina and South Carolina have passed legislation setting targets for renewable power. Dominion Energy continues to add utility-scale solar capacity and is committed to meeting Virginia’s goals of 12% of base year electric energy sales from renewable power sources by 2022, and 15% by 2025, North Carolina’s Renewable Portfolio Standard of 12.5% by 2021 and South Carolina’s goal of 2% of aggregate generation capacity from renewable power sources by 2021. Backed by a $1 billion investment from 2018 through 2020, Dominion Energy has grown its solar fleet in Virginia and North Carolina to about 1,700 MW in service, in construction or under development.

See Operating Segments and Item 2. Properties for additional information, including Dominion Energy’s merchant solar properties.

GHG EMISSIONS

Since 2000, Dominion Energy and Virginia Power have tracked the emissions of their electric generation fleet, which employs a mix of fuel and renewable energy sources. Comparing annual year 2017 to annual year 2000, the entire electric generating fleet

 

 

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(based on ownership percentage) reduced its average CO2 emissions per MWh of energy produced from electric generation by approximately 50%. Comparing annual year 2017 to annual year 2000, the regulated electric generating fleet (based on ownership percentage) reduced its average CO2 emissions per MWh of energy produced from electric generation by approximately 35%. Dominion Energy and Virginia Power’s 2018 emissions data is not yet available.

Dominion Energy also develops a comprehensive GHG inventory annually. For Power Generation, Dominion Energy and Virginia Power’s direct CO2 equivalent emissions (based on ownership percentage) were 30.1 million metric tons and 26.4 million metric tons, respectively, in 2017, compared to 37.2 million metric tons and 33.1 million metric tons, respectively, in 2016. The corresponding Power Generation carbon intensity rates for Dominion Energy were 0.295 metric tons CO2 equivalent emissions per net MWh in 2017 and 0.339 metric tons CO2 equivalent emissions per net MWh in 2016.

For Power Delivery’s regulated electric transmission and distribution operations, direct CO2 equivalent emissions for 2017 were 37,841 metric tons, compared to 42,847 metric tons in 2016.

Dominion Energy’s natural gas companies have been reporting GHG emissions to the EPA since 2011 under the GHG Reporting Program. In January 2016, the GHG Reporting Program was expanded to also include GHG inputs and emissions associated with natural gas gathering and boosting sources and transmission pipeline blowdowns for facilities that exceed 25,000 metric tons per year of CO2 equivalent emissions. The sources within these new facilities were not previously covered under the rule and the first reports for these new sources were submitted to the EPA on March 31, 2017.

Hope and East Ohio’s direct CO2 equivalent emissions together increased to 0.88 million metric tons in 2017 from 0.86 in 2016. DETI and Cove Point’s direct CO2 equivalent emissions together were 1.6 million metric tons in 2017, increasing from 1.3 million metric tons in 2016, attributable to increased operational activity related to new construction.

The Companies’ GHG inventory follows all methodologies specified in the EPA Mandatory Greenhouse Gas Reporting Rule, 40 Code of Federal Regulations Part 98 for calculating emissions. Total CO2 equivalent emissions reported for our natural gas assets, as estimated in Dominion Energy’s corporate inventory, were 3.51 million metric tons in 2017. This estimate includes emissions reported under the GHG Reporting Program, as well as other emissions not required to be reported under the federal program. The 2017 corporate GHG inventory emission estimate includes Dominion Energy Questar Pipeline, Questar Gas and Wexpro for the entire calendar year. Dominion Energy’s 2017 methane emissions reported under Subpart W of the Greenhouse Gas Reporting Rule are as follows:

 

Subpart W Segment   

Subpart W
Total CH4
Emissions

(mcf CH4)

 

Distribution

     1,668,183  

Production

     762,788  

Transmission pipelines

     396,720  

Transmission compressor stations

     147,565  

Gathering and boosting

     144,188  

Storage

     53,748  

LNG import/export

     6,444  

Processing

     916  

Energy Infrastructure Modernization

Dominion Energy’s investment plan from 2019 through 2023 includes a focus on upgrading the electric grid in Virginia through investments in additional renewable generation facilities, smart meters, customer information platform, intelligent grid devices and associated control systems, physical and cyber security investments, strategic undergrounding and energy conservation programs. Dominion Energy also plans to upgrade its gas and electric transmission and distribution networks and meet environmental requirements and standards set by various regulatory bodies. These enhancements are primarily aimed at meeting Dominion Energy’s continued goal of providing reliable service and to address increases in electricity consumption. An additional benefit will be added capacity to efficiently deliver electricity from the renewable projects now being developed, or to be developed in the future, to meet our customers’ preference for cleaner energy. See Operating Segments for additional information.

The Companies have also implemented infrastructure improvements and improved operational practices to reduce the GHG emissions from our natural gas facilities. Dominion Energy and Dominion Energy Gas, in connection with the investment plan, are also pursuing the construction or upgrade of regulated infrastructure in their natural gas businesses. The Companies have made voluntary commitments as part of the EPA Methane Challenge Program to continue to reduce methane emissions as part of these improvements. See Operating Segments for additional information, including natural gas infrastructure projects.

Conservation and Energy Efficiency

Conservation and load management play a significant role in meeting the growing demand for electricity and natural gas, while also helping to reduce the environmental footprint of our customers. The Companies offer various energy efficiency programs in Virginia,

 

 

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North Carolina, Ohio, South Carolina, Utah and Wyoming designed to reduce energy consumption including programs such as:

  Energy audits and assessments;
  Incentives for customers to upgrade or install certain energy efficient measures and/or systems;
  Weatherization assistance to help income-eligible customers reduce their energy usage;
  Home energy planning, which provides homeowners with a step-by-step roadmap to efficiency improvements to reduce gas usage; and
  Rebates for installing high-efficiency equipment.

 

 

CYBERSECURITY

In an effort to reduce the likelihood and severity of cyber intrusions, the Companies have a comprehensive cybersecurity program designed to protect and preserve the confidentiality, integrity and availability of data and systems. In November 2018, Dominion Energy appointed a Chief Security Officer who is responsible for the further development and implementation of corporate security policies and procedures that protect cyber assets. In addition, the Companies are subject to mandatory cybersecurity regulatory requirements, including those enacted in December 2018 by FERC with compliance requirements effective in 2020, interface regularly with a wide range of external organizations and participate in classified briefings to maintain an awareness of current cybersecurity threats and vulnerabilities. The Companies’ current security posture and regulatory compliance efforts are intended to address the evolving and changing cyber threats. See Item 1A. Risk Factors for additional information.

 

 

Item 1A. Risk Factors

The Companies’ businesses are influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond their control. A number of these factors have been identified below. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in Item 7. MD&A.

The Companies’ results of operations can be affected by changes in the weather. Fluctuations in weather can affect demand for the Companies’ services. For example, milder than normal weather can reduce demand for electricity and gas transmission and distribution services. In addition, severe weather, including hurricanes, winter storms, earthquakes, floods and other natural disasters can stress systems, disrupt operation of the Companies’ facilities and cause service outages, production delays and property damage that require incurring additional expenses. Changes in weather conditions can result in reduced water levels or changes in water temperatures that could adversely affect operations at some of the Companies’ power stations. Furthermore, the Companies’ operations could be adversely affected and their physical plant placed at greater risk of damage should changes in global climate produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in more intense, frequent and extreme weather events, abnormal levels of precipitation and, for operations located on or near coastlines, a change in sea level or sea temperatures.

The rates of Dominion Energy and Dominion Energy Gas gas transmission and distribution operations and Dominion Energy and Virginia Powers electric transmission, distribution and generation operations are subject to regulatory review. Revenue provided by Dominion Energy and Virginia Power’s electric transmission, distribution and generation operations and Dominion Energy and Dominion Energy Gas’ gas transmission and distribution operations is based primarily on rates approved by state and federal regulatory agencies. However, certain large scale customers are able to enter into negotiated-rate contracts rather than pay cost-of-service rates which are subject to regulatory review. The profitability of these businesses is dependent on their ability, through the rates that they are permitted to charge, to recover costs and earn a reasonable rate of return on their capital investment.

Dominion Energy and Virginia Power’s wholesale rates for electric transmission service are updated on an annual basis through operation of a FERC-approved formula rate mechanism. Through this mechanism, Dominion Energy and Virginia Power’s wholesale rates for electric transmission reflect the estimated cost-of-service for each calendar year. The difference in the estimated cost-of-service and actual cost-of-service for each calendar year is included as an adjustment to the wholesale rates for electric transmission service in a subsequent calendar year. These wholesale rates are subject to FERC review and prospective adjustment in the event that customers and/or interested state commissions file a complaint with FERC and are able to demonstrate that Dominion Energy or Virginia Power’s wholesale revenue requirement is no longer just and reasonable. They are also subject to retroactive corrections to the extent that the formula rate was not properly populated with the actual costs.

Similarly, various rates and charges assessed by Dominion Energy and Dominion Energy Gas’ gas transmission businesses are subject to review by FERC. In addition, the rates of Dominion Energy and Dominion Energy Gas’ gas distribution businesses are subject to state regulatory review in the jurisdictions in which they operate. A failure by Dominion Energy or Dominion Energy Gas to support these rates could result in rate decreases from current rate levels, which could adversely affect Dominion Energy and Dominion Energy Gas’ results of operations, cash flows and financial condition.

Virginia Power’s base rates, terms and conditions for generation and distribution services to customers in Virginia are reviewed by the Virginia Commission in a proceeding that involves the determination of Virginia Power’s actual earned ROE during a historic test period, and the determination of Virginia Power’s authorized ROE prospectively. Under certain circumstances described in the Regulation Act, Virginia Power may be required to share a portion of its earnings with customers through a refund process.

Dominion Energy and Virginia Power’s retail electric base rates for bundled generation, transmission, and distribution services to customers in South Carolina and North Carolina, respectively, are regulated on a cost-of-service/rate-of-return basis subject to South Carolina and North Carolina statutes, and the rules and procedures of the South Carolina and North Carolina Commissions. If retail electric earnings exceed the returns established by the South Carolina Commission and the North Carolina Commission, retail electric rates may be subject to review and

 

 

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possible reduction by the South Carolina Commission and the North Carolina Commission, which may decrease Dominion Energy and Virginia Power’s future earnings, respectively. Additionally, if the South Carolina and the North Carolina Commission do not allow recovery through base rates, on a timely basis, of costs incurred in providing service, Dominion Energy and Virginia Power’s future earnings could be negatively impacted.

Governmental officials, stakeholders and advocacy groups may challenge these regulatory reviews. Such challenges may lengthen the time, complexity and costs associated with such regulatory reviews.

The Companies are subject to complex governmental regulation, including tax regulation, that could adversely affect their results of operations and subject the Companies to monetary penalties. The Companies’ operations are subject to extensive federal, state and local regulation and require numerous permits, approvals and certificates from various governmental agencies. Such laws and regulations govern the terms and conditions of the services we offer, our relationships with affiliates, protection of our critical electric infrastructure assets and pipeline safety, among other matters. These operations are also subject to legislation governing taxation at the federal, state and local level. They must also comply with environmental legislation and associated regulations. Management believes that the necessary approvals have been obtained for existing operations and that the business is conducted in accordance with applicable laws. The Companies’ businesses are subject to regulatory regimes which could result in substantial monetary penalties if any of the Companies is found not to be in compliance, including mandatory reliability standards and interaction in the wholesale markets. New laws or regulations, the revision or reinterpretation of existing laws or regulations, changes in enforcement practices of regulators, or penalties imposed for non-compliance with existing laws or regulations may result in substantial additional expense. Recent legislative and regulatory changes that are impacting the Companies include the 2017 Tax Reform Act and tariffs imposed on imported solar panels by the U.S. government in 2018.

The 2017 Tax Reform Act could have a material impact on our operations, cash flows, and financial results. Reductions in the estimated annual cost-of-service effect (commonly referred to as the gross-up factor) due to the reduction in the corporate income tax rates to 21% under the provisions of the 2017 Tax Reform Act have been recognized as a regulatory liability and are expected to be refunded to customers, generally through reductions in future rates or in the form of credits to customer bills. In addition, the Companies’ regulators may require the reduction in accumulated deferred income tax balances under the provisions of the 2017 Tax Reform Act to be shared with customers, generally through reductions in future rates or in the form of credits to customer bills. The 2017 Tax Reform Act includes provisions that stipulate how these excess deferred taxes may be passed back to customers for certain accelerated tax depreciation benefits. Potential reductions in future rates attributable to other, non-plant related excess deferred taxes may be determined by our regulators.

The 2017 Tax Reform Act could have a material impact on Dominion Energy and Dominion Energy Gas’ FERC-regulated gas operations including rates charged to customers. In light of the reduction in the income tax rate in the 2017 Tax Reform Act, our FERC-regulated gas subsidiaries were required to file

informational reports to substantiate the rates charged for transportation and storage of natural gas in interstate commerce, when viewed holistically, are “just and reasonable” taking into account the effects of the 2017 Tax Reform Act and all other drivers. It is unclear if FERC will mandate a one-time rate reset or Section 5 rate case for Dominion Energy and Dominion Energy Gas’ FERC-regulated gas subsidiaries; however, any such action could have a material impact on our operations, cash flows and financial results.

The interpretation of provisions of the 2017 Tax Reform Act that take effect in 2019 may significantly impact our operations. The 2017 Tax Reform Act contains provisions that limit the deductibility of interest expense. The provisions generally limit the interest deduction on business interest to (1) business interest income, plus (2) 30 percent of the taxpayer’s adjusted taxable income. Business interest and business interest income is defined as that allocable to a trade or business and not investment interest and income. Dominion Energy is a consolidated group with both regulated and nonregulated lines of businesses. In November 2018, the U.S. Department of Treasury issued proposed regulations defining interest as any amounts associated with the time value of money or use of funds. These proposed regulations provide guidance for purposes of the exception to the interest limitation for regulated public utilities, the application of the interest limitation to consolidated groups, such as Dominion Energy, and the interest limitation with respect to partnerships and partners in those partnerships. It is unclear when that guidance may be finalized, or whether that guidance could result in a disallowance of a portion of our interest deductions in the future.

Dominion Energy and Virginia Power’s generation business may be negatively affected by possible FERC actions that could change market design in the wholesale markets or affect pricing rules or revenue calculations in the RTO markets. Dominion Energy and Virginia Power’s generation stations operating in RTO markets sell capacity, energy and ancillary services into wholesale electricity markets regulated by FERC. The wholesale markets allow these generation stations to take advantage of market price opportunities, but also expose them to market risk. Properly functioning competitive wholesale markets depend upon FERC’s continuation of clearly identified market rules. From time to time FERC may investigate and authorize RTOs to make changes in market design. FERC also periodically reviews Dominion Energy’s authority to sell at market-based rates. Material changes by FERC to the design of the wholesale markets or its interpretation of market rules, Dominion Energy or Virginia Power’s authority to sell power at market-based rates, or changes to pricing rules or rules involving revenue calculations, could adversely impact the future results of Dominion Energy or Virginia Power’s generation business. For example, in June 2018, FERC issued an order on PJM’s Minimum Offer Price Rule proposals finding the PJM tariff unjust and unreasonable because state out-of-market support for resources is suppressing PJM capacity prices and the current tariff provisions do not adequately address the price suppression. FERC is evaluating an alternative that would pull any state supported resource out of the capacity market along with an equivalent amount of load. In addition, there have been changes to the interpretation and application of FERC’s market manipulation rules. A failure to comply with these rules could lead to civil and criminal penalties.

 

 

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The Companies infrastructure build and expansion plans often require regulatory approval, including environmental permits, before commencing construction and completing projects. The Companies may not complete facility construction, pipeline, conversion or other infrastructure projects that they commence, or they may complete projects on materially different terms or timing than initially anticipated, and they may not be able to achieve the intended benefits of any such project, if completed. Several facility construction, pipeline, electric transmission line, expansion, conversion and other infrastructure projects have been announced and additional projects may be considered in the future. The Companies compete for projects with companies of varying size and financial capabilities, including some that may have competitive advantages. Commencing construction on announced and future projects may require approvals from applicable state and federal agencies, and such approvals could include mitigation costs which may be material to the Companies. Projects may not be able to be completed on time as a result of weather conditions, delays in obtaining or failure to obtain regulatory approvals, delays in obtaining key materials, labor difficulties, difficulties with partners or potential partners, a decline in the credit strength of counterparties or vendors, or other factors beyond the Companies’ control. For example, Atlantic Coast Pipeline has experienced certain delays in obtaining permits necessary for construction along with construction delays due to judicial actions which has impacted the cost and schedule for the Atlantic Coast Pipeline Project. Even if facility construction, pipeline, expansion, electric transmission line, conversion and other infrastructure projects are completed, the total costs of the projects may be higher than anticipated and the performance of the business of the Companies following completion of the projects may not meet expectations. Start-up and operational issues can arise in connection with the commencement of commercial operations at our facilities. Such issues may include failure to meet specific operating parameters, which may require adjustments to meet or amend these operating parameters. Additionally, the Companies may not be able to timely and effectively integrate the projects into their operations and such integration may result in unforeseen operating difficulties or unanticipated costs. Further, regulators may disallow recovery of some of the costs of a project if they are deemed not to be prudently incurred. Any of these or other factors could adversely affect the Companies’ ability to realize the anticipated benefits from the facility construction, pipeline, electric transmission line, expansion, conversion and other infrastructure projects.

The development, construction and commissioning of several large-scale infrastructure projects simultaneously involves significant execution risk. The Companies are currently simultaneously developing, constructing or commissioning several major projects, including the Atlantic Coast Pipeline Project, the Supply Header project and the Coastal Virginia Offshore Wind project. Several of the Companies’ key projects are increasingly large-scale, complex and being constructed in constrained geographic areas or in difficult terrain, for example, the Atlantic Coast Pipeline Project. The advancement of the Companies’ ventures is also affected by the interventions, litigation or other activities of stakeholder and advocacy groups, some of which oppose natural gas-related and energy infrastructure projects. For example, certain landowners and stakeholder groups oppose the Atlantic Coast Pipeline

Project, which could impede construction activities or the acquisition of rights-of-way and other land rights on a timely basis or on acceptable terms. Given that these projects provide the foundation for the Companies’ strategic growth plan, if the Companies are unable to obtain or maintain the required approvals, develop the necessary technical expertise, allocate and coordinate sufficient resources, adhere to budgets and timelines, effectively handle public outreach efforts, or otherwise fail to successfully execute the projects, there could be an adverse impact to the Companies’ financial position, results of operations and cash flows. Failure to comply with regulatory approval conditions or an adverse ruling in any future litigation could adversely affect the Companies’ ability to execute their business plan.

The Companies are dependent on their contractors for the successful and timely completion of large-scale infrastructure projects. The construction of such projects is expected to take several years, is typically confined within a limited geographic area or difficult terrain and could be subject to delays, cost overruns, labor disputes and other factors that could cause the total cost of the project to exceed the anticipated amount and adversely affect the Companies’ financial performance and/or impair the Companies’ ability to execute the business plan for the project as scheduled.

Further, an inability to obtain financing or otherwise provide liquidity for the projects on acceptable terms could negatively affect the Companies’ financial condition, cash flows, the projects’ anticipated financial results and/or impair the Companies’ ability to execute the business plan for the projects as scheduled.

The Companies’ operations and construction activities are subject to a number of environmental laws and regulations which impose significant compliance costs to the Companies. The Companies’ operations and construction activities are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, and health and safety. Compliance with these legal requirements requires the Companies to commit significant capital toward permitting, emission fees, environmental monitoring, installation and operation of environmental control equipment and purchase of allowances and/or offsets. Additionally, the Companies could be responsible for expenses relating to remediation and containment obligations, including at sites where they have been identified by a regulatory agency as a potentially responsible party. Expenditures relating to environmental compliance have been significant in the past, and the Companies expect that they will remain significant in the future. Certain facilities have become uneconomical to operate and have been shut down, converted to new fuel types or sold. These types of events could occur again in the future.

We expect that existing environmental laws and regulations may be revised and/or new laws may be adopted including regulation of GHG emissions which could have an impact on the Companies’ business. Risks relating to expected regulation of GHG emissions from existing fossil fuel-fired electric generating units are discussed below. In addition, further regulation of air quality and GHG emissions under the CAA have been imposed on the natural gas sector, including rules to limit methane leakage. The Companies are also subject to federal water and waste regulations, including regulations concerning cooling water intake structures, coal combustion by-product handling and disposal

 

 

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practices, wastewater discharges from steam electric generating stations, management and disposal of hydraulic fracturing fluids and the potential further regulation of polychlorinated biphenyls.

Compliance costs cannot be estimated with certainty due to the inability to predict the requirements and timing of implementation of any new environmental rules or regulations. Other factors which affect the ability to predict future environmental expenditures with certainty include the difficulty in estimating clean-up costs and quantifying liabilities under environmental laws that impose joint and several liabilities on all responsible parties. However, such expenditures, if material, could make the Companies’ facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect the Companies’ results of operations, financial performance or liquidity.

Any additional federal and/or state requirements imposed on energy companies mandating limitations on GHG emissions or requiring efficiency improvements may result in compliance costs that alone or in combination could make some of the Companies electric generation units or natural gas facilities uneconomical to maintain or operate. The EPA has proposed the Affordable Clean Energy rule targeted at reducing CO2 emissions from existing fossil fuel-fired power generation facilities as a replacement for the Clean Power Plan which has been stayed. The Affordable Clean Energy rule would require states to develop plans within three years of the final rule to implement these performance standards. States are also contemplating regulations regarding GHG emissions. For example, the Virginia General Assembly recently considered legislation which would authorize the state to directly join the RGGI program as a full participant. Compliance with the proposed Affordable Clean Energy rule or other federal or state carbon regulations is expected to require increasing the energy efficiency of equipment at facilities, committing significant capital toward carbon reduction programs, purchase of allowances and/or emission rate credits, fuel switching, and/or retirement of high-emitting generation facilities and potential replacement with lower-emitting generation facilities. Given these developments and uncertainties, Dominion Energy and Virginia Power cannot estimate the aggregate effect of such requirements on their results of operations, financial condition or their customers. However, such expenditures, if material, could make Dominion Energy and Virginia Power’s generation facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect Dominion Energy or Virginia Power’s results of operations, financial performance or liquidity.

There are also potential impacts on Dominion Energy and Dominion Energy Gas’ natural gas businesses as federal or state GHG regulations may require GHG emission reductions from the natural gas sector which, in addition to resulting in increased costs, could affect demand for natural gas. Additionally, GHG requirements could result in increased demand for energy conservation and renewable products, which could impact the natural gas businesses.

Dominion Energy and Virginia Power are subject to risks associated with the disposal and storage of coal ash. Dominion Energy and Virginia Power historically produced and continue to produce coal ash, or CCRs, as a by-product of their coal-fired generation operations. The ash is stored and managed in

impoundments (ash ponds) and landfills located at 11 different facilities, eight of which are at Virginia Power.

The EPA has issued regulations concerning the management and storage of CCRs, which Virginia has adopted. These CCR regulations require Dominion Energy and Virginia Power to make additional capital expenditures and increase operating and maintenance expenses. In addition, Dominion Energy and Virginia Power will incur expenses and other costs associated with closing, corrective action and ongoing monitoring of certain ash ponds. Dominion Energy and Virginia Power also may face litigation concerning their coal ash facilities.

Further, while Dominion Energy and Virginia Power operate their ash ponds and landfills in compliance with applicable state safety regulations, a release of coal ash with a significant environmental impact, such as the Dan River ash basin release by a neighboring utility, could result in remediation costs, civil and/or criminal penalties, claims, litigation, increased regulation and compliance costs, and reputational damage, and could impact the financial condition of Dominion Energy and/or Virginia Power.

The Companies’ operations are subject to operational hazards, equipment failures, supply chain disruptions and personnel issues which could negatively affect the Companies. Operation of the Companies’ facilities involves risk, including the risk of potential breakdown or failure of equipment or processes due to aging infrastructure, fuel supply, pipeline integrity or transportation disruptions, accidents, labor disputes or work stoppages by employees, acts of terrorism or sabotage, construction delays or cost overruns, shortages of or delays in obtaining equipment, material and labor, operational restrictions resulting from environmental limitations and governmental interventions, changes to the environment and performance below expected levels. The Companies’ businesses are dependent upon sophisticated information technology systems and network infrastructure, the failure of which could prevent them from accomplishing critical business functions. Because the Companies’ transmission facilities, pipelines and other facilities are interconnected with those of third parties, the operation of their facilities and pipelines could be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties.

Operation of the Companies’ facilities below expected capacity levels could result in lost revenues and increased expenses, including higher maintenance costs. Unplanned outages of the Companies’ facilities and extensions of scheduled outages due to mechanical failures or other problems occur from time to time and are an inherent risk of the Companies’ business. Unplanned outages typically increase the Companies’ operation and maintenance expenses and may reduce their revenues as a result of selling less output or may require the Companies to incur significant costs as a result of operating higher cost units or obtaining replacement output from third parties in the open market to satisfy forward energy and capacity or other contractual obligations. Moreover, if the Companies are unable to perform their contractual obligations, penalties or liability for damages could result.

In addition, there are many risks associated with the Companies’ operations and the transportation, storage and processing of natural gas and NGLs, including nuclear accidents, fires, explosions, uncontrolled release of natural gas and other environ-

 

 

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mental hazards, pole strikes, electric contact cases, the collision of third party equipment with pipelines and avian and other wildlife impacts. Such incidents could result in loss of human life or injuries among employees, customers or the public in general, environmental pollution, damage or destruction of facilities or business interruptions and associated public or employee safety impacts, loss of revenues, increased liabilities, heightened regulatory scrutiny and reputational risk. Further, the location of pipelines and storage facilities, or generation, transmission, substations and distribution facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

Dominion Energy and Virginia Power have substantial ownership interests in and operate nuclear generating units; as a result, each may incur substantial costs and liabilities. Dominion Energy and Virginia Power’s nuclear facilities are subject to operational, environmental, health and financial risks such as the on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, limitations on the amounts and types of insurance available, potential operational liabilities and extended outages, the costs of replacement power, the costs of maintenance and the costs of securing the facilities against possible terrorist attacks. Dominion Energy and Virginia Power maintain decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks; however, it is possible that future decommissioning costs could exceed amounts in the decommissioning trusts and/or damages could exceed the amount of insurance coverage. If Dominion Energy and Virginia Power’s decommissioning trust funds are insufficient, and they are not allowed to recover the additional costs incurred through insurance or regulatory mechanisms, their results of operations could be negatively impacted.

Dominion Energy and Virginia Power’s nuclear facilities are also subject to complex government regulation which could negatively impact their results of operations. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generating facilities. In the event of noncompliance, the NRC has the authority to impose fines, set license conditions, shut down a nuclear unit, or take some combination of these actions, depending on its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could require Dominion Energy and Virginia Power to make substantial expenditures at their nuclear plants. In addition, although the Companies have no reason to anticipate a serious nuclear incident at their plants, if an incident did occur, it could materially and adversely affect their results of operations and/or financial condition. A major incident at a nuclear facility anywhere in the world, such as the nuclear events in Japan in 2011, could cause the NRC to adopt increased safety regulations or otherwise limit or restrict the operation or licensing of domestic nuclear units.

Sustained declines in natural gas and NGL prices have resulted in, and could result in further, curtailments of third-party producers drilling programs, delaying the production of volumes of natural gas and NGLs that Dominion Energy and Dominion Energy Gas gather, process, and transport and reducing the value of NGLs retained by Dominion Energy Gas, which may adversely affect Dominion Energy and Dominion

Energy Gas revenues and earnings. Dominion Energy and Dominion Energy Gas obtain their supply of natural gas and NGLs from numerous third-party producers. Most producers are under no obligation to deliver a specific quantity of natural gas or NGLs to Dominion Energy and Dominion Energy Gas’ facilities. A number of other factors could reduce the volumes of natural gas and NGLs available to Dominion Energy and Dominion Energy Gas’ pipelines and other assets. Increased regulation of energy extraction activities could result in reductions in drilling for new natural gas wells, which could decrease the volumes of natural gas supplied to Dominion Energy and Dominion Energy Gas. Producers with direct commodity price exposure face liquidity constraints, which could present a credit risk to Dominion Energy and Dominion Energy Gas. Producers could shift their production activities to regions outside Dominion Energy and Dominion Energy Gas’ footprint. In addition, the extent of natural gas reserves and the rate of production from such reserves may be less than anticipated. If producers were to decrease the supply of natural gas or NGLs to Dominion Energy and Dominion Energy Gas’ systems and facilities for any reason, Dominion Energy and Dominion Energy Gas could experience lower revenues to the extent they are unable to replace the lost volumes on similar terms. In addition, Dominion Energy Gas’ revenue from processing and fractionation operations largely results from the sale of commodities at market prices. Dominion Energy Gas receives the wet gas product from producers and may retain the extracted NGLs as compensation for its services. This exposes Dominion Energy Gas to commodity price risk for the value of the spread between the NGL products and natural gas, and relative changes in these prices could adversely impact Dominion Energy Gas’ results.

Dominion Energy’s merchant power business operates in a challenging market, which could adversely affect its results of operations and future growth. The success of Dominion Energy’s merchant power business depends upon favorable market conditions including the ability to sell power at prices sufficient to cover its operating costs. Dominion Energy operates in active wholesale markets that expose it to price volatility for electricity and nuclear fuel as well as the credit risk of counterparties. Dominion Energy attempts to manage its price risk by entering into hedging transactions, including short-term and long-term fixed price sales and purchase contracts.

In these wholesale markets, the spot market price of electricity for each hour is generally determined by the cost of supplying the next unit of electricity to the market during that hour. In many cases, the next unit of electricity supplied would be provided by generating stations that consume fossil fuels, primarily natural gas. Consequently, the open market wholesale price for electricity generally reflects the cost of natural gas plus the cost to convert the fuel to electricity. Therefore, changes in the price of natural gas generally affect the open market wholesale price of electricity. To the extent Dominion Energy does not enter into long-term power purchase agreements or otherwise effectively hedge its output, these changes in market prices could adversely affect its financial results.

Dominion Energy purchases nuclear fuel primarily under long-term contracts. Dominion Energy is exposed to nuclear fuel cost volatility for the portion of its nuclear fuel obtained through short-term contracts or on the spot market, including as a result

 

 

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of market supply shortages. Nuclear fuel prices can be volatile and the price that can be obtained for power produced may not change at the same rate as nuclear fuel costs, thus adversely impacting Dominion Energy’s financial results. In addition, in the event that any of the merchant generation facilities experience a forced outage, Dominion Energy may not receive the level of revenue it anticipated.

The Companies’ financial results can be adversely affected by various factors driving supply and demand for electricity and gas and related services. Technological advances required by federal laws mandate new levels of energy efficiency in end-use devices, including lighting, furnaces and electric heat pumps and could lead to declines in per capita energy consumption. Additionally, certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date. Further, Virginia Power’s business model is premised upon the cost efficiency of the production, transmission and distribution of large-scale centralized utility generation. However, advances in distributed generation technologies, such as solar cells, gas microturbines and fuel cells, may make these alternative generation methods competitive with large-scale utility generation, and change how customers acquire or use our services. Virginia Power has an exclusive franchise to serve retail electric customers in Virginia. However, Virginia’s Retail Access Statutes allow certain Power Generation customers exceptions to this franchise. As market conditions change, Virginia Power’s customers may further pursue exceptions and Virginia Power’s exclusive franchise may erode.

Reduced energy demand or significantly slowed growth in demand due to customer adoption of energy efficient technology, conservation, distributed generation, regional economic conditions, or the impact of additional compliance obligations, unless substantially offset through regulatory cost allocations, could adversely impact the value of the Companies’ business activities.

Dominion Energy Gas has experienced a decline in demand for certain of its processing services due to competing facilities operating in nearby areas.

Dominion Energy and Dominion Energy Gas may not be able to maintain, renew or replace their existing portfolio of customer contracts successfully, or on favorable terms. Upon contract expiration, customers may not elect to re-contract with Dominion Energy and Dominion Energy Gas as a result of a variety of factors, including the amount of competition in the industry, changes in the price of natural gas, their level of satisfaction with Dominion Energy and Dominion Energy Gas’ services, the extent to which Dominion Energy and Dominion Energy Gas are able to successfully execute their business plans and the effect of the regulatory framework on customer demand. The failure to replace any such customer contracts on similar terms or with counterparties with similar credit profiles could result in a loss of revenue for Dominion Energy and Dominion Energy Gas and related decreases in their earnings and cash flows.

Certain of Dominion Energy and Dominion Energy Gas’ gas pipeline services are subject to long-term, fixed-price “negotiated rate” contracts that are not subject to adjustment, even if the cost to perform such services exceeds the revenues received from such contracts. Under FERC policy, a regulated service provider and a customer may mutually agree to sign a contract for service at a “negotiated rate” which may be above or

below the FERC regulated, cost-based recourse rate for that service. These “negotiated rate” contracts are not generally subject to adjustment for increased costs which could be produced by inflation or other factors relating to the specific facilities being used to perform the services. Any shortfall of revenue as a result of these “negotiated rate” contracts could decrease Dominion Energy and Dominion Energy Gas’ earnings and cash flows.

Dominion Energy and Dominion Energy Gas conduct certain operations through joint ventures that may limit our operational flexibility. Certain operations are conducted through joint venture arrangements, such as Atlantic Coast Pipeline and Iroquois, to which Dominion Energy and Dominion Energy Gas have significant influence but do not control the operations of such entities. The joint ventures operate in accordance with the applicable governing provisions of each entity. Accordingly, Dominion Energy and Dominion Energy Gas may have limited ability to influence or control certain day to day activities affecting the operations and do have not unilateral control over decisions that may have a material financial impact on the joint venture participants. Dominion Energy and Dominion Energy Gas are dependent upon third parties satisfying their respective obligations, including, as applicable, funding of their required share of capital expenditures. In addition, Dominion Energy and Dominion Energy Gas may be subject to restrictions or limitations on their ability to sell or transfer their interests in the joint venture arrangements. The third-party participants in the joint ventures have their own interests and objectives which may differ from those of Dominion Energy and Dominion Energy Gas. Accordingly, any disputes amongst the joint venture partners may result in delays, litigation or operational impasses.

Exposure to counterparty performance may adversely affect the Companies financial results of operations. The Companies are exposed to credit risks of their counterparties and the risk that one or more counterparties may fail or delay the performance of their contractual obligations, including but not limited to payment for services. Some of Dominion Energy’s operations are conducted through less than wholly-owned subsidiaries, as noted above. Counterparties could fail or delay the performance of their contractual obligations for a number of reasons, including the effect of regulations on their operations. Defaults or failure to perform by customers, suppliers, contractors, joint venture partners, financial institutions or other third parties may adversely affect the Companies’ financial results.

Dominion Energy is exposed to counterparty credit risk relating to the terminal services agreements for the Liquefaction Project. While the counterparties’ obligations are supported by parental guarantees and letters of credit, there is no assurance that such credit support would be sufficient to satisfy the obligations in the event of a counterparty default. In addition, if a controversy arises under either agreement resulting in a judgment in Dominion Energy’s favor, Dominion Energy may need to seek to enforce a final U.S. court judgment in a foreign tribunal, which could involve a lengthy process.

Market performance and other changes may decrease the value of Dominion Energy and Virginia Powers decommissioning trust funds and Dominion Energy and Dominion Energy Gas benefit plan assets or increase Dominion Energy and Dominion Energy Gas liabilities, which could then require significant additional funding. The performance of the capital markets affects the value of the assets that are held in trusts to

 

 

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satisfy future obligations to decommission Dominion Energy and Virginia Power’s nuclear plants and under Dominion Energy and Dominion Energy Gas’ pension and other postretirement benefit plans. The Companies have significant obligations in these areas and hold significant assets in these trusts. These assets are subject to market fluctuation and will yield uncertain returns, which may fall below expected return rates.

With respect to decommissioning trust funds, a decline in the market value of these assets may increase the funding requirements of the obligations to decommission Dominion Energy and Virginia Power’s nuclear plants or require additional NRC-approved funding assurance.

A decline in the market value of the assets held in trusts to satisfy future obligations under Dominion Energy and Dominion Energy Gas’ pension and other postretirement benefit plans may increase the funding requirements under such plans. Additionally, changes in interest rates will affect the liabilities under Dominion Energy and Dominion Energy Gas’ pension and other postretirement benefit plans; as interest rates decrease, the liabilities increase, potentially requiring additional funding. Further, changes in demographics, including increased numbers of retirements or changes in mortality assumptions, may also increase the funding requirements of the obligations related to the pension and other postretirement benefit plans.

If the decommissioning trust funds and benefit plan assets are negatively impacted by market fluctuations or other factors, the Companies’ results of operations, financial condition and/or cash flows could be negatively affected.

The use of derivative instruments could result in financial losses and liquidity constraints. The Companies use derivative instruments, including futures, swaps, forwards, options and FTRs, to manage commodity, currency and financial market risks. In addition, Dominion Energy and Dominion Energy Gas purchase and sell commodity-based contracts for hedging purposes.

The Dodd-Frank Act was enacted into law in July 2010 in an effort to improve regulation of financial markets. The CEA, as amended by Title VII of the Dodd-Frank Act, requires certain over-the-counter derivatives, or swaps, to be cleared through a derivatives clearing organization and, if the swap is subject to a clearing requirement, to be executed on a designated contract market or swap execution facility. Non-financial entities that use swaps to hedge or mitigate commercial risk, often referred to as end users, may elect the end-user exception to the CEA’s clearing requirements. The Companies have elected to exempt their swaps from the CEA’s clearing requirements. If, as a result of changes to the rulemaking process, the Companies’ derivative activities are not exempted from the clearing, exchange trading or margin requirements, the Companies could be subject to higher costs due to decreased market liquidity or increased margin payments. In addition, the Companies’ swap dealer counterparties may attempt to pass-through additional trading costs in connection with changes to or the elimination of rulemaking that implements Title VII of the Dodd-Frank Act.

Changing rating agency requirements could negatively affect the Companies’ growth and business strategy. In order to maintain appropriate credit ratings to obtain needed credit at a reasonable cost in light of existing or future rating agency requirements, the Companies may find it necessary to take steps or change their

business plans in ways that may adversely affect their growth and earnings. A reduction in the Companies’ credit ratings could result in an increase in borrowing costs, loss of access to certain markets, or both, thus adversely affecting operating results and could require the Companies to post additional collateral in connection with some of its price risk management activities.

An inability to access financial markets could adversely affect the execution of the Companies’ business plans. The Companies rely on access to short-term money markets and longer-term capital markets as significant sources of funding and liquidity for business plans with increasing capital expenditure needs, normal working capital and collateral requirements related to hedges of future sales and purchases of energy-related commodities. Deterioration in the Companies’ creditworthiness, as evaluated by credit rating agencies or otherwise, or declines in market reputation either for the Companies or their industry in general, or general financial market disruptions outside of the Companies’ control could increase their cost of borrowing or restrict their ability to access one or more financial markets. Further market disruptions could stem from delays in the current economic recovery, the bankruptcy of an unrelated company, general market disruption due to general credit market or political events, or the failure of financial institutions on which the Companies rely. Increased costs and restrictions on the Companies’ ability to access financial markets may be severe enough to affect their ability to execute their business plans as scheduled.

Potential changes in accounting practices may adversely affect the Companies’ financial results. The Companies cannot predict the impact that future changes in accounting standards or practices may have on public companies in general, the energy industry or their operations specifically. New accounting standards could be issued that could change the way they record revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect earnings or could increase liabilities.

War, acts and threats of terrorism, intentional acts and other significant events could adversely affect the Companies’ operations. The Companies cannot predict the impact that any future terrorist attacks may have on the energy industry in general, or on the Companies’ business in particular. Any retaliatory military strikes or sustained military campaign may affect the Companies’ operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets. In addition, the Companies’ infrastructure facilities, including projects under construction, could be direct targets of, or indirect casualties of, an act of terror. For example, there have been multiple instances of vandalism or attempted sabotage on third-party oil and gas pipelines either under construction or in operation. Furthermore, the physical compromise of the Companies’ facilities could adversely affect the Companies’ ability to manage these facilities effectively. Instability in financial markets as a result of terrorism, war, intentional acts, pandemic, credit crises, recession or other factors could result in a significant decline in the U.S. economy and increase the cost of insurance coverage. This could negatively impact the Companies’ results of operations and financial condition.

Hostile cyber intrusions could severely impair the Companies’ operations, lead to the disclosure of confidential information, damage the reputation of the Companies and otherwise have an adverse effect on the Companies’ business.

 

 

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The Companies own assets deemed as critical infrastructure, the operation of which is dependent on information technology systems. Further, the computer systems that run the Companies’ facilities are not completely isolated from external networks. There appears to be an increasing level of activity, sophistication and maturity of threat actors, in particular nation state actors, that wish to disrupt the U.S. bulk power system and the U.S. gas transmission or distribution system. Such parties could view the Companies’ computer systems, software or networks as attractive targets for cyber attack. For example, malware has been designed to target software that runs the nation’s critical infrastructure such as power transmission grids and gas pipelines. In addition, the Companies’ businesses require that they and their vendors collect and maintain sensitive customer data, as well as confidential employee and shareholder information, which is subject to electronic theft or loss.

A successful cyber attack on the systems that control the Companies’ electric generation, electric or gas transmission or distribution assets could severely disrupt business operations, preventing the Companies from serving customers or collecting revenues. The breach of certain business systems could affect the Companies’ ability to correctly record, process and report financial information. A major cyber incident could result in significant expenses to investigate and repair security breaches or system damage and could lead to litigation, fines, other remedial action, heightened regulatory scrutiny and damage to the Companies’ reputation. In addition, the misappropriation, corruption or loss of personally identifiable information and other confidential data at the Companies or one of their vendors could lead to significant breach notification expenses and mitigation expenses such as credit monitoring. While the Companies maintain property and casualty insurance, along with other contractual provisions, that may cover certain damage caused by potential cyber incidents, all damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. For these reasons, a significant cyber incident could materially and adversely affect the Companies’ business, financial condition and results of operations.

Failure to attract and retain key executive officers and an appropriately qualified workforce could have an adverse effect on the Companies’ operations. The Companies’ business strategy is dependent on their ability to recruit, retain and motivate employees. The Companies’ key executive officers are the CEO, CFO and presidents and those responsible for financial, operational, legal, regulatory and accounting functions. Competition for skilled management employees in these areas of the Companies’ business operations is high. Certain events, such as an aging workforce, mismatch of skill set, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge base and the length of time required for skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or future availability and cost of contract labor may adversely affect the ability to manage and operate the Companies’ business. In addition, certain specialized knowledge is required of the Companies’ technical employees for construction and oper-

ation of transmission, generation and distribution assets. The Companies’ inability to attract and retain these employees could adversely affect their business and future operating results.

Following the SCANA Combination, Dominion Energy may be unable to successfully integrate SCANAs businesses. Dominion Energy is devoting significant management attention and resources to integrating SCANAs businesses. While Dominion Energy has assumed that a certain level of transaction and integration expenses will be incurred, there are a number of factors beyond its control that could affect the total amount or the timing of its integration expenses. Potential difficulties Dominion Energy may encounter in the integration process include the following:

  The complexities associated with integrating SCANA, including its utility businesses, while at the same time continuing to provide consistent, high quality services;
  The complexities of integrating a company with different markets and customers;
  The inability to attract and retain key employees;
  Potential unknown liabilities and unforeseen increased expenses associated with the SCANA Combination;
  Difficulties in managing political and regulatory conditions related to SCANA’s utility businesses;
  The moratorium on filing requests for adjustments in SCE&G’s base electric rates until May 2020 with no changes in rates until January 1, 2021, which limits Dominion Energy’s ability to recover increases in non-fuel related costs of electric operations for SCE&G’s customers;
  The stipulation agreement approved by the North Carolina Commission, which provides for a rate moratorium at PSNC until November 1, 2021, with certain exceptions; and
  Performance shortfalls as a result of the diversion of Dominion Energy management’s attention caused by integrating SCANA’s businesses.

For these reasons, it is possible that the integration process could result in the distraction of Dominion Energy’s management, the disruption of Dominion Energy’s ongoing business or inconsistencies in its services, standards, controls, procedures and policies, any of which could adversely affect the ability of Dominion Energy to maintain or establish relationships with current and prospective customers, vendors and employees or could otherwise adversely affect the business and financial results of Dominion Energy.

Dominion Energy may be materially adversely affected by negative publicity related to the SCANA Combination and in connection with other related matters, including the abandonment of the NND Project. From time to time, political and public sentiment in connection with the merger and in connection with other matters, including the abandonment of the NND Project, may result in a significant amount of adverse press coverage and other adverse public statements affecting Dominion Energy. Adverse press coverage and other adverse statements, whether or not driven by political or public sentiment, may also result in investigations by regulators, legislators and law enforcement officials or in legal claims. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, as well as responding to and addressing adverse press coverage and other adverse public statements, can divert the time and effort of senior management from the management of Dominion Energy’s business.

 

 

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Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time consuming and expensive and, regardless of the factual basis for the assertions being made, can have a negative impact on the reputation of Dominion Energy, on the morale and performance of their employees and on their relationships with their respective regulators, customers and commercial counterparties. It may also have a negative impact on their ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on Dominion Energy’s business, financial condition and results of operations.

The SCANA Combination may not be accretive to operating earnings and may cause dilution to Dominion Energy’s earnings per share, which may negatively affect the market price of Dominion Energy common stock. Dominion Energy currently anticipates that the SCANA Combination will be immediately accretive to Dominion Energy’s forecasted operating earnings per share on a standalone basis. This expectation is based on preliminary estimates, which may materially change. Dominion Energy may encounter additional transaction and integration-related costs, may fail to realize all of the benefits anticipated in the merger or be subject to other factors that affect preliminary estimates or its ability to realize operational efficiencies. Any of these factors could cause a decrease in Dominion Energy’s operating earnings per share or decrease or delay the expected accretive effect of the merger and contribute to a decrease in the price of Dominion Energy’s common stock. Dominion Energy expects the initial effect of the SCANA Combination on its GAAP earnings will be a decrease in such earnings due to the anticipated charges for refunds to SCE&G customers and transaction and transition costs.

Through the SCANA Combination, Dominion Energy acquired SCANA and SCE&G which are subject to numerous legal proceedings and ongoing governmental investigations and examinations. SCANA and SCE&G are defendants in numerous federal and state legal proceedings and governmental investigations relating to the decision to abandon construction at the

NND Project. Among other things, the lawsuits and investigations allege misrepresentation, failure to properly manage the NND Project, unfair trade practices and violation of anti-trust laws. The plaintiffs seek a judgment that SCE&G may not charge its customers for any past or continuing costs of the NND Project, among other remedies.

Additionally, SCANA and SCE&G are defendants in federal and state legal proceedings relating to the SCANA Combination. Among other things, the lawsuits allege breaches of various fiduciary duties. Remedies sought include rescinding the SCANA Combination.

The outcome of these legal proceedings, investigations and examinations is uncertain and may adversely affect Dominion Energy’s financial condition or results of operation.

Dominion Energy has goodwill and other intangible assets on its balance sheet, and these amounts will increase as a result of the SCANA Combination. If its goodwill or other intangible assets become impaired in the future, Dominion Energy may be required to record a significant, non-cash charge to earnings and reduce its shareholders’ equity. Dominion Energy will record as goodwill the excess of the purchase price paid by Dominion Energy over the fair value of SCANA’s assets and liabilities as determined for financial accounting purposes in its Consolidated Balance Sheet beginning in the first quarter of 2019. Under GAAP, intangible assets are reviewed for impairment on an annual basis or more frequently whenever events or circumstances indicate that its carrying value may not be recoverable. If Dominion Energy’s intangible assets, including goodwill as a result of the SCANA Combination, are determined to be impaired in the future, Dominion Energy may be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.

 

 

Item 1B. Unresolved Staff Comments

None.

 

 

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Item 2. Properties

As of December 31, 2018, Dominion Energy owned its principal executive office in Richmond, Virginia and five other corporate offices. Dominion Energy also leases corporate offices in other cities in which its subsidiaries operate. Virginia Power and Dominion Energy Gas share Dominion Energy’s principal office in Richmond, Virginia, which is owned by Dominion Energy. In addition, Virginia Power’s Power Delivery and Power Generation segments share certain leased buildings and equipment.

Dominion Energy’s assets consist primarily of its investments in its subsidiaries, the principal properties of which are described below.

Certain of Virginia Power’s properties are subject to the lien of the Indenture of Mortgage securing its First and Refunding Mortgage Bonds. There were no bonds outstanding as of December 31, 2018; however, by leaving the indenture open, Virginia Power expects to retain the flexibility to issue mortgage bonds in the future. Certain of Dominion Energy’s merchant generation facilities are also subject to liens. Additionally, SCE&G’s bond indenture, which secures its First Mortgage Bonds, constitutes a direct mortgage lien on substantially all of its electric utility property. GENCO’s Williams Station is also subject to a first mortgage lien which secures certain outstanding debt of GENCO.

POWER DELIVERY

Virginia Power has approximately 6,700 miles of electric transmission lines of 69 kV or more located in North Carolina, Virginia and West Virginia. Portions of Virginia Power’s electric transmission lines cross national parks and forests under permits

entitling the federal government to use, at specified charges, any surplus capacity that may exist in these lines. While Virginia Power owns and maintains its electric transmission facilities, they are a part of PJM, which coordinates the planning, operation, emergency assistance and exchange of capacity and energy for such facilities.

In addition, Virginia Power’s electric distribution network includes approximately 58,300 miles of distribution lines, exclusive of service level lines, in Virginia and North Carolina. The grants for most of its electric lines contain rights-of-way that have been obtained from the apparent owners of real estate, but underlying titles have not been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly-owned property, where permission to operate can be revoked. In addition, Virginia Power owns 475 substations.

POWER GENERATION

Dominion Energy and Virginia Power generate electricity for sale on a wholesale and a retail level. Dominion Energy and Virginia Power supply electricity demand either from their generation facilities or through purchased power contracts. As of December 31, 2018, Power Generation’s total utility, non-jurisdictional and merchant generating capacity was approximately 26,000 MW. The following tables list Power Generation’s utility, non-jurisdictional and merchant generating units and capability, as of December 31, 2018.

 

 

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VIRGINIA POWER UTILITY GENERATION

 

Plant    Location     

Net Summer

Capability (MW)

   

Percentage

Net Summer

Capability

 

Gas

       

Greensville County (CC)

     Greensville County, VA        1,588    

Brunswick County (CC)

     Brunswick County, VA        1,376    

Warren County (CC)

     Warren County, VA        1,370    

Ladysmith (CT)

     Ladysmith, VA        783    

Bear Garden (CC)

     Buckingham County, VA        622    

Remington (CT)

     Remington, VA        622    

Possum Point (CC)

     Dumfries, VA        573    

Chesterfield (CC)

     Chester, VA        397    

Elizabeth River (CT)

     Chesapeake, VA        330    

Possum Point(1)

     Dumfries, VA        316    

Bellemeade (CC)(1)

     Richmond, VA        267    

Bremo(1)

     Bremo Bluff, VA        227    

Gordonsville Energy (CC)

     Gordonsville, VA        218    

Gravel Neck (CT)

     Surry, VA        170    

Darbytown (CT)

     Richmond, VA        168    

Rosemary (CC)

     Roanoke Rapids, NC        160          

Total Gas

        9,187       41

Coal

       

Mt. Storm

     Mt. Storm, WV        1,621    

Chesterfield(1)

     Chester, VA        1,275    

Virginia City Hybrid Energy Center

     Wise County, VA        610    

Clover

     Clover, VA        439 (3)    

Yorktown(2)

     Yorktown, VA        323    

Mecklenburg(1)

     Clarksville, VA        138          

Total Coal

        4,406       20  

Nuclear

       

Surry

     Surry, VA        1,676    

North Anna

     Mineral, VA        1,672 (4)          

Total Nuclear

        3,348       15  

Oil

       

Yorktown

     Yorktown, VA        790    

Possum Point

     Dumfries, VA        770    

Gravel Neck (CT)

     Surry, VA        198    

Darbytown (CT)

     Richmond, VA        168    

Possum Point (CT)

     Dumfries, VA        72    

Chesapeake (CT)

     Chesapeake, VA        51    

Low Moor (CT)

     Covington, VA        48    

Northern Neck (CT)

     Lively, VA        47          

Total Oil

        2,144       10  

Hydro

       

Bath County

     Warm Springs, VA        1,808 (5)    

Gaston

     Roanoke Rapids, NC        220    

Roanoke Rapids

     Roanoke Rapids, NC        95    

Other

              1          

Total Hydro

        2,124       9  

Biomass

       

Pittsylvania(1)

     Hurt, VA        83    

Altavista

     Altavista, VA        51    

Polyester

     Hopewell, VA        51    

Southampton

     Southampton, VA        51          

Total Biomass

        236       1  

Solar

       

Whitehouse Solar

     Louisa County, VA        20    

Woodland Solar

     Isle of Wight County, VA        19    

Scott Solar

     Powhatan County, VA        17          

Total Solar

        56        

Various

       

Mt. Storm (CT)

     Mt. Storm, WV        11        
                21,512          

Power Purchase Agreements

              930       4  

Total Utility Generation

              22,442       100

Note: (CT) denotes combustion turbine and (CC) denotes combined cycle.

(1)

Virginia Power has placed certain units at this facility in cold storage.

(2)

Coal-fired units are expected to be retired at Yorktown power station as early as 2019 as a result of the issuance of MATS.

(3)

Excludes 50% undivided interest owned by ODEC.

(4)

Excludes 11.6% undivided interest owned by ODEC.

(5)

Excludes 40% undivided interest owned by Allegheny Generating Company, a subsidiary of FirstEnergy Corp.

 

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VIRGINIA POWER NON-JURISDICTIONAL GENERATION

 

Plant    Location   

Net Summer

Capability (MW)

 

Solar(1)

     

Pecan

   Pleasant Hill, NC      75  

Montross

   Montross, VA      20  

Morgans Corner

   Pasquotank County, NC      20  

Remington

   Remington, VA      20  

Oceana

   Virginia Beach, VA      18  

Hollyfield

   Manquin, VA      17  

Puller

   Topping, VA      15  

Total Solar

          185  

 

(1)

All solar facilities are alternating current.

DOMINION ENERGY MERCHANT GENERATION

 

Plant    Location     

Net Summer

Capability (MW)

   

Percentage

Net Summer

Capability

 

Nuclear

       

Millstone

     Waterford, CT        2,001 (1)          

Total Nuclear

        2,001       59

Solar(2)

       

Escalante I, II and III

     Beaver County, UT        120 (3)    

Amazon Solar Farm Virginia—Southampton

     Newsoms, VA        100 (5)    

Amazon Solar Farm Virginia—Accomack

     Oak Hall, VA        80 (5)    

Innovative Solar 37

     Morven, NC        79 (5)    

Moffett Solar 1

     Ridgeland, SC        71 (5)    

Granite Mountain East and West

     Iron County, UT        65 (3)    

Summit Farms Solar

     Moyock, NC        60 (5)    

Enterprise

     Iron County, UT        40 (3)    

Iron Springs

     Iron County, UT        40 (3)    

Pavant Solar

     Holden, UT        34 (4)    

Camelot Solar

     Mojave, CA        30 (4)    

Midway II

     Calipatria, CA        30 (5)    

Indy I, II and III

     Indianapolis, IN        20 (4)    

Amazon Solar Farm Virginia—Buckingham

     Cumberland, VA        20 (5)    

Amazon Solar Farm Virginia—Correctional

     Barhamsville, VA        20 (5)     

Hecate Cherrydale

     Cape Charles, VA        20 (5)    

Amazon Solar Farm Virginia—Sappony

     Stoney Creek, VA        20 (5)     

Amazon Solar Farm Virginia—Scott II

     Powhatan, VA        20 (5)    

Cottonwood Solar

     Kings and Kern counties, CA        16 (4)    

Alamo Solar

     San Bernardino, CA        13 (4)    

Maricopa West Solar

     Kern County, CA        13 (4)    

Imperial Valley Solar

     Imperial, CA        13 (4)    

Richland Solar

     Jeffersonville, GA        13 (4)    

CID Solar

     Corcoran, CA        13 (4)    

Kansas Solar

     Lenmore, CA        13 (4)    

Kent South Solar

     Lenmore, CA        13 (4)    

Old River One Solar

     Bakersfield, CA        13 (4)    

West Antelope Solar

     Lancaster, CA        13 (4)    

Adams East Solar

     Tranquility, CA        13 (4)    

Catalina 2 Solar

     Kern County, CA        12 (4)    

Mulberry Solar

     Selmer, TN        11 (4)    

Selmer Solar

     Selmer, TN        11 (4)    

Columbia 2 Solar

     Mojave, CA        10 (4)    

Hecate Energy Clarke County

     White Post, VA        10 (5)    

Ridgeland Solar Farm I

     Ridgeland, SC        10 (5)     

Other

     Various        43 (4)(5)          

Total Solar

        1,122       33  

Wind

       

Fowler Ridge(6)

     Benton County, IN        150 (7)    

NedPower(6)

     Grant County, WV        132 (8)          

Total Wind

        282       8  

Fuel Cell

       

Bridgeport Fuel Cell

     Bridgeport, CT        15          

Total Fuel Cell

              15        

Total Merchant Generation

              3,420       100

 

40        


 

 

(1)

Excludes 6.53% undivided interest in Unit 3 owned by Massachusetts Municipal and Green Mountain.

(2)

All solar facilities are alternating current.

(3)

Excludes 50% noncontrolling interest owned by GIP. Dominion Energy’s interest is subject to a lien securing Dominion Solar Projects III, Inc.’s debt.

(4)

Excludes 33% noncontrolling interest owned by Terra Nova Renewable Partners. Dominion Energy’s interest is subject to a lien securing SBL Holdco’s debt.

(5)

Dominion Energy’s interest is subject to a lien securing Eagle Solar’s debt.

(6)

Subject to a lien securing the facility’s debt.

(7)

Excludes 50% membership interest owned by BP.

(8)

Excludes 50% membership interest owned by Shell.

GAS INFRASTRUCTURE

Dominion Energy and Dominion Energy Gas

East Ohio’s gas distribution network is located in Ohio. This network involves approximately 18,900 miles of pipe, exclusive of service lines. The right-of-way grants for many natural gas pipelines have been obtained from the actual owners of real estate, as underlying titles have been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many natural gas pipelines are on publicly-owned property, where company rights and actions are determined on a case-by-case basis, with results that range from reimbursed relocation to revocation of permission to operate.

Dominion Energy Gas has approximately 10,800 miles, excluding interests held by others, of gas transmission, gathering and storage pipelines located in the states of Maryland, New York, Ohio, Pennsylvania, Virginia and West Virginia. Dominion Energy Gas also owns NGL processing plants capable of processing over 270,000 mcf per day of natural gas. Hastings is the largest plant and is capable of processing over 180,000 mcf per day of natural gas. Hastings can also fractionate over 580,000 Gals per day of NGLs into marketable products, including propane, isobutane, butane and natural gasoline. NGL operations have storage capacity of 1,340,000 Gals of propane, 118,000 Gals of isobutane, 242,000 Gals of butane, 2,000,000 Gals of natural gasoline and 1,012,500 Gals of mixed NGLs. Dominion Energy Gas also operates 20 underground gas storage fields located in New York, Ohio, Pennsylvania and West Virginia, with approximately 2,000 storage wells and approximately 399,000 acres of operated leaseholds.

The total designed capacity of the underground storage fields operated by Dominion Energy Gas is approximately 926 bcf. Certain storage fields are jointly-owned and operated by Dominion Energy Gas. The capacity of those fields owned by Dominion Energy Gas’ partners totals approximately 223 bcf.

Dominion Energy

Cove Point’s LNG Facility has an operational peak regasification daily send-out capacity of approximately 1.8 million Dths and an aggregate LNG storage capacity of approximately 14.6 bcfe. In addition, Cove Point has a liquefier that has the potential to create approximately 15,000 Dths/day. The Liquefaction Project consists of one LNG train with a nameplate outlet capacity of 5.25 Mtpa. Cove Point has authorization from the DOE to export up to 0.77 Bcfe/day (approximately 5.75 Mtpa) should the liquefaction facilities perform better than expected.

The Cove Point Pipeline is a 36-inch diameter underground, interstate natural gas pipeline that extends approximately 88 miles

from Cove Point to interconnections with Transco in Fairfax County, Virginia, and with Columbia Gas Transmission, LLC and DETI in Loudoun County, Virginia. In 2009, the original pipeline was expanded to include a 36-inch diameter expansion that extends approximately 48 miles, roughly 75% of which is parallel to the original pipeline.

Dominion Energy Questar Pipeline operates 2,200 miles of natural gas transportation pipelines that interconnect with other pipelines in Utah, Wyoming and western Colorado. Dominion Energy Questar Pipeline’s system ranges in diameter from lines that are less than four inches to 36-inches. Dominion Energy Questar Pipeline owns the Clay Basin storage facility in northeastern Utah, which has a certificated capacity of 120 bcf, including 54 bcf of working gas.

DECG’s interstate natural gas pipeline system in South Carolina and southeastern Georgia is comprised of nearly 1,500 miles of transmission pipeline.

Questar Gas owns and operates distribution systems in Utah, Wyoming and Idaho with a total of 30,100 miles of street mains, service lines and interconnecting pipelines.

Hope’s gas distribution network located in West Virginia is comprised of 3,200 miles of pipe, exclusive of service lines.

In total, Dominion Energy has 172 compressor stations with approximately 1,340,000 installed compressor horsepower.

SOUTHEAST ENERGY

SCE&G has approximately 3,500 miles and 26,500 miles of electric transmission and distribution lines, respectively, exclusive of service level lines, in South Carolina. The grants for most of SCE&G’s electric lines contain rights-of-way that have been obtained from the apparent owners of real estate, but underlying property titles have not been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly-owned property, where permission to operate can be revoked. In addition, SCE&G owns 440 substations.

SCE&G and PSNC’s natural gas system includes approximately 1,100 miles of transmission pipeline of up to 24 inches in diameter that connect their distribution systems with Southern Natural Gas Company, Transco and DECG. SCE&G and PSNC’s natural gas distribution system consists of approximately 40,600 miles of distribution mains and related service facilities.

SCE&G owns two LNG facilities, one located near Charleston, South Carolina, and the other in Salley, South Carolina. The Charleston facility can store the liquefied equivalent of 1.0 bcf of natural gas, can regasify approximately 6% of its storage capacity per day and can liquefy less than 1% of its storage capacity per day. The Salley facility can store the liquefied equivalent of 0.9 bcf of natural gas and can regasify approximately 10% of its storage capacity per day. The Salley facility has no liquefying capabilities.

PSNC owns one LNG facility that stores the liquefied equivalent of 1.0 bcf of natural gas, can regasify approximately 10% of its storage capacity per day and can liquefy less than 1% of its storage capacity per day.

To meet the requirements of their high priority natural gas customers during periods of maximum demand, SCE&G and

 

 

41


 

 

PSNC have contracted for approximately 6 bcf of natural gas storage capacity on the systems of Southern Natural Gas Company and Transco.

Dominion Energy acquired through the SCANA Combination total utility generating capacity of approximately 6,000 MW, as detailed in the following table:

 

Plant    Location   

Net Summer

Capability (MW)

   

Percentage

Net Summer

Capability

 

Gas

       

Jasper (CC)

   Hardeeville, SC      852 (1)    

Columbia Energy Center (CC)

   Gaston, SC      504 (1)    

Urquhart (CC)

   Beech Island, SC      458 (1)    

McMeekin

   Irmo, SC      250    

Hagood (CT)

   Charleston, SC      126 (1)    

Urquhart Unit 3

   Beech Island, SC      95    

Urquhart (CT)

   Beech Island, SC      87    

Parr (CT)

   Jenkinsville, SC      60 (1)    

Williams (CT)

   Goose Creek, SC      40 (1)    

Coit (CT)

   Columbia, SC      26 (1)    

Hardeeville (CT)

   Hardeeville, SC      9          

Total Gas

        2,507       42

Coal

       

Wateree

   Eastover, SC      684    

Williams

   Goose Creek, SC      605    

Cope

   Cope, SC      415 (2)          

Total Coal

        1,704       28  

Hydro

       

Fairfield

   Jenkinsville, SC      576    

Saluda

   Irmo, SC      198    

Other

   Various      18          

Total Hydro

        792       13  

Nuclear

       

Summer(1)

   Jenkinsville, SC      647 (3)          

Total Nuclear

        647       11  

Power Purchase Agreements

          335       6  

Total Utility Generation

          5,985       100

Note: (CT) denotes combustion turbine and (CC) denotes combined cycle.

(1) Capable of burning fuel oil as a secondary source.

(2) Capable of burning natural gas as a secondary source.

(3)

Excludes 33.3% undivided interest owned by Santee Cooper.

 

42        


 

 

Item 3. Legal Proceedings

From time to time, the Companies are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by the Companies, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, the Companies and their subsidiaries are involved in various legal proceedings.

See Notes 13 and 22 to the Consolidated Financial Statements and Future Issues and Other Matters in Item 7. MD&A, which information is incorporated herein by reference, for discussion of various legal, environmental and other regulatory proceedings to which the Companies are a party. See also Note 3 to the Consolidated Financial Statements, which information is incorporated herein by reference, for a discussion of various legal proceedings to which SCANA and SCE&G were a party to at the closing of the SCANA Combination.

 

 

Item 4. Mine Safety Disclosures

Not applicable.

 

 

43


 

 

Executive Officers of Dominion Energy

Information concerning the executive officers of Dominion Energy, each of whom is elected annually, is as follows:

 

Name and Age    Business Experience Past Five Years(1)

Thomas F. Farrell, II (64)

   Chairman of the Board of Directors, President and CEO of Dominion Energy from April 2007 to date.

Robert M. Blue (51)

   Executive Vice President and President & CEO—Power Delivery from May 2017 to date; Senior Vice President and President & CEO—Power Delivery from January 2017 to May 2017; Senior Vice President—Law, Regulation & Policy from February 2016 to December 2016; Senior Vice President—Regulation, Law, Energy Solutions and Policy from May 2015 to January 2016; President of Virginia Power from January 2014 to May 2015.

James R. Chapman (49)

   Executive Vice President, Chief Financial Officer and Treasurer from January 2019 to date; Senior Vice President, Chief Financial Officer and Treasurer from November 2018 to December 2018; Senior Vice President—Mergers & Acquisitions and Treasurer from February 2016 to October 2018; Vice President—Corporate Finance and Mergers & Acquisitions and Assistant Treasurer from May 2015 to January 2016; Vice President—Corporate Finance and Mergers & Acquisitions from January 2015 to May 2015; Assistant Treasurer from October 2013 to December 2014.

Paul D. Koonce (59)

   Executive Vice President and President & CEO—Power Generation from January 2017 to date; Executive Vice President and CEO—Power Generation from January 2016 to December 2016; Executive Vice President and CEO—Gas Infrastructure from February 2013 to December 2015.

Diane Leopold (52)

   Executive Vice President and President & CEO—Gas Infrastructure from May 2017 to date; Senior Vice President and President & CEO—Gas Infrastructure from January 2017 to May 2017; President of DETI, East Ohio and Dominion Cove Point, Inc. from January 2014 to date.

P. Rodney Blevins (54)

   President & Chief Executive Officer—Southeast Energy from January 2019 to date; Senior Vice President and Chief Information Officer from January 2014 to December 2018.

Carlos M. Brown (44)

   Senior Vice President and General Counsel from January 2019 to date; Vice President and General Counsel from January 2017 to December 2018; Deputy General Counsel—Litigation, Labor, and Employment of DES from July 2016 to December 2016; Director—Power Generation Station II of DES from July 2015 to June 2016; Director—Alternative Energy Solutions Business Development & Commercialization of DES from January 2013 to June 2015.

William L. Murray (51)

   Senior Vice President—Corporate Affairs & Communications from February 2019 to date; Vice President—State & Electric Public Policy of DES from May 2017 to January 2019; Senior Policy Director—Public Policy of DES from April 2016 to May 2017; Managing Director—Corporate Public Policy of DES from June 2007 to March 2016.

Michele L. Cardiff (51)

   Vice President, Controller and CAO from April 2014 to date; Vice President—Accounting of DES from January 2014 to March 2014.

 

(1)

All positions held at Dominion Energy, unless otherwise noted. Any service listed for Virginia Power, DETI, East Ohio, Dominion Cove Point, Inc., and DES reflects service at a subsidiary of Dominion Energy.

 

44        


 

 

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Dominion Energy

Dominion Energy’s common stock is listed on the NYSE under the ticker symbol D. At February 15, 2019, there were approximately 137,000 record holders of Dominion Energy’s common stock. The number of record holders is comprised of individual shareholder accounts maintained on Dominion Energy’s transfer agent records and includes accounts with shares held in (1) certificate form, (2) book-entry in the Direct Registration System and (3) book-entry under Dominion Energy Direct®. Discussions of expected dividend payments required by this Item are contained in Liquidity and Capital Resources in Item 7. MD&A.

The following table presents certain information with respect to Dominion Energy’s common stock repurchases during the fourth quarter of 2018:

 

DOMINION ENERGY PURCHASES OF EQUITY SECURITIES
Period   

Total

Number

of Shares

(or Units)

Purchased(1)

    

Average

Price Paid
per Share

(or Unit)(2)

    

Total Number

of Shares (or Units)

Purchased as Part

of Publicly Announced
Plans or Programs

    

Maximum Number (or

Approximate Dollar Value)
of Shares (or Units) that May

Yet Be Purchased under the
Plans or Programs(3)

 

10/1/18-10/31/18

     27,800      $ 70.10             19,629,059 shares/$1.18 billion

11/1/18-11/30/18

     3,630        70.33             19,629,059 shares/$1.18 billion

12/1/18-12/31/18

     1,494        74.58             19,629,059 shares/$1.18 billion

Total

     32,924      $ 70.33             19,629,059 shares/$1.18 billion

 

(1)

27,800, 3,630 and 1,494 shares were tendered by employees to satisfy tax withholding obligations on vested restricted stock in October, November and December 2018, respectively.

(2)

Represents the weighted-average price paid per share.

(3)

The remaining repurchase authorization is pursuant to repurchase authority granted by the Dominion Energy Board of Directors in February 2005, as modified in June 2007. The aggregate authorization granted by the Dominion Energy Board of Directors was 86 million shares (as adjusted to reflect a two-for-one stock split distributed in November 2007) not to exceed $4 billion.

Virginia Power

There is no established public trading market for Virginia Power’s common stock, all of which is owned by Dominion Energy. Virginia Power intends to pay quarterly cash dividends in 2019 but is neither required to nor restricted, except as described in Note 20 to the Consolidated Financial Statements, from making such payments.

Dominion Energy Gas

All of Dominion Energy Gas’ membership interests are owned by Dominion Energy. Dominion Energy Gas intends to pay quarterly cash dividends in 2019 but is neither required to nor restricted, except as described in Note 20 to the Consolidated Financial Statements, from making such payments.

 

        45


 

 

Item 6. Selected Financial Data

The following table should be read in conjunction with the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

Beginning in 2019, Dominion Energy’s result of operations will include the results of operations of SCANA. Additionally, in connection with the SCANA Combination, SCE&G will provide refunds and restitution of $2.0 billion over 20 years with capital support from Dominion Energy as well as exclude from rate recovery $2.4 billion of costs related to the NND Project and $180 million of costs associated with the purchase of the Columbia Energy Center power station. See Note 3 to the Consolidated Financial Statements for further information including charges expected to be recognized in the first quarter of 2019.

DOMINION ENERGY

 

Year Ended December 31,    2018(1)      2017(2)      2016(3)      2015      2014(4)  
(millions, except per share amounts)                                   

Operating revenue

   $ 13,366      $ 12,586      $ 11,737      $ 11,683      $ 12,436  

Net income attributable to Dominion Energy

     2,447        2,999        2,123        1,899        1,310  

Net income attributable to Dominion Energy per common share-basic

     3.74        4.72        3.44        3.21        2.25  

Net income attributable to Dominion Energy per common share-diluted

     3.74        4.72        3.44        3.20        2.24  

Dividends declared per common share

     3.340        3.035        2.80        2.59        2.40  

Total assets

     77,914        76,585        71,610        58,648        54,186  

Long-term debt(5)

     31,144        30,948        30,231        23,468        21,665  

 

(1)

Includes $568 million after-tax gains on sales of certain merchant generation facilities and equity method investments partially offset by $164 million after-tax charge related to the impairment of certain gathering and processing assets and a $160 million after-tax charge associated with Virginia legislation enacted in March 2018 that required one-time rate credits of certain amounts to utility customers.

(2)

Includes $851 million of tax benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate, partially offset by $96 million of after-tax charges associated with equity method investments in wind-powered generation facilities.

(3)

Includes a $122 million after-tax charge related to future ash pond and landfill closure costs at certain utility generation facilities.

(4)

Includes $248 million of after-tax charges associated with Virginia legislation enacted in April 2014 relating to the development of a third nuclear unit located at North Anna and offshore wind facilities, a $193 million after-tax charge related to Dominion Energy’s restructuring of its producer services business and a $174 million after-tax charge associated with the Liability Management Exercise.

(5)

Includes capital leases.

 

46        


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

MD&A discusses Dominion Energy’s results of operations and general financial condition and Virginia Power and Dominion Energy Gas’ results of operations. MD&A should be read in conjunction with Item 1. Business and the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Virginia Power and Dominion Energy Gas meet the conditions to file under the reduced disclosure format, and therefore have omitted certain sections of MD&A.

 

 

CONTENTS OF MD&A

MD&A consists of the following information:

  Forward-Looking Statements
  Accounting Matters—Dominion Energy
  Dominion Energy
    Results of Operations
    Segment Results of Operations
  Virginia Power
    Results of Operations
  Dominion Energy Gas
    Results of Operations
  Liquidity and Capital Resources—Dominion Energy
  Future Issues and Other Matters—Dominion Energy

 

 

FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Companies’ expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “continue,” “target” or other similar words.

The Companies make forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:

  Unusual weather conditions and their effect on energy sales to customers and energy commodity prices;
  Extreme weather events and other natural disasters, including, but not limited to, hurricanes, high winds, severe storms, earthquakes, flooding and changes in water temperatures and availability that can cause outages and property damage to facilities;
  Federal, state and local legislative and regulatory developments, including changes in federal and state tax laws and regulations;
  Changes to federal, state and local environmental laws and regulations, including those related to climate change, the tightening of emission or discharge limits for GHGs and other substances, more extensive permitting requirements and the regulation of additional substances;
  Cost of environmental compliance, including those costs related to climate change;
  Changes in implementation and enforcement practices of regulators relating to environmental standards and litigation exposure for remedial activities;
  Difficulty in anticipating mitigation requirements associated with environmental and other regulatory approvals or related appeals;
  Risks associated with the operation of nuclear facilities, including costs associated with the disposal of spent nuclear fuel, decommissioning, plant maintenance and changes in existing regulations governing such facilities;
  Unplanned outages at facilities in which the Companies have an ownership interest;
  Fluctuations in energy-related commodity prices and the effect these could have on Dominion Energy and Dominion Energy Gas’ earnings and the Companies’ liquidity position and the underlying value of their assets;
  Counterparty credit and performance risk;
  Global capital market conditions, including the availability of credit and the ability to obtain financing on reasonable terms;
  Risks associated with Virginia Power’s membership and participation in PJM, including risks related to obligations created by the default of other participants;
  Fluctuations in the value of investments held in nuclear decommissioning trusts by Dominion Energy and Virginia Power and in benefit plan trusts by Dominion Energy and Dominion Energy Gas;
  Fluctuations in interest rates or foreign currency exchange rates;
  Changes in rating agency requirements or credit ratings and their effect on availability and cost of capital;
  Changes in financial or regulatory accounting principles or policies imposed by governing bodies;
  Employee workforce factors including collective bargaining agreements and labor negotiations with union employees;
  Risks of operating businesses in regulated industries that are subject to changing regulatory structures;
  Impacts of acquisitions, including the recently completed SCANA Combination, divestitures, transfers of assets to joint ventures and retirements of assets based on asset portfolio reviews;
  Receipt of approvals for, and timing of, closing dates for acquisitions and divestitures;
  Changes in rules for RTOs and ISOs in which Dominion Energy and Virginia Power participate, including changes in rate designs, changes in FERC’s interpretation of market rules and new and evolving capacity models;
  Political and economic conditions, including inflation and deflation;
  Domestic terrorism and other threats to the Companies’ physical and intangible assets, as well as threats to cybersecurity;
 

Changes in demand for the Companies’ services, including industrial, commercial and residential growth or decline in the Companies’ service areas, changes in supplies of natural gas delivered to Dominion Energy and Dominion Energy Gas’ pipeline and processing systems, failure to maintain or replace customer contracts on favorable terms, changes in customer growth or usage patterns, including as a result of

 

 

        47


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

   

energy conservation programs, the availability of energy efficient devices and the use of distributed generation methods;

  Additional competition in industries in which the Companies operate, including in electric markets in which Dominion Energy’s merchant generation facilities operate and potential competition from the development and deployment of alternative energy sources, such as self-generation and distributed generation technologies, and availability of market alternatives to large commercial and industrial customers;
  Competition in the development, construction and ownership of certain electric transmission facilities in Dominion Energy and Virginia Power’s service territories in connection with Order 1000;
  Changes in technology, particularly with respect to new, developing or alternative sources of generation and smart grid technologies;
  Changes to regulated electric rates collected by Dominion Energy and Virginia Power and regulated gas distribution, transportation and storage rates, including LNG storage, collected by Dominion Energy and Dominion Energy Gas;
  Changes in operating, maintenance and construction costs;
  Timing and receipt of regulatory approvals necessary for planned construction or growth projects and compliance with conditions associated with such regulatory approvals;
  The inability to complete planned construction, conversion or growth projects at all, or with the outcomes or within the terms and time frames initially anticipated, including as a result of increased public involvement or intervention in such projects;
  Adverse outcomes in litigation matters or regulatory proceedings, including matters acquired in the SCANA Combination; and
  The impact of operational hazards, including adverse developments with respect to pipeline and plant safety or integrity, equipment loss, malfunction or failure, operator error, and other catastrophic events.

Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors.

The Companies’ forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Companies caution the reader not to place undue reliance on their forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. The Companies undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

 

 

ACCOUNTING MATTERS

Critical Accounting Policies and Estimates

Dominion Energy has identified the following accounting policies, including certain inherent estimates, that as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. Dominion Energy has discussed the development, selection

and disclosure of each of these policies with the Audit Committee of its Board of Directors.

ACCOUNTING FOR REGULATED OPERATIONS

The accounting for Dominion Energy’s regulated electric and gas operations differs from the accounting for nonregulated operations in that Dominion Energy is required to reflect the effect of rate regulation in its Consolidated Financial Statements. For regulated businesses subject to federal or state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by nonregulated companies. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, these costs that otherwise would be expensed by nonregulated companies are deferred as regulatory assets. Likewise, regulatory liabilities are recognized when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have yet to be incurred. Generally, regulatory assets and liabilities are amortized into income over the period authorized by the regulator.

Dominion Energy evaluates whether or not recovery of its regulatory assets through future rates is probable and makes various assumptions in its analysis. The expectations of future recovery are generally based on orders issued by regulatory commissions, legislation or historical experience, as well as discussions with applicable regulatory authorities and legal counsel. If recovery of a regulatory asset is determined to be less than probable, it will be written off in the period such assessment is made. See Notes 12 and 13 to the Consolidated Financial Statements for additional information.

ASSET RETIREMENT OBLIGATIONS

Dominion Energy recognizes liabilities for the expected cost of retiring tangible long-lived assets for which a legal obligation exists and the ARO can be reasonably estimated. These AROs are recognized at fair value as incurred or when sufficient information becomes available to determine fair value and are generally capitalized as part of the cost of the related long-lived assets. In the absence of quoted market prices, Dominion Energy estimates the fair value of its AROs using present value techniques, in which it makes various assumptions including estimates of the amounts and timing of future cash flows associated with retirement activities, credit-adjusted risk free rates and cost escalation rates. The impact on measurements of new AROs or remeasurements of existing AROs, using different cost escalation or credit-adjusted risk free rates in the future, may be significant. When Dominion Energy revises any assumptions used to calculate the fair value of existing AROs, it adjusts the carrying amount of both the ARO liability and the related long-lived asset for assets that are in service; for assets that have ceased operations, Dominion Energy adjusts the carrying amount of the ARO liability with such changes recognized in income. Dominion Energy accretes the ARO liability to reflect the passage of time. In 2018, Dominion Energy recorded an increase in AROs of $140 million primarily related to future ash pond and landfill closure costs at certain generation facilities. See Note 22 to the Consolidated Financial Statements for additional information.

 

 

48        


 

 

In 2018, 2017 and 2016, Dominion Energy recognized $119 million, $117 million and $104 million, respectively, of accretion, and expects to recognize approximately $145 million in 2019. Dominion Energy records accretion and depreciation associated with utility nuclear decommissioning AROs and regulated pipeline replacement AROs as an adjustment to the regulatory liabilities related to these items.

A significant portion of Dominion Energy’s AROs relates to the future decommissioning of its merchant and utility nuclear facilities. These nuclear decommissioning AROs are reported in the Power Generation segment. Subsequent to the SCANA Combination, SCANA’s nuclear decommissioning AROs will be reported in the Southeast Energy segment. At December 31, 2018, Dominion Energy’s nuclear decommissioning AROs totaled $1.6 billion, representing approximately 62% of its total AROs. Subsequent to the SCANA Combination, Dominion Energy’s nuclear decommissioning AROs will total approximately $1.8 billion, representing approximately 55% of its total AROs. Based on their significance, the following discussion of critical assumptions inherent in determining the fair value of AROs relates to those associated with Dominion Energy’s nuclear decommissioning obligations.

Dominion Energy obtains from third-party specialists periodic site-specific base year cost studies in order to estimate the nature, cost and timing of planned decommissioning activities for its nuclear plants. These cost studies are based on relevant information available at the time they are performed; however, estimates of future cash flows for extended periods of time are by nature highly uncertain and may vary significantly from actual results. In addition, Dominion Energy’s cost estimates include cost escalation rates that are applied to the base year costs. Dominion Energy determines cost escalation rates, which represent projected cost increases over time due to both general inflation and increases in the cost of specific decommissioning activities, for each nuclear facility. The selection of these cost escalation rates is dependent on subjective factors which are considered to be critical assumptions.

INCOME TAXES

Judgment and the use of estimates are required in developing the provision for income taxes and reporting of tax-related assets and liabilities. The interpretation of tax laws, including the provisions of the 2017 Tax Reform Act, involves uncertainty, since tax authorities may interpret the laws differently. In addition, the states in which the Companies operate may or may not conform to some or all the provisions in the 2017 Tax Reform Act. Ultimate resolution or clarification of income tax matters may result in favorable or unfavorable impacts to net income and cash flows, and adjustments to tax-related assets and liabilities could be material.

Given the uncertainty and judgment involved in the determination and filing of income taxes, there are standards for recognition and measurement in financial statements of positions taken or expected to be taken by an entity in its income tax returns. Positions taken by an entity in its income tax returns that are recognized in the financial statements must satisfy a more-likely-than-not recognition threshold, assuming that the position will be examined by tax authorities with full knowledge of all relevant information. At December 31, 2018, Dominion Energy had

$44 million of unrecognized tax benefits. Changes in these unrecognized tax benefits may result from remeasurement of amounts expected to be realized, settlements with tax authorities and expiration of statutes of limitations.

Deferred income tax assets and liabilities are recorded representing future effects on income taxes for temporary differences between the bases of assets and liabilities for financial reporting and tax purposes. Dominion Energy evaluates quarterly the probability of realizing deferred tax assets by considering current and historical financial results, expectations for future taxable income and the availability of tax planning strategies that can be implemented, if necessary, to realize deferred tax assets. Failure to achieve forecasted taxable income or successfully implement tax planning strategies may affect the realization of deferred tax assets. Dominion Energy establishes a valuation allowance when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. At December 31, 2018, Dominion Energy had established $158 million of valuation allowances.

The 2017 Tax Reform Act included a broad range of tax reform provisions affecting the Companies, including changes in corporate tax rates and business deductions. Many of these provisions differ significantly from prior U.S. tax law, resulting in pervasive financial reporting implications for the Companies. The 2017 Tax Reform Act included significant changes to the Internal Revenue Code of 1986, including amendments which significantly change the taxation of individuals and business entities and included specific provisions related to regulated public utilities including Dominion Energy subsidiaries Questar Gas, Hope, and SCE&G and PSNC, following the SCANA Combination, Virginia Power and Dominion Energy Gas’ subsidiaries DETI and East Ohio. The more significant changes that impact the Companies included in the 2017 Tax Reform Act are (i) reducing the corporate federal income tax rate from 35% to 21%; (ii) effective in 2018, limiting the deductibility of interest expense to 30% of adjusted taxable income for certain businesses with any disallowed interest allowed to be carried forward indefinitely; (iii) permitting 100% expensing (100% bonus depreciation) for certain qualified property; (iv) eliminating the deduction for qualified domestic production activities; and (v) limiting the utilization of net operating losses arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The specific provisions related to regulated public utilities in the 2017 Tax Reform Act generally allow for the continued deductibility of interest expense, the exclusion from full expensing for tax purposes of certain property acquired and placed in service after September 27, 2017 and continued certain rate normalization requirements for accelerated depreciation benefits.

At the date of enactment, the Companies’ deferred taxes were remeasured based upon the new tax rate expected to apply when temporary differences are realized or settled. For regulated operations, many of the changes in deferred taxes represented amounts probable of collection from or refund to customers, and were recorded as either an increase to a regulatory asset or liability. The 2017 Tax Reform Act included provisions that stipulate how these excess deferred taxes may be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred taxes will be determined by the Companies’ regulators. For nonregulated operations, the changes in deferred taxes were recorded as an adjustment to deferred tax expense.

 

 

49


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

ACCOUNTING FOR DERIVATIVE CONTRACTS AND FINANCIAL INSTRUMENTS AT FAIR VALUE

Dominion Energy uses derivative contracts such as physical and financial forwards, futures, swaps, options and FTRs to manage commodity, interest rate and foreign currency exchange rate risks of its business operations. Derivative contracts, with certain exceptions, are reported in the Consolidated Balance Sheets at fair value. The majority of investments held in Dominion Energy’s nuclear decommissioning and rabbi trusts and pension and other postretirement funds are also subject to fair value accounting. See Notes 6 and 21 to the Consolidated Financial Statements for further information on these fair value measurements.

Fair value is based on actively-quoted market prices, if available. In the absence of actively-quoted market prices, management seeks indicative price information from external sources, including broker quotes and industry publications. When evaluating pricing information provided by brokers and other pricing services, Dominion Energy considers whether the broker is willing and able to trade at the quoted price, if the broker quotes are based on an active market or an inactive market and the extent to which brokers are utilizing a particular model if pricing is not readily available. If pricing information from external sources is not available, or if Dominion Energy believes that observable pricing information is not indicative of fair value, judgment is required to develop the estimates of fair value. In those cases, Dominion Energy must estimate prices based on available historical and near-term future price information and use of statistical methods, including regression analysis, that reflect its market assumptions.

Dominion Energy maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

USE OF ESTIMATES IN GOODWILL IMPAIRMENT TESTING

As of December 31, 2018, Dominion Energy reported $6.4 billion of goodwill in its Consolidated Balance Sheet. A significant portion resulted from the acquisition of the former CNG in 2000 and the Dominion Energy Questar Combination in 2016. As discussed in Note 3 to the Consolidated Financial Statements, Dominion Energy expects to reflect a significant amount of goodwill in connection with the SCANA Combination in its Consolidated Balance Sheet in the first quarter of 2019.

In April of each year, Dominion Energy tests its goodwill for potential impairment, and performs additional tests more frequently if an event occurs or circumstances change in the interim that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The 2018, 2017 and 2016 annual tests and any interim tests did not result in the recognition of any goodwill impairment.

In general, Dominion Energy estimates the fair value of its reporting units by using a combination of discounted cash flows and other valuation techniques that use multiples of earnings for peer group companies and analyses of recent business combinations involving peer group companies. Fair value estimates are dependent on subjective factors such as Dominion Energy’s estimate of future cash flows, the selection of appropriate discount and growth rates, and the selection of peer group companies and recent transactions. These underlying assumptions and estimates are made as of a point in time; subsequent modifications, partic-

ularly changes in discount rates or growth rates inherent in Dominion Energy’s estimates of future cash flows, could result in a future impairment of goodwill. Although Dominion Energy has consistently applied the same methods in developing the assumptions and estimates that underlie the fair value calculations, such as estimates of future cash flows, and based those estimates on relevant information available at the time, such cash flow estimates are highly uncertain by nature and may vary significantly from actual results. If the estimates of future cash flows used in the most recent tests had been 10% lower, the resulting fair values would have still been greater than the carrying values of each of those reporting units tested, indicating that no impairment was present.

See Note 11 to the Consolidated Financial Statements for additional information.

USE OF ESTIMATES IN LONG-LIVED ASSET AND EQUITY METHOD INVESTMENT IMPAIRMENT TESTING

Impairment testing for an individual or group of long-lived assets, including intangible assets with definite lives, and equity method investments is required when circumstances indicate those assets may be impaired. When a long-lived asset’s carrying amount exceeds the undiscounted estimated future cash flows associated with the asset, the asset is considered impaired to the extent that the asset’s fair value is less than its carrying amount. When an equity method investment’s carrying amount exceeds its fair value, and the decline in value is deemed to be other-than-temporary, an impairment is recognized to the extent that the fair value is less than its carrying amount. Performing an impairment test on long-lived assets and equity method investments involves judgment in areas such as identifying if circumstances indicate an impairment may exist, identifying and grouping affected assets in the case of long-lived assets, and developing the undiscounted and discounted estimated future cash flows (used to estimate fair value in the absence of a market-based value) associated with the asset, including probability weighting such cash flows to reflect expectations about possible variations in their amounts or timing, expectations about the operations of the long-lived assets and equity method investments and the selection of an appropriate discount rate. When determining whether a long-lived asset or asset group has been impaired, management groups assets at the lowest level that has identifiable cash flows. Although cash flow estimates are based on relevant information available at the time the estimates are made, estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results. For example, estimates of future cash flows would contemplate factors which may change over time, such as the expected use of the asset or underlying assets of equity method investees, including future production and sales levels, expected fluctuations of prices of commodities sold and consumed and expected proceeds from dispositions. See Notes 6 and 9 to the Consolidated Financial Statements for a discussion of impairments related to certain long-lived assets and equity method investments.

As discussed in Future Issues and Other Matters, delays in obtaining permits necessary for construction and construction delays due to judicial actions have impacted the estimated cost and schedule for the Atlantic Coast Pipeline Project. As a result, Dominion Energy evaluated the carrying amount of its equity

 

 

50        


 

 

method investment in Atlantic Coast Pipeline for an other-than-temporary impairment and determined that it was not impaired. Any significant changes affecting the discounted cash flow estimates associated with the Atlantic Coast Pipeline Project, such as future unfavorable judicial actions resulting in further construction and in-service delays along with an increase in construction costs, could result in an impairment charge.

EMPLOYEE BENEFIT PLANS

Dominion Energy sponsors noncontributory defined benefit pension plans and other postretirement benefit plans for eligible active employees, retirees and qualifying dependents. The projected costs of providing benefits under these plans are dependent, in part, on historical information such as employee demographics, the level of contributions made to the plans and earnings on plan assets. Assumptions about the future, including the expected long-term rate of return on plan assets, discount rates applied to benefit obligations, mortality rates and the anticipated rate of increase in healthcare costs and participant compensation, also have a significant impact on employee benefit costs. The impact of changes in these factors, as well as differences between Dominion Energy’s assumptions and actual experience, is generally recognized in the Consolidated Statements of Income over the remaining average service period of plan participants, rather than immediately.

The expected long-term rates of return on plan assets, discount rates, healthcare cost trend rates and mortality rates are critical assumptions. Dominion Energy determines the expected long-term rates of return on plan assets for pension plans and other postretirement benefit plans by using a combination of:

  Expected inflation and risk-free interest rate assumptions;

 

  Historical return analysis to determine long-term historic returns as well as historic risk premiums for various asset classes;

 

  Expected future risk premiums, asset classes’ volatilities and correlations;

 

  Forward-looking return expectations derived from the yield on long-term bonds and the expected long-term returns of major capital market assumptions; and

 

  Investment allocation of plan assets. The strategic target asset allocation for Dominion Energy’s pension funds is 28% U.S. equity, 18% non-U.S. equity, 35% fixed income, 3% real estate and 16% other alternative investments, such as private equity investments.

Strategic investment policies are established for Dominion Energy’s prefunded benefit plans based upon periodic asset/liability studies. Factors considered in setting the investment policy include those mentioned above such as employee demographics, liability growth rates, future discount rates, the funded status of the plans and the expected long-term rate of return on plan assets. Deviations from the plans’ strategic allocation are a function of Dominion Energy’s assessments regarding short-term risk and reward opportunities in the capital markets and/or short-term market movements which result in the plans’ actual asset allocations varying from the strategic target asset allocations. Through periodic rebalancing, actual allocations are brought back in line with the targets. Future asset/liability studies will focus on strategies to further reduce pension and other postretirement plan risk, while still achieving attractive levels of returns.

Dominion Energy develops non-investment related assumptions, which are then compared to the forecasts of an independent investment advisor to ensure reasonableness. An internal committee selects the final assumptions. Dominion Energy calculated its pension cost using an expected long-term rate of return on plan assets assumption of 8.75% for 2018, 2017 and 2016. For 2019, the expected long-term rate of return for pension cost assumption is 8.65% for Dominion Energy’s plans held as of December 31, 2018. Dominion Energy calculated its other postretirement benefit cost using an expected long-term rate of return on plan assets assumption of 8.50% for 2018, 2017 and 2016. For 2019, the expected long-term rate of return for other postretirement benefit cost assumption is 8.50%. The rate used in calculating other postretirement benefit cost is lower than the rate used in calculating pension cost because of differences in the relative amounts of various types of investments held as plan assets.

Dominion Energy determines discount rates from analyses of AA/Aa rated bonds with cash flows matching the expected payments to be made under its plans. The discount rates used to calculate pension cost and other postretirement benefit cost ranged from 3.80% to 3.81% for pension plans and 3.76% for other postretirement benefit plans in 2018, ranged from 3.31% to 4.50% for pension plans and 3.92% to 4.47% for other postretirement benefit plans in 2017 and ranged from 2.87% to 4.99% for pension plans and 3.56% to 4.94% for other postretirement benefit plans in 2016. Dominion Energy selected a discount rate ranging from 4.42% to 4.43% for pension plans and 4.37% to 4.38% for other postretirement benefit plans for determining its December 31, 2018 projected benefit obligations.

Dominion Energy establishes the healthcare cost trend rate assumption based on analyses of various factors including the specific provisions of its medical plans, actual cost trends experienced and projected, and demographics of plan participants. Dominion Energy’s healthcare cost trend rate assumption as of December 31, 2018 was 6.50% and is expected to gradually decrease to 5.00% by 2025 and continue at that rate for years thereafter.

Mortality rates are developed from actual and projected plan experience for postretirement benefit plans. Dominion Energy’s actuary conducts an experience study periodically as part of the process to select its best estimate of mortality. Dominion Energy considers both standard mortality tables and improvement factors as well as the plans’ actual experience when selecting a best estimate. During 2016, Dominion Energy conducted a new experience study as scheduled and, as a result, updated its mortality assumptions.

The following table illustrates the effect on cost of changing the critical actuarial assumptions previously discussed for Dominion Energy’s plans held as of December 31, 2018, while holding all other assumptions constant:

 

             Increase in Net Periodic Cost  
     

Change in

Actuarial

Assumption

   

Pension

Benefits

    

Other

Postretirement

Benefits

 
(millions, except percentages)                    

Discount rate

     (0.25 )%      $20        $  2  

Long-term rate of return on plan assets

     (0.25 )%      19        4  

Healthcare cost trend rate

     1  %      N/A        20  
 

 

51


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

In addition to the effects on cost, at December 31, 2018, a 0.25% decrease in the discount rate would increase Dominion Energy’s projected pension benefit obligation by $294 million and its accumulated postretirement benefit obligation by $37 million, while a 1.00% increase in the healthcare cost trend rate would increase its accumulated postretirement benefit obligation by $130 million.

See Note 21 to the Consolidated Financial Statements for additional information on Dominion Energy’s employee benefit plans.

New Accounting Standards

See Note 2 to the Consolidated Financial Statements for a discussion of new accounting standards.

Dominion Energy

 

 

RESULTS OF OPERATIONS

Presented below is a summary of Dominion Energy’s consolidated results:

 

Year Ended
December 31,
   2018      $ Change     2017      $ Change      2016  
(millions, except EPS)                                  

Net Income attributable to Dominion Energy

   $  2,447        $ (552)     $  2,999        $ 876      $  2,123  

Diluted EPS

     3.74        (0.98     4.72        1.28        3.44  

Overview

2018 VS. 2017

Net income attributable to Dominion Energy decreased 18%, primarily due to the absence of benefits in 2017 resulting from the remeasurement of deferred income taxes to the new corporate income tax rate, an impairment charge on certain gathering and processing assets, a charge associated with Virginia legislation enacted in March 2018, decreased net investment earnings on nuclear decommissioning trust funds, lower renewable energy investment tax credits and a charge for disallowance of FERC-regulated plant. These decreases were partially offset by gains on the sales of certain merchant generation facilities and equity method investments, the commencement of commercial operations of the Liquefaction Project and the absence of charges associated with equity method investments in wind-powered generation facilities.

2017 VS. 2016

Net income attributable to Dominion Energy increased 41%, primarily due to benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate, the Dominion Energy Questar Combination and an absence of charges related to future ash pond and landfill closures. These increases were partially offset by lower renewable energy investment tax credits and charges associated with equity method investments in wind-powered generation facilities.

Analysis of Consolidated Operations

Presented below are selected amounts related to Dominion Energy’s results of operations:

Year Ended December 31,   2018     $ Change     2017     $ Change     2016  
(millions)                              

Operating revenue

  $ 13,366       $780     $ 12,586       $849     $ 11,737  

Electric fuel and other energy-related purchases

    2,814       513       2,301       (32     2,333  

Purchased electric capacity

    122       116       6       (93     99  

Purchased gas

    645       (56     701       242       459  

Net revenue

    9,785       207       9,578       732       8,846  

Other operations and maintenance

    3,458       258       3,200       (79     3,279  

Depreciation, depletion and amortization

    2,000       95       1,905       346       1,559  

Other taxes

    703       35       668       72       596  

Impairment of assets and related charges

    403       388       15       11       4  

Gains on sales of assets

    (380     (233     (147     (107     (40

Other income

    1,021       663       358       (71     429  

Interest and related charges

    1,493       288       1,205       195       1,010  

Income tax expense

    580       610       (30     (685     655  

Noncontrolling interests

    102       (19     121       32       89  

An analysis of Dominion Energy’s results of operations follows:

2018 VS. 2017

Net revenue increased 2%, primarily reflecting:

  A $500 million increase due to commencement of commercial operations of the Liquefaction Project, including terminalling services provided to the export customers ($508 million) and regulated gas transportation contracts to serve the export customers ($58 million), partially offset by credits associated with the start-up phase of the Liquefaction Project ($66 million);
  An increase in sales to electric utility retail customers from an increase in heating degree days during the heating season of 2018 ($71 million) and an increase in cooling degree days during the cooling season of 2018 ($69 million);
  A $130 million increase due to favorable pricing at merchant generation facilities;
  A $92 million increase due to growth projects placed in service, other than the Liquefaction Project;
  A $74 million increase in services performed for Atlantic Coast Pipeline; and
  A $46 million increase in sales to electric utility retail customers due to customer growth.

These increases were partially offset by:

  A $325 million decrease for regulated electric generation and electric and gas distribution operations as a result of the 2017 Tax Reform Act;
  A $215 million charge associated with Virginia legislation enacted in March 2018 that requires one-time rate credits of certain amounts to utility customers;
 

A $94 million increase in net electric capacity expense related to the annual PJM capacity performance market effective June 2017 ($112 million) and the annual PJM capacity perform-

 

 

52        


 

 

   

ance market effective June 2018 ($39 million), partially offset by a benefit related to non-utility generators ($57 million);

  An $89 million decrease in rate adjustment clauses associated with electric utility operations, which includes the impacts of the 2017 Tax Reform Act; and
  A $38 million decrease from scheduled declines in or expiration of certain DETI and Cove Point contracts.

Net revenue does not reflect an impact from a reduction in planned outage days at Millstone as there was an offsetting increase in unplanned outage days.

Other operations and maintenance increased 8%, primarily reflecting:

  A $102 million increase in storm damage and service restoration costs in the regulated electric service territory;
  An $81 million increase due to a charge associated primarily with future ash pond and landfill closure costs in connection with the enactment of Virginia legislation in April 2018;
  A $73 million increase in services performed for Atlantic Coast Pipeline. These expenses are billed to Atlantic Coast Pipeline and do not significantly impact net income;
  A $47 million increase in operating expenses from the commercial operations of the Liquefaction Project and costs associated with regulated gas transportation contracts to serve the export customers; and
  A $38 million increase in salaries, wages and benefits, partially offset by
  A $74 million decrease from a reduction in planned outage days at certain merchant and utility generation facilities.

Depreciation, depletion and amortization increased 5%, primarily due to an increase from various growth projects being placed into service ($187 million), including the Liquefaction Project ($81 million), partially offset by revised depreciation rates for regulated nuclear plants to comply with the Virginia Commission requirements ($61 million).

Impairment of assets and related charges increased $388 million, primarily due to a $219 million impairment charge on certain gathering and processing assets, a $135 million charge for disallowance of FERC-regulated plant and a $37 million write-off associated with the Eastern Market Access Project.

Gains on sales of assets increased $233 million, primarily due to the sale of Fairless and Manchester ($210 million) and an increase in gains related to agreements to convey shale development rights under natural gas storage fields ($46 million).

Other income increased $663 million, primarily reflecting a gain on the sale of Dominion Energy’s 50% limited partnership interest in Blue Racer ($546 million), the absence of charges associated with equity method investments in wind-powered generation facilities ($158 million), a gain on the sale of Dominion Energy’s 25% limited partnership interest in Catalyst Old River Hydroelectric Limited Partnership ($87 million) and a decrease in the non-service components of pension and other postretirement employee benefit credits capitalized to property, plant and equipment in 2018 ($45 million), partially offset by a decrease in net investment earnings on nuclear decommissioning trust funds ($209 million).

Interest and related charges increased 24%, primarily due to the absence of capitalization of interest expense associated with the Liquefaction Project upon completion of construction ($111

million), higher long-term debt interest expense resulting from net debt issuances in 2018 and 2017 ($92 million) and charges associated with the early redemption of certain debt securities ($69 million).

Income tax expense increased $610 million, primarily due to the absence of benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate ($851 million) and lower renewable energy investment tax credits ($138 million), partially offset by the reduced corporate income tax rate ($414 million).

2017 VS. 2016

Net revenue increased 8%, primarily reflecting:

  A $663 million increase from the operations acquired in the Dominion Energy Questar Combination being included for all of 2017;
  A $97 million electric capacity benefit related to non-utility generators ($133 million) and a benefit due to the annual PJM capacity performance market effective June 2016 ($123 million), partially offset by the annual PJM capacity performance market effective June 2017 ($159 million);
  An $86 million increase due to additional generation output from merchant solar generating projects;
  A $71 million increase in sales to electric utility retail customers due to the effect of changes in customer usage and other factors, including $25 million related to customer growth;
  A $63 million increase from regulated natural gas transmission growth projects placed in service;
  A $46 million increase from rate adjustment clauses associated with electric utility operations; and
  A $34 million increase in services performed for Atlantic Coast Pipeline.

These increases were partially offset by:

  A $144 million decrease from Cove Point import contracts;
  A $114 million decrease due to unfavorable pricing at merchant generation facilities; and
  A decrease in sales to electric utility retail customers from a decrease in cooling degree days during the cooling season of 2017 ($53 million) and a reduction in heating degree days during the heating season of 2017 ($28 million).

Other operations and maintenance decreased 2%, primarily reflecting:

  A $197 million absence of charges related to future ash pond and landfill closure costs at certain utility generation facilities;
  A $115 million decrease in certain electric transmission-related expenditures. These expenses are primarily recovered through state and FERC rates and do not impact net income;
  The absence of organizational design initiative costs ($64 million); and
  A $46 million decrease in storm damage and service restoration costs associated with electric utility operations, partially offset by
  A $162 million increase from the operations acquired in the Dominion Energy Questar Combination being included for all of 2017;
  A $92 million increase in salaries, wages and benefits;
  A $36 million increase in outage costs; and
 

 

53


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

  A $33 million increase in services performed for Atlantic Coast Pipeline. These expenses are billed to Atlantic Coast Pipeline and do not significantly impact net income.

Depreciation, depletion and amortization increased 22%, primarily due to the operations acquired in the Dominion Energy Questar Combination being included for all of 2017 ($162 million) and various growth projects being placed into service ($151 million).

Other taxes increased 12%, primarily due to the operations acquired in the Dominion Energy Questar Combination being included for all of 2017 ($35 million) and increased property taxes related to growth projects placed into service ($27 million).

Gains on sales of assets increased $107 million, primarily due to the sale of certain assets associated with nonregulated retail energy marketing operations.

Other income decreased 17%, primarily due to charges associated with equity method investments in wind-powered generation facilities ($158 million), partially offset by an increase in earnings, excluding charges, from equity method investments ($29 million) an increase in AFUDC associated with rate-regulated projects ($23 million) and an increase in the non-service cost components of pension and other postretirement employee benefit credits ($14 million).

Interest and related charges increased 19%, primarily due to higher long-term debt interest expense resulting from debt issuances in 2016 and 2017 ($171 million) and debt acquired in the Dominion Energy Questar Combination ($37 million).

Income tax expense decreased $685 million, primarily due to benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate ($851 million), partially offset by lower renewable energy investment tax credits ($133 million).

Outlook

Dominion Energy’s 2019 net income is expected to decrease on a per share basis as compared to 2018 primarily from the following:

  Charges incurred for refunds to SCE&G electric customers and transaction and transition costs related to the SCANA Combination;
  The absence of earnings from, and gains on, the sales of certain merchant generation facilities and equity method investments;
  A charge associated with the early retirement of the existing automated meter reading infrastructure;
  Return to normal weather;
  An increase in pension-related expenses; and
  Share dilution.

These decreases are expected to be partially offset by the following:

  Commercial operation of the Liquefaction Project for the entire year;
  The inclusion of operations acquired in the SCANA Combination;
  The absence of charges associated with the impairment of certain gathering and processing assets and disallowance of FERC-regulated plant;
  The absence of charges associated with Virginia legislation enacted in March 2018;
  Construction and operation of growth projects in gas transmission and distribution; and
  Construction and operation of growth projects in electric utility operations.

 

 

SEGMENT RESULTS OF OPERATIONS

Segment results include the impact of intersegment revenues and expenses, which may result in intersegment profit or loss. Presented below is a summary of contributions by Dominion Energy’s operating segments to net income attributable to Dominion Energy:

 

Year Ended December 31,   2018     2017     2016  
    

Net

income
(loss)
attributable
to Dominion
Energy

   

Diluted

EPS

    Net income
attributable
to Dominion
Energy
   

Diluted

EPS

   

Net

income
(loss)
attributable
to Dominion
Energy

   

Diluted

EPS

 
(millions, except EPS)                                    

Power Delivery

    $   587       $0.90       $   531       $ 0.83       $   484       $ 0.78  

Power Generation

    1,254       1.92       1,181       1.86       1,397       2.26  

Gas Infrastructure

    1,214       1.85       898       1.41       726       1.18  

Primary operating segments

    3,055       4.67       2,610       4.10       2,607       4.22  

Corporate and Other

    (608     (0.93     389       0.62       (484     (0.78

Consolidated

    $2,447       $3.74       $2,999       $ 4.72       $2,123       $ 3.44  

Power Delivery

Presented below are operating statistics related to Power Delivery’s operations:

 

Year Ended December 31,   2018     % Change     2017     % Change     2016  

Electricity delivered (million MWh)

       87.8       5     83.4           83.7  

Degree days (electric distribution service area):

         

Cooling

    2,019       12       1,801       (2     1,830  

Heating

    3,608       16       3,104       (10     3,446  

Average electric distribution customer accounts

(thousands)(1)

    2,600       1       2,574       1       2,549  

 

(1)

Period average.

Presented below, on an after-tax basis, are the key factors impacting Power Delivery’s net income contribution:

2018 VS. 2017

 

      Increase (Decrease)  
      Amount     EPS  
(millions, except EPS)             

Regulated electric sales:

    

Weather

   $ 29     $ 0.05  

Other

     48       0.08  

Rate adjustment clause equity return

     26       0.04  

Depreciation and amortization

     (8     (0.01

Storm damage and service restoration

     (19     (0.03

Other

     (20     (0.03

Share dilution

           (0.03

Change in net income contribution

   $ 56     $ 0.07  
 

 

54        


 

 

2017 VS. 2016

 

      Increase (Decrease)  
      Amount      EPS  
(millions, except EPS)              

Regulated electric sales:

     

Weather

   $ (14)      $ (0.02)  

Other

     15        0.02  

FERC transmission equity return

     14        0.02  

Storm damage and service restoration

     14        0.02  

Other

     18        0.03  

Share dilution

            (0.02

Change in net income contribution

   $ 47      $ 0.05  

Power Generation

Presented below are operating statistics related to Power Generation’s operations:

 

Year Ended December 31,   2018     % Change     2017     % Change     2016  

Electricity supplied (million MWh):

         

Utility

    88.0       4     85.0       (3 )%      87.9  

Merchant

    28.8             28.9             28.9  

Degree days (electric utility service area):

         

Cooling

    2,019       12       1,801       (2     1,830  

Heating

    3,608       16       3,104       (10     3,446  

Presented below, on an after-tax basis, are the key factors impacting Power Generation’s net income contribution:

2018 VS. 2017

 

      Increase (Decrease)  
      Amount     EPS  
(millions, except EPS)             

Regulated electric sales:

    

Weather

     $  57       $ 0.09  

Other

     (5     (0.01

Merchant generation margin

     110       0.17  

Planned outage costs

     46       0.07  

2017 Tax Reform Act impacts

     45       0.07  

Depreciation and amortization

     30       0.05  

Electric capacity

     (66     (0.10

Renewable energy investment tax credit

     (138     (0.21

Other

     (6     (0.01

Share dilution

           (0.06

Change in net income contribution

     $  73       $ 0.06  

2017 VS. 2016

 

      Increase (Decrease)  
      Amount     EPS  
(millions, except EPS)             

Regulated electric sales:

    

Weather

     $  (36)       $(0.06)  

Other

     32       0.05  

Electric capacity

     58       0.09  

Depreciation and amortization

     (46     (0.07

Renewable energy investment tax credit

     (133     (0.21

Merchant generation margin

     (28     (0.04

Interest expense

     (25     (0.04

Outage costs

     (22     (0.03

Other

     (16     (0.03

Share dilution

           (0.06

Change in net income contribution

     $(216)       $(0.40)  

Gas Infrastructure

Presented below are selected operating statistics related to Gas Infrastructure’s operations.

 

Year Ended December 31,   2018     % Change     2017     % Change     2016  

Gas distribution throughput (bcf)(1):

         

Sales

    131       1     130       113     61  

Transportation

    725       11       654       22       537  

Heating degree days (gas distribution service area):

         

Eastern region

    5,693       15       4,930       (6     5,235  

Western region(1)

    4,672       (4     4,892       161       1,876  

Average gas distribution customer accounts (thousands)(1)(2):

         

Sales

    1,258       1       1,240             1,234 (3)  

Transportation

    1,096       1       1,086       1       1,071  

Average retail energy marketing customer accounts (thousands)(2)

    750       (47     1,405       2       1,376  

 

(1)

Includes Dominion Energy Questar effective September 2016.

(2)

Period average.

(3)

Includes Dominion Energy Questar customer accounts for the entire year.

Presented below, on an after-tax basis, are the key factors impacting Gas Infrastructure’s net income contribution:

2018 VS. 2017

 

      Increase (Decrease)  
      Amount     EPS  
(millions, except EPS)             

2017 Tax Reform Act impacts

     $141       $ 0.22  

State legislative change

     18       0.03  

Assignment of shale development rights

     27       0.04  

Transportation and storage growth projects

     30       0.05  

Cove Point export contracts

     259       0.41  

Cove Point import contracts

     (12     (0.02

DETI contract declines

     (20     (0.03

Interest expense, net

     (86     (0.14

Other

     (41     (0.07

Share dilution

           (0.05

Change in net income contribution

     $316       $ 0.44  
 

 

55


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

2017 VS. 2016

 

      Increase (Decrease)  
      Amount     EPS  
(millions, except EPS)             

Dominion Energy Questar Combination

     $184       $0.30  

Sale of certain energy marketing assets

     48       0.08  

Assignment of shale development rights

     13       0.02  

Noncontrolling interest(1)

     (30     (0.05

Cove Point import contracts

     (86     (0.14

Transportation and storage growth projects

     29       0.04  

Other

     14       0.02  

Share dilution

           (0.04

Change in net income contribution

     $172       $0.23  

 

(1)

Represents the portion of earnings attributable to Dominion Energy Midstream’s public unitholders.

Corporate and Other

Presented below are the Corporate and Other segment’s after-tax results:

 

Year Ended December 31,    2018     2017     2016  
(millions, except EPS)                   

Specific items attributable to operating segments

     $   (88     $ 861     $ (180

Specific items attributable to Corporate and Other segment

     (116     (151     (44

Total specific items

     (204     710       (224

Other corporate operations:

      

2017 Tax Reform Act impacts

     (80            

Interest expense, net

     (355     (330     (277

Other

     31       9       17  

Total other corporate operations

     (404     (321     (260

Total net income (expense)

     (608     389       (484

EPS impact

     $(0.93     $0.62     $ (0.78

TOTAL SPECIFIC ITEMS

Corporate and Other includes specific items attributable to Dominion Energy’s primary operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or in allocating resources. See Note 25 to the Consolidated Financial Statements for discussion of these items in more detail. Corporate and Other also includes specific items attributable to the Corporate and Other segment. In 2018, this primarily included $51 million of after-tax charges associated with the early redemption of certain debt securities and $31 million of after-tax transaction and transition costs associated with the Dominion Energy Questar Combination and SCANA Combination. In 2017, this primarily included $124 million of tax benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate. In 2016, this primarily included $53 million of after-tax transaction and transition costs associated with the Dominion Energy Questar Combination.

VIRGINIA POWER

 

 

RESULTS OF OPERATIONS

Presented below is a summary of Virginia Power’s consolidated results:

 

Year Ended
December 31,
   2018      $ Change      2017      $ Change      2016  
(millions)                                   

Net Income

     $1,282        $(258)        $1,540        $322      $ 1,218  

Overview

2018 VS. 2017

Net income decreased 17%, primarily due to a charge associated with Virginia legislation enacted in March 2018, an increase in storm damage and service restoration costs, a charge associated primarily with future ash pond and landfill closure costs in connection with the enactment of Virginia legislation in April 2018 and an increase in net electric capacity expense, partially offset by an increase in heating and cooling degree days in the service territory.

2017 VS. 2016

Net income increased 26%, primarily due to the absence of charges related to future ash pond and landfill closure costs, a benefit from the remeasurement of deferred income taxes to the new corporate income tax rate and an electric capacity benefit.

Analysis of Consolidated Operations

Presented below are selected amounts related to Virginia Power’s results of operations:

 

Year Ended December 31,   2018     $ Change     2017     $ Change     2016  
(millions)                              

Operating revenue

  $ 7,619       $ 63     $ 7,556       $ (32)     $ 7,588  

Electric fuel and other energy-related purchases

    2,318       409       1,909       (64     1,973  

Purchased electric capacity

    122       116       6       (93     99  

Net revenue

    5,179       (462     5,641       125       5,516  

Other operations and maintenance

    1,676       198       1,478       (379     1,857  

Depreciation and amortization

    1,132       (9     1,141       116       1,025  

Other taxes

    300       10       290       6       284  

Other income

    22       (54     76       20       56  

Interest and related charges

    511       17       494       33       461  

Income tax expense

    300       (474     774       47       727  

An analysis of Virginia Power’s results of operations follows:

2018 VS. 2017

Net revenue decreased 8%, primarily reflecting:

  A $238 million decrease for regulated generation and distribution operations as a result of the 2017 Tax Reform Act;
  A $215 million charge associated with Virginia legislation enacted in March 2018 that requires one-time rate credits of certain amounts to utility customers;
 

A $94 million increase in net electric capacity expense related to the annual PJM capacity performance market effective June

 

 

56        


 

 

   

2017 ($112 million) and the annual PJM capacity performance market effective June 2018 ($39 million), partially offset by a benefit related to non-utility generators ($57 million); and

  An $89 million decrease from rate adjustment clauses, which includes the impacts of the 2017 Tax Reform Act; partially offset by
  An increase in sales to retail customers from an increase in heating degree days during the heating season of 2018 ($71 million) and an increase in cooling degree days during the cooling season of 2018 ($69 million); and
  A $46 million increase in sales to retail customers due to customer growth.

Other operations and maintenance increased 13%, primarily reflecting:

  A $102 million increase due to storm damage and service restoration costs; and
  An $81 million increase due to a charge associated primarily with future ash pond and landfill closure costs in connection with the enactment of Virginia legislation in April 2018; partially offset by
  A $19 million decrease from a reduction in planned outage days at certain generation facilities.

Depreciation and amortization was substantially consistent as a decrease due to revised depreciation rates for regulated nuclear plants to comply with the Virginia Commission requirements ($61 million) was substantially offset by various growth projects being placed into service ($56 million).

Other income decreased 71%, primarily related to lower realized gains (including investment income) on nuclear decommissioning trust funds ($23 million), the electric transmission tower rental portfolio, including the absence of the assignment of such amounts to Vertical Bridge Towers II, LLC ($18 million) and the absence of interest income associated with the settlement of state income tax refund claims ($11 million), partially offset by the absence of a charge associated with a customer settlement ($16 million).

Income tax expense decreased 61%, primarily due to lower pre-tax income ($256 million), the reduced corporate income tax rate ($235 million) and higher renewable energy investment tax credits ($35 million), partially offset by the absence of benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate ($93 million).

2017 VS. 2016

Net revenue increased 2%, primarily reflecting:

  A $97 million electric capacity benefit related to non-utility generators ($133 million) and a benefit due to the annual PJM capacity performance market effective June 2016 ($123 million), partially offset by the annual PJM capacity performance market effective June 2017 ($159 million);
  A $71 million increase in sales to retail customers due to the effect of changes in customer usage and other factors, including $25 million related to customer growth; and
  A $46 million increase from rate adjustment clauses; partially offset by
  A decrease in sales to retail customers from a decrease in cooling degree days during the cooling season of 2017 ($53 million) and a reduction in heating degree days during the heating season of 2017 ($28 million).

Other operations and maintenance decreased 20%, primarily reflecting:

  A $197 million decrease due to the absence of charges related to future ash pond and landfill closure costs at certain utility generation facilities;
  A $115 million decrease in certain electric transmission-related expenditures. These expenses are primarily recovered through state and FERC rates and do not impact net income;
  A $46 million decrease in storm damage and service restoration costs; and
  The absence of organizational design initiative costs ($32 million); partially offset by
  A $37 million increase in salaries, wages and benefits and general administrative expenses.

Depreciation and amortization increased 11%, primarily due to various growth projects being placed into service ($58 million) and revised depreciation rates ($40 million).

Other income increased 36%, primarily reflecting:

  An $11 million increase in interest income associated with the settlement of state income tax refund claims;
  An $11 million increase from the assignment of Virginia Power’s electric transmission tower rental portfolio; and
  An $8 million increase in AFUDC associated with rate-regulated projects; partially offset by
  A $16 million charge associated with a customer settlement.

Income tax expense increased 6% primarily due to higher pretax income ($139 million), partially offset by benefits resulting from the remeasurement of deferred income taxes to the new corporate income tax rate ($93 million).

DOMINION ENERGY GAS

 

 

RESULTS OF OPERATIONS

Presented below is a summary of Dominion Energy Gas’ consolidated results:

 

Year Ended December 31,    2018      $ Change      2017      $ Change      2016  
(millions)                                   
Net Income      $301        $(314)        $615        $223        $392  

Overview

2018 VS. 2017

Net income decreased 51%, primarily due to an impairment charge on certain gathering and processing assets, a charge for disallowance of FERC-regulated plant and the absence of benefits from the 2017 Tax Reform Act partially offset by regulated natural gas transmission activities from growth projects placed into service and an increase in gains from agreements to convey shale development rights underneath several natural gas storage fields.

 

 

57


Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

 

 

2017 VS. 2016

Net income increased 57%, primarily due to a benefit from the remeasurement of deferred income taxes to the new corporate income tax rate and gas transportation and storage activities from growth projects placed into service.

Analysis of Consolidated Operations

Presented below are selected amounts related to Dominion Energy Gas’ results of operations:

 

Year Ended December 31,   2018     $ Change     2017     $ Change     2016  
(millions)                              

Operating revenue

  $ 1,940       $126     $ 1,814       $176     $ 1,638  

Purchased gas

    40       (92     132       23       109  

Other energy-related purchases

    135       114       21       9       12  

Net revenue

    1,765       104       1,661       144       1,517  

Other operations and maintenance

    759       94       665       70       595  

Depreciation and amortization