8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 6, 2018

 

  

 

 

Commission

File Number

  (Exact name of registrant as specified in its charter)  

IRS 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  

120 Tredegar Street

Richmond, Virginia

  23219

(State or other jurisdiction

of incorporation)

  (Address of Principal Executive Offices)   (Zip Code)

Registrants’ telephone number, including area code: (804) 819-2000

Not Applicable

(Former name or address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below)

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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.  ☐

 

 

 


Item 8.01 Other Events

Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC (the “Registrants”) are filing this Current Report on Form 8-K to recast the consolidated financial statements and other financial information previously included in their combined Annual Reports on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 27, 2018. As disclosed in the combined Quarterly Reports on Form 10-Q of the Registrants, effective January 1, 2018, the Registrants adopted revised accounting guidance pertaining to certain net periodic pension and other postretirement benefit costs, restricted cash and equivalents and certain distributions from equity method investees that required retrospective application.

The revised accounting guidance related to certain net periodic pension and other postretirement benefit costs requires that the service cost component of net periodic pension and other postretirement benefit costs be classified in the same line item as other compensation costs arising from services rendered by employees, while all other components of net periodic pension and other postretirement benefit costs are classified outside of income from operations. In addition, only the service cost component remains eligible for capitalization during construction. Dominion Energy, Inc.’s and Dominion Energy Gas Holdings, LLC’s Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 have been recast to reflect the retrospective adoption for the presentation of the non-service cost component of net periodic pension and other postretirement benefit costs.

The revised accounting guidance related to restricted cash and equivalents states that restricted cash and equivalents are included in the Consolidated Statements of Cash Flows, with the change in balance no longer considered to be a separate investing activity. The Registrants’ Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 have been recast to reflect the retrospective adoption of this revised accounting guidance.

In accordance with revised accounting guidance related to certain distributions from equity method investees, Dominion Energy, Inc. and Dominion Energy Gas Holdings, LLC classify distributions from equity method investees as either cash flows from operating activities or cash flows from investing activities in the Consolidated Statements of Cash Flows according to the nature of the distribution. Distributions received are classified on the basis of the nature of the activity of the investee that generated the distribution as either a return on investment (classified as cash flows from operating activities) or a return of an investment (classified as cash flows from investing activities) when such information is available to Dominion Energy, Inc. and Dominion Energy Gas Holdings, LLC. Dominion Energy, Inc.’s and Dominion Energy Gas Holdings, LLC’s Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 have been recast to reflect the retrospective adoption of this revised accounting guidance.

The following items of the combined Annual Reports on Form 10-K of the Registrants for the year ended December 31, 2017 have been recast to reflect the previously described adoption of revised accounting guidance and are filed as exhibits to this Current Report on Form 8-K and incorporated herein by reference:

 

    Exhibit 99.1

 

    Item 8. Financial Statements and Supplementary Data

 

    Exhibit 99.2

 

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

 

    Exhibit 101

 

    The following financial statements from Dominion Energy, Inc.’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. The following financial statements from Virginia Electric and Power Company’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statement of Common Shareholder’s Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. The following financial statements of Dominion Energy Gas Holdings, LLC’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

The implementation of the revised accounting guidance pertaining to certain net periodic pension and other postretirement benefit costs, restricted cash and equivalents and certain distributions from equity method investees reflected in the recast consolidated financial statements had no effect on the Registrants’ net income for any period. The recast items of the Form 10-K described above have been updated only for the aforementioned adoption of revised accounting guidance. The Registrants have not otherwise updated for activities or events occurring after the date these items were originally presented. This Current Report on Form 8-K should be read in conjunction with the Registrants’ combined Annual Reports on Form 10-K (except for Items 7 and 8, which are included in this Current Report on Form 8-K) and the Registrants’ other periodic and current reports on Forms 10-Q and Forms 8-K.


Item 9.01 Financial Statement and Exhibits.

 

  (d) Exhibits.

 

Exhibit

Number

  

Description

  23    Consent of Deloitte & Touche LLP (filed herewith).
  99.1    Item 8. Financial Statements and Supplementary Data of Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas’ combined Annual Report on Form 10-K for the year ended December 31, 2017.
  99.2    Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas’ combined Annual Report on Form 10-K for the year ended December 31, 2017.
  101    The following financial statements from Dominion Energy, Inc.’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. The following financial statements from Virginia Electric and Power Company’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statement of Common Shareholder’s Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. The following financial statements of Dominion Energy Gas Holdings, LLC’s Current Report on Form 8-K for the quarter ended March 31, 2018, filed on June 6, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

DOMINION ENERGY, INC.

Registrant

 

 

/s/ Michele L. Cardiff

Name:   Michele L. Cardiff
Title:  

Vice President, Controller and

Chief Accounting Officer

Date: June 6, 2018

 

VIRGINIA ELECTRIC AND POWER COMPANY

Registrant

 

 

/s/ Michele L. Cardiff

Name:  

Michele L. Cardiff

Title:  

Vice President, Controller and

Chief Accounting Officer

Date: June 6, 2018

 

DOMINION ENERGY GAS HOLDINGS, LLC

Registrant

 

 

/s/ Michele L. Cardiff

Name:   Michele L. Cardiff
Title:  

Vice President, Controller and

Chief Accounting Officer

Date: June 6, 2018

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-216476, 333-219088 and 333-221291 on Form S-3, Registration Statement No. 333-223036 on Form S-4, and Registration Statement Nos. 033-62705, 333-02733, 333-09167, 333-18391, 333-25587, 333-49725, 333-78173, 333-85094, 333-87529, 333-95795, 333-110332, 333-124256, 333-124257, 333-130566, 333-130570, 333-143916, 333-149989, 333-149993, 333-156027, 333-163805, 333-189578, 333-189579, 333-189580, 333-189581, 333-195768, 333-202364, 333-202366, 333-203952, 333-223264 and 333-223265 on Form S-8 of our report dated February 27, 2018, except for the impact of the matters discussed in Note 2 pertaining to the adoption of revised accounting guidance related to certain net periodic pension and other postretirement benefit costs, restricted cash and equivalents and certain distributions from equity method investees, as to which the date is June 6, 2018, with respect to the consolidated financial statements of Dominion Energy, Inc. and subsidiaries included in this Current Report on Form 8-K.

We consent to the incorporation by reference in Registration Statement No. 333-219085 on Form S-3 of our report dated February 27, 2018, except for the impact of the matter discussed in Note 2 pertaining to the adoption of revised accounting guidance related to restricted cash and equivalents, as to which the date is June 6, 2018, with respect to the consolidated financial statements of Virginia Electric and Power Company (a wholly-owned subsidiary of Dominion Energy, Inc.) and subsidiaries included in this Current Report on Form 8-K.

We consent to the incorporation by reference in Registration Statement No. 333-219086 on Form S-3 of our report dated February 27, 2018, except for the impact of the matters discussed in Note 2 pertaining to the adoption of revised accounting guidance related to certain net periodic pension and other postretirement benefit costs, restricted cash and equivalents and certain distributions from equity method investees, as to which the date is June 6, 2018, with respect to the consolidated financial statements of Dominion Energy Gas Holdings, LLC (a wholly-owned subsidiary of Dominion Energy, Inc.) and subsidiaries included in this Current Report on Form 8-K.

/s/ Deloitte & Touche LLP

Richmond, Virginia

June 6, 2018

EX-99.1

Exhibit 99.1

Glossary of Terms

 

The following abbreviations or acronyms used in this Form 8-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

2015 Biennial Review Order

  

Order issued by the Virginia Commission in November 2015 concluding the 2013—2014 biennial review of Virginia Power’s base rates, terms and conditions

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

ABO

  

Accumulated benefit obligation

AFUDC

  

Allowance for funds used during construction

AMR

  

Automated meter reading program deployed by East Ohio

AOCI

  

Accumulated other comprehensive income (loss)

APCo

  

Appalachian Power Company

ARO

  

Asset retirement obligation

Atlantic Coast Pipeline

  

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

BACT

  

Best available control technology

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

Blue Racer

  

Blue Racer Midstream, LLC, a joint venture between Dominion Energy and Caiman

BREDL

  

Blue Ridge Environmental Defense League

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

CCR

  

Coal combustion residual

CERCLA

  

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

CGN Committee

  

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

CNG

  

Consolidated Natural Gas Company

CO2

  

Carbon dioxide

COL

  

Combined Construction Permit and Operating License

Companies

  

Dominion Energy, Virginia Power and Dominion Energy Gas, collectively

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

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.

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 GP Holding Company, LLC, Iroquois GP Holding Company, LLC, DECG and Dominion Energy Questar Pipeline (beginning December 1, 2016) or operating segment, 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 operating segment, 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

 

        1


    

    

 

Abbreviation or Acronym    Definition

Dominion Energy Questar Pipeline

  

Dominion Energy Questar Pipeline, LLC (formerly known as Questar Pipeline, LLC), one or more of its consolidated subsidiaries, or the entirety of Dominion Energy Questar Pipeline, LLC and its consolidated subsidiaries

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

East Ohio

  

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

EPA

  

U.S. Environmental Protection Agency

EPS

  

Earnings per share

ERISA

  

Employee Retirement Income Security Act of 1974

ERM

  

Enterprise Risk Management

FASB

  

Financial Accounting Standards Board

FERC

  

Federal Energy Regulatory Commission

Four Brothers

  

Four Brothers Solar, LLC, a limited liability company owned by Dominion Energy and Four Brothers Holdings, LLC, a wholly-owned subsidiary of NRG effective November 2016

Fowler Ridge

  

Fowler I Holdings LLC, a wind-turbine facility joint venture with BP Wind Energy North America Inc. in Benton County, Indiana

FTA

  

Free Trade Agreement

FTRs

  

Financial transmission rights

GAAP

  

U.S. generally accepted accounting principles

Gas Infrastructure

  

Gas Infrastructure Group operating segment

GHG

  

Greenhouse gas

Granite Mountain

  

Granite Mountain Holdings, LLC, a limited liability company owned by Dominion Energy and Granite Mountain Renewables, LLC, a wholly-owned subsidiary of NRG effective November 2016

Green Mountain

  

Green Mountain Power Corporation

Greensville County

  

An approximately 1,588 MW natural gas-fired combined-cycle power station under construction in Greensville County, Virginia

HATFA of 2014

  

Highway and Transportation Funding Act of 2014

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 wholly-owned subsidiary of NRG effective November 2016

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

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

MAP 21 Act

  

Moving Ahead for Progress in the 21st Century Act

Massachusetts Municipal

  

Massachusetts Municipal Wholesale Electric Company

MATS

  

Utility Mercury and Air Toxics Standard Rule

mcfe

  

Thousand cubic feet equivalent

MGD

  

Million gallons a day

Millstone

  

Millstone nuclear power station

MISO

  

Midcontinent Independent System Operator, Inc.

Morgans Corner

  

Morgans Corner Solar Energy, LLC

MW

  

Megawatt

MWh

  

Megawatt hour

NAV

  

Net asset value

NedPower

  

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

 

2        


    

    

 

Abbreviation or Acronym    Definition

NEIL

  

Nuclear Electric Insurance Limited

NGL

  

Natural gas liquid

NJNR

  

NJNR Pipeline Company

North Anna

  

North Anna nuclear power station

North Carolina Commission

  

North Carolina Utilities Commission

NOX

  

Nitrogen oxide

NRC

  

Nuclear Regulatory Commission

NRG

  

The legal entity, NRG Energy, Inc., one or more of its consolidated subsidiaries (including, effective November 2016, 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

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

Philadelphia Utility Index

  

Philadelphia Stock Exchange Utility Index

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

Questar Gas

  

Questar Gas Company

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

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 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 Woodland, Scott Solar and Whitehouse

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

RTO

  

Regional transmission organization

SBL Holdco

  

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

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

SCANA Merger Agreement

  

Agreement and plan of merger entered on January 2, 2018 between Dominion Energy and SCANA in which SCANA will become a wholly-owned subsidiary of Dominion Energy upon closing

SCE&G

  

South Carolina Electric & Gas Company, a wholly-owned subsidiary of SCANA

Scott Solar

  

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

SEC

  

Securities and Exchange Commission

September 2006 hybrids

  

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

South Carolina Commission

  

South Carolina Public Service Commission

 

        3


    

    

 

Abbreviation or Acronym    Definition

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

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

Western System

  

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

Wexpro

  

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

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

 

4        


Item 8. Financial Statements and Supplementary Data

 

 

      Page Number  

Dominion Energy, Inc.

  

Report of Independent Registered Public Accounting Firm

     6  

Consolidated Statements of Income for the years ended December  31, 2017, 2016 and 2015

     7  

Consolidated Statements of Comprehensive Income for the years ended December  31, 2017, 2016 and 2015

     8  

Consolidated Balance Sheets at December 31, 2017 and 2016

     9  

Consolidated Statements of Equity for the years ended December  31, 2017, 2016 and 2015

     11  

Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016 and 2015

     12  

Virginia Electric and Power Company

  

Report of Independent Registered Public Accounting Firm

     14  

Consolidated Statements of Income for the years ended December  31, 2017, 2016 and 2015

     15  

Consolidated Statements of Comprehensive Income for the years ended December  31, 2017, 2016 and 2015

     16  

Consolidated Balance Sheets at December 31, 2017 and 2016

     17  

Consolidated Statements of Common Shareholder’s Equity for the years ended December 31, 2017, 2016 and
2015

     19  

Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016 and 2015

     20  

Dominion Energy Gas Holdings, LLC

  

Report of Independent Registered Public Accounting Firm

     22  

Consolidated Statements of Income for the years ended December  31, 2017, 2016 and 2015

     23  

Consolidated Statements of Comprehensive Income for the years ended December  31, 2017, 2016 and 2015

     24  

Consolidated Balance Sheets at December 31, 2017 and 2016

     25  

Consolidated Statements of Equity for the years ended December  31, 2017, 2016 and 2015

     27  

Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016 and 2015

     28  

Combined Notes to Consolidated Financial Statements

     30  

 

        5


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and the Board of Directors of

Dominion Energy, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Dominion Energy, Inc. and subsidiaries (“Dominion Energy”) at December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Dominion Energy at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Dominion Energy’s internal control over financial reporting at December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018 (not presented herein), expressed an unqualified opinion on Dominion Energy’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of Dominion Energy’s management. Our responsibility is to express an opinion on Dominion Energy’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Dominion Energy in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Richmond, Virginia

February 27, 2018, except for the impact of the matters

discussed in Note 2 pertaining to the adoption of revised accounting

guidance related to certain net periodic pension and other postretirement

benefit costs, restricted cash and equivalents and certain

distributions from equity method investees, as to which the date

is June 6, 2018

We have served as Dominion Energy’s auditor since 1988.

 

6        


Dominion Energy, Inc.

Consolidated Statements of Income

 

 

 

Year Ended December 31,    2017     2016      2015  
(millions, except per share amounts)                    

Operating Revenue(1)

   $ 12,586     $ 11,737      $ 11,683  

Operating Expenses

       

Electric fuel and other energy-related purchases

     2,301       2,333        2,725  

Purchased electric capacity

     6       99        330  

Purchased gas

     701       459        551  

Other operations and maintenance

     3,068       3,243        2,711  

Depreciation, depletion and amortization

     1,905       1,559        1,395  

Other taxes

     668       596        551  

Total operating expenses

     8,649       8,289        8,263  

Income from operations

     3,937       3,448        3,420  

Other income(1)

     358       429        312  

Interest and related charges

     1,205       1,010        904  

Income from operations including noncontrolling interests before income tax expense (benefit)

     3,090       2,867        2,828  

Income tax expense (benefit)

     (30     655        905  

Net Income Including Noncontrolling Interests

     3,120       2,212        1,923  

Noncontrolling Interests

     121       89        24  

Net Income Attributable to Dominion Energy

     2,999       2,123        1,899  

Earnings Per Common Share

       

Net income attributable to Dominion Energy—Basic

   $ 4.72     $ 3.44      $ 3.21  

Net income attributable to Dominion Energy—Diluted

   $ 4.72     $ 3.44      $ 3.20  

Dividends Declared Per Common Share

   $ 3.035     $ 2.80      $ 2.59  

 

(1) See Note 9 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy’s Consolidated Financial Statements.

 

        7


Dominion Energy, Inc.

Consolidated Statements of Comprehensive Income

 

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Net income including noncontrolling interests

   $ 3,120     $ 2,212     $ 1,923  

Other comprehensive income (loss), net of taxes:

      

Net deferred gains on derivatives-hedging activities, net of $(3), $(37) and $(74) tax

     8       55       110  

Changes in unrealized net gains on investment securities, net of $(121), $(53) and $23 tax

     215       93       6  

Changes in net unrecognized pension and other postretirement benefit costs, net of $32, $189 and $29 tax

     (69     (319     (66

Amounts reclassified to net income:

      

Net derivative gains-hedging activities, net of $18, $100 and $68 tax

     (29     (159     (108

Net realized gains on investment securities, net of $21, $15 and $29 tax

     (37     (28     (50

Net pension and other postretirement benefit costs, net of $(32), $(22) and $(35) tax

     50       34       51  

Changes in other comprehensive income (loss) from equity method investees, net of $(2), $— and $1 tax

     3       (1     (1

Total other comprehensive income (loss)

     141       (325     (58

Comprehensive income including noncontrolling interests

     3,261       1,887       1,865  

Comprehensive income attributable to noncontrolling interests

     122       89       24  

Comprehensive income attributable to Dominion Energy

   $ 3,139     $ 1,798     $ 1,841  

The accompanying notes are an integral part of Dominion Energy’s Consolidated Financial Statements.

 

8        


Dominion Energy, Inc.

Consolidated Balance Sheets

 

 

 

At December 31,    2017     2016  
(millions)             
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 120     $ 261  

Customer receivables (less allowance for doubtful accounts of $17 and $18)

     1,660       1,523  

Other receivables (less allowance for doubtful accounts of $2 at both dates)(1)

     126       183  

Inventories

    

Materials and supplies

     1,049       1,087  

Fossil fuel

     328       341  

Gas Stored

     100       96  

Prepayments

     260       194  

Regulatory assets

     294       244  

Other

     397       319  

Total current assets

     4,334       4,248  

Investments

    

Nuclear decommissioning trust funds

     5,093       4,484  

Investment in equity method affiliates

     1,544       1,561  

Other

     327       298  

Total investments

     6,964       6,343  

Property, Plant and Equipment

    

Property, plant and equipment

     74,823       69,556  

Accumulated depreciation, depletion and amortization

     (21,065     (19,592

Total property, plant and equipment, net

     53,758       49,964  

Deferred Charges and Other Assets

    

Goodwill

     6,405       6,399  

Pension and other postretirement benefit assets

     1,378       1,078  

Intangible assets, net

     685       618  

Regulatory assets

     2,480       2,473  

Other

     581       487  

Total deferred charges and other assets

     11,529       11,055  

Total assets

   $ 76,585     $ 71,610  

 

(1) See Note 9 for amounts attributable to related parties.

 

        9


 

 

At December 31,    2017     2016  
(millions)             
LIABILITIES AND EQUITY     

Current Liabilities

    

Securities due within one year

   $ 3,078     $ 1,709  

Short-term debt

     3,298       3,155  

Accounts payable

     875       1,000  

Accrued interest, payroll and taxes

     848       798  

Other(1)

     1,537       1,453  

Total current liabilities

     9,636       8,115  

Long-Term Debt

    

Long-term debt

     25,588       24,878  

Junior subordinated notes

     3,981       2,980  

Remarketable subordinated notes

     1,379       2,373  

Total long-term debt

     30,948       30,231  

Deferred Credits and Other Liabilities

    

Deferred income taxes and investment tax credits

     4,523       8,602  

Regulatory liabilities

     6,916       2,622  

Asset retirement obligations

     2,169       2,236  

Pension and other postretirement benefit liability

     2,160       2,112  

Other(1)

     863       852  

Total deferred credits and other liabilities

     16,631       16,424  

Total liabilities

     57,215       54,770  

Commitments and Contingencies (see Note 22)

    

Equity

    

Common stock-no par(2)

     9,865       8,550  

Retained earnings

     7,936       6,854  

Accumulated other comprehensive loss

     (659     (799

Total common shareholders’ equity

     17,142       14,605  

Noncontrolling interests

     2,228       2,235  

Total equity

     19,370       16,840  

Total liabilities and equity

   $ 76,585     $ 71,610  

 

(1) See Notes 3 and 9 for amounts attributable to related parties.
(2) 1 billion shares authorized; 645 million shares and 628 million shares outstanding at December 31, 2017 and 2016, respectively.

The accompanying notes are an integral part of Dominion Energy’s Consolidated Financial Statements.

 

10        


Dominion Energy, Inc.

Consolidated Statements of Equity

 

 

 

      Common Stock     Dominion Energy
Shareholders
                      
      Shares      Amount     Retained
Earnings
   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total Common

Shareholders’

Equity

   

Noncontrolling

Interests

   

Total

Equity

 
(millions)                                            

December 31, 2014

     585      $ 5,876     $ 6,095       $(416     $11,555       $   402     $ 11,957  

Net income including noncontrolling interests

          1,899         1,899       24       1,923  

Dominion Energy Midstream’s acquisition of interest in Iroquois

                    216       216  

Acquisition of Four Brothers and Three Cedars

                    47       47  

Contributions from SunEdison to Four Brothers and Three Cedars

                    103       103  

Sale of interest in merchant solar projects

        26           26       179       205  

Purchase of Dominion Energy Midstream common units

        (6         (6     (19     (25

Issuance of common stock

     11        786           786         786  

Stock awards (net of change in unearned compensation)

        13           13         13  

Dividends

          (1,536       (1,536       (1,536

Dominion Energy Midstream distributions

                    (16     (16

Other comprehensive loss, net of tax

            (58     (58       (58

Other

              (15                     (15     2       (13

December 31, 2015

     596        6,680       6,458       (474     12,664       938       13,602  

Net income including noncontrolling interests

          2,123         2,123       89       2,212  

Contributions from SunEdison to Four Brothers and Three Cedars

                    189       189  

Sale of interest in merchant solar projects

        22           22       117       139  

Sale of Dominion Energy Midstream common units—net of offering costs

                    482       482  

Sale of Dominion Energy Midstream convertible preferred units—net of offering costs

                    490       490  

Purchase of Dominion Energy Midstream common units

        (3         (3     (14     (17

Issuance of common stock

     32        2,152           2,152         2,152  

Stock awards (net of change in unearned compensation)

        14           14         14  

Present value of stock purchase contract payments related to RSNs(1)

        (191         (191       (191

Tax effect of Dominion Energy Questar Pipeline contribution to Dominion Energy Midstream

        (116         (116       (116

Dividends and distributions

          (1,727       (1,727     (62     (1,789

Other comprehensive loss, net of tax

            (325     (325       (325

Other

              (8                     (8     6       (2

December 31, 2016

     628        8,550       6,854       (799     14,605       2,235       16,840  

Net income including noncontrolling interests

          2,999         2,999       121       3,120  

Contributions from NRG to Four Brothers and Three Cedars

                    9       9  

Issuance of common stock

     17        1,302           1,302         1,302  

Sale of Dominion Energy Midstream common units—net of offering costs

                    18       18  

Stock awards (net of change in unearned compensation)

        22           22         22  

Dividends and distributions

          (1,931       (1,931     (156     (2,087

Other comprehensive income, net of tax

            140       140       1       141  

Other

              (9     14               5               5  

December 31, 2017

     645      $ 9,865     $ 7,936       $(659     $17,142       $2,228     $ 19,370  

 

(1) See Note 17 for further information.

The accompanying notes are an integral part of Dominion Energy’s Consolidated Financial Statements

 

        11


Dominion Energy, Inc.

Consolidated Statements of Cash Flows

 

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Operating Activities

      

Net income including noncontrolling interests

   $ 3,120     $ 2,212     $ 1,923  

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:

      

Depreciation, depletion and amortization (including nuclear fuel)

     2,202       1,849       1,669  

Deferred income taxes and investment tax credits

     (3     725       854  

Current income tax for Dominion Energy Questar Pipeline contribution to Dominion Energy Midstream

           (212      

Proceeds from assignment of tower rental portfolio

     91              

Gains on the sales of assets

     (148     (50     (123

Charges associated with equity method investments

     158              

Charges associated with future ash pond and landfill closure costs

           197       99  

Contribution to pension plan

     (75            

Other adjustments

     (84     (84     (26

Changes in:

      

Accounts receivable

     (103     (286     294  

Inventories

     15       1       (26

Deferred fuel and purchased gas costs, net

     (71     54       94  

Prepayments

     (62     21       (25

Accounts payable

     (89     97       (199

Accrued interest, payroll and taxes

     64       203       (52

Margin deposit assets and liabilities

     (10     (66     237  

Net realized and unrealized changes related to derivative activities

     44       (335     (176

Asset retirement obligations

     (94     (61     (4

Pension and other postretirement benefits

     (177     (152     (51

Other operating assets and liabilities

     (276     38       3  

Net cash provided by operating activities

     4,502       4,151       4,491  

Investing Activities

      

Plant construction and other property additions (including nuclear fuel)

     (5,504     (6,085     (5,575

Acquisition of Dominion Energy Questar, net of cash acquired

           (4,381      

Acquisition of solar development projects

     (405     (40     (418

Acquisition of DECG

                 (497

Proceeds from sales of securities

     1,831       1,422       1,340  

Purchases of securities

     (1,940     (1,504     (1,326

Sale of certain retail energy marketing assets

     68              

Proceeds from assignment of shale development rights

     70       10       79  

Contributions to equity method affiliates

     (370     (198     (51

Distributions from equity method affiliates

     275       2        

Other

     33       83       (65

Net cash used in investing activities

     (5,942     (10,691     (6,513

Financing Activities

      

Issuance (repayment) of short-term debt, net

     143       (654     734  

Issuance of short-term notes

           1,200       600  

Repayment and repurchase of short-term notes

     (250     (1,800     (400

Issuance and remarketing of long-term debt

     3,880       7,722       2,962  

Repayment and repurchase of long-term debt

     (1,572     (1,610     (892

Net proceeds from issuance of Dominion Energy Midstream common units

     18       482        

Net proceeds from issuance of Dominion Energy Midstream preferred units

           490        

Proceeds from sale of interest in merchant solar projects

           117       184  

Contributions from NRG and SunEdison to Four Brothers and Three Cedars

     9       189       103  

Issuance of common stock

     1,302       2,152       786  

Common dividend payments

     (1,931     (1,727     (1,536

Other

     (296     (331     (224

Net cash provided by financing activities

     1,303       6,230       2,317  

Increase (decrease) in cash, restricted cash and equivalents

     (137     (310     295  

Cash, restricted cash and equivalents at beginning of year

     322       632       337  

Cash, restricted cash and equivalents at end of year

   $ 185     $ 322     $ 632  

Supplemental Cash Flow Information

      

Cash paid during the year for:

      

Interest and related charges, excluding capitalized amounts

   $ 1,083     $ 905     $ 843  

Income taxes

     9       145       75  

Significant noncash investing and financing activities:(1)(2)

      

Accrued capital expenditures

     343       427       478  

Guarantee provided to equity method affiliate

     30              

Dominion Energy Midstream’s acquisition of a noncontrolling partnership interest in Iroquois in exchange for issuance of Dominion Energy Midstream common units

                 216  

 

(1) See Note 3 for noncash activities related to the acquisition of Four Brothers and Three Cedars.
(2) See Note 17 for noncash activities related to the remarketing of RSNs in 2017 and 2016.

The accompanying notes are an integral part of Dominion Energy’s Consolidated Financial Statements.

 

12        


    

 

 

 

 

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        13

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholder of

Virginia Electric and Power Company

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Virginia Electric and Power Company (a wholly-owned subsidiary of Dominion Energy, Inc.) and subsidiaries (“Virginia Power”) at December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, common shareholder’s equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Virginia Power at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of Virginia Power’s management. Our responsibility is to express an opinion on Virginia Power’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Virginia Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Virginia Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Virginia Power’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Richmond, Virginia

February 27, 2018, except for the impact of the matters

discussed in Note 2 pertaining to the adoption of revised

accounting guidance related to restricted cash and

equivalents, as to which the date is June 6, 2018

We have served as Virginia Power’s auditor since 1988.

 

14        


Virginia Electric and Power Company

Consolidated Statements of Income

 

 

Year Ended December 31,    2017      2016      2015  
(millions)                     

Operating Revenue(1)

   $ 7,556      $ 7,588      $ 7,622  

Operating Expenses

        

Electric fuel and other energy-related purchases(1)

     1,909        1,973        2,320  

Purchased electric capacity

     6        99        330  

Other operations and maintenance:

        

Affiliated suppliers

     309        310        279  

Other

     1,169        1,547        1,355  

Depreciation and amortization

     1,141        1,025        953  

Other taxes

     290        284        264  

Total operating expenses

     4,824        5,238        5,501  

Income from operations

     2,732        2,350        2,121  

Other income

     76        56        68  

Interest and related charges(1)

     494        461        443  

Income from operations before income tax expense

     2,314        1,945        1,746  

Income tax expense

     774        727        659  

Net Income

   $ 1,540      $ 1,218      $ 1,087  

 

(1) See Note 24 for amounts attributable to affiliates.

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

        15


Virginia Electric and Power Company

Consolidated Statements of Comprehensive Income

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Net income

   $ 1,540     $ 1,218     $ 1,087  

Other comprehensive income (loss), net of taxes:

      

Net deferred losses on derivatives-hedging activities, net of $3, $1 and $2 tax

     (5     (2     (1

Changes in unrealized net gains (losses) on nuclear decommissioning trust funds, net of $(16), $(7) and $1 tax

     24       11       (4

Amounts reclassified to net income:

      

Net derivative losses on derivative-hedging activities, net of $—, $— and $— tax

     1       1       1  

Net realized gains on nuclear decommissioning trust funds, net of $3, $2 and $4 tax

     (4     (4     (6

Total other comprehensive income (loss)

     16       6       (10

Comprehensive income

   $ 1,556     $ 1,224     $ 1,077  

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

16        


Virginia Electric and Power Company

Consolidated Balance Sheets

 

 

At December 31,    2017     2016  
(millions)             
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 14     $ 11  

Customer receivables (less allowance for doubtful accounts of $10 at both dates)

     951       892  

Other receivables (less allowance for doubtful accounts of $1 at both dates)

     64       99  

Affiliated receivables

     3       112  

Inventories (average cost method)

    

Materials and supplies

     531       525  

Fossil fuel

     319       328  

Prepayments

     27       30  

Regulatory assets

     205       179  

Other(1)

     110       72  

Total current assets

     2,224       2,248  

Investments

    

Nuclear decommissioning trust funds

     2,399       2,106  

Other

     3       3  

Total investments

     2,402       2,109  

Property, Plant and Equipment

    

Property, plant and equipment

     42,329       40,030  

Accumulated depreciation and amortization

     (13,277     (12,436

Total property, plant and equipment, net

     29,052       27,594  

Deferred Charges and Other Assets

    

Pension and other postretirement benefit assets(1)

     199       130  

Intangible assets, net

     233       225  

Regulatory assets

     810       770  

Derivative assets(1)

     91       128  

Other

     128       104  

Total deferred charges and other assets

     1,461       1,357  

Total assets

   $ 35,139     $ 33,308  

 

(1) See Note 24 for amounts attributable to affiliates.

 

        17


 

 

At December 31,    2017      2016  
(millions)              
LIABILITIES AND SHAREHOLDERS EQUITY      

Current Liabilities

     

Securities due within one year

   $ 850      $ 678  

Short-term debt

     542        65  

Accounts payable

     361        444  

Payables to affiliates

     125        109  

Affiliated current borrowings

     33        262  

Accrued interest, payroll and taxes

     256        239  

Asset retirement obligations

     216        181  

Other(1)

     537        544  

Total current liabilities

     2,920        2,522  

Long-Term Debt

     10,496        9,852  

Deferred Credits and Other Liabilities

     

Deferred income taxes and investment tax credits

     2,728        5,103  

Asset retirement obligations

     1,149        1,262  

Regulatory liabilities

     4,760        1,962  

Pension and other postretirement benefit liabilities(1)

     505        396  

Other

     357        346  

Total deferred credits and other liabilities

     9,499        9,069  

Total liabilities

     22,915        21,443  

Commitments and Contingencies (see Note 22)

     

Common Shareholder’s Equity

     

Common stock – no par(2)

     5,738        5,738  

Other paid-in capital

     1,113        1,113  

Retained earnings

     5,311        4,968  

Accumulated other comprehensive income

     62        46  

Total common shareholder’s equity

     12,224        11,865  

Total liabilities and shareholder’s equity

   $ 35,139      $ 33,308  

 

(1) See Note 24 for amounts attributable to affiliates.
(2) 500,000 shares authorized; 274,723 shares outstanding at December 31, 2017 and 2016.

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

18        


Virginia Electric and Power Company

Consolidated Statements of Common Shareholder’s Equity

 

 

 

     

 

Common Stock

    

Other

Paid-In

Capital

    

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

 
     Shares      Amount            
(millions, except for shares)    (thousands)                                        

Balance at December 31, 2014

     275      $ 5,738      $ 1,113      $ 3,154       $ 50     $ 10,055  

Net income

              1,087         1,087  

Dividends

              (491       (491

Other comprehensive loss, net of tax

                                        (10     (10

Balance at December 31, 2015

     275        5,738        1,113        3,750       40       10,641  

Net income

              1,218         1,218  

Other comprehensive income, net of tax

                                        6       6  

Balance at December 31, 2016

     275        5,738        1,113        4,968       46       11,865  

Net income

              1,540         1,540  

Dividends

              (1,199       (1,199

Other comprehensive income, net of tax

                16       16  

Other

                                2               2  

Balance at December 31, 2017

     275      $ 5,738      $ 1,113      $ 5,311       $ 62     $ 12,224  

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

        19


Virginia Electric and Power Company

Consolidated Statements of Cash Flows

 

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Operating Activities

      

Net income

   $ 1,540     $ 1,218     $ 1,087  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization (including nuclear fuel)

     1,333       1,210       1,121  

Deferred income taxes and investment tax credits

     269       469       251  

Proceeds from assignment of rental portfolio

     91              

Charges associated with future ash pond and landfill closure costs

           197       99  

Other adjustments

     (36     (16     (27

Changes in:

      

Accounts receivable

     (27     (65     128  

Affiliated accounts receivable and payable

     125       220       (314

Inventories

     3       20       (20

Prepayments

     3       8       214  

Deferred fuel expenses, net

     (59     69       64  

Accounts payable

     (42     25       (75

Accrued interest, payroll and taxes

     17       49       (9

Net realized and unrealized changes related to derivative activities

     13       (153     (67

Asset retirement obligations

     (88     (59     10  

Other operating assets and liabilities

     (181     77       93  

Net cash provided by operating activities

     2,961       3,269       2,555  

Investing Activities

      

Plant construction and other property additions

     (2,496     (2,489     (2,474

Purchases of nuclear fuel

     (192     (153     (172

Acquisition of solar development projects

     (41     (7     (43

Purchases of securities

     (884     (775     (651

Proceeds from sales of securities

     849       733       639  

Other

     (41     (33     (87

Net cash used in investing activities

     (2,805     (2,724     (2,788

Financing Activities

      

Issuance (repayment) of short-term debt, net

     477       (1,591     295  

Repayment of affiliated current borrowings, net

     (229     (114     (51

Issuance and remarketing of long-term debt

     1,500       1,688       1,112  

Repayment of long-term debt

     (681     (517     (625

Common dividend payments to parent

     (1,199           (491

Other

     (11     (18     (4

Net cash provided by (used in) financing activities

     (143     (552     236  

Increase (decrease) in cash, restricted cash and equivalents

     13       (7     3  

Cash, restricted cash and equivalents at beginning of year

     11       18       15  

Cash, restricted cash and equivalents at end of year

   $ 24     $ 11     $ 18  

Supplemental Cash Flow Information

      

Cash paid during the year for:

      

Interest and related charges, excluding capitalized amounts

   $ 458     $ 435     $ 422  

Income taxes

     362       79       517  

Significant noncash investing activities:

      

Accrued capital expenditures

     169       256       169  

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

20        


 

 

 

 

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        21


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors of

Dominion Energy Gas Holdings, LLC

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Dominion Energy Gas Holdings, LLC (a wholly-owned subsidiary of Dominion Energy, Inc.) and subsidiaries (“Dominion Energy Gas”) at December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Dominion Energy Gas at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of Dominion Energy Gas’ management. Our responsibility is to express an opinion on Dominion Energy Gas’ consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Dominion Energy Gas in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Dominion Energy Gas is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Dominion Energy Gas’ internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Richmond, Virginia

February 27, 2018, except for the impact of the matters

discussed in Note 2 pertaining to the adoption of revised accounting

guidance related to certain net periodic pension and other postretirement

benefit costs, restricted cash and equivalents and certain

distributions from equity method investees, as to which the date

is June 6, 2018

We have served as Dominion Energy Gas’ auditor since 2012.

 

22        


Dominion Energy Gas Holdings, LLC

Consolidated Statements of Income

 

 

Year Ended December 31,    2017      2016      2015  
(millions)                     

Operating Revenue(1)

   $ 1,814      $ 1,638      $ 1,716  

Operating Expenses

        

Purchased gas(1)

     132        109        133  

Other energy-related purchases(1)

     21        12        21  

Other operations and maintenance:

        

Affiliated suppliers

     87        81        64  

Other(1)

     524        469        388  

Depreciation and amortization

     227        204        217  

Other taxes

     185        170        166  

Total operating expenses

     1,176        1,045        989  

Income from operations

     638        593        727  

Earnings from equity method investee

     21        21        23  

Other income

     104        87        63  

Interest and related charges(1)

     97        94        73  

Income from operations before income tax expense

     666        607        740  

Income tax expense

     51        215        283  

Net Income

   $ 615      $ 392      $ 457  

 

(1) See Note 24 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy Gas’ Consolidated Financial Statements.

 

        23


Dominion Energy Gas Holdings, LLC

Consolidated Statements of Comprehensive Income

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Net income

   $ 615     $ 392     $ 457  

Other comprehensive income (loss), net of taxes:

      

Net deferred gains (losses) on derivatives-hedging activities, net of $(3), $10, and $(4) tax

     5       (16     6  

Changes in unrecognized pension benefit (costs), net of $(8), $14, and $13 tax

     20       (20     (20

Amounts reclassified to net income:

      

Net derivative (gains) losses, net of $3, $(6), and $3 tax

     (4     9       (3

Net pension and other postretirement benefit costs, net of $(2), $(2), and $(3) tax

     4       3       4  

Other comprehensive income (loss)

     25       (24     (13

Comprehensive income

   $ 640     $ 368     $ 444  

The accompanying notes are an integral part of Dominion Energy Gas’ Consolidated Financial Statements.

 

24        


Dominion Energy Gas Holdings, LLC

Consolidated Balance Sheets

 

 

At December 31,    2017     2016  
(millions)             
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 4     $ 23  

Customer receivables (less allowance for doubtful accounts of $1 at both dates)(1)

     297       281  

Other receivables (less allowance for doubtful accounts of $1 at both dates)(1)

     15       13  

Affiliated receivables

     10       17  

Inventories:

    

Materials and supplies

     55       57  

Gas stored

     9       13  

Prepayments

     112       94  

Gas imbalances(1)

     46       37  

Other

     52       47  

Total current assets

     600       582  

Investments

     97       99  

Property, Plant and Equipment

    

Property, plant and equipment

     11,173       10,475  

Accumulated depreciation and amortization

     (3,018     (2,851

Total property, plant and equipment, net

     8,155       7,624  

Deferred Charges and Other Assets

    

Goodwill

     542       542  

Intangible assets, net

     109       98  

Regulatory assets

     511       577  

Pension and other postretirement benefit assets(1)

     1,828       1,557  

Other(1)

     98       63  

Total deferred charges and other assets

     3,088       2,837  

Total assets

   $ 11,940     $ 11,142  

 

(1) See Note 24 for amounts attributable to related parties.

 

        25


 

 

At December 31,    2017     2016  
(millions)             
LIABILITIES AND EQUITY     

Current Liabilities

    

Short-term debt

   $ 629     $ 460  

Accounts payable

     193       221  

Payables to affiliates

     62       29  

Affiliated current borrowings

     18       118  

Accrued interest, payroll and taxes

     250       225  

Other(1)

     189       162  

Total current liabilities

     1,341       1,215  

Long-Term Debt

     3,570       3,528  

Deferred Credits and Other Liabilities

    

Deferred income taxes and investment tax credits

     1,454       2,438  

Regulatory liabilities

     1,227       219  

Other(1)

     185       206  

Total deferred credits and other liabilities

     2,866       2,863  

Total liabilities

     7,777       7,606  

Commitments and Contingencies (see Note 22)

    

Equity

    

Membership interests

     4,261       3,659  

Accumulated other comprehensive loss

     (98     (123

Total equity

     4,163       3,536  

Total liabilities and equity

   $ 11,940     $ 11,142  

 

(1) See Note 24 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy Gas’ Consolidated Financial Statements.

 

26        


Dominion Energy Gas Holdings, LLC

Consolidated Statements of Equity

 

 

     

Membership

Interests

 

   

Accumulated

Other

Comprehensive

Income (Loss)

 

   

Total

 

 
(millions)                   

Balance at December 31, 2014

     $3,652       $ (86   $ 3,566  

Net income

     457         457  

Distributions

     (692       (692

Other comprehensive loss, net of tax

             (13     (13

Balance at December 31, 2015

     3,417       (99     3,318  

Net income

     392         392  

Distributions

     (150       (150

Other comprehensive loss, net of tax

             (24     (24

Balance at December 31, 2016

     3,659       (123     3,536  

Net income

     615         615  

Distributions

     (15       (15

Other comprehensive income, net of tax

       25       25  

Other

     2               2  

Balance at December 31, 2017

     $4,261       $ (98   $ 4,163  

The accompanying notes are an integral part of Dominion Energy Gas’ Consolidated Financial Statements.

 

        27


Dominion Energy Gas Holdings, LLC

Consolidated Statements of Cash Flows

 

 

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Operating Activities

      

Net income

   $ 615     $ 392     $ 457  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Gains on sales of assets

     (70     (50     (123

Depreciation and amortization

     227       204       217  

Deferred income taxes and investment tax credits

     27       238       163  

Other adjustments

     (7     (6     23  

Changes in:

      

Accounts receivable

     (17     (68     115  

Affiliated receivables and payables

     40       88       (105

Inventories

     6       8       (13

Prepayments

     (18     (6     99  

Accounts payable

     (17     15       (51

Accrued interest, payroll and taxes

     24       42       (11

Pension and other postretirement benefits

     (143     (141     (119

Other operating assets and liabilities

     (1     (68     (17

Net cash provided by operating activities

     666       648       635  

Investing Activities

      

Plant construction and other property additions

     (778     (854     (795

Proceeds from sale of equity method investment in Iroquois

           7        

Proceeds from assignments of shale development rights

     70       10       79  

Other

     (19     (12     (17

Net cash used in investing activities

     (727     (849     (733

Financing Activities

      

Issuance of short-term debt, net

     169       69       391  

Issuance (repayment) of affiliated current borrowings, net

     (100     23       (289

Repayment of long-term debt

           (400      

Issuance of long-term debt

           680       700  

Distribution payments to parent

     (15     (150     (692

Other

     (6     (5     (7

Net cash provided by financing activities

     48       217       103  

Increase (decrease) in cash, restricted cash and equivalents

     (13     16       5  

Cash, restricted cash and equivalents at beginning of year

     43       27       22  

Cash, restricted cash and equivalents at end of year

   $ 30     $ 43     $ 27  

Supplemental Cash Flow Information

      

Cash paid (received) during the year for:

      

Interest and related charges, excluding capitalized amounts

   $ 89     $ 81     $ 70  

Income taxes

     9       (92     98  

Significant noncash investing and financing activities:

      

Accrued capital expenditures

     38       59       57  

The accompanying notes are an integral part of Dominion Energy Gas’ Consolidated Financial Statements.

 

28        


    

 

 

 

 

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        29

 


Combined Notes to Consolidated Financial Statements

 

 

NOTE 1. NATURE OF OPERATIONS

Dominion Energy, headquartered in Richmond, Virginia, is one of the nation’s largest producers and transporters of energy. Dominion Energy’s operations are conducted through various subsidiaries, including Virginia Power and Dominion Energy Gas. Virginia Power is a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina. Virginia Power is a member of PJM, an RTO, and its electric transmission facilities are integrated into the PJM wholesale electricity markets. All of Virginia Power’s stock is owned by Dominion Energy. Dominion Energy Gas is a holding company that conducts 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. All of Dominion Energy Gas’ membership interests are held by Dominion Energy. The Dominion Energy Questar Combination was completed in September 2016. See Note 3 for a description of operations acquired in the Dominion Energy Questar Combination.

Dominion Energy’s operations also include the Cove Point LNG import, transport and storage facility in Maryland, an equity investment in Atlantic Coast Pipeline and regulated gas transportation and distribution operations in West Virginia. Dominion Energy’s nonregulated operations include merchant generation, energy marketing and price risk management activities, retail energy marketing operations and an equity investment in Blue Racer.

In October 2014, Dominion Energy Midstream launched its initial public offering of 20,125,000 common units representing limited partner interests. At December 31, 2017, Dominion Energy owns the general partner, 50.6% of the common and subordinated units and 37.5% of the convertible preferred interests in Dominion Energy Midstream, which owns a preferred equity interest and the general partner interest in Cove Point, DECG, Dominion Energy Questar Pipeline and a 25.93% noncontrolling partnership interest in Iroquois. The public’s ownership interest in Dominion Energy Midstream is reflected as noncontrolling interest in Dominion Energy’s Consolidated Financial Statements.

Dominion Energy manages its daily operations through three primary operating segments: Power Delivery, Power Generation and Gas Infrastructure. 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 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 one 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.

See Note 25 for further discussion of the Companies’ operating segments.

 

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

General

The Companies make certain estimates and assumptions in preparing their Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses and cash flows for the periods presented. Actual results may differ from those estimates.

The Companies’ Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of their respective majority-owned subsidiaries and non-wholly-owned entities in which they have a controlling financial interest. For certain partnership structures, income is allocated based on the liquidation value of the underlying contractual arrangements. NRG’s ownership interest in Four Brothers and Three Cedars, as well as Terra Nova Renewable Partners’ 33% interest in certain of Dominion Energy’s merchant solar projects, is reflected as noncontrolling interest in Dominion Energy’s Consolidated Financial Statements. See Note 3 for further information on these transactions.

The Companies report certain contracts, instruments and investments at fair value. See Note 6 for further information on fair value measurements.

Dominion Energy maintains pension and other postretirement benefit plans. Virginia Power and Dominion Energy Gas participate in certain of these plans. See Note 21 for further information on these plans.

Certain amounts in the Companies’ 2017, 2016 and 2015 Consolidated Financial Statements and Notes have been reclassified as a result of the adoption of revised accounting guidance pertaining to certain net periodic pension and other postretirement benefit costs, restricted cash and equivalents and certain distributions from equity method investees. In addition, certain other amounts in the 2016 and 2015 Consolidated Financial Statements and Notes have been reclassified to conform to the 2017 presentation for comparative purposes; however, such reclassifications did not affect the Companies’ net income, total assets, liabilities, equity or cash flows.

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

Operating Revenue

Operating revenue is recorded on the basis of services rendered, commodities delivered or contracts settled and includes amounts yet to be billed to customers. Dominion Energy and Virginia

 

 

30        


 

 

Power collect sales, consumption and consumer utility taxes and Dominion Energy Gas collects sales taxes; however, these amounts are excluded from revenue. Dominion Energy’s customer receivables at December 31, 2017 and 2016 included $661 million and $631 million, respectively, of accrued unbilled revenue based on estimated amounts of electricity and natural gas delivered but not yet billed to its utility customers. Virginia Power’s customer receivables at December 31, 2017 and 2016 included $400 million and $349 million, respectively, of accrued unbilled revenue based on estimated amounts of electricity delivered but not yet billed to its customers. Dominion Energy Gas’ customer receivables at December 31, 2017 and 2016 included $121 million and $134 million, respectively, of accrued unbilled revenue based on estimated amounts of natural gas delivered but not yet billed to its customers. See Note 9 for amounts attributable to related parties.

The primary types of sales and service activities reported as operating revenue for Dominion Energy are as follows:

  Regulated electric sales consist primarily of state-regulated retail electric sales, and federally-regulated wholesale electric sales and electric transmission services;
  Nonregulated electric sales consist primarily of sales of electricity at market-based rates and contracted fixed rates, and associated derivative activity;
  Regulated gas sales consist primarily of state- and FERC-regulated natural gas sales and related distribution services and associated derivative activity;
  Nonregulated gas sales consist primarily of sales of natural gas production at market-based rates and contracted fixed prices, sales of gas purchased from third parties, gas trading and marketing revenue and associated derivative activity;
  Gas transportation and storage consists primarily of FERC-regulated sales of transmission and storage services. Also included are state-regulated gas distribution charges to retail distribution service customers opting for alternate suppliers and sales of gathering services; and
  Other revenue consists primarily of sales of NGL production and condensate, extracted products and associated derivative activity. Other revenue also includes miscellaneous service revenue from electric and gas distribution operations, sales of energy-related products and services from Dominion Energy’s retail energy marketing operations and gas processing and handling revenue.

The primary types of sales and service activities reported as operating revenue for Virginia Power are as follows:

  Regulated electric sales consist primarily of state-regulated retail electric sales and federally-regulated wholesale electric sales and electric transmission services; and
  Other revenue consists primarily of miscellaneous service revenue from electric distribution operations and miscellaneous revenue from generation operations, including sales of capacity and other commodities.

The primary types of sales and service activities reported as operating revenue for Dominion Energy Gas are as follows:

  Regulated gas sales consist primarily of state- and FERC-regulated natural gas sales and related distribution services;
  Nonregulated gas sales consist primarily of sales of natural gas
   

production at market-based rates and contracted fixed prices and sales of gas purchased from third parties. Revenue from sales of gas production is recognized based on actual volumes of gas sold to purchasers and is reported net of royalties;

  Gas transportation and storage consists primarily of FERC-regulated sales of transmission and storage services. Also included are state-regulated gas distribution charges to retail distribution service customers opting for alternate suppliers and sales of gathering services;
  NGL revenue consists primarily of sales of NGL production and condensate, extracted products and associated derivative activity; and
  Other revenue consists primarily of miscellaneous service revenue, gas processing and handling revenue.

Electric Fuel, Purchased Energy and Purchased Gas-Deferred Costs

Where permitted by regulatory authorities, the differences between Dominion Energy’s and Virginia Power’s actual electric fuel and purchased energy expenses and Dominion Energy’s and Dominion Energy Gas’ purchased gas expenses and the related levels of recovery for these expenses in current rates are deferred and matched against recoveries in future periods. The deferral of costs in excess of current period fuel rate recovery is recognized as a regulatory asset, while rate recovery in excess of current period fuel expenses is recognized as a regulatory liability.

Of the cost of fuel used in electric generation and energy purchases to serve utility customers, approximately 84% is currently subject to deferred fuel accounting, while substantially all of the remaining amount is subject to recovery through similar mechanisms.

Virtually all of Dominion Energy Gas’, Cove Point’s, Questar Gas’ and Hope’s natural gas purchases are either subject to deferral accounting or are recovered from the customer in the same accounting period as the sale.

Income Taxes

A consolidated federal income tax return is filed for Dominion Energy and its subsidiaries, including Virginia Power and Dominion Energy Gas’ subsidiaries. In addition, where applicable, combined income tax returns for Dominion Energy and its subsidiaries are filed in various states; otherwise, separate state income tax returns are filed.

Although Dominion Energy Gas is disregarded for income tax purposes, a provision for income taxes is recognized to reflect the inclusion of its business activities in the tax returns of its parent, Dominion Energy. Virginia Power and Dominion Energy Gas participate in intercompany tax sharing agreements with Dominion Energy and its subsidiaries. Current income taxes are based on taxable income or loss and credits determined on a separate company basis.

Under the agreements, if a subsidiary incurs a tax loss or earns a credit, recognition of current income tax benefits is limited to refunds of prior year taxes obtained by the carryback of the net operating loss or credit or to the extent the tax loss or credit is absorbed by the taxable income of other Dominion Energy consolidated group members. Otherwise, the net operating loss or credit is carried forward and is recognized as a deferred tax asset until realized.

 

 

31


Combined Notes to Consolidated Financial Statements, Continued

 

 

 

The 2017 Tax Reform Act includes a broad range of tax reform provisions affecting the Companies, including changes in corporate tax rates and business deductions. The 2017 Tax Reform Act reduces the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. Deferred tax assets and liabilities are classified as noncurrent in the Consolidated Balance Sheets and measured at the enacted tax rate expected to apply when temporary differences are realized or settled. Thus, at the date of enactment, federal deferred taxes were remeasured based upon the new 21% tax rate. The total effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the law is enacted, even if the assets and liabilities relate to other components of the financial statements, such as items of accumulated other comprehensive income. For Dominion Energy subsidiaries that are not rate-regulated utilities, existing deferred income tax assets or liabilities were adjusted for the reduction in the corporate income tax rate and allocated to continuing operations. Dominion Energy’s rate-regulated utility subsidiaries likewise are required to adjust deferred income tax assets and liabilities for the change in income tax rates. However, if it is probable that the effect of the change in income tax rates will be recovered or refunded in future rates, the regulated utility recorded a regulatory asset or liability instead of an increase or decrease to deferred income tax expense.

Accounting for income taxes involves an asset and liability approach. Deferred income tax assets and liabilities are provided, representing future effects on income taxes for temporary differences between the bases of assets and liabilities for financial reporting and tax purposes. Accordingly, deferred taxes are recognized for the future consequences of different treatments used for the reporting of transactions in financial accounting and income tax returns. The Companies establish a valuation allowance when it is more-likely-than-not that all, or a portion, of a deferred tax asset will not be realized. Where the treatment of temporary differences is different for rate-regulated operations, a regulatory asset is recognized if it is probable that future revenues will be provided for the payment of deferred tax liabilities.

The Companies recognize positions taken, or expected to be taken, in income tax returns that are more-likely-than-not to be realized, assuming that the position will be examined by tax authorities with full knowledge of all relevant information.

If it is not more-likely-than-not that a tax position, or some portion thereof, will be sustained, the related tax benefits are not recognized in the financial statements. Unrecognized tax benefits may result in an increase in income taxes payable, a reduction of income tax refunds receivable or changes in deferred taxes. Also, when uncertainty about the deductibility of an amount is limited to the timing of such deductibility, the increase in income taxes payable (or reduction in tax refunds receivable) is accompanied by a decrease in deferred tax liabilities. Except when such amounts are presented net with amounts receivable from or amounts prepaid to tax authorities, noncurrent income taxes payable related to unrecognized tax benefits are classified in other deferred credits and other liabilities on the Consolidated Balance Sheets and current payables are included in accrued interest, payroll and taxes on the Consolidated Balance Sheets.

The Companies recognize interest on underpayments and overpayments of income taxes in interest expense and other

income, respectively. Penalties are also recognized in other income.

Dominion Energy and Virginia Power both recognized interest income of $11 million in 2017. Dominion Energy Gas’ interest was immaterial in 2017. Interest for the Companies was immaterial in 2016 and 2015. Dominion Energy’s, Virginia Power’s and Dominion Energy Gas’ penalties were immaterial in 2017, 2016 and 2015.

At December 31, 2017, Virginia Power had an income tax-related affiliated payable of $16 million, comprised of $16 million of federal income taxes due to Dominion Energy. Dominion Energy Gas also had an affiliated payable of $25 million due to Dominion Energy, representing $21 million of federal income taxes and $4 million of state income taxes. The net affiliated payables are expected to be paid to Dominion Energy.

In addition, Virginia Power’s Consolidated Balance Sheet at December 31, 2017 included $1 million of noncurrent federal income taxes receivable, less than $1 million of state income taxes receivable and $1 million of noncurrent state income taxes receivable. Dominion Energy Gas’ Consolidated Balance Sheet at December 31, 2017 included $14 million of state income taxes receivable.

At December 31, 2016, Virginia Power had an income tax-related affiliated receivable of $112 million, comprised of $122 million of federal income taxes due from Dominion Energy net of $10 million for state income taxes due to Dominion Energy. Dominion Energy Gas also had an affiliated receivable of $11 million due from Dominion Energy, representing $10 million of federal income taxes and $1 million of state income taxes. The net affiliated receivables were refunded by Dominion Energy.

In addition, Virginia Power’s Consolidated Balance Sheet at December 31, 2016 included $2 million of noncurrent federal income taxes payable, $6 million of state income taxes receivable and $13 million of noncurrent state income taxes receivable. Dominion Energy Gas’ Consolidated Balance Sheet at December 31, 2016 included $1 million of noncurrent federal income taxes payable, $1 million of state income taxes receivable and $7 million of noncurrent state income taxes payable.

Investment tax credits are recognized by nonregulated operations in the year qualifying property is placed in service. For regulated operations, investment tax credits are deferred and amortized over the service lives of the properties giving rise to the credits. Production tax credits are recognized as energy is generated and sold.

Cash, Restricted Cash and Equivalents

Current banking arrangements generally do not require checks to be funded until they are presented for payment. The following table illustrates the checks outstanding but not yet presented for payment and recorded in accounts payable for the Companies:

 

Year Ended December 31,    2017      2016  
(millions)              

Dominion Energy

   $ 30      $ 24  

Virginia Power

     17        11  

Dominion Energy Gas

     7        9  
 

 

32        


 

 

RESTRICTED CASH AND EQUIVALENTS

The Companies hold restricted cash and equivalent balances that primarily consist of amounts held for certain customer deposits, future debt payments on SBL Holdco and Dominion Solar Projects III, Inc.’s term loan agreements and a distribution reserve at Cove Point. Upon adoption of revised accounting guidance in January 2018, restricted cash and equivalents are included within the Companies’ Consolidated Statements of Cash Flows, with the change in balance no longer considered a separate investing activity. The guidance required retrospective application which resulted in adjustments to other cash provided by (used in) investing activities presented within Dominion Energy, Virginia Power and Dominion Energy Gas’ Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, which were previously reported as follows:

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Dominion Energy

   $ 29     $ 47     $ (71

Virginia Power

     (51     (33     (87

Dominion Energy Gas

     (23     (18     (11

The following table provides a reconciliation of the total cash, restricted cash and equivalents reported within the Companies’ Consolidated Balance Sheets to the corresponding amounts reported within the Companies’ Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015:

 

      Cash, Restricted Cash and Equivalents at
End/Beginning of Year
 
At December 31,    2017      2016      2015      2014  
(millions)                            

Dominion Energy

           

Cash and cash equivalents

   $ 120      $ 261      $ 607      $ 318  

Restricted cash and equivalents(1)

     65        61        25        19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash, restricted cash and equivalents shown in the Consolidated Statements of Cash Flows

   $ 185      $ 322      $ 632      $ 337  
  

 

 

    

 

 

    

 

 

    

 

 

 

Virginia Power

           

Cash and cash equivalents

   $ 14      $ 11      $ 18      $ 15  

Restricted cash and equivalents(1)

     10                       
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash, restricted cash and equivalents shown in the Consolidated Statements of Cash Flows

   $ 24      $ 11      $ 18      $ 15  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dominion Energy Gas

           

Cash and cash equivalents

   $ 4      $ 23      $ 13      $ 9  

Restricted cash and equivalents(1)

     26        20        14        13  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash, restricted cash and equivalents shown in the Consolidated Statements of Cash Flows

   $ 30      $ 43      $ 27      $ 22  

 

(1) Restricted cash and equivalent balances are presented within other current assets in the Companies’ Consolidated Balance Sheets.

DISTRIBUTIONS FROM EQUITY METHOD INVESTEES

Dominion Energy and Dominion Energy Gas each hold investments that are accounted for under the equity method of accounting. Effective January 2018, Dominion Energy and Dominion Energy Gas classify distributions from equity method investees as either cash flows from operating activities or cash flows from investing activities in the Consolidated Statements of Cash Flows according to the nature of the distribution. Dis-

tributions received are classified on the basis of the nature of the activity of the investee that generated the distribution as either a return on investment (classified as cash flows from operating activities) or a return of an investment (classified as cash flows from investing activities) when such information is available to Dominion Energy and Dominion Energy Gas. Previously, distributions were determined to be either a return on an investment or return of an investment based on a cumulative earnings approach whereby any distributions received in excess of earnings were considered to be a return of an investment. Dominion Energy and Dominion Energy Gas have applied this approach on a retrospective basis. As a result distributions from equity method investees were reclassified within the Consolidated Statements of Cash Flows between distributions from equity method affiliates and other cash used in investing activities at Dominion Energy and Dominion Energy Gas, respectively, to other adjustments from operating activities for both Dominion Energy and Dominion Energy Gas, which were previously reported as follows:

 

Year Ended December 31,    2017     2016     2015  
(millions)                   

Dominion Energy

   $ (37   $ (108   $ (42

Dominion Energy Gas

     (9     (6     16  

For purposes of the Consolidated Statements of Cash Flows, cash, restricted cash and equivalents include cash on hand, cash in banks and temporary investments purchased with an original maturity of three months or less.

Derivative Instruments

Dominion Energy uses derivative instruments such as physical and financial forwards, futures, swaps, options and FTRs to manage the commodity, interest rate and foreign currency exchange rate risks of its business operations. Virginia Power uses derivative instruments such as physical and financial forwards, futures, swaps, options and FTRs to manage commodity and interest rate risks. Dominion Energy Gas uses derivative instruments such as physical and financial forwards, futures and swaps to manage commodity, interest rate and foreign currency exchange rate risks.

All derivatives, except those for which an exception applies, are required to be reported in the Consolidated Balance Sheets at fair value. Derivative contracts representing unrealized gain positions and purchased options are reported as derivative assets. Derivative contracts representing unrealized losses and options sold are reported as derivative liabilities. One of the exceptions to fair value accounting, normal purchases and normal sales, may be elected when the contract satisfies certain criteria, including a requirement that physical delivery of the underlying commodity is probable. Expenses and revenues resulting from deliveries under normal purchase contracts and normal sales contracts, respectively, are included in earnings at the time of contract performance.

The Companies do not offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Dominion Energy had margin assets of $92 million and $82 million associated with cash collateral at

 

 

33


Combined Notes to Consolidated Financial Statements, Continued

 

 

 

December 31, 2017 and 2016, respectively. Dominion Energy’s margin liabilities associated with cash collateral at December 31, 2017 or 2016 were immaterial. Virginia Power had margin assets of $23 million and $2 million associated with cash collateral at December 31, 2017 and 2016, respectively. Virginia Power’s margin liabilities associated with cash collateral were immaterial at December 31, 2017 and 2016. Dominion Energy Gas’ margin assets and liabilities associated with cash collateral were immaterial at December 31, 2017 and 2016. See Note 7 for further information about derivatives.

To manage price risk, the Companies hold certain derivative instruments that are not designated as hedges for accounting purposes. However, to the extent the Companies do not hold offsetting positions for such derivatives, they believe these instruments represent economic hedges that mitigate their exposure to fluctuations in commodity prices. All income statement activity, including amounts realized upon settlement, is presented in operating revenue, operating expenses, interest and related charges or other income based on the nature of the underlying risk.

Changes in the fair value of derivative instruments result in the recognition of regulatory assets or regulatory liabilities for jurisdictions subject to cost-based rate regulation. Realized gains or losses on the derivative instruments are generally recognized when the related transactions impact earnings.

DERIVATIVE INSTRUMENTS DESIGNATED AS HEDGING INSTRUMENTS

The Companies designate a portion of their derivative instruments as either cash flow or fair value hedges for accounting purposes. For all derivatives designated as hedges, the Companies formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for using the hedging instrument. The Companies assess whether the hedging relationship between the derivative and the hedged item is highly effective at offsetting changes in cash flows or fair values both at the inception of the hedging relationship and on an ongoing basis. Any change in the fair value of the derivative that is not effective at offsetting changes in the cash flows or fair values of the hedged item is recognized currently in earnings. Also, the Companies may elect to exclude certain gains or losses on hedging instruments from the assessment of hedge effectiveness, such as gains or losses attributable to changes in the time value of options or changes in the difference between spot prices and forward prices, thus requiring that such changes be recorded currently in earnings. Hedge accounting is discontinued prospectively for derivatives that cease to be highly effective hedges. For derivative instruments that are accounted for as fair value hedges or cash flow hedges, the cash flows from the derivatives and from the related hedged items are classified in operating cash flows.

Cash Flow Hedges-A majority of the Companies’ hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of electricity, natural gas and NGLs. The Companies also use interest rate swaps to hedge their exposure to variable interest rates on long-term debt as well as foreign currency swaps to hedge their exposure to interest payments denominated in Euros. For transactions in which the Companies are hedging the variability of cash flows, changes in the fair value of the derivatives are reported in AOCI, to the extent they are effective at offsetting changes in the hedged item.

Any derivative gains or losses reported in AOCI are reclassified to earnings when the forecasted item is included in earnings, or earlier, if it becomes probable that the forecasted transaction will not occur. For cash flow hedge transactions, hedge accounting is discontinued if the occurrence of the forecasted transaction is no longer probable.

Dominion Energy entered into interest rate derivative instruments to hedge its forecasted interest payments related to planned debt issuances in 2014. These interest rate derivatives were designated by Dominion Energy as cash flow hedges prior to the formation of Dominion Energy Gas. For the purposes of the Dominion Energy Gas financial statements, the derivative balances, AOCI balance, and any income statement impact related to these interest rate derivative instruments entered into by Dominion Energy have been, and will continue to be, included in the Dominion Energy Gas’ Consolidated Financial Statements as the forecasted interest payments related to the debt issuances now occur at Dominion Energy Gas.

Fair Value Hedges-Dominion Energy also uses fair value hedges to mitigate the fixed price exposure inherent in commodity inventory. In addition, Dominion Energy has designated interest rate swaps as fair value hedges on certain fixed rate long-term debt to manage interest rate exposure. For fair value hedge transactions, changes in the fair value of the derivative are generally offset currently in earnings by the recognition of changes in the hedged item’s fair value. Hedge accounting is discontinued if the hedged item no longer qualifies for hedge accounting. See Note 6 for further information about fair value measurements and associated valuation methods for derivatives. See Note 7 for further information on derivatives.

Property, Plant and Equipment

Property, plant and equipment is recorded at lower of original cost or fair value, if impaired. Capitalized costs include labor, materials and other direct and indirect costs such as asset retirement costs, capitalized interest and, for certain operations subject to cost-of-service rate regulation, AFUDC and overhead costs. The cost of repairs and maintenance, including minor additions and replacements, is generally charged to expense as it is incurred.

In 2017, 2016 and 2015, Dominion Energy capitalized interest costs and AFUDC to property, plant and equipment of $236 million, $159 million and $100 million, respectively. In 2017, 2016 and 2015, Virginia Power capitalized AFUDC to property, plant and equipment of $37 million, $21 million and $30 million, respectively. In 2017, 2016 and 2015, Dominion Energy Gas capitalized AFUDC to property, plant and equipment of $25 million, $8 million and $1 million, respectively.

Under Virginia law, certain Virginia jurisdictional projects qualify for current recovery of AFUDC through rate adjustment clauses. AFUDC on these projects is calculated and recorded as a regulatory asset and is not capitalized to property, plant and equipment. In 2017, 2016 and 2015, Virginia Power recorded $22 million, $31 million and $19 million of AFUDC related to these projects, respectively.

For property subject to cost-of-service rate regulation, including Virginia Power electric distribution, electric transmission, and generation property, Dominion Energy Gas natural gas distribution and transmission property, and for certain Dominion Energy natural gas property, the undepreciated cost of such prop-

 

 

34        


 

 

erty, less salvage value, is generally charged to accumulated depreciation at retirement. Cost of removal collections from utility customers not representing AROs are recorded as regulatory liabilities. For property subject to cost-of-service rate regulation that will be abandoned significantly before the end of its useful life, the net carrying value is reclassified from plant-in-service when it becomes probable it will be abandoned.

For property that is not subject to cost-of-service rate regulation, including nonutility property, cost of removal not associated with AROs is charged to expense as incurred. The Companies also record gains and losses upon retirement based upon the difference between the proceeds received, if any, and the property’s net book value at the retirement date.

Depreciation of property, plant and equipment is computed on the straight-line method based on projected service lives. The Companies’ average composite depreciation rates on utility property, plant and equipment are as follows:

 

Year Ended December 31,    2017      2016      2015  
(percent)                     

Dominion Energy

        

Generation

     2.94        2.83        2.78  

Transmission

     2.55        2.47        2.42  

Distribution

     3.00        3.02        3.11  

Storage

     2.48        2.29        2.42  

Gas gathering and processing

     2.21        2.66        3.19  

General and other

     4.89        4.12        3.67  

Virginia Power

        

Generation

     2.94        2.83        2.78  

Transmission

     2.54        2.36        2.33  

Distribution

     3.32        3.32        3.33  

General and other

     4.68        3.49        3.40  

Dominion Energy Gas

        

Transmission

     2.40        2.43        2.46  

Distribution

     2.42        2.55        2.45  

Storage

     2.45        2.19        2.44  

Gas gathering and processing

     2.42        2.58        3.20  

General and other

     4.96        4.54        4.72  

In the first quarter of 2017, Virginia Power revised the depreciation rates for its assets to reflect the results of a new depreciation study. This change resulted in an increase in annual depreciation expense of $40 million ($25 million after-tax) for 2017. Additionally, Dominion Energy revised the depreciable lives for its merchant generation assets, excluding Millstone, which resulted in a decrease in annual depreciation expense of $26 million ($16 million after-tax) for 2017.

Capitalized costs of development wells and leaseholds are amortized on a field-by-field basis using the unit-of-production method and the estimated proved developed or total proved gas and oil reserves, at a rate of $2.11 per mcfe in 2017.

Dominion Energy’s nonutility property, plant and equipment is depreciated using the straight-line method over the following estimated useful lives:

 

Asset    Estimated Useful Lives  

Merchant generation-nuclear

     44 years  

Merchant generation-other

     15-40 years  

Nonutility gas gathering and processing

     3-50 years  

General and other

     5-59 years  

 

Depreciation and amortization related to Virginia Power’s and Dominion Energy Gas’ nonutility property, plant and equipment and exploration and production properties was immaterial for the years ended December 31, 2017, 2016 and 2015, except for Dominion Energy Gas’ nonutility gas gathering and processing properties which are depreciated using the straight-line method over estimated useful lives between 10 and 50 years.

Nuclear fuel used in electric generation is amortized over its estimated service life on a units-of-production basis. Dominion Energy and Virginia Power report the amortization of nuclear fuel in electric fuel and other energy-related purchases expense in their Consolidated Statements of Income and in depreciation and amortization in their Consolidated Statements of Cash Flows.

Long-Lived and Intangible Assets

The Companies perform an evaluation for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets or intangible assets with finite lives may not be recoverable. A long-lived or intangible asset is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount. Intangible assets with finite lives are amortized over their estimated useful lives.

Regulatory Assets and Liabilities

The accounting for Dominion Energy’s and Dominion Energy Gas’ regulated gas and Virginia Power’s regulated electric operations differs from the accounting for nonregulated operations in that they are required to reflect the effect of rate regulation in their 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.

The Companies evaluate whether or not recovery of their regulatory assets through future rates is probable and make various assumptions in their analyses. 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.

Asset Retirement Obligations

The Companies recognize AROs at fair value as incurred or when sufficient information becomes available to determine a reasonable estimate of the fair value of future retirement activities to be performed, for which a legal obligation exists. These amounts are generally capitalized as costs of the related tangible long-lived assets. Since relevant market information is not available, fair value is estimated using discounted cash flow analyses. Quarterly, the Companies assess their AROs to determine if circumstances

 

 

        35


Combined Notes to Consolidated Financial Statements, Continued

 

 

indicate that estimates of the amounts or timing of future cash flows associated with retirement activities have changed. AROs are adjusted when significant changes in the amounts or timing of future cash flows are identified. Dominion Energy and Dominion Energy Gas report accretion of AROs and depreciation on asset retirement costs associated with their natural gas pipeline and storage well assets as an adjustment to the related regulatory liabilities when revenue is recoverable from customers for AROs. Virginia Power reports accretion of AROs and depreciation on asset retirement costs associated with decommissioning its nuclear power stations as an adjustment to the regulatory liability for certain jurisdictions. Additionally, Virginia Power reports accretion of AROs and depreciation on asset retirement costs associated with certain rider and prospective rider projects as an adjustment to the regulatory asset for certain jurisdictions. Accretion of all other AROs and depreciation of all other asset retirement costs are reported in other operations and maintenance expense and depreciation expense, respectively, in the Consolidated Statements of Income.

Debt Issuance Costs

The Companies defer and amortize debt issuance costs and debt premiums or discounts over the expected lives of the respective debt issues, considering maturity dates and, if applicable, redemption rights held by others. Deferred debt issuance costs are recorded as a reduction in long-term debt in the Consolidated Balance Sheets. Amortization of the issuance costs is reported as interest expense. Unamortized costs associated with redemptions of debt securities prior to stated maturity dates are generally recognized and recorded in interest expense immediately. As permitted by regulatory authorities, gains or losses resulting from the refinancing of debt allocable to utility operations subject to cost-based rate regulation are deferred and amortized over the lives of the new issuances.

Investments

MARKETABLE EQUITY AND DEBT SECURITIES

Dominion Energy accounts for and classifies investments in marketable equity and debt securities as trading or available-for-sale securities. Virginia Power classifies investments in marketable equity and debt securities as available-for-sale securities.

  Trading securities include marketable equity and debt securities held by Dominion Energy in rabbi trusts associated with certain deferred compensation plans. These securities are reported in other investments in the Consolidated Balance Sheets at fair value with net realized and unrealized gains and losses included in other income in the Consolidated Statements of Income.
  Available-for-sale securities include all other marketable equity and debt securities, primarily comprised of securities held in the nuclear decommissioning trusts. These investments are reported at fair value in nuclear decommissioning trust funds in the Consolidated Balance Sheets. Net realized and unrealized gains and losses (including any other-than-temporary impairments) on investments held in Virginia Power’s nuclear decommissioning trusts are recorded to a regulatory liability for certain jurisdictions subject to cost-based regulation. For
   

all other available-for-sale securities, including those held in Dominion Energy’s merchant generation nuclear decommissioning trusts, net realized gains and losses (including any other-than-temporary impairments) are included in other income and unrealized gains and losses are reported as a component of AOCI, after-tax.

In determining realized gains and losses for marketable equity and debt securities, the cost basis of the security is based on the specific identification method.

NON-MARKETABLE INVESTMENTS

The Companies account for illiquid and privately held securities for which market prices or quotations are not readily available under either the equity or cost method. Non-marketable investments include:

  Equity method investments when the Companies have the ability to exercise significant influence, but not control, over the investee. Dominion Energy’s investments are included in investments in equity method affiliates and Virginia Power’s investments are included in other investments in their Consolidated Balance Sheets. The Companies record equity method adjustments in other income in the Consolidated Statements of Income including: their proportionate share of investee income or loss, gains or losses resulting from investee capital transactions, amortization of certain differences between the carrying value and the equity in the net assets of the investee at the date of investment and other adjustments required by the equity method.
  Cost method investments when Dominion Energy and Virginia Power do not have the ability to exercise significant influence over the investee. Dominion Energy’s and Virginia Power’s investments are included in other investments and nuclear decommissioning trust funds.

OTHER-THAN-TEMPORARY IMPAIRMENT

The Companies periodically review their investments to determine whether a decline in fair value should be considered other-than-temporary. If a decline in fair value of any security is determined to be other-than-temporary, the security is written down to its fair value at the end of the reporting period.

Decommissioning Trust Investments—Special Considerations

  The recognition provisions of the FASB’s other-than-temporary impairment guidance apply only to debt securities classified as available-for-sale or held-to-maturity, while the presentation and disclosure requirements apply to both debt and equity securities.
 

Debt Securities—Using information obtained from their nuclear decommissioning trust fixed-income investment managers, Dominion Energy and Virginia Power record in earnings any unrealized loss for a debt security when the manager intends to sell the debt security or it is more-likely-than-not that the manager will have to sell the debt security before recovery of its fair value up to its cost basis. If that is not the case, but the debt security is deemed to have experienced a credit loss, Dominion Energy and Virginia Power record the credit loss in earnings and any remaining portion

 

 

36        


 

 

   

of the unrealized loss in AOCI. Credit losses are evaluated primarily by considering the credit ratings of the issuer, prior instances of non-performance by the issuer and other factors.

  Equity securities and other investments—Dominion Energy’s and Virginia Power’s method of assessing other-than-temporary declines requires demonstrating the ability to hold individual securities for a period of time sufficient to allow for the anticipated recovery in their market value prior to the consideration of the other criteria mentioned above. Since Dominion Energy and Virginia Power have limited ability to oversee the day-to-day management of nuclear decommissioning trust fund investments, they do not have the ability to ensure investments are held through an anticipated recovery period. Accordingly, they consider all equity and other securities as well as non-marketable investments held in nuclear decommissioning trusts with market values below their cost bases to be other-than-temporarily impaired.

Inventories

Materials and supplies and fossil fuel inventories are valued primarily using the weighted-average cost method. Stored gas inventory is valued using the weighted-average cost method, except for East Ohio gas distribution operations, which are valued using the LIFO method. Under the LIFO method, current stored gas inventory was valued at $9 million and $13 million at December 31, 2017 and December 31, 2016, respectively. Based on the average price of gas purchased during 2017 and 2016, the cost of replacing the current portion of stored gas inventory exceeded the amount stated on a LIFO basis by $79 million and $55 million, respectively.

Gas Imbalances

Natural gas imbalances occur when the physical amount of natural gas delivered from, or received by, a pipeline system or storage facility differs from the contractual amount of natural gas delivered or received. Dominion Energy and Dominion Energy Gas value these imbalances due to, or from, shippers and operators at an appropriate index price at period end, subject to the terms of its tariff for regulated entities. Imbalances are primarily settled in-kind. Imbalances due to Dominion Energy from other parties are reported in other current assets and imbalances that Dominion Energy and Dominion Energy Gas owe to other parties are reported in other current liabilities in the Consolidated Balance Sheets.

Goodwill

Dominion Energy and Dominion Energy Gas evaluate goodwill for impairment annually as of April 1 and whenever 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.

New Accounting Standards

REVENUE RECOGNITION

In May 2014, the FASB issued revised accounting guidance for revenue recognition from contracts with customers. The core principle of this revised accounting guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consid-

eration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update also require disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For the Companies, the revised accounting guidance is effective for interim and annual periods beginning January 1, 2018. The Companies have completed their evaluations of the impact of this guidance and expect no significant impact on their results of operations. However, the Companies will have offsetting increases in operating revenues and other energy-related purchases for noncash consideration related to NGLs received in consideration for performing processing and fractionation services and offsetting decreases in operating revenues and purchased gas for fuel retained to offset costs on certain transportation and storage arrangements. The Companies will apply the standard using the modified retrospective method as opposed to the full retrospective method.

FINANCIAL INSTRUMENTS

In January 2016, the FASB issued revised accounting guidance for the recognition, measurement, presentation and disclosure of financial instruments. In accordance with the guidance effective January 2018, Dominion Energy and Virginia Power will no longer classify equity securities as trading or available-for-sale securities. All equity securities with a readily determinable fair value, or for which it is permitted to estimate fair value using NAV (or its equivalent), including those held in Dominion Energy’s and Virginia Power’s nuclear decommissioning trusts and Dominion Energy’s rabbi trusts, will be reported at fair value in nuclear decommissioning trust funds and other investments, respectively, in the Consolidated Balance Sheets. However, Dominion Energy and Virginia Power may elect a measurement alternative for equity securities without a readily determinable fair value. Under the measurement alternative, equity securities will be reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Net realized and unrealized gains and losses on equity securities held in Virginia Power’s nuclear decommissioning trusts will be recorded to a regulatory liability for certain jurisdictions subject to cost-based regulation. For all other equity securities, including those held in Dominion Energy’s merchant generation nuclear decommissioning trusts and rabbi trusts, net realized and unrealized gains and losses will be included in other income. Dominion Energy and Virginia Power will qualitatively assess equity securities reported using the measurement alternative to evaluate whether the investment is impaired on an ongoing basis.

Upon adoption of this guidance for equity securities held at January 1, 2018, Dominion Energy and Virginia Power recorded the cumulative-effect of a change in accounting principle to reclassify net unrealized gains from AOCI to retained earnings and to recognize equity securities previously categorized as cost method investments at fair value in nuclear decommissioning trust funds in the Consolidated Balance Sheets and a cumulative-effect adjustment to retained earnings. Dominion Energy and Virginia Power reclassified approximately $1.1 billion ($734 million after-tax) and $119 million ($73 million after-tax), respectively, of net unrealized gains from AOCI to retained earnings. Dominion Energy and Virginia Power also recorded approx-

 

 

        37


Combined Notes to Consolidated Financial Statements, Continued

 

 

imately $36 million ($22 million after-tax) in net unrealized gains on equity securities previously classified as cost method investments of which $4 million was recorded to retained earnings and $32 million was recorded to regulatory liabilities for net unrealized gains subject to cost-based regulation. The potential impact to the Consolidated Statements of Income is subject to investment price risk and is therefore difficult to reasonably estimate. If this guidance had been effective January 1, 2017, Dominion Energy and Virginia Power would have recorded net unrealized gains of approximately $275 million ($176 million after-tax) and $30 million ($19 million after-tax), respectively, to other income in the Consolidated Statements of Income.

LEASES

In February 2016, the FASB issued revised accounting guidance for the recognition, measurement, presentation and disclosure of leasing arrangements. The update requires that a liability and corresponding right-of-use asset are recorded on the balance sheet for all leases, including those leases currently classified as operating leases, while also refining the definition of a lease. In addition lessees will be required to disclose key information about the amount, timing, and uncertainty of cash flows arising from leasing arrangements. Lessor accounting remains largely unchanged.

The guidance is effective for the Companies’ interim and annual reporting periods beginning January 1, 2019, although it can be early adopted, with a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented for leases that commenced prior to the date of adoption. The Companies plan to elect the proposed transition expedient which would allow the Companies to maintain historical presentation for periods before January 1, 2019. The Companies expect to elect the other practical expedients, which would require no reassessment of whether existing contracts are or contain leases and no reassessment of lease classification for existing leases. The Companies have completed a preliminary assessment for evaluating the impact of this guidance and anticipate that its adoption will result in a significant amount of offsetting right-of-use assets and liabilities on their financial position for leases in effect at the adoption date. No material changes are expected on the Companies’ results of operations. The Companies are beginning implementation activities that primarily include accumulating contracts and lease data points in formats compatible with a new lease management system that will assist with the initial adoption and on-going compliance with the standard.

DEFINITION OF A BUSINESS

In January 2017, the FASB issued revised accounting guidance to clarify the definition of a business. The revised guidance affects the evaluation of whether a transaction should be accounted for as an acquisition or disposition of an asset or a business, which may impact goodwill and related financial statement disclosures. The Companies have adopted this guidance on a prospective basis effective October 1, 2017. The adoption of the pronouncement will result in additional transactions being accounted for as asset acquisitions or dispositions.

DERECOGNITION AND PARTIAL SALES OF NONFINANCIAL ASSETS

In February 2017, the FASB issued revised accounting guidance clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The guidance is effective for the Companies’ interim and annual reporting periods beginning January 1, 2018, and the Companies have elected to apply the standard using the modified retrospective method. Upon adoption of the standard on January 1, 2018, Dominion Energy recorded the cumulative-effect of a change in accounting principle to reclassify $127 million from noncontrolling interests to common stock related to the sale of a noncontrolling interest in certain merchant solar projects completed in December 2015 and January 2016.

NET PERIODIC PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

In March 2017, the FASB issued revised accounting guidance for the presentation of net periodic pension and other postretirement benefit costs. The update requires that the service cost component of net periodic pension and other postretirement benefit costs be classified in the same line item as other compensation costs arising from services rendered by employees, while all other components of net periodic pension and other postretirement costs are classified outside of income from operations. In addition, only the service cost component remains eligible for capitalization during construction. These changes do not impact the accounting by participants in a multi-employer plan. The standard also recognizes that in the event that a regulator continues to require capitalization of all net periodic benefit costs prospectively, the difference would result in recognition of a regulatory asset or liability. For costs not capitalized for which regulators are expected to provide recovery, a regulatory asset will be established. As such, the amounts eligible for capitalization in the Consolidated Financial Statements of Virginia Power and Dominion Energy Gas, as subsidiary participants in Dominion Energy’s multi-employer plans, will differ from the amounts eligible for capitalization in the Consolidated Financial Statements of Dominion Energy, the plan administrator. These differences will result in a regulatory asset or liability recorded in the Consolidated Financial Statements of Dominion Energy.

This guidance became effective for the Companies beginning January 1, 2018 with a retrospective adoption for income statement presentation and a prospective adoption for capitalization. Dominion Energy’s and Dominion Energy Gas’ Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 have been recast to reflect retrospective adoption for the presentation of the non-service cost component of net periodic pension and other postretirement benefit costs. Previously, the non-service cost component for Dominion Energy and Dominion Energy Gas was reflected in other operations and maintenance in the Consolidated Statements of Income, along with the service cost component of net periodic pension and other postretirement benefit costs. Subsequent to the adoption of this guidance, the non-service cost component of net periodic pension and other postretirement benefit costs is recorded in other income in the Consolidated Statements of Income. As previously

 

 

38        


 

 

reported, Dominion Energy and Dominion Energy Gas’ other operations and maintenance expense and other income were as follows:

 

Year Ended December 31,    2017      2016      2015  
(millions)                     

Dominion Energy

        

Other operations and maintenance expense

   $ 2,875      $ 3,064      $ 2,595  

Other income

     165        250        196  

Dominion Energy Gas

        

Other operations and maintenance expense

     440        393        326  

Other income

     20        11        1  

TAX REFORM

In December 2017, the staff of the SEC issued guidance which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one-year measurement period in which to complete the required analyses and accounting. The guidance describes three scenarios associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting for income taxes based on the provisions of the tax laws that were in effect immediately prior to the 2017 Tax Reform Act being enacted. In addition, the guidance provides clarification related to disclosures for entities which are utilizing the measurement period. The Companies have recorded their best estimate of the impacts of the 2017 Tax Reform Act as discussed above and in Note 5. The amounts are considered to be provisional and may result in adjustments to be recognized during the measurement period.

In February 2018, the FASB issued revised accounting guidance to provide clarification on the application of the 2017 Tax Reform Act for balances recorded within AOCI. The revised guidance provides for stranded amounts within AOCI from the impacts of the 2017 Tax Reform Act to be reclassified to retained earnings. The guidance is effective for the Companies’ interim and annual reporting periods beginning January 1, 2019, with early adoption permitted, and may be applied prospectively or retrospectively upon adoption. If the Companies had adopted this guidance for the period ended December 31, 2017, Dominion Energy would have reclassified a benefit of $165 million from AOCI to retained earnings, Dominion Energy Gas would have reclassified a benefit of $26 million from AOCI to membership interests and Virginia Power would have reclassified an expense of $13 million from AOCI to retained earnings.

 

 

NOTE 3. ACQUISITIONS AND DISPOSITIONS

DOMINION ENERGY

Proposed Acquisition of SCANA

Under the terms of the SCANA Merger Agreement announced in January 2018, Dominion Energy has agreed to issue 0.6690 shares of Dominion Energy common stock for each share of

SCANA common stock upon closing. In addition, Dominion Energy will provide the financial support for SCE&G to make a $1.3 billion up-front, one-time rate credit to all current electric service customers of SCE&G to be paid within 90 days of closing and a $575 million refund along with the benefit of the 2017 Tax Reform Act resulting in at least a 5% reduction to SCE&G electric service customers’ bills over an eight-year period as well as the exclusions from rate recovery of approximately $1.7 billion of costs related to the V.C. Summer Units 2 and 3 new nuclear development project and approximately $180 million to purchase the Columbia Energy Center power station. In addition, SCANA’s debt, which currently totals approximately $7.0 billion, is expected to remain outstanding.

The transaction requires approval of SCANA’s shareholders, FERC and the NRC and clearance from the Federal Trade Commission under the Hart-Scott-Rodino Act. In February 2018, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Act. In January 2018, SCANA and Dominion Energy filed for review and approval, as required, from the South Carolina Commission, the North Carolina Commission, the Georgia Public Service Commission and the NRC. Dominion Energy is not required to accept an order by the South Carolina Commission approving Dominion Energy’s merger with SCANA if such order contains any material change to the terms, conditions or undertakings set forth in the cost recovery plan related to the V.C. Summer Units 2 and 3 new nuclear development project or any significant changes to the economic value of the cost recovery plan. In addition, the SCANA Merger Agreement provides that Dominion Energy will have the right to refuse to close the merger if there shall have occurred any substantive change in the Base Load Review Act or other laws governing South Carolina public utilities which has or would reasonably be expected to have an adverse effect on SCE&G. The SCANA Merger Agreement contains certain termination rights for both Dominion Energy and SCANA, and provides that, upon termination of the SCANA Combination under specified circumstances, Dominion Energy would be required to pay a termination fee of $280 million to SCANA and SCANA would be required to pay Dominion Energy a termination fee of $240 million. Subject to receipt of SCANA shareholder and any required regulatory approvals and meeting closing conditions, Dominion Energy targets closing by the end of 2018.

Acquisition of Dominion Energy Questar

In September 2016, Dominion Energy completed the Dominion Energy Questar Combination and Dominion Energy Questar, a Rockies-based integrated natural gas company, became a wholly-owned subsidiary of Dominion Energy. Dominion Energy Questar included Questar Gas, Wexpro and Dominion Energy Questar Pipeline at closing. Questar Gas has regulated gas distribution operations 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. The Dominion Energy Questar Combination provides Dominion Energy with

 

 

        39


Combined Notes to Consolidated Financial Statements, Continued

 

 

pipeline infrastructure that provides a principal source of gas supply to Western states. Dominion Energy Questar’s regulated businesses also provide further balance between Dominion Energy’s electric and gas operations.

In accordance with the terms of the Dominion Energy Questar Combination, at closing, each share of issued and outstanding Dominion Energy Questar common stock was converted into the right to receive $25.00 per share in cash. The total consideration was $4.4 billion based on 175.5 million shares of Dominion Energy Questar outstanding at closing.

Dominion Energy financed the Dominion Energy Questar Combination through the: (1) August 2016 issuance of $1.4 billion of 2016 Equity Units, (2) August 2016 issuance of $1.3 billion of senior notes, (3) September 2016 borrowing of $1.2 billion under a term loan agreement and (4) $500 million of the proceeds from the April 2016 issuance of common stock. See Notes 17 and 19 for more information.

PURCHASE PRICE ALLOCATION

Dominion Energy Questar’s assets acquired and liabilities assumed were measured at estimated fair value at the closing date and are included in the Gas Infrastructure operating segment. The majority of operations acquired are subject to the rate-setting authority of FERC, as well as the Utah Commission and/or the Wyoming Commission and therefore are accounted for pursuant to ASC 980, Regulated Operations. The fair values of Dominion Energy Questar’s assets and liabilities subject to rate-setting and cost recovery provisions provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base. As such, the fair values of these assets and liabilities equal their carrying values. Accordingly, neither the assets and liabilities acquired, nor the pro forma financial information, reflect any adjustments related to these amounts.

The fair value of Dominion Energy Questar’s assets acquired and liabilities assumed that are not subject to the rate-setting provisions discussed above was determined using the income approach. In addition, the fair value of Dominion Energy Questar’s 50% interest in White River Hub, accounted for under the equity method, was determined using the market approach and income approach. The valuations are considered Level 3 fair value measurements due to the use of significant judgmental and unobservable inputs, including projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows and future market prices.

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill at the closing date. The goodwill reflects the value associated with enhancing Dominion Energy’s regulated portfolio of businesses, including the expected increase in demand for low-carbon, natural gas-fired generation in the Western states and the expected continued growth of rate-regulated businesses located in a defined service area with a stable regulatory environment. The goodwill recognized is not deductible for income tax purposes, and as such, no deferred taxes have been recorded related to goodwill.

The table below shows the allocation of the purchase price to the assets acquired and liabilities assumed at closing which reflects the following adjustments from the preliminary valuation recog-

nized during the measurement period. During the fourth quarter of 2016, certain modifications were made to preliminary valuation amounts for acquired property, plant and equipment, current liabilities, and deferred income taxes, resulting in a $6 million net decrease to goodwill, which related primarily to the sale of Questar Fueling Company in December 2016 as further described in the Sale of Questar Fueling Company. In the third quarter of 2017, certain modifications were made to the valuation amounts for regulatory liabilities, current liabilities and deferred income taxes, resulting in a $6 million net increase to goodwill recorded in Dominion Energy’s Consolidated Balance Sheets. The modifications relate primarily to the finalization of Dominion Energy Questar’s 2016 tax return for the period January 1, 2016 through the Dominion Energy Questar Combination, as well as certain regulatory adjustments.

 

      Amount  
(millions)       

Total current assets

   $ 224  

Investments(1)

     58  

Property, plant and equipment(2)

     4,131  

Goodwill

     3,111  

Total deferred charges and other assets, excluding goodwill

     75  

Total Assets

     7,599  

Total current liabilities(3)

     793  

Long-term debt(4)

     963  

Deferred income taxes

     807  

Regulatory liabilities

     259  

Asset retirement obligations

     160  

Other deferred credits and other liabilities

     220  

Total Liabilities

     3,202  

Total purchase price

     4,397  

 

(1) Includes $40 million for an equity method investment in White River Hub. The fair value adjustment on the equity method investment in White River Hub is considered to be equity method goodwill and is not amortized.
(2) Nonregulated property, plant and equipment, excluding land, will be depreciated over remaining useful lives primarily ranging from 9 to 18 years.
(3) Includes $301 million of short-term debt, of which no amounts remain outstanding at December 31, 2017, as well as a $250 million variable interest rate term loan due in August 2017 that was paid in July 2017.
(4) Unsecured senior and medium-term notes with maturities which range from 2017 to 2048 and bear interest at rates from 2.98% to 7.20%.

REGULATORY MATTERS

The transaction required approval of Dominion Energy Questar’s shareholders, clearance from the Federal Trade Commission under the Hart-Scott-Rodino Act and approval from both the Utah Commission and the Wyoming Commission. In February 2016, the Federal Trade Commission granted antitrust approval of the Dominion Energy Questar Combination under the Hart-Scott-Rodino Act. In May 2016, Dominion Energy Questar’s shareholders voted to approve the Dominion Energy Questar Combination. In August 2016 and September 2016, approvals were granted by the Utah Commission and the Wyoming Commission, respectively. Information regarding the transaction was also provided to the Idaho Commission, who acknowledged the Dominion Energy Questar Combination in October 2016, and directed Dominion Energy Questar to notify the Idaho Commission when it makes filings with the Utah Commission.

 

 

40        


 

 

With the approval of the Dominion Energy Questar Combination in Utah and Wyoming, Dominion Energy agreed to the following:

    Contribution of $75 million to Dominion Energy Questar’s qualified and non-qualified defined-benefit pension plans and its other post-employment benefit plans within six months of the closing date. This contribution was made in January 2017.
    Increasing Dominion Energy Questar’s historical level of corporate contributions to charities by $1 million per year for at least five years.
    Withdrawal of Questar Gas’ general rate case filed in July 2016 with the Utah Commission and agreement to not 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. Questar Gas’ ability to adjust rates through various riders is not affected.

RESULTS OF OPERATIONS AND PRO FORMA INFORMATION

The impact of the Dominion Energy Questar Combination on Dominion Energy’s operating revenue and net income attributable to Dominion Energy in the Consolidated Statements of Income for the twelve months ended December 31, 2016 was an increase of $379 million and $73 million, respectively.

Dominion Energy incurred transaction and transition costs in 2017 and 2016, of which $26 million and $58 million was recorded in other operations and maintenance expense, respectively, and $16 million was recorded in interest and related charges in 2016 in Dominion Energy’s Consolidated Statements of Income. These costs consist of the amortization of financing costs, the charitable contribution commitment described above, employee-related expenses, professional fees, and other miscellaneous costs.

The following unaudited pro forma financial information reflects the consolidated results of operations of Dominion Energy assuming the Dominion Energy Questar Combination had taken place on January 1, 2015. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved or the future consolidated results of operations of the combined company.

 

      Twelve Months Ended December 31,  
                       2016(1)                      2015  
(millions, except EPS)              

Operating Revenue

     $12,497        $12,818  

Net income attributable to Dominion Energy

     2,300        2,108  

Earnings Per Common Share – Basic

     $    3.73        $    3.56  

Earnings Per Common Share – Diluted

     $    3.73        $    3.55  

 

(1) Amounts include adjustments for non-recurring costs directly related to the Dominion Energy Questar Combination.

CONTRIBUTION OF DOMINION ENERGY QUESTAR PIPELINE TO DOMINION ENERGY MIDSTREAM

In October 2016, Dominion Energy entered into the Contribution Agreement under which Dominion Energy contributed Dominion Energy Questar Pipeline to Dominion Energy Midstream. Upon closing of the agreement on December 1, 2016, Dominion Energy Midstream became the owner of all of the issued and outstanding membership interests of Dominion Energy Questar Pipeline in exchange for consideration consisting of Dominion Energy Midstream common and convertible preferred units with a combined value of $467 million and cash payment of $823 million, $300 million of which is considered a debt-financed distribution, for a total of $1.3 billion. In addition, under the terms of the Contribution Agreement, Dominion Energy Midstream repurchased 6,656,839 common units from Dominion Energy, and repaid its $301 million promissory note to Dominion Energy in December 2016. The cash proceeds from these transactions were utilized in December 2016 to repay the $1.2 billion term loan agreement borrowed in September 2016. Since Dominion Energy consolidates Dominion Energy Midstream for financial reporting purposes, the transactions associated with the Contribution Agreement were eliminated upon consolidation. See Note 5 for the tax impacts of the transactions.

SALE OF QUESTAR FUELING COMPANY

In December 2016, Dominion Energy completed the sale of Questar Fueling Company. The proceeds from the sale were $28 million, net of transaction costs. No gain or loss was recorded in Dominion Energy’s Consolidated Statements of Income, as the sale resulted in measurement period adjustments to the net assets acquired of Dominion Energy Questar. See the Purchase Price Allocation section above for additional details on the measurement period adjustments recorded.

 

 

41


Combined Notes to Consolidated Financial Statements, Continued

 

 

Wholly-Owned Merchant Solar Projects

ACQUISITIONS

The following table presents significant completed acquisitions of wholly-owned merchant solar projects by Dominion Energy.

 

Completed Acquisition
Date
   Seller    Number of
Projects
    Project
Location
   Project Name(s)   Initial
Acquisition
(millions)(1)
     Project
Cost
(millions)(2)
     Date of Commercial
Operations
   MW
Capacity
 

April 2015

   EC&R NA Solar PV, LLC      1     California    Alamo     $  66        $  66      May 2015      20  

April 2015

  

EDF Renewable Development, Inc.

     3     California    Cottonwood(3)     106        106      May 2015      24  

June 2015

  

EDF Renewable Development, Inc.

     1     California    Catalina 2     68        68      July 2015      18  

July 2015

   SunPeak Solar, LLC      1     California    Imperial Valley 2     42        71      August 2015      20  

November 2015

   EC&R NA Solar PV, LLC      1     California    Maricopa West     65        65      December 2015      20  

November 2015

  

Community Energy Solar, LLC

     1     Virginia    Amazon Solar Farm
U.S East
    34        212      October 2016      80  

February 2017

  

Community Energy Solar, LLC

     1     Virginia    Amazon Solar Farm
Virginia—Southampton
    29        205      December 2017      100  

March 2017

  

Solar Frontier Americas Holding LLC

     1 (4)    California    Midway II     77        78      June 2017      30  

May 2017

  

Cypress Creek Renewables, LLC

     1     North
Carolina
   IS37     154        160      June 2017      79  

June 2017

  

Hecate Energy Virginia C&C LLC

     1     Virginia    Clarke County     16        16      August 2017      10  

June 2017

  

Strata Solar Development, LLC/Moorings Farm 2 Holdco, LLC

     2     North
Carolina
   Fremont, Moorings 2     20        20      November 2017      10  

September 2017

  

Hecate Energy Virginia C&C LLC

     1     Virginia    Cherrydale     40        41      November 2017      20  

October 2017

  

Strata Solar Development, LLC

     2     North
Carolina
   Clipperton, Pikeville     20        21      November 2017      10  

 

(1) The purchase price was primarily allocated to Property, Plant and Equipment.
(2) Includes acquisition cost.
(3) One of the projects, Marin Carport, began commercial operations in 2016.
(4) In April 2017, Dominion Energy discontinued efforts on the acquisition of the additional 20 MW solar project from Solar Frontier Americas Holding LLC.

In addition during 2016, Dominion Energy acquired 100% of the equity interests of seven solar projects in Virginia, North Carolina and South Carolina for an aggregate purchase price of $32 million, all of which was allocated to property, plant and equipment. The projects cost $421 million in total, including initial acquisition costs, and generate 221 MW combined. One of the projects commenced commercial operations in 2016 and the remaining projects commenced commercial operations in 2017.

Long-term power purchase, interconnection and operation and maintenance agreements have been executed for all of the projects described above. These projects are included in the Power Generation operating segment. Dominion Energy has claimed or will claim federal investment tax credits on these solar projects.

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-currently wholly-owned merchant solar projects, 24 solar projects totaling 425 MW, to SunEdison, including certain projects in the table above. 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. Terra Nova Renewable Partners has a future option to buy all or a portion of Dominion Energy’s remaining 67% ownership in the projects upon the occurrence of certain events, none of which are expected to occur in 2018.

 

42        


 

 

Non-Wholly-Owned Merchant Solar Projects

ACQUISITIONS OF FOUR BROTHERS AND THREE CEDARS

In June 2015, Dominion Energy acquired 50% of the units in Four Brothers from SunEdison for $64 million of consideration, consisting of $2 million in cash and a $62 million payable. Dominion Energy had no remaining obligation related to this payable at December 31, 2016. Four Brothers operates four solar projects located in Utah, which produce and sell electricity and renewable energy credits. The facilities began commercial operations during the third quarter of 2016, generating 320 MW, at a cost of approximately $670 million.

In September 2015, Dominion Energy acquired 50% of the units in Three Cedars from SunEdison for $43 million of consideration, consisting of $6 million in cash and a $37 million payable. There was a $2 million payable included in other current liabilities in Dominion Energy’s Consolidated Balance Sheets at December 31, 2016. Dominion has no remaining obligation related to this payable at December 31, 2017. Three Cedars operates three solar projects located in Utah, which produce and sell electricity and renewable energy credits. The facilities began commercial operations during the third quarter of 2016, generating 210 MW, at a cost of approximately $450 million.

The Four Brothers and Three Cedars facilities operate under long-term power purchase, interconnection and operation and maintenance agreements. Dominion Energy claimed 99% of the federal investment tax credits on the projects.

Dominion Energy owns 50% of the voting interests in Four Brothers and Three Cedars and has a controlling financial interest over the entities through its rights to control operations. The allocation of the $64 million purchase price for Four Brothers resulted in $89 million of property, plant and equipment and $25 million of noncontrolling interest. The allocation of the $43 million purchase price for Three Cedars resulted in $65 million of property, plant and equipment and $22 million of noncontrolling interest. The noncontrolling interest for each entity was measured at fair value using the discounted cash flow method, with the primary components of the valuation being future cash flows (both incoming and outgoing) and the discount rate. Dominion Energy determined its discount rate based on the cost of capital a utility-scale investor would expect, as well as the cost of capital an individual project developer could achieve via a combination of nonrecourse project financing and outside equity partners. The acquired assets of Four Brothers and Three Cedars are included in the Power Generation operating segment.

Dominion Energy has assumed the majority of the agreements to provide administrative and support services in connection with operations and maintenance of the facilities and technical management services of the solar facilities. Costs related to services to be provided under these agreements were immaterial for the years ended December 31, 2017, 2016 and 2015.

In November 2016, NRG acquired the 50% of units in Four Brothers and Three Cedars previously held by SunEdison. Subsequent to Dominion Energy’s acquisition of Four Brothers and Three Cedars, SunEdison and NRG made contributions to Four Brothers and Three Cedars of $301 million in aggregate through December 31, 2017, which are reflected as noncontrolling interests in the Consolidated Balance Sheets.

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, which owns and operates a 416-mile, FERC-regulated natural gas transmission pipeline in New York and Connecticut. In exchange for this partnership interest, Dominion Energy Midstream issued 8.6 million common units representing limited partnership interests in Dominion Energy Midstream (6.8 million common units to NG for its 20.4% interest and 1.8 million common units to NJNR for its 5.53% interest). The investment was recorded at $216 million based on the value of Dominion Energy Midstream’s common units at closing. These common units are reflected as noncontrolling interest in Dominion Energy’s Consolidated Financial Statements. Dominion Energy Midstream’s noncontrolling partnership interest is reflected in the Gas Infrastructure operating segment. In addition to this acquisition, Dominion Energy Gas currently holds a 24.07% noncontrolling partnership interest in Iroquois. Dominion Energy Midstream and Dominion Energy Gas each account for their interest in Iroquois as an equity method investment. See Notes 9 and 15 for more information regarding Iroquois.

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. DECG owns and operates nearly 1,500 miles of FERC-regulated interstate natural gas pipeline in South Carolina and southeastern Georgia. This acquisition supports Dominion Energy’s natural gas expansion into the southeastern U.S. The allocation of the purchase price resulted in $277 million of net property, plant and equipment, $250 million of goodwill, of which approximately $225 million is expected to be deductible for income tax purposes, and $38 million of regulatory liabilities. The goodwill reflects the value associated with enhancing Dominion Energy’s regulated gas position, economic value attributable to future expansion projects as well as increased opportunities for synergies. The acquired assets of DECG are included in the Gas Infrastructure operating segment.

On March 24, 2015, DECG converted to a limited liability company under the laws of South Carolina and changed its name from Carolina Gas Transmission Corporation to DECG. On April 1, 2015, Dominion Energy contributed 100% of the issued and outstanding membership interests of DECG to Dominion Energy Midstream in exchange for total consideration of $501 million, as adjusted for working capital. Total consideration to Dominion Energy consisted of the issuance of a two-year, $301 million senior unsecured promissory note payable by Dominion Energy Midstream at an annual interest rate of 0.6%, and 5,112,139 common units, valued at $200 million, representing limited partner interests in Dominion Energy Midstream. The number of units was based on the volume weighted average trading price of Dominion Energy Midstream’s common units for the ten trading days prior to April 1, 2015, or $39.12 per unit. Since Dominion Energy consolidates Dominion Energy Midstream for financial reporting purposes, this transaction was

 

 

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Combined Notes to Consolidated Financial Statements, Continued

 

 

eliminated upon consolidation and did not impact Dominion Energy’s financial position or cash flows.

VIRGINIA POWER

Acquisition of Solar Projects

In December 2015, Virginia Power completed the acquisition of 100% of a solar development project in North Carolina from Morgans Corner for $47 million, all of which was allocated to property, plant and equipment. The project was placed into service in December 2015 with a total cost of $49 million, including the initial acquisition cost. The project generates 20 MW. The output generated by the project is used to meet a ten-year non-jurisdictional supply agreement with the U.S. Navy, which has the unilateral option to extend for an additional ten years. In October 2015, the North Carolina Commission granted the transfer of the existing CPCN from Morgans Corner to Virginia Power. The acquired asset is included in the Power Generation operating segment.

DOMINION ENERGY AND DOMINION ENERGY GAS

Blue Racer

See Note 9 for a discussion of transactions related to Blue Racer.

NOTE 4. OPERATING REVENUE

The Companies’ operating revenue consists of the following:

 

Year Ended December 31,    2017      2016      2015  
(millions)                     

Dominion Energy

        

Electric sales:

        

Regulated

   $ 7,383      $ 7,348      $ 7,482  

Nonregulated

     1,429        1,519        1,488  

Gas sales:

        

Regulated

     1,067        500        218  

Nonregulated

     457        354        471  

Gas transportation and storage

     1,786        1,636        1,616  

Other

     464        380        408  

Total operating revenue

   $ 12,586      $ 11,737      $ 11,683  

Virginia Power

        

Regulated electric sales

   $ 7,383      $ 7,348      $ 7,482  

Other

     173        240        140  

Total operating revenue

   $ 7,556      $ 7,588      $ 7,622  

Dominion Energy Gas

        

Gas sales:

        

Regulated

   $ 87      $ 119      $ 122  

Nonregulated

     20        13        10  

Gas transportation and storage

     1,435        1,307        1,366  

NGL revenue

     91        62        93  

Other

     181        137        125  

Total operating revenue

   $ 1,814      $ 1,638      $ 1,716  

 

 

NOTE 5. 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 involves uncertainty, since tax authorities may interpret the laws differently. The Companies are routinely audited by federal and state tax author-

ities. Ultimate resolution 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.

The 2017 Tax Reform Act includes a broad range of tax reform provisions affecting the Companies as discussed in Note 2. The 2017 Tax Reform Act reduces the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. At the date of enactment, deferred tax assets and liabilities were remeasured based upon the new 21% enacted tax rate expected to apply when temporary differences are realized or settled. The specific provisions related to regulated public utilities in the 2017 Tax Reform Act generally allows for the continued deductibility of interest expense, changes the tax depreciation of certain property acquired after September 27, 2017, and continues certain rate normalization requirements for accelerated depreciation benefits.

In December 2015, U.S. federal legislation was enacted, providing an extension of the 50% bonus depreciation allowance for qualifying expenditures incurred in 2015, 2016 and 2017. In addition, the legislation extended the 30% investment tax credit for qualifying expenditures incurred through 2019 and provides a phase down of the credit to 26% in 2020, 22% in 2021 and 10% in 2022 and thereafter.

As indicated in Note 2, certain of the Companies’ operations, including accounting for income taxes, is subject to regulatory accounting treatment. For regulated operations, many of the changes in deferred taxes represent amounts probable of collection from or refund to customers, and are recorded as either an increase to a regulatory asset or liability. 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 refunds of other deferred taxes may be determined by state and federal regulators. See Note 13 for more information.

The Companies have completed or have made a reasonable estimate for the measurement and accounting of certain effects of the 2017 Tax Reform Act which have been reflected in the Consolidated Financial Statements. The changes in deferred taxes were recorded as either an increase to a regulatory liability or as an adjustment to the deferred tax provision.

The items reflected as provisional amounts are related to accelerated depreciation for tax purposes of certain property acquired and placed into service after September 27, 2017 and the impact of accelerated depreciation on state income taxes to the extent there is uncertainty on conformity to the new federal tax system.

The determination of the income tax effects of the items reflected as provisional amounts represents a reasonable estimate, but will require additional analysis of historical records and further interpretation of the 2017 Tax Reform Act from yet to be issued U.S. Department of Treasury regulations, which will require more time, information and resources than currently available to the Companies.

 

 

44        


 

 

Continuing Operations

Details of income tax expense for continuing operations including noncontrolling interests were as follows:

 

     Dominion Energy     Virginia Power     Dominion Energy Gas  
Year Ended December 31,   2017     2016     2015     2017     2016     2015     2017     2016     2015  
(millions)                                                      

Current:

                 

Federal

  $ (1   $ (155   $ (24   $ 432     $ 168     $ 316     $ 16     $ (27   $ 90  

State

    (26     85       75       73       90       92       8       4       30  

Total current expense (benefit)

    (27     (70     51       505       258       408       24       (23     120  

Deferred:

                 

Federal

                 

2017 Tax Reform Act impact

    (851                 (93                 (197            

Taxes before operating loss carryforwards and investment tax credits

    739       1,050       384       319       435       154       199       239       156  

Tax utilization expense (benefit) of operating loss carryforwards

    174       (161     539       4       (2     96       5       (2     6  

Investment tax credits

    (200     (248     (134     (23     (25     (11                  

State

    132       50       66       59       27       13       20       1       1  

Total deferred expense (benefit)

    (6     691       855       266       435       252       27       238       163  

Investment tax credit-gross deferral

    5       35             5       35                          

Investment tax credit-amortization

    (2     (1     (1     (2     (1     (1                  

Total income tax expense (benefit)

  $ (30   $ 655     $ 905     $ 774     $ 727     $ 659     $ 51     $ 215     $ 283  

The accounting for the reduction in the corporate income tax rate decreased deferred income tax expense by $851 million at Dominion Energy, $93 million at Virginia Power, and $197 million for Dominion Energy Gas for the year ending December 31, 2017. The decrease in deferred income taxes at Dominion Energy primarily relates to the remeasurement of deferred taxes on merchant operations and includes the effects at Virginia Power and Dominion Energy Gas. Virginia Power and Dominion Energy Gas have certain regulatory assets and liabilities that have not yet been charged or returned to customers through rates, or on which they do not earn a return, including unrecognized pension and other postretirement benefits. The remeasurement of the deferred taxes on these regulatory balances was charged to continuing operations in 2017. For ratemaking purposes, Dominion Energy Gas’ subsidiary DETI follows the cash method on pension contributions. Deferred taxes recorded on pension balances as required by GAAP are not included as a component of rates and therefore the remeasurement of these deferred taxes were charged to continuing operations in 2017.

In 2016, Dominion Energy realized a taxable gain resulting from the contribution of Dominion Energy Questar Pipeline to Dominion Energy Midstream. The contribution and related transactions resulted in increases in the tax basis of Dominion Energy Questar Pipeline’s assets and the number of Dominion Energy Midstream’s common and convertible preferred units held by noncontrolling interests. The direct tax effects of the transactions included a provision for current income taxes ($212 million) and an offsetting benefit for deferred income taxes ($96 million) and were charged to common shareholders’ equity. The federal tax liability was reduced by $129 million of tax credits generated in 2016 that otherwise would have resulted in additional credit carryforwards and a $17 million benefit provided by the domestic production activities deduction. These benefits, as indirect effects of the contribution transaction, were reflected in Dominion Energy’s 2016 current federal income tax expense.

In 2015, Dominion Energy’s current federal income tax benefit includes the recognition of a $20 million benefit related to a carryback to be filed for nuclear decommissioning expenditures included in its 2014 net operating loss.

For continuing operations including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to the Companies’ effective income tax rate as follows:

 

      Dominion Energy     Virginia Power     Dominion Energy Gas  
Year Ended December 31,    2017     2016     2015     2017     2016     2015     2017     2016      2015  

U.S. statutory rate

     35.0     35.0     35.0     35.0     35.0     35.0     35.0     35.0      35.0

Increases (reductions) resulting from:

                   

State taxes, net of federal benefit

     2.0       2.4       3.7       3.7       3.8       3.9       2.4       0.5        2.7  

Investment tax credits

     (6.3     (11.7     (4.7     (0.8           (0.6                   

Production tax credits

     (0.7     (0.8     (0.8     (0.4     (0.5     (0.6                   

Valuation allowances

     0.2       1.2       (0.3           0.1             0.3               

Federal legislative change

     (27.5                 (4.0                 (29.5             

State legislative change

           (0.6     (0.1                                     

AFUDC—equity

     (1.4     (0.6     (0.3     (0.6     (0.6     (0.6     (0.9     (0.2      0.2  

Employee stock ownership plan deduction

     (0.6     (0.6     (0.6                                     

Other, net

     (1.7     (1.4     0.1       0.6       (0.4     0.6       0.4       0.1        0.3  

Effective tax rate

     (1.0 )%      22.9     32.0     33.5     37.4     37.7     7.7     35.4      38.2

In 2017, the Companies’ effective tax rates reflect the net benefit of remeasurement of deferred taxes resulting from the lower corporate income tax rate promulgated by the 2017 Tax Reform Act, and the completion of audits by state tax authorities that resulted in the recog-

 

        45


Combined Notes to Consolidated Financial Statements, Continued

 

 

nition of previously unrecognized tax benefits. At December 31, 2016, Virginia Power’s unrecognized tax benefits included state refund claims for open tax years through 2011. Management believed settlement of the claims, including interest thereon, within the next twelve months was remote. In June 2017, Virginia Power received and accepted a cash offer to settle the refund claims. As a result of the settlement, Virginia Power decreased its unrecognized tax benefits by $8 million, and recognized a $2 million tax benefit, which impacted its effective tax rate. Also in connection with this settlement, Virginia Power realized interest income of $11 million, which is reflected in other income in the Consolidated Statements of Income.

In 2016, Dominion Energy’s effective tax rate reflects a valuation allowance on a state credit not expected to be utilized by a Dominion Energy subsidiary which files a separate state return.

The Companies’ deferred income taxes consist of the following:

 

     Dominion Energy     Virginia Power     Dominion Energy
Gas
 
At December 31,   2017     2016     2017     2016     2017     2016  
(millions)                                    

Deferred income taxes:

           

Total deferred income tax assets

  $ 2,686     $ 1,827     $ 923       $   268       $   320     $ 126  

Total deferred income tax liabilities

    7,158       10,381       3,600       5,323       1,774       2,564  

Total net deferred income tax liabilities

  $ 4,472     $ 8,554     $ 2,677       $5,055       $1,454     $ 2,438  

Total deferred income taxes:

           

Plant and equipment, primarily depreciation method and basis differences

  $ 5,056     $ 7,782     $ 2,969       $4,604       $1,132     $ 1,726  

Excess deferred income taxes

    (1,050           (687           (244      

Nuclear decommissioning

    829       1,240       260       406              

Deferred state income taxes

    834       747       378       321       227       204  

Federal benefit of deferred state income taxes

    (175     (261     (79     (112     (48     (71

Deferred fuel, purchased energy and gas costs

    1       (25     (3     (29     2       4  

Pension benefits

    141       155       (104     (138     419       646  

Other postretirement benefits

    (51     (68     44       49       (2     (6

Loss and credit carryforwards

    (1,536     (1,547     (111     (88     (4     (5

Valuation allowances

    146       135       5       3       3        

Partnership basis differences

    473       688                   26       43  

Other

    (196     (292     5       39       (57     (103

Total net deferred income tax liabilities

  $ 4,472     $ 8,554     $ 2,677       $5,055       $1,454     $ 2,438  

Deferred Investment Tax Credits – Regulated Operations

    51       48