When investors look back on 2018, the high points of the year will likely overshadow some of the key financial details at Dominion Energy, Inc. (NYSE:D). It was, indeed, a very active year for the giant utility, which seemed to be constantly in the news because of its plan to buy smaller peer SCANA. Management does deserve some kudos for the progress it made on the headline-grabbing news items. But if you look past the big picture, the company's ability to achieve some less-noticed goals was just as important to Dominion's future.
The big moves
There's no question that Dominion's purchase of SCANA was the biggest issue to watch in 2018. SCANA found itself in financial trouble after Westinghouse declared bankruptcy in 2017, leading the utility to cease construction of the nuclear power plant SCANA was building for it. Dominion pounced on this weakness. However, utility mergers require a long list of approvals, notably including industry regulators from all of the regions a utility serves. The problem was that SCANA's nuclear decision left it at odds with regulators, politicians, customers, and investors, so approval of this deal was no sure thing. However, Dominion was able to navigate the trouble spots in 2018 and closed the deal on Jan. 2, 2019.
Although big construction projects have been a headache for peers, like SCANA, Dominion showed its construction chops last year. It was able to bring its Cove Point liquified natural gas (LNG) facility online in April. This is a large, multiyear project that allows Dominion to play a key role in the export of U.S. LNG to the world, an increasingly important destination for the fuel. Most notable, perhaps, was that fact that Cove Point was delivered on time and on budget.
While it was dealing with the SCANA merger and Cove Point, Dominion was also forced to clean up a bit of a mess surrounding controlled master limited partnership Dominion Energy Midstream Partners, L.P. This entity was originally envisioned as a way to raise capital that the parent company could put toward growth projects. Dominion has billions of dollars worth of investment opportunities across its portfolio, including gas pipeline upgrades, storm hardening of electrical lines, and building renewable power assets, among many others. However, a regulatory change in early 2018 made the partnership structure a much less desirable option for raising cash, and the company chose to (perhaps "was forced to" is a better way to think about it) buy it back. That deal, which was started in 2018, was completed on Jan. 28, 2019.
Check out the latest earnings call transcript for Dominion Energy.
Making the magic happen
Note one key theme from all of the big-picture events above: cash going out the door. Then reexamine the purchase of Dominion's controlled MLP -- that asset was actually expected to be a source of cash for the company. On top of all of this, the tax law changes that took effect last year altered the math on the regulatory approved returns for utilities like Dominion. Dominion essentially had to pass on its savings to customers and rework the equity levels at some of its utility subsidiaries. All of this led credit agencies to rethink Dominion's credit ratings with a negative bias.
That's not a good thing for any company, let alone a giant utility that makes heavy use of leverage. Long-term debt makes up roughly 60% of Dominion's capital structure. That's not unreasonable, given the business is largely regulated and sells products (energy) that are vital to customers. However, a credit downgrade would have been a bad outcome since it would have led to higher financing costs.
To deal with this risk, Dominion made a few strategic moves that didn't make major headlines. It raised $2.3 billion worth of equity capital. Although originally expecting to sell Cove Point to its controlled partnership, management shifted gears and took on $3 billion in debt at this facility and pushed the cash up to Dominion. Dominion also sold some non-core assets.
The original goal for asset sales in 2018 was to generate between $1 billion and $1.5 billion in after-tax proceeds. However, Dominion was able to generate $2.5 billion in after-tax proceeds through assets sales, including jettisoning stakes in various power stations and a midstream business.
This was integral to the company's ability to reduce parent-level debt to target levels two years ahead of schedule. Perhaps more importantly, it comforted the ratings agencies, which removed their negative outlooks on Dominion. That, in turn, ensures that the company will be able to access the credit markets at the competitive rates it was expecting, and it will help it achieve its long-term goal of 6% to 8% annualized earnings growth between 2017 and 2020.
On to the future
There's no doubt that 2018 was a very big year for Dominion Energy. It made strategic investments and, at the same time, faced a number of notable headwinds. It was able to work through all of this activity and enter 2019 in a better position to navigate future opportunities (like finishing work on the Atlantic Coast Pipeline, which is facing regulatory pushback).
While the headline-grabbing SCANA, Cove Point, and MLP issues were important, the behind-the-scenes work to ensure there was enough cash to get everything done (and appease the credit rating agencies) was just as important. That, notably, included exceeding asset sales targets and debt reduction goals. Investors will likely forget this piece of the the 2018 puzzle, but it speaks to a management team that knows how to execute on the big-picture items as well as the always-important "small" details.