Dominion Energy, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Dominion Energy, Inc. and Virginia Electric and Power Company for the three and nine months ended September 30, 2020. Dominion Energy operates regulated electric and gas utilities, contracted and merchant generation, and related energy infrastructure. Virginia Power is a regulated electric utility serving Virginia and northeastern North Carolina. The statements are unaudited and presented in accordance with U.S. GAAP.
Beginning in September 2020, Dominion Energy reported Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, Contracted Assets, and Corporate and Other segments. Gas transmission and storage operations were classified as held for sale and discontinued operations following the agreement to sell substantially those operations to Berkshire Hathaway Energy.
Key financial metrics
| Dominion Energy, millions except per-share data | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Operating revenue | $3,607 | $3,782 | $10,651 | $10,506 |
| Net income attributable to Dominion Energy | $356 | $975 | $(1,083) | $349 |
| Net income from continuing operations attributable to Dominion Energy | $369 | $937 | $767 | $(171) |
| Diluted EPS | $0.41 | $1.17 | $(1.38) | $0.42 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $4,810 | $3,709 |
| Capital expenditures and other property additions | Not provided for quarter | Not provided for quarter | $4,409 | $3,407 |
Reported operating margin was approximately 0.7% in Q3 2020 versus 29.2% in Q3 2019, and approximately 11.3% for the first nine months of 2020 versus 5.8% in the prior-year period. These comparisons are heavily affected by impairment and other charges. Continuing-operations net margin attributable to Dominion Energy was approximately 10.2% in Q3 and 7.2% year to date.
- Cash, restricted cash and equivalents were $558 million at September 30, 2020, versus $440 million at September 30, 2019 and $269 million at December 31, 2019.
- Total assets were $104.5 billion; total liabilities were $76.5 billion; and total equity was $28.1 billion at September 30, 2020.
- Dominion Energy reported $33.1 billion of long-term debt, plus $2.7 billion of securities due within one year, $2.3 billion of short-term debt, and $225 million outstanding under a supplemental 364-day credit facility.
- Available capacity under the $6.0 billion joint revolving credit facility was $3.8 billion. A separate $900 million 364-day revolving facility had $675 million available.
- Common dividends paid during the first nine months were $2.4 billion. The 2020 annualized dividend rate was established at $3.76 per share, with management expecting a fourth-quarter payment of approximately $0.63 per share subject to Board declaration.
Virginia Power metrics
| Virginia Power, millions | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Operating revenue | $2,248 | $2,264 | $5,983 | $6,167 |
| Net income | $475 | $602 | $685 | $722 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $2,565 | $2,068 |
| Capital expenditures, property additions and nuclear fuel | Not provided for quarter | Not provided for quarter | $2,471 | $1,912 |
Virginia Power’s Q3 net margin was approximately 21.1%, compared with 26.6% in Q3 2019. Its September 30, 2020 balance sheet included $62 million of cash, $12.8 billion of long-term debt, and $422 million of short-term debt.
Material changes versus the prior comparable period
- Q3 Dominion Energy earnings declined $619 million, primarily because of a $665 million impairment of certain merchant solar facilities, a $221 million Fowler Ridge contract termination charge, and a $200 million Virginia customer credit reinvestment charge. Higher nuclear decommissioning trust investment earnings partly offset these items.
- Year-to-date net loss attributable to Dominion Energy was $1.1 billion, compared with income of $349 million in 2019. The major driver was the $2.3 billion equity-method loss associated with cancellation of the Atlantic Coast Pipeline Project, included in discontinued operations.
- Year-to-date revenue increased $145 million despite lower customer usage, reflecting the absence of the prior-year $1.0 billion South Carolina nuclear project refund charge and higher Virginia rate-adjustment-clause revenue. COVID-19 and weather reduced electricity sales.
- Operating cash flow increased $1.1 billion to $4.8 billion, including $1.6 billion from discontinued operations. Investing cash use increased to $4.9 billion, primarily because of higher construction spending.
- Dominion Energy repurchased $2.4 billion of common stock through September 30, including open-market purchases, a private transaction, and accelerated share repurchase agreements. Approximately 28.5 million shares were purchased during the third quarter.
- Debt financing increased materially, including $2.3 billion of senior notes issued in March and April, a $1.0 billion floating-rate senior-note issuance in September, and other subsidiary debt issuances. The company also redeemed or repaid certain securities.
Guidance, outlook, risks and unusual items
- Dominion Energy agreed to sell substantially all gas transmission and storage operations to Berkshire Hathaway Energy for approximately $10 billion of total consideration, including approximately $4.0 billion of cash and assumed debt. The transaction closed in November 2020, after the reporting date, and Dominion Energy received $2.7 billion of cash proceeds.
- The company expected to recognize an approximately $200 million pretax gain in Q4 2020 on the completed transaction, including a $1.4 billion goodwill write-off and approximately $200 million of closing adjustments payable to BHE.
- The separate Q-Pipe Transaction was expected to provide $1.3 billion of cash consideration plus assumed debt and to close in early 2021, subject to regulatory and antitrust approvals. Dominion Energy expected an approximately $500 million pretax gain at closing, excluding closing adjustments. If the transaction did not close by December 30, 2021, Dominion Energy would generally be required to repay the $1.3 billion deposit or issue equivalent-value common stock at its option.
- Dominion Energy and Duke Energy cancelled the Atlantic Coast Pipeline Project. Dominion Energy recorded a $1.1 billion current liability related to its share of Atlantic Coast Pipeline obligations and guarantees, and Atlantic Coast Pipeline had $1.8 billion outstanding under its revolving credit facility. Additional wind-down losses were expected, although management did not expect its share to be material.
- Virginia’s Clean Economy Act requires significant renewable development, energy storage, energy-efficiency programs, carbon-trading participation, and phased retirement of fossil-fuel generation. Dominion Energy expects significant capital expenditures, with recovery subject to regulatory approvals and rate mechanisms.
- Virginia Power recorded a $200 million reserve for future customer benefits associated with the 2021 quadrennial rate review. Proposed Virginia legislation could require forgiveness of approximately $125 million of certain customer balances and could materially affect results, liquidity, and cash flow if enacted.
- COVID-19 reduced customer usage and increased allowance-for-credit-loss expense. Management did not expect a material operating impact at the filing date, but stated that the ultimate effect could be material depending on the duration of the pandemic and economic recovery.
- Key continuing risks include regulatory disallowances, rate recovery, environmental compliance, nuclear operations and spent-fuel obligations, commodity and interest-rate volatility, counterparty and credit risk, litigation related to the former SCANA operations, and the timing and approval of the Q-Pipe Transaction.
- At September 30, 2020, Dominion Energy had $5.7 billion of subsidiary guarantee exposure, including $1.9 billion related to Cove Point, $2.2 billion related to commodity transactions, and $453 million related to solar projects.
Most important facts for an investor to verify
- Whether the completed GT&S sale and proposed Q-Pipe sale generated the expected cash proceeds and pretax gains, and how proceeds were allocated among debt reduction, pension contributions, dividends, and share repurchases.
- The final settlement and accounting for the $1.5 billion accelerated share repurchase agreements, including the final number and effective price of shares repurchased.
- The ultimate cost of Atlantic Coast Pipeline wind-down activities, guarantees, debt obligations, and related litigation or regulatory matters.
- Whether Virginia and other regulators approve recovery of early-retirement, environmental, coal-ash, renewable, grid-modernization, and customer-credit costs.
- The effect of COVID-19 on customer collections, forgiven balances, bad-debt expense, electricity demand, construction schedules, and liquidity.
- The sustainability of cash flow and dividends given reported year-to-date net loss, substantial capital expenditures, debt maturities, and continuing reliance on capital markets.