DOMINION ENERGY, INC quarterly report, Q2 FY2020

Dominion Energy, Inc. — 2020 Second-Quarter Form 10-Q Summary

Business context and reporting period

Combined Form 10-Q filed August 5, 2020 for the quarter and six months ended June 30, 2020. The filing covers Dominion Energy, Inc., Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC. Dominion Energy operates regulated electric and gas utilities, gas transmission and storage, LNG infrastructure, contracted generation and related energy businesses.

Results reflect the COVID-19 pandemic, lower commercial and industrial demand, weather effects, the cancellation of the Atlantic Coast Pipeline Project, planned generation retirements and the proposed sale of substantially all gas transmission and storage operations to Berkshire Hathaway Energy Company.

Key financial metrics

Dominion Energy consolidated	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Operating revenue	$3.585 billion	$3.970 billion	$8.081 billion	$7.828 billion
Income from operations	$540 million	$461 million	$1.171 billion	$(21) million
Net income attributable to Dominion Energy	$(1.169) billion	$54 million	$(1.439) billion	$(626) million
Diluted EPS	$(1.41)	$0.05	$(1.75)	$(0.78)
Net cash from operating activities	Not separately provided	Not separately provided	$3.136 billion	$2.313 billion
Capital expenditures and property additions	Not separately provided	Not separately provided	$2.915 billion	$2.112 billion

Approximate consolidated operating margin was 15.1% in Q2 2020 and 14.5% for the first six months of 2020. Approximate net margin was negative 32.6% and negative 17.8%, respectively, driven largely by unusual charges.
Cash, restricted cash and equivalents were $742 million at June 30, 2020, compared with $269 million at December 31, 2019.
Total debt, including current and long-term debt and junior subordinated notes, was approximately $40.3 billion at June 30, 2020, versus approximately $36.2 billion at year-end 2019.
Dominion Energy had $5.687 billion of available capacity under its $6.0 billion joint revolving credit facility and $675 million available under a $900 million 364-day revolving credit agreement.
Virginia Power reported Q2 net income of $490 million, compared with $100 million, and six-month net income of $210 million, compared with $120 million.
Dominion Energy Gas reported Q2 net loss attributable to Dominion Energy Gas of $198 million, compared with income of $119 million, and a six-month net loss of $29 million, compared with income of $309 million.

Material changes versus prior comparable periods

Q2 consolidated revenue declined $385 million, primarily because of lower electric sales, COVID-19-related usage reductions, unfavorable Millstone pricing and derivative effects. These impacts were partly offset by higher Virginia Power rate-adjustment-clause revenue.
Six-month revenue increased $253 million, principally because the prior-year period included a $1.0 billion customer refund obligation related to the abandoned V.C. Summer nuclear project.
Operating and maintenance expense decreased $288 million in Q2 because the 2019 period included a voluntary retirement program charge. The six-month decrease was $247 million.
Atlantic Coast Pipeline and related Supply Header Project charges materially reduced earnings. Dominion Energy recorded a $2.3 billion equity-method loss from Atlantic Coast Pipeline in Q2 and six-month results, and a $482 million impairment charge for probable abandonment of portions of the Supply Header Project.
Virginia Power recorded $30 million of Q2 charges for dismantling certain generation facilities and had recorded a $754 million first-quarter charge for planned early retirements of coal- and oil-fired units.
Investment results improved in Q2 but declined year to date: Dominion Energy reported net investment gains on nuclear decommissioning and other trust investments in Q2, while six-month results reflected net investment losses compared with gains in 2019.
Operating cash flow increased $823 million year over year to $3.136 billion, while investing cash use increased to $3.334 billion, primarily because of higher construction spending and the absence of 2019 acquisition-related cash proceeds.

Guidance, outlook, management commentary and unusual items

In July 2020, Dominion Energy agreed to sell substantially all gas transmission and storage operations to Berkshire Hathaway Energy for approximately $10 billion of total value, including approximately $4.0 billion of cash and assumed Dominion Energy Gas long-term debt. Closing was expected in the fourth quarter of 2020, subject to regulatory and other conditions.
Management expected to recognize an estimated pre-tax gain of approximately $1 billion at closing, based on June 30 balances. If certain regulatory clearance was not obtained by mid-September 2020, Dominion Energy could exclude Questar Pipeline and other entities, reducing cash consideration to approximately $2.7 billion.
The assets and liabilities to be sold were expected to be classified as held for sale and reported as discontinued operations beginning in the third quarter of 2020. Dominion Energy also expected approximately $225 million of third-quarter pre-tax losses on debt-related cash-flow hedges that would become probable of not occurring.
The company expected to use $250 million of sale proceeds to fund qualified pension plans by year-end 2020. It announced an expected December 2020 common dividend of approximately $0.63 per share, subject to board declaration, compared with the previously declared quarterly rate of $0.94 per share.
Virginia’s Clean Economy Act requires substantial renewable development, energy-storage deployment, energy-efficiency programs and phased retirement of fossil generation. Dominion Energy expects significant related capital expenditures, with recovery dependent on regulatory approvals and applicable rate mechanisms.
In July 2020, the board authorized repurchases of up to $3.0 billion of common stock and rescinded prior repurchase authorizations. No shares were repurchased under the prior program during the reported quarter.
COVID-19 reduced customer usage and increased allowance-for-credit-risk expense. Management did not expect a material operating impact at the reporting date, but stated that the ultimate effect on operations, financial position and cash flows could be material depending on the pandemic’s duration and economic recovery.

Risks, contingencies and other matters

Atlantic Coast Pipeline wind-down activities could generate additional losses; Dominion Energy had recorded a $1.0 billion liability associated with its share of equity losses, credit-facility obligations and asset-retirement obligations.
SCANA-related litigation, ratepayer claims, shareholder actions, regulatory investigations and a proposed SEC settlement remained relevant. SCANA legal-proceeding reserves were $538 million at June 30, 2020. Certain matters could have a material effect, although the filing states that some potential losses cannot be reasonably estimated.
Environmental compliance, coal-ash remediation, greenhouse-gas regulation, water-intake requirements, nuclear decommissioning and spent-fuel obligations could require material future expenditures. Rate recovery may mitigate some regulated-utility impacts but is subject to approval.
Regulatory assets totaled $10.054 billion for Dominion Energy at June 30, 2020, including $4.8 billion on which the company did not expect to earn a return during the applicable recovery period.
Interest-rate, commodity-price, investment-market, counterparty-credit, liquidity and credit-rating risks remain significant. Dominion Energy reported $1.334 billion of derivative liabilities and $216 million of derivative assets at June 30, 2020.
The filing identified no material changes to previously disclosed risk factors and stated that disclosure controls and procedures remained effective.

Investor verification checklist

Verify completion, regulatory approvals, final consideration and closing adjustments for the Berkshire Hathaway Energy transaction.
Verify the third-quarter 2020 held-for-sale and discontinued-operations presentation and the actual gain or loss recognized on the sale and related hedges.
Assess the final costs of Atlantic Coast Pipeline cancellation, Supply Header Project abandonment and remaining obligations under guarantees and credit facilities.
Reconcile reported earnings with recurring operating performance by excluding pipeline cancellation, generation-retirement, investment-market, litigation and other unusual items.
Monitor debt maturities, refinancing needs, credit-facility availability, derivative collateral requirements and the effect of the proposed asset sale on leverage and liquidity.
Evaluate the sustainability of dividends and the $3.0 billion repurchase authorization in light of negative GAAP earnings, capital spending, transaction timing and regulatory requirements.
Review developments in SCANA litigation and investigations, Virginia Clean Economy Act implementation, environmental obligations and potential rate recovery.