Business Context and Reporting Period
Dominion Energy, Inc. filed a combined Form 10-K for the fiscal year ended December 31, 2019, together with Virginia Electric and Power Company and Dominion Energy Gas Holdings, LLC. Dominion Energy is a regulated and contracted electricity and natural gas company serving more than 7 million customers, primarily in the eastern and Rocky Mountain regions of the United States.
The filing includes the first full year of operations acquired in the January 2019 SCANA Combination, a stock-for-stock transaction valued at approximately $13.4 billion, including $6.9 billion of assumed debt. Dominion Energy reorganized its reporting structure into five primary operating segments in December 2019.
Key Financial Metrics
| Dominion Energy, Inc. consolidated | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $16.572 billion | $13.366 billion | +24% |
| Income from operations | $2.514 billion | $3.601 billion | -30% |
| Net income attributable to Dominion Energy | $1.358 billion | $2.447 billion | -45% |
| Diluted EPS | $1.62 | $3.74 | -$2.12 |
| Operating margin | 15.2% | 26.9% | Down |
| Net margin | 8.2% | 18.3% | Down |
| Cash flow from operating activities | $5.204 billion | $4.773 billion | +9% |
| Capital expenditures and other property additions | $4.980 billion | $4.254 billion | +17% |
| Long-term debt | $33.824 billion | $31.144 billion | +9% |
| Cash, restricted cash and equivalents | $269 million | $391 million | -$122 million |
Fourth-quarter 2019 operating revenue was $4.475 billion and net income attributable to Dominion Energy was $1.009 billion. Fourth-quarter results included significant litigation charges related to SCANA matters, partly offset by nuclear decommissioning trust investment gains.
At December 31, 2019, Dominion Energy had $5.075 billion of available capacity under its $6.0 billion joint revolving credit facility. Outstanding commercial paper was $836 million and letters of credit were $89 million. The reported debt-to-total-capital ratio under the credit agreement was 50.3%, compared with a maximum permitted ratio of 67.5%.
Dominion Energy declared $3.67 per common share of dividends for 2019 and established a 2020 annualized dividend rate of $3.76 per share, subject to Board approval. Credit ratings were investment grade with stable outlooks from Fitch, Moody's and Standard & Poor's as of February 25, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from the SCANA Combination, higher Virginia rate-adjustment-clause revenue, a full year of Cove Point liquefaction operations and improved Millstone pricing.
- Net income declined substantially because of SCANA-related costs, including a $756 million after-tax charge for refunds of amounts previously collected for the abandoned nuclear project, a $480 million after-tax litigation charge, merger and integration costs, and a voluntary retirement program.
- Virginia Power recorded charges associated with early retirement of generating facilities, retirement of automated meter-reading infrastructure, termination of a non-utility generator contract and abandonment of a coal-rail project.
- Dominion Energy Gas benefited from a full year of Cove Point liquefaction operations and the absence of 2018 FERC plant-disallowance and gathering-and-processing impairment charges. Net income attributable to Dominion Energy Gas increased to $721 million from $481 million.
- Dominion Energy completed the sale of a 25% noncontrolling interest in Cove Point for approximately $2.1 billion and acquired a 20% interest in Wrangler, a retail natural gas marketing partnership.
- Dominion Energy's total assets increased to $103.823 billion from $77.914 billion, primarily reflecting the SCANA Combination and related goodwill and regulatory assets.
- Operating cash flow increased, but investing cash use increased to $4.622 billion because of higher construction spending and lower proceeds from asset sales.
Guidance, Outlook, Risks and Unusual Items
Management expects 2020 net income per share to increase compared with 2019, primarily because the company does not expect a repeat of the 2019 NND Project refund charge, certain early-retirement charges and the largest SCANA integration costs. Expected offsets include the loss of earnings associated with the sale of the Cove Point interest, higher planned Millstone outage days and share dilution. No specific 2020 EPS target is provided in the filing.
Dominion Energy expects planned capital expenditures of approximately $8.2 billion in 2020, $8.1 billion in 2021 and $7.6 billion in 2022. Its 2019-2023 growth capital plan totals approximately $26 billion, focused on regulated electric and gas infrastructure, renewable generation, grid modernization, pipeline replacement and nuclear license extensions.
- Atlantic Coast Pipeline remains subject to permitting, litigation and construction delays. The project cost estimate was approximately $8 billion, excluding financing costs, with full in-service expected in early 2022. Further delays or cost increases could lead to impairment charges and additional funding requirements.
- SCANA-related litigation and governmental investigations remain material. The filing reports $696 million of reserves for SCANA legal proceedings at year-end and notes a February 2020 preliminary settlement term sheet involving several ratepayer cases, with Dominion Energy's expected portion of approximately $320 million, subject to final settlement and court approval.
- Regulatory recovery is critical because the company carries substantial regulatory assets and liabilities. Dominion Energy reported $8.566 billion of regulatory assets and $11.498 billion of regulatory liabilities at year-end.
- Environmental requirements, including coal-ash closure, carbon regulation, water-discharge standards and methane controls, could require material capital and operating expenditures. Recovery through regulated rates may mitigate but not eliminate the impact.
- Nuclear operations involve decommissioning, spent-fuel, insurance, outage and regulatory risks. Dominion Energy reported approximately $1.7 billion of nuclear decommissioning obligations and $6.2 billion of related trust assets.
- The company is exposed to weather, commodity prices, interest rates, counterparty performance, cybersecurity, operational incidents and access to capital markets.
- The company reported effective disclosure controls and internal control over financial reporting. However, management and the auditors excluded the acquired SCANA businesses from the 2019 internal-control assessment; those businesses represented 19% of 2019 revenue and 17% of year-end assets.
Most Important Facts for Investors to Verify
- Reconcile reported 2019 GAAP earnings with recurring earnings after removing SCANA-related charges, early-retirement costs, litigation reserves and trust-investment gains.
- Review the final settlement amounts and remaining exposure from SCANA/NND Project litigation, ratepayer actions and governmental investigations.
- Monitor Atlantic Coast Pipeline permits, Supreme Court and regulatory decisions, revised construction costs, customer contract amendments and impairment risk.
- Assess whether the planned $8.2 billion of 2020 capital spending can be funded while maintaining investment-grade credit ratings, dividends and acceptable leverage.
- Evaluate the sustainability of regulatory asset recovery, customer refunds and rate-adjustment-clause earnings across the regulated businesses.
- Track nuclear license-renewal decisions, coal-ash closure costs, carbon regulations and the related rate-recovery mechanisms.
- Confirm the effect of the Cove Point ownership sale, Millstone power purchase agreements, share dilution and 2020 planned outages on earnings and cash flow.
- Review the filing's subsequent-event disclosures, including debt redemptions and the revised February 28, 2020 earnings release reflecting additional SCANA legal reserves.