Business Context and Reporting Period
Dominion Energy, Inc. filed a combined unaudited Form 10-Q with Virginia Electric and Power Company for the quarter ended March 31, 2022. Dominion Energy operates regulated electric and gas utilities, nonregulated generation, gas transportation and storage, solar development, and a 50% noncontrolling interest in Cove Point. Virginia Power is Dominion Energy’s wholly owned electric utility subsidiary.
Interim results are seasonal and are affected by weather, energy prices, fuel costs, rate changes, regulatory deferrals and investment-market performance.
Key Financial Metrics
| Dominion Energy, millions except per-share data | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $4,279 | $3,870 | +$409, 11% |
| Income from operations | $976 | $878 | +$98 |
| Net income from continuing operations | $692 | $980 | -$288 |
| Net income attributable to Dominion Energy | $711 | $1,008 | -$297, 29% |
| Diluted EPS | $0.83 | $1.23 | -$0.40 |
| Operating margin | 22.8% | 22.7% | Approximately flat |
| Net margin | 16.6% | 26.0% | Lower year over year |
| Cash flow from operating activities | $1,125 | $1,452 | -$327 |
| Capital expenditures and property additions | $1,622 | $1,328 | +$294 |
| Cash, restricted cash and equivalents | $594 | $562 | +$32 at period end |
Revenue growth primarily reflected higher fuel-cost recovery, the absence of a prior-year unbilled-revenue reduction, higher riders, the PSNC base-rate case and increased electric usage. Fuel and purchased-gas costs increased substantially but were generally recovered through customer rates and therefore did not materially affect earnings.
Dominion Energy reported $80 million of equity-method earnings, unchanged from the prior year. Other income fell to $46 million from $287 million, principally because nuclear decommissioning trust investments produced losses rather than prior-year gains. Interest and related charges increased to $174 million from $53 million.
At March 31, 2022, Dominion Energy reported total assets of $100.9 billion, total liabilities of $71.7 billion and shareholders’ equity of $27.5 billion. Current liabilities were $10.6 billion, including $2.55 billion of securities due within one year and $2.55 billion of short-term debt. Long-term debt was $36.7 billion, including $1.4 billion of junior subordinated notes.
Liquidity included a $6.0 billion joint revolving credit facility, of which $3.813 billion was available after commercial paper and letters of credit. Dominion Energy had $2.075 billion of commercial paper and $112 million of letters of credit outstanding under the facility.
Virginia Power
| Virginia Power, millions | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $2,167 | $1,830 | +$337, 18% |
| Net income | $357 | $374 | -$17, 5% |
| Cash flow from operating activities | $685 | $784 | -$99 |
| Capital expenditures and property additions | $1,037 | $766 | +$271 |
| Cash, restricted cash and equivalents | $36 | $56 | -$20 at period end |
Virginia Power’s March 31, 2022 balance sheet showed total assets of $48.8 billion, total liabilities of $32.4 billion and shareholder’s equity of $16.3 billion. Long-term debt was $14.2 billion, and current liabilities included $686 million of short-term debt and $1.013 billion of securities due within one year.
Material Changes Versus the Prior Comparable Period
- Dominion Energy earnings declined primarily because of lower nuclear decommissioning trust investment results and an $87 million deferred-tax charge associated with classifying Hope Gas as held for sale.
- Net investment results on nuclear decommissioning and rabbi trust investments shifted to a $197 million loss in Q1 2022 from a $304 million gain in Q1 2021.
- Dominion Energy Virginia earnings increased $84 million, principally from renewable-energy investment tax credits, rider equity returns and weather, partly offset by storm costs and other operating items.
- Gas Distribution earnings increased $43 million, while Dominion Energy South Carolina earnings increased $7 million. Contracted Assets earnings declined $49 million because of lower margins, planned outages and lower renewable-energy tax credits.
- Corporate and Other changed from $71 million of net income in Q1 2021 to a $311 million net expense in Q1 2022. The change included investment losses, storm-related costs, Hope-related taxes, hedging effects and the absence of prior-year benefits.
- Operating cash flow declined because of customer refund payments related to the 2021 Triennial Review, lower deferred-fuel recoveries and working-capital changes. Capital spending increased approximately 22%.
- Virginia Power revised depreciation rates following a new depreciation study. The change reduced Q1 depreciation expense by $15 million, increased after-tax earnings by approximately $11 million and increased Dominion Energy EPS by approximately $0.01. The company expects annual after-tax savings of approximately $45 million and EPS benefit of approximately $0.05.
Guidance, Outlook, Risks and Unusual Items
Management stated that there were no material changes to Dominion Energy’s 2022 outlook or planned capital expenditures through 2026 as disclosed in the 2021 Form 10-K. Dominion Energy expects approximately $3.2 billion to $4.4 billion of long-term debt issuance during 2022, inclusive of the $1.0 billion issued through March 31, and expects to raise approximately $300 million to $500 million through common-stock issuance.
- Hope Gas was under an agreement to be sold for $690 million, subject to regulatory approvals and closing conditions. Management expected closing by year-end 2022 and an after-tax loss of approximately $40 million at closing, subject to adjustments.
- The proposed Kewaunee sale remained uncertain. If held-for-sale criteria had been met at March 31, 2022, the company estimated a loss of approximately $660 million pretax, or $520 million after tax. The final result depends primarily on the nuclear decommissioning trust and asset-retirement obligations.
- Dominion Energy expected to complete a second contribution of Virginia privatization operations to Dominion Privatization, subject to approvals, with expected cash proceeds of approximately $108 million and an after-tax gain of approximately $100 million.
- Virginia Power’s pending fuel-factor filing involved projected fuel expense of approximately $2.3 billion and an estimated $1.0 billion under-recovered balance. A potential charge of approximately $155 million could result for certain customers if the proposed recovery treatment is approved.
- Virginia Power estimated potential unrecovered RGGI compliance costs of approximately $215 million if its requested recovery treatment is not approved.
- Dominion Energy planned to settle the 2019 Equity Units in June 2022, potentially issuing up to 21.8 million common shares for approximately $1.6 billion. Subject to conditions, the Series A Preferred Stock was expected to be redeemed in September 2022.
- At March 31, 2022, guarantees included $4.005 billion of subsidiary guarantees and Cove Point guarantees with cumulative maximum exposure of $1.9 billion for two guarantees. No amounts had been recorded for the Cove Point guarantees.
- Environmental, nuclear, regulatory, litigation, cybersecurity, commodity-price, interest-rate, investment-market, weather and supply-chain risks could materially affect results. The filing states that previously disclosed risk factors had not materially changed.
- Dominion Energy estimated that a 10% increase in commodity prices would reduce the fair value of commodity derivatives by $78 million. A 10% decrease in interest rates would reduce the fair value of interest-rate derivatives by $228 million.
Most Important Facts for Investors to Verify
- Reconcile the 29% earnings decline with operating performance, particularly nuclear trust investment losses, the Hope deferred-tax charge and derivative mark-to-market effects.
- Monitor cash generation relative to capital spending, dividends and debt maturities; Q1 operating cash flow of $1.125 billion was below capital additions of $1.622 billion.
- Verify the timing and economics of the Hope and Kewaunee dispositions, including the potential Kewaunee loss and regulatory approvals.
- Track Virginia fuel-cost, RGGI, rider and Triennial Review proceedings, including potential customer refunds or unrecovered-cost charges.
- Assess the June 2022 Equity Units settlement, potential common-share dilution, Series A Preferred Stock remarketing and planned redemption.
- Review debt issuance needs, available revolver capacity, collateral requirements and credit-rating sensitivity.
- Evaluate execution and recovery risks for the CVOW Commercial Project, renewable projects, environmental compliance and nuclear decommissioning obligations.