Key Highlights

● Third-quarter operating Earnings Per Share rose about a fifth to $1.28.

● The Virginia and South Carolina utilities supplied nearly all of the improvement.

● Full-year operating earnings are expected in the top half of the stated range.

● The pending NextEra Energy combination was flagged in the release.

Dominion Energy (NYSE:D) reported third-quarter operating earnings of about one and one-seventh billion dollars, or $1.28 per share, compared with about $920 million, or $1.06 per share, in the same period a year earlier. The Richmond-based Utility said it now expects full-year operating earnings to land in the top half of its range of $3.45 to $3.69 per share.

Reported net earnings under generally accepted accounting principles were also higher, at roughly one and one-sixth billion dollars, or $1.30 per share. The results were published in a filing with the Securities and Exchange Commission on the last day of October, and they came with a segment table that shows exactly where the improvement came from: the Virginia and South Carolina utilities.

What were the headline third-quarter figures for Dominion Energy?

Operating earnings, the non-GAAP measure that excludes certain items, rose by roughly $218 million from the prior-year quarter. On a per-share basis, the gain was $0.22, even though the average share count increased to about $882 million from about $855 million as the company issued equity.

Operating revenue climbed to about $5.6 billion from about $4.5 billion a year earlier, while total operating expenses rose to about $3.8 billion from $3.2 billion. Operating Margin before financing costs improved by roughly half a billion dollars.

Interest and related charges also increased, to about $620 million from about $530 million, reflecting higher borrowing to fund construction. Earnings attributable to outside owners of certain projects were noticeably higher as well. Noncontrolling interests, which capture the share of project earnings that belongs to partners, rose to roughly $114 million from about $22 million, a change that largely reflects the structure around the offshore wind project. Tax expense was essentially flat.

Why do operating and reported earnings differ?

The company reports both measures because reported earnings include items that it regards as unrelated to day-to-day performance, such as changes in the value of hedges and nuclear decommissioning trust funds, and certain impairments and merger-related costs. In the third quarter alone the adjustments were small, a pre-tax benefit of about $37 million.

Over the first nine months, the gap was much larger. Reported earnings per share were $2.37, while operating earnings per share were $3.02, a difference of $0.65. The release itemizes market gains, asset retirements and impairments to explain the difference. Readers comparing Dominion Energy with other utilities should note that definitions of operating or adjusted earnings vary, so the reconciliation table is the best place to check what has been excluded.

The company cautioned that it cannot estimate those items on a reported basis in advance, which is why guidance is given only on the operating measure.

Which segment supplied most of the improvement?

Dominion Energy Virginia produced operating earnings of about $860 million, up from about $680 million a year earlier, or $0.98 per share against $0.79. The segment's improvement of roughly $180 million was by far the largest.

The company attributed the gain to the outcome of the biennial review of rates, which added about $137 million, an increase in the Equity earnings allowed on rider projects of about $112 million, and more favorable weather worth about $55 million. Offsets included higher electric capacity expense, higher salaries and administrative costs, and dilution from the larger share count. The weather benefit reflects weather that was more favorable to sales than a year before, while the rider and biennial review items reflect decisions by the Virginia State Corporation Commission that took effect over the past year.

For the first nine months, the Virginia segment's operating earnings rose by about $413 million, again driven by the biennial review and the rider equity earnings.

What happened in South Carolina?

Dominion Energy South Carolina earned about $230 million in operating terms, up from about $168 million, or $0.26 per share against $0.20. The increase of roughly $62 million came from the effect of Base Rate and revenue-stabilization cases, worth about $46 million, and from weather, worth about $36 million.

Higher Depreciation and a group of smaller items took a bite out of the gain. The segment includes the electric and gas operations the company acquired in the state and serves roughly half a million gas customers. In the release, the company says it serves about 3.6 million electric customers across Virginia, North Carolina and South Carolina, along with about half a million gas customers in South Carolina.

For readers following Utility Stocks, the South Carolina result illustrates how a rate case that concludes in one period can change year-over-year comparisons: the benefit appears as soon as new rates take effect, whereas the costs behind them were incurred earlier.

Why did Contracted Energy decline?

The Contracted Energy segment, which houses nuclear, solar and other generation supplied under long-term agreements, earned about $134 million, down from about $165 million. Per-share earnings fell to $0.15 from $0.19.

Production tax credits rose, with a substantial portion coming from renewable Natural Gas facilities, and margins improved. Those gains were more than offset by lower tax credits tied to project spending, a group of other items, and higher interest costs. Tax credits tied to project spending depend on when projects reach completion, so they tend to fluctuate from quarter to quarter, while production tax credits accumulate as renewable facilities generate output. The mix therefore shifts depending on construction timing.

Contracted Energy results can be lumpy for this reason, and management generally frames the segment on an annual basis. Corporate and Other, the catch-all segment, showed a smaller loss than a year earlier as a rise in net interest expense was matched by an improvement in other items.

What charges affected the nine-month totals?

Nonregulated impairments amounted to roughly $720 million, mainly a charge of about $820 million on renewable natural gas facilities and a smaller charge on certain solar facilities, partly offset by a benefit of about $195 million from revised asset retirement obligations at the Millstone nuclear station.

Regulated asset retirements of about $95 million reflected costs of the Coastal Virginia Offshore Wind project that the Virginia utility does not expect to recover from customers. Market-related items produced a net benefit of roughly $315 million, including gains on nuclear decommissioning trust funds that were partly offset by hedging losses.

Merger-related costs totaled about $39 million for the period, of which about $26 million fell in the third quarter.

What did the company say about guidance for Dominion Energy?

Management said it expects operating earnings to be in the top half of its range of $3.45 to $3.69 per share. It reaffirmed guidance for Credit metrics, dividends and long-term growth, without changing any of the underlying figures.

A year earlier, the company had narrowed its range to between $3.33 and $3.48 and said it expected to be at or above the midpoint, according to RTTNews. The new range is therefore higher, reflecting both underlying growth and the rate decisions already in hand.

The top-half statement narrows where within the published range the company expects to finish. As is customary, the release carries a long list of cautions about weather, regulation, financing, construction and the pending transaction.

How is the offshore wind project treated?

Coastal Virginia Offshore Wind is a large regulated project off the coast of Virginia in which the company owns a 50% noncontrolling interest in the commercial component. The release notes that uncertainties include timing, cost, cost recovery and the possibility of optional Capital contributions from its partner.

Costs that the Virginia utility does not expect to pass through to customers are being recorded as regulated asset retirements, and these are excluded from operating earnings. That is the source of the $95 million item mentioned above. The release also notes that the company may be asked to make optional capital contributions if its partner needs them, which is among the factors that could change the cost picture.

Offshore wind projects of this type depend on specialized vessels, ports and federal permits, which is why schedule and cost estimates are watched closely by regulators and market participants.

How are data centers affecting Virginia?

The release notes growing electricity Demand from new data centers, concentrated in Loudoun County, and treats it as both a source of growth and a source of uncertainty. Faster demand growth means more capital spending, but it also requires timely approvals and permits for new facilities.

Virginia's regulators have been reviewing how large customers should be charged, and the biennial review that boosted the quarter is one of the mechanisms through which the company's costs and allowed earnings are set. Loudoun County, in northern Virginia, hosts one of the largest clusters of data centers in the world, and the demand from those facilities is a principal reason regional capacity costs have risen. Rider projects, which cover specific projects such as generation and grid upgrades, add a separate stream of earnings growth.

Electric capacity expense, which the company cited as an offset in the quarter, relates to the cost of securing power capacity in the regional market and is one of the visible costs of rising demand.

Where does the NextEra Energy combination stand?

The release mentions the proposed Merger with NextEra Energy in its cautionary language, citing approval uncertainty, closing timing and effects on employees, regulators and customers. NextEra Energy's own update said owners of both companies approved the deal in early September.

According to that update, hearings in Virginia are set for November and in South Carolina for December, with final orders expected early next year, followed by expert hearings in North Carolina and continuing federal reviews. Closing is anticipated in the second half of next year.

The merger costs recorded this year are the first accounting trace of the transaction in Dominion Energy's results. The combined company, according to the NextEra Energy update, would aim for regulatory capital growth of roughly 11% a year through the early part of the next decade and adjusted earnings growth above 9%, aims that depend on approvals and execution. Further costs would be expected as the process continues.

How does the quarter compare with the first nine months?

The third quarter contributed a bit under half of the nine-month operating earnings of about $2.7 billion, or $3.02 per share, which compares with about $2.4 billion, or $2.74, in the same stretch last year. Nine-month revenue grew to roughly $15 billion from about $12.4 billion.

Because summer is the strongest season for electric sales in Virginia and the Carolinas, the third quarter normally carries more weight than the first or second. That is one reason the company's full-year guidance rests heavily on how the summer and the early winter turn out.

The reported nine-month figure was lower than a year earlier, at $2.37 per share compared with $2.81, because of the impairments and retirements noted earlier. Operating earnings, which exclude them, rose.

What do the balance-sheet items say about funding?

Higher interest charges and a larger share count are the visible signs of a company funding a large building program. Diluted average shares rose by about $27 million over the year, and interest and related charges grew by roughly $96 million in the quarter alone.

Utilities typically finance construction with a combination of long-term debt, equity and retained cash, and the regulated earnings they are allowed are designed to cover those costs over time. The lag between spending and recovery is a recurring theme, and riders are one of the tools used to shorten it.

Credit metrics are among the items the company reaffirmed. Rating agencies look at Cash Flow relative to debt, and the company has a stated aim for that ratio in its materials.

What should readers watch next for Dominion Energy?

Near-term events include the Virginia hearings, any further disclosures on the offshore wind project, and the company's year-end results, where it will confirm where within its guidance range the year landed. The segment table will also be worth watching for the pace of rider and rate-case contributions.

The stock is a member of the S&P 500, and utilities in that benchmark have attracted attention as electricity demand growth has resumed. Each company's circumstances differ, though, and Dominion Energy's results are influenced by its own regulatory calendar and by the pending transaction. The company describes itself as a leading developer of regulated offshore wind and solar and the largest producer of carbon-free electricity in New England, a reference to its Millstone nuclear station in Connecticut.

Primary documents, including the filing with federal regulators, should be consulted for complete figures.