Dominion Energy

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Dominion Energy is a major energy producer and transporter, operating a vast infrastructure across multiple states and focused mainly on providing electric and natural gas services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Dominion Energy, primarily focused on regulated utility operations, has a moat of 2/5 due to a mix of strengths and weaknesses. Its position within geographically limited areas creates some barriers to entry, but these barriers are regulatory and are often not as powerful as a proprietary advantage. Long-term contracts and its significant asset base add some stability and predictability to its revenue streams, further adding to the moat, but it is offset by the volatility in energy demand and pricing, which adds risk and is not a moat, itself. Ultimately, its competitive advantages, while present, are not particularly strong or wide, and are not expected to give the company higher returns over its competitors.

Business Description:

Dominion Energy is a major player in the energy sector, operating primarily as a regulated utility provider. Here’s a breakdown of its key aspects:

  • Revenue Streams: The company generates revenue from its regulated operations across its service territory. These operations primarily involve the generation, transmission, and distribution of electricity and natural gas. These are steady income sources, though subject to regulatory oversight. Furthermore, Dominion also earns income from trading activities related to gas and other energy products.
  • Industry Trends: The energy industry is undergoing a significant transformation, with greater interest in renewable energy sources, energy storage solutions, and a growing movement towards decentralization. Deregulation, and the need for grid modernization are also major themes driving change in the industry. The energy transition from fossil fuels to cleaner sources can be both a threat and opportunity. The company is facing rising competition, from renewable companies and new competitors in different areas of operation.
  • Margins: Dominion’s operating margins are heavily influenced by regulatory decisions about how much it can pass on to its customers. This can often make the earnings appear artificially stable, regardless of the underlying profitability of its operations. With high inflation, the operating costs are going up as well, and this can impact the company’s profitability margins.
  • Competitive Landscape: Dominion Energy operates mostly in regulated markets where pricing is usually established with regulators. The business has competition from other utilities as well as from private power generators. There are a few major players in the area of Dominion’s operation, but the threat is not as strong due to the natural monopolies within the regions. Competition mostly comes from companies that are trying to supply energy to customers that are not in its regulated territory, and so does not impact it much.
  • What Makes It Different: Dominion’s core competency is its scale and experience in regulated operations within its geography. They operate several types of generation facilities, including nuclear, fossil fuel, renewables, and hydro. The large infrastructure that the company has, like power plants, pipelines, and substations, is a big barrier to entry for new competitors. Its wide distribution network is a key advantage in its current operations. However, its business is heavily regulated and requires regulatory approvals which may take some time.

Financials in Depth:

  • Dominion Energy’s latest quarterly earnings: Dominion reported its 3rd Quarter, earnings on 11/02/2023. The company recorded an operating earnings per share of $0.77, this is after adjustments for several special items and is not GAAP based. The company earned $1.26 per share according to GAAP. This EPS has a higher contribution from the non-regulated energy operations, which has helped it mitigate the lower regulated earnings. Furthermore, the company reported a positive outlook on its business and its operations.
  • Revenue: The company reported $3.85 billion in revenues, which represents a 10% increase year-over-year. The increase was primarily driven by higher prices as the overall demand for its services remained consistent year over year.
  • Net Income: GAAP based net income for the company was $179 million vs. $1.29 billion in the previous year’s quarter. This drastic drop in profit was primarily due to the impact of an impairment related to the Millstone asset. Non-GAAP net income for the company was $725 million.
  • Balance Sheet: The company has around $160 billion in assets, which is primarily made of its huge infrastructure. It has a significant amount of debt, roughly around $41 billion in long-term debt and around $5 billion in current debt. It has around $37 billion in retained earnings and a total equity of around $65 billion. This high amount of debt and the liability component in total equity causes some concerns about the financial strength of the company. The company’s ability to take on new debt is also hampered due to an already leveraged balance sheet.
  • Cash Flow: Dominion’s cash flow is heavily dependent on the regulatory decisions. Also, the company is highly affected by fluctuations in energy demand and pricing. The company generated $2.3 billion in net cash flow from operating activities year to date, but cash used in investing activities and repayments of debt have had a significant impact.

The company’s financial condition is not very healthy with a large debt load and negative free cash flow over the last few years.

Understandability Rating: 2 / 5 Although Dominion Energy operates as a utility and in some ways a simple business, the regulatory processes and requirements make its financial statements hard to analyze, and there are very limited data to compare it with other businesses.

Balance Sheet Health Rating: 2 / 5 Dominion’s balance sheet is heavily leveraged. The company has high debt to equity and has had problems consistently generating positive cash flow.

Risks to the Moat:

  • Technological Disruption: The increasing emergence of distributed generation, energy storage, and other emerging technologies can reduce the need for traditional utility services and create competition. The company also faces challenges by technological advancements in energy distribution, which have the potential to become a cheaper alternative to their business in a decade or so.
  • Regulatory Changes: Changes in state and federal energy regulations, including carbon policies, could impact pricing models and return on capital, potentially reducing the attractiveness of the company’s operations. New legislations and climate regulations will impose more restrictions on future operations of the company and may reduce its ability to create revenue and profits.
  • Competition: While the company has a quasi-monopoly in its operating areas, new technologies, new entrants and new business models from private power generators and renewable energy providers could affect its long-term profitability.
  • Commodity Price Volatility: Despite being in mostly regulated markets, changes in commodity prices of gas and coal can fluctuate the company’s costs and may impact its long-term profitability and margins. High inflation can also severely impact the company’s financials.

Business Resilience: Despite risks, Dominion Energy has several strengths contributing to resilience:

  • Stable Revenue Streams: The company’s revenues primarily come from regulated markets and are predictable and stable. As a utility company, it also provides a vital service.
  • Geographic Advantage: Dominion operates in areas with growing demand for power and utilities and its huge asset base and established networks serve as significant moats.
  • Experienced Management: The company has a strong leadership with a long track record in the utilities industry.
  • Diversified Portfolio: Although primarily utilities, the company has a diversified energy portfolio in different sectors of the energy industry.

Overall, Dominion is a solid business in a traditional, but highly regulated industry. However, it is not without its challenges, primarily related to competition, technological innovation and an increasingly more regulated environment. The company is heavily leveraged and needs to shore up its balance sheet to attract more investors. Furthermore, the long term economic benefits that may be derived from renewable operations are difficult to fully anticipate.