Duke, Dominion digest large impairments from commercial renewables value

Utility industry analysts are more confident in Duke Energy Corp.'s strategy than Dominion Energy Inc.'s for managing earnings hits tied to investment tax credits used to finance commercial renewable generation assets.

Duke disclosed Feb. 9 a $1.3 billion impairment on over 5,000 MW of solar, wind and battery capacity up for sale in 2023, while Dominion one day earlier reported a $1.5 billion impairment on about 30 solar facilities representing approximately 1,000 MW of generation with long-term power purchase agreements.

Both companies took the full 30% solar investment tax credit, or ITC, when those projects began operating, analysts at CreditSights wrote Feb. 9. A change in ownership within five years would trigger the Internal Revenue Service to "claw back," or recapture, some of those funds.

But while Duke plans to unload its contracted renewables portfolio in 2023 for what BMO Capital Markets analysts called "a new book value of $1.5 billion to $1.6 billion," Dominion has not yet committed to doing the same.

"The capital we've used in the past to generate those ITCs can be employed elsewhere to greater long-term shareholder benefit," Dominion Senior Vice President and CFO Steven Ridge noted during a Feb. 8 conference call as the rationale for halting investment. "That led to a subsequent impairment test where we looked at the carrying value or book value and we compared it to a series of discounted and non-discounted cash flows consistent with accounting guidance and ultimately determined that the fair market value was lower than the carrying value."

Guggenheim and Scotiabank told clients the decision was due in part to higher interest rates, with Scotiabank lowering Dominion's target share price to $72 from $76.

CreditSights also questioned whether Dominion's planned 2,587-MW, $10 billion Virginia Beach Offshore Wind Project will stay on budget.

"This company is impairing solar assets in a red hot market for solar, but we are supposed to believe their offshore wind project will come online at budget when the world leader in offshore wind (Ørsted A/S) is already taking their own impairment charges on U.S. offshore wind," the analysts wrote.

Dominion could sell a passive stake in the project as part of a strategic review if the Virginia House of Delegates votes in favor of a state Senate bill allowing the company to do so.

Duke's impairment, meanwhile, is "within ... planning range" for what the company expected the portfolio would sell for, according to Chairman, President and CEO Lynn Good.

"This is an accounting adjustment that's really driven by the earnings profile of renewables, where a lot of the profit that's in the early part of the life, you then depreciate it over a longer period of time," the CEO said during a Feb. 9 conference call. "So when you make a decision to exit before the end of the useful life, you've kind of set yourself up for an impairment."

Guggenheim analysts wrote that they "came away with the impression that [Duke executives] were comfortable with being able to offset the incremental financing drag in order to maintain guidance."

Recapturing transferability

The U.S. Inflation Reduction Act passed in 2022 offers new financing options for renewable developers, allowing for the conversion of tax credits into cash payments themselves by transferring, or selling, the credits to corporate entities unaffiliated with their projects as an alternative to traditional tax equity financing.

The industry is awaiting federal guidance on many of the law's benefits aimed at accelerating renewable development. But recapture rules will still likely apply to that new transferability option, according to Keith Martin, a renewable energy tax expert and co-head of projects at Norton Rose Fulbright.

"The question the Treasury will have to address is 'who then ends up having to repay the recapture liability, the sponsor or the transferee of the tax credits?' The most sensible thing to me would be the sponsor since it would be the one who could affect whether recapture occurs," Martin said.

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