Dominion Energy, Inc. (NYSE:D) Q4 2022 Earnings Call Transcript

Dominion Energy, Inc. (NYSE:D) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Good day, everyone, and welcome to the Dominion Energy Fourth Quarter 2022 Earnings Conference Call. At this time, each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions. Instructions will be given for the procedure to follow if you would like to ask a question. I would now like to turn the call over to David McFarland, Vice President, Investor Relations. Please go ahead.

David McFarland: Good morning, and thank you for joining today’s call. Earnings materials, including today’s prepared remarks, contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings, including our most recent annual reports on Form 10-K and our quarterly reports on Form 10-Q for a discussion of factors that may cause results to differ from management’s estimates and expectations. This morning, we will discuss some measures of our company’s performance that differ from those recognized by GAAP. Reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measures, which we can calculate are contained in the earnings release kit.

I encourage you to visit our Investor Relations website to review webcast slides as well as the earnings release kit. Joining today’s call are Bob Blue, Chair, President and Chief Executive Officer; Steven Ridge, Senior Vice President, Chief Financial Officer; and Diane Leopold, Executive Vice President, Chief Operating Officer. I will now turn the call over to Bob.

Bob Blue: Thank you, David, and good morning, everyone. During 2022, we delivered earnings and dividend growth in line with our guidance, provided safe, reliable and affordable energy while demonstrating careful environmental stewardship, served our customers and invested in our communities, and made meaningful progress on our regulated investment programs focused on decarbonization and resiliency. I’ll begin by highlighting our annual safety performance. As shown on slide 3, our employee OSHA injury recordable rate continues to compare favorably with the Company’s long-term historical results as well as national industry and regional electric utility averages. However, our ultimate goal has been and continues to be that none of our colleagues get hurt ever.

Next, on reliability, which our customers consistently indicate is their highest priority. In the past year, customers in our electric service areas in Virginia, South Carolina and North Carolina had power 99.9% of the time, excluding major storms. And it’s worth noting that Virginia reached record summer peak demand in August and all-time peak demand in December. As they do time and time again, our colleagues rose to the challenge and kept our system delivering without major or extended interruption during these demanding load conditions. The scale of our team and resiliency of our system were never more evident than during the December winter storm, when we also did not experience any major or extended service disruptions. Finally, affordability: Our rates continue to be lower than national and regional averages.

As we discuss later, we’re very focused on ensuring that our customers are not priced out of the significant long-term benefits that will result from our decarbonization and resiliency investment programs. On that same theme, 2022 was a significant year in terms of advancing our regulated decarbonization and resiliency strategy. In Virginia, the State Corporation Commission approved several rider-eligible investment programs, including our offshore wind project, subsequent license renewals of our four nuclear units, our second clean energy filing of new solar and energy storage projects and Phase 2 of our grid transformation program. Additional rider-eligible investments currently under SCC review include new solar and energy storage projects and our third annual clean energy filing, and high-voltage electric transmission necessary to continue to serve growing customer demand and data center load.

In South Carolina, we achieved our second best year ever for service reliability. In December, Moody’s upgraded Dominion Energy South Carolina’s credit rating, citing evidence of the Company’s €œimproved regulatory and stakeholder relationships€. In our Gas Distribution segment, we invested over $300 million, modernizing infrastructure that is safer, more reliable and better for the environment. We completed our LNG peaking supply facility in Utah, and we increased the number of our renewable natural gas projects in operation or under construction to €˜21. All told, our nuclear units produced about 50 million-megawatt hours of low-cost zero-carbon baseload power. That’s roughly 40% of our total generation production as a company. Our fleet’s performance continues to be exemplary, especially in periods of extreme weather, during which our stations provide vital stabilizing support to the grid and price stability in their respective regions.

Our power purchase agreement in Connecticut saved customers nearly $300 million. In summary, the regulated decarbonization and resiliency investment opportunity that we’ve outlined on previous earnings calls will continue to play a key role in driving the long-term growth of the Company for years to come. Before transitioning to comments on the business review, let me also highlight progress around our sustainability goals. I’m pleased to report that through 2021, we’ve reduced Scope 1 carbon emissions from our electric operations by 46% since 2005 and Scope 1 methane emissions from our gas operations by 38% since 2010. Notwithstanding the strong performance, we recognize the need to look holistically at our company’s footprint, which is why during 2022, we expanded our net zero commitment to include all Scope 2 emissions and the material categories of Scope 3 emissions.

These new commitments align with our focus on helping our customers and suppliers decarbonize. Finally, we increased the diversity of our workforce to 37%, an increase of nearly 4 percentage points since 2019, while also increasing our procurement spend with diverse suppliers to over $1.3 billion, representing 17% of our supplier spend, an increase of 4 percentage points since 2019. Now, let me turn to the top-to-bottom business review. I’m leading the effort with support from the full management team and in frequent consultation with our Board. We’re devoting all necessary resources to ensure that we thoroughly and methodically review every aspect of our business. When we announced the review in November, I indicated that we would be guided by the following principles as shown on slide 5.

A commitment to our state-regulated utility profile with an industry-leading investment opportunity focused on decarbonization and resiliency; a commitment to our current dividend; a commitment to our current credit profile; and a commitment to shareholder value enhancement and to transparency. None of those principles have changed. We are proceeding with pace and purpose. And as a result, we’re able to provide additional commentary on how we believe we should optimally position Dominion Energy at the conclusion of the review, to create maximum long-term value for our shareholders. First, a focus on delivering durable, high-quality and predictable long-term earnings growth profile. We recognize the importance of executing consistently against any earnings guidance offered post review.

Second, we believe it is critical to position our regulated utilities to earn a fair and competitive return on investment. We know that investors have choices about where they can confidently allocate long-term capital. Third, we know it is our responsibility to constantly look for ways to optimize the efficiency of our operations without losing sight of the absolute necessity of meeting high customer service standards. In recent years, we’ve driven down cost through improved processes, innovative use of technology and other best practice initiatives. We’ve included our O&M performance metrics in the appendix of today’s materials. As part of the review, we are evaluating what we can additionally do on costs within the context of the significant operational and cost efficiency we have achieved over the years.

Fourth, we believe that our financial credit metric performance needs strengthening. We want to emerge from the review with the ability over time to consistently meet and exceed our downgrade thresholds even during temporary periods of cost or regulatory pressure. As part of the review, we’re analyzing the most efficient sources of capital to fund our growth programs while seeking to minimize any amount of ongoing external equity financing need. Finally, we believe it is important to affirm our commitment to the dividend. I’ll note here our announcement this morning that the 2023 dividend, subject to Board approval, will be equal to the 2022 dividend. We believe that it is important to achieve potentially over time and without reducing the dividend, a payout ratio consistent with our current 65% ratio.

Since the announcement, we’ve spoken with hundreds of equity and fixed income investors and received valuable and direct feedback, much of which has affirmed our focus on these priorities. Investors have also understandably been focused on the go-forward earnings potential of the Company. Given that the review is still underway, we have and will continue to refrain from providing that guidance until the review is complete. I will say that the outcome will be informed by the principles and priorities I just outlined. We will continue to be deliberate in making ourselves available for input from the Company’s current and prospective capital providers. Let me now turn to address the Virginia legislative session. There is legislation pending that revises our regulatory model.

In addition, there is legislation that would, subject to commission approval, provide for a passive equity partner in our offshore wind project. It is too early to predict the outcome of any legislation. We remain engaged with stakeholders in the process. In terms of timing, as shown on slide 6, the Virginia General Assembly is scheduled to adjourn on February 25th. The Governor then has until March 27th to sign, amend or veto legislation that has passed both chambers. In the case that the Governor amends or vetos a bill, the legislation returns to the general assembly for what is typically a one-day reconvened session on April 12th. At that time, the general assembly may vote to override a veto or accept or reject amendments proposed by the Governor.

The Governor then has approximately 30 days to act on legislation that has been addressed in the reconvened session. Having a clear and definitive understanding of the future Virginia regulatory construct is a key input for the business review. Therefore, legislation timing will influence the cadence at which we’re able to share more details about the business review in the future. Steven will share some additional thoughts on investor communication in his prepared remarks. I know the business review is of paramount importance to our stakeholders. Let me reiterate my confidence that we’re executing a thorough, expeditious and comprehensive review with the goal of ensuring that Dominion Energy is best positioned to create significant long-term value for our shareholders, our customers and our employees.

With that, I’ll turn it over to Stephen to address financial matters before I provide further business updates on the execution of our plan.

Steven Ridge: Thank you, Bob, and good morning, everyone. Our fourth quarter 2022 operating earnings, as shown on slide 7, were $1.06 per share, which for this quarter represented normal weather in our utility service areas. These results were at the midpoint of our quarterly guidance range. Positive factors as compared to last year were weather, normal course regulated growth, the absence of the Millstone planned outage, absence of last year’s COVID deferred O&M and tax timing. Other factors as compared to last year were interest expense and share dilution. Full year 2022 operating earnings per share were $4.11 per share, slightly above the midpoint of our guidance range for the year. 2022 GAAP results were $1.09 per share.

Here, I’d highlight one adjustment, which is described in Schedule 2 of the earnings release kit. In connection with the business review, management has reviewed the unregulated solar portfolio that reports to our contracted assets segment. These approximately 30 solar facilities, representing around 1,000 megawatts operate primarily under long-term power purchase agreements with third parties. Consistent with prior commentary, the Company no longer intends to invest in unregulated solar projects for purposes of generating investment tax credits or ITCs. As a result, the Company impaired the portfolio in the fourth quarter and recognized a noncash charge of $1.5 billion. Moving now to guidance on slide 8. Given the pending business review, we are not providing full year 2023 earnings guidance nor are we refreshing our long-term capital investment plans at this time.

For the first quarter 2023, we expect operating earnings to be between $0.97 and $1.12 per share. Last year’s first quarter operating earnings were $1.18 and included $0.01 of benefit from weather. Positive year-over-year changes include growth in regulated investment, higher sales and higher Millstone margins. Negative changes include higher interest expense as a result of higher rates, as I will touch on more in a moment; lower DEV margins for certain utility customer contracts with market-based rates; a hurt from pension and OPEB as a result of 2022 asset performance; higher depreciation; the absence of solar investment tax credits; and O&M and tax timing. And just briefly as it relates to pension, I’d note that our pension funded status at year-end was 108%.

Turning to slide 9, let me address electric sales trends. Weather-normalized sales increased 3.4% in 2022 as compared to 2021. Components of this growth include a slight decline for residential, as you would expect, with continued back to the office trend and higher growth for the commercial segment driven by data center customers in Virginia. For 2023, we expect to remain above our long-term demand growth assumption of 1% to 1.5% per year, as Bob will touch on more in a moment. Briefly on financing. Since our last call, we’ve bolstered our liquidity at DEI with an opportunistic long-term debt issuance of $850 million late last year and a 364-day term loan facility of $2.5 billion, which we closed last month. These financings provide incremental flexibility, including to address first quarter maturities, which are described in the appendix of today’s materials.

We’ll refresh our financing plans pending the outcome of the business review. Let me share some color on two macro topics. First, higher interest rates. We maintain a level of floating rate, typically short-term debt at our holding company and operating segments, primarily to fund working capital as well as more permanent capital needs between long-term fixed rate issuances. This floating rate portfolio represents around 20% of our total debt or $8 billion. Since this time a year ago, we’ve seen our borrowing costs on this part of our capital structure increased by about 400 basis points. We will provide an update on rate assumptions, interest expense, hedging strategies and other mitigants when we conclude our business review. Another macro headwind is fuel costs.

We have very clear cut pass-through mechanisms for fuel costs across all our utilities. We employ prudent hedging and mitigation strategies to keep fuel costs low while ensuring security of supply. In aggregate, as of December 31st, we have an under-collected balance of approximately $2.5 billion in fuel costs across the Company. We’ve included a slide in the appendix with these details. As we’ve discussed previously, we don’t want our customers to miss out on the significant long-term benefits of our decarbonization and resiliency investment programs as a result of temporary cost pressures such as fuel. We will continue proactively working with regulators to employ mitigation measures to keep any increase to customer bills as muted as possible.

Turning now to credit, which Bob highlighted as one of our business review priorities. We continue to target high BBB range credit ratings for our parent company and single-A range ratings for our regulated operating companies. Over the last several years, we have taken steps to position Dominion Energy as an increasingly pure-play, state-regulated utility with a differentiated clean energy transition profile. And as a result, we’ve improved our business risk profile. Despite this meaningful qualitative improvement, our Moody’s published CFO pre-working capital to debt, one of the primary quantitative metrics used to determine our credit rating, has underperformed our downgrade threshold for the last several periods. Moody’s has indicated publicly that under the status quo, they expect that underperformance to persist.

Living consistently below our downgrade threshold is not a place we want to be. As Bob mentioned, we want to emerge from the review with the ability over time to consistently meet and exceed our downgrade threshold even during temporary periods of cost or regulatory pressure. Achieving and maintaining that will require a meaningful credit repair considering both the size of our balance sheet as well as the substantially elevated regulated capital investment over the next few years. Finally, as shown on slide 10, we intend to provide a business review update this spring with final timing to consider the status of the Virginia legislative process. We would expect to use that update to discuss any changes to the Virginia regulatory model as well as next steps as it relates to the business review.

That meeting would be followed with an Investor Day in the third quarter that would include a comprehensive update of the business plan. I will now turn the call back over to Bob.

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Bob Blue: Let me turn to other business updates and the execution of our growth program. As I’ve discussed in previous earnings calls, the strength of our Virginia service area economy supports our robust capital investment programs at DEV. Two recent announcements have confirmed Virginia’s economic strength. First, PJM recently published its annual forecast of demand growth. The Dominion Zone continues to be the highest growth rate among all zones within PJM, covering 13 states in the District of Columbia. PJM projects the 10-year summer peak load to grow at a 5% annual rate. This growth, primarily driven by data center loads, which have been increasing at an unprecedented rate, will require significant new capital investment.

Second, last month, Amazon announced its plans to invest $35 billion by 2040 to establish multiple data center campuses across Virginia. These new campuses will combine expandable capacity to position Amazon for long-term growth in Virginia and create an estimated 1,000 jobs. Data centers currently represent about 20% of our total sales in Virginia and have provided strong sales growth to date, a trend supported by these two announcements we certainly expect to continue. Our work continues to advance projects to bring both new and upgraded infrastructure to enable the continued connection and expansion of data center customers. For example, we filed for a new 500 kV transmission line with the SCC with an expected in-service date of late 2025.

The submission included around $700 million of capital investment. Turning to offshore wind on slide 12. In December, the SCC approved the cost sharing settlement agreement developed in collaboration with key stakeholders, including the Office of the Attorney General and other parties. We’re very pleased to be extending our track record of constructive regulatory outcomes. As it relates to the project execution, it’s very much on track and on budget. We have continued to work closely with the Bureau of Ocean Energy Management and other stakeholders to support the project’s time line. In particular, we received the draft environmental impact statement, which started the 36-day public comment period that will close later this month. The draft, DEIS, was thorough and contained no surprises.

Public hearings have already taken place, and we continue to work collaboratively with BOEM and all of the cooperating agencies. Advanced engineering and design work, which has allowed us to release major equipment for fabrication in advanced procurement and other preconstruction activities for the onshore scope of work. Project costs, excluding contingency, are currently 80% fixed and we continue to expect about 90% of the project costs, excluding contingency, will be fixed by the end of the first quarter. We remain on schedule to complete construction of the project by the end of 2026. We expect the EIS record of decision in late October of this year, slightly later than expected because of the DEIS timing, but still in support of our current project schedule.

Next, our Jones Act-compliant turbine installation vessel is currently 65% complete. We continue to expect it to be in service for the 2024 turbine installation season. Turning to other business updates on slide 14. As part of our ongoing resource planning, Dominion Energy South Carolina is replacing several of our older generation peaking turbines with modern, more efficient units. These peaking units which often operate seasonally during certain times of day when the demand for energy is at its highest, play an important role in our generation fleet with their ability to go from idle to producing energy quickly. Modernizing this equipment will lower fuel cost to customers, improve environmental performance and provide reliability and efficiency benefits.

These important resources are also critical to support the grid as solar continues to be added to our system. Construction activities will begin later this year for two of the facilities and the all-source RFP for a third facility is on track. On the regulatory front, we filed our 2023 IRP last month. Our preferred plan continues to be indicative of the potential for accelerated decarbonization and assumes all coal-only units are retired by the end of the decade. We look forward to engaging with all stakeholders on this planning process. Next, at our gas distribution business, we continue to see strong support for timely recovery on prudently incurred investment that provides safe, reliable, affordable and increasingly sustainable service including pipeline replacement efforts and expansion of service to rural communities.

For example, in December, the Public Service Commission of Utah approved a general rate increase of $48 million, and an allowed ROE of 9.6%. In this constructive outcome, they also approved the continuation of the infrastructure replacement tracker programs and the costs related to our natural gas storage project in Utah, Magna LNG, which was placed in service at the end of last year and will be used to meet system reliability for customers’ gas supply in the Salt Lake City area. On RNG, we remain one of the largest agriculture-based RNG developers in the country. We have six projects producing negative carbon renewable natural gas and 15 additional projects in various stages of development. We’re also reviewing potential tax benefits available to RNG through the inflation Reduction Act.

When we launched this business, we did so on the strength of the underlying project economics, and the very robust decarbonization benefit of agricultural renewable natural gas. Those investment criteria have not changed. If the projects are deemed eligible for tax incentives, we would expect to capture that value on behalf of our shareholders. With that, let me summarize our remarks on slide 15. Safety remains our top priority as our first core value. We delivered 2022 financial results that were in line with our guidance range. We continue to aggressively execute on our decarbonization and resiliency investment programs to meet our customers’ needs while creating jobs and spurring new business growth. Our offshore wind cost sharing settlement agreement was approved, which allows the project to continue moving forward on schedule and on budget.

And the top to bottom business review is proceeding with pace and purpose. I am focused on ensuring that Dominion Energy is best positioned to create significant long-term value for our shareholders. With that, we’re ready to take your questions.

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Q&A Session

Operator: Our first question comes from Shahriar Pourreza with Guggenheim Partners.

Shahriar Pourreza: So just starting, Bob, with the business review priorities you kind of discussed in the prepared remarks and you kind of laid out on slide 5, specifically kind of on the dividend comment. Could we maybe try to parse through the awards here a little more closely? I mean, obviously, we understand that you guys are holding the dividend at the current level for obvious reasons and that’s obviously consistent with your support for the dividend. But I guess, what is the language around quote unquote potentially over time mean as we think about the payout ratio bounds in the near term. I guess, what do you mean by potentially? Could this mean a faster or slower trajectory to get to the 60% range? I mean, we’ve received a lot of inbounds on these three words. So, any sort of visibility you could provide would probably be a reprieve.

Bob Blue: Yes, sure. Shahriar, I appreciate that. As we said in our prepared remarks, slightly more detailed than on the slide. Our current payout ratio of 65%, to the extent that that were to go up, our expectation and plan would be to return to 65% without cutting the dividend. That’s consistent with what we said when we announced the review. We’re doing a business review right now. So, I can’t answer exactly what the payout ratio might end up. But if it is above 65%, our expectation is to get it back to 65%, without cutting the dividend.

Shahriar Pourreza: Got it. Okay. I guess, we’ll wait for additional color there. And then, Bob, you took large impairment on the solar projects. I understand the test was triggered by the decision to not stay on the investment ITC recognition hamster wheel. But what part of the impairment test did you actually fail?

Steven Ridge: Shahriar, hey, it’s Steve. I can take that. So just to be specific, this has to do with our contracted assets solar portfolio. And there were really two primary purposes for the development of the portfolio. The first was to develop expertise in developing solar so we could employ that expertise credibly across our regulated footprint, which is what we’re doing right now. So, in effect, that task has been completed. The second was to generate investment tax credits. We believe given the attractiveness of our decarbonization and resiliency capital investment opportunity, the capital we’ve used in the past to generate those ITCs can be employed elsewhere to greater long-term shareholder benefit. So, the first sort of gating decision was, are we going to continue to invest in that portfolio for purposes of generating ITC?

And the answer we’ve said is no. 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, and that led to the impairment.

Shahriar Pourreza: Okay. Got it. Got it. That’s helpful. And then just really quick lastly for me. Just from a legislative process standpoint, I guess, how should we think about the likelihood of slippage into a reconvened session? I mean, put differently, if you had firm clarity on March 27th, could we see the schedule accelerate? Thanks.

Bob Blue: Shahriar, it’s Bob. It’s way too early to predict what the timing of the Virginia General Assembly and any action on any particular bill, including ones that relate to us, may be. As we laid out in our prepared remarks, the general assembly is scheduled to adjourn on the 25th of February. And then the Governor — bills go to the Governor at that point, or earlier once they’ve passed. And bills that arrive on the Governor’s desk with fewer than 7 days left in the legislative session, the Governor has 30 days to act on those bills. If he chooses to propose an amendment or veto a bill, then the general assembly, as you noted, comes back for a one-day reconvened session, and then they address those gubernatorial actions. So, I can’t give you any more clarity because we don’t know what the time frame on the general assembly may be. Once we do know something, that will allow us to address our own schedule.

Operator: Our next question comes from Steve Fleishman with Wolfe Research.

Steve Fleishman: So just first on the credit comment. Could you — you say you’re kind of both targeting high-BBB, but then also seem to imply kind of targeting above current thresholds, which I think your ratings are mid-BBB at the parent. So, could you just clarify, are you targeting the mid-BBB and above that? Are you targeting high-BBB because that’s a big difference?

Steven Ridge: Yes. Hey Steve, this is Steve. I’ll take that one. So, on an issuer rating, we’re actually high-BBB at two of the three rating agencies. At Moody we’re BBB. Our objective is to maintain those targeted rating categories, and the downgrade thresholds, at least at Moody’s associated with that is 14% on the down and 17% on the up. As we mentioned in the call script, we intend to meet and exceed that downgrade threshold even in times of temporary pressures from cost like fuel costs and regulatory adjustments. And that has been one of the drivers of our underperformance historically relative to our downgrade threshold. So, we’re still targeting high-BBB. It’s where we are on two of the three agencies from an issuer rating perspective. And the appropriate downgrade threshold, at least from the Moody’s perspective, is 14%.

Steve Fleishman: Okay. So, for the senior unsecured rating, which we typically use, that would be mid-BBB?

Steven Ridge: Depending on the specific methodology — but, yes.

Steve Fleishman: Okay. So you’re basically targeting the ratings you’re currently at, not a higher rate in your current…

Steven Ridge: That’s right.