Q2 2023 Dominion Energy Inc Earnings Call
Welcome to the Dominion Energy second corner 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'd like to ask a question.
I'd now like to turn the call over to David Mcfarland, Vice President of Investor Relations.
Yeah.
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.
It 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 really.
<unk> 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 <unk>.
Bob.
Thank you David Good morning, everyone as.
As announced this morning, we reported second quarter operating earnings of 53 per share our results were meaningfully impacted by historically mild weather and outages at the Millstone power station, both of which will address later in our prepared remarks, but first I'll address our safety performance and provide an update on the status of the business review.
Turning to slide three our employee Osha injury recordable rate for the first half of the year was 0.3 to this remarkable performance has us on pace to achieve the best safety year in the history of our company.
Safety is of course much more than just a number on the page. It's our first core value and represents the wellbeing of our people.
I commend my colleagues for the dedicated focus necessary to create and maintain the safety mindset and work practices that enable this outstanding performance.
Moving now to the business review I'm pleased with the progress, we're making towards delivering a compelling repositioning of our company.
Maximum long term value for shareholders employees customers and other stakeholders as I've said before I'm as excited as ever for the future of our company are guiding commitments and priorities are unchanged and replicated identically on slide four.
Have you timeline shown on slide five is also unchanged. We expect to conclude the review and hosted an investor day during the third quarter at which we will provide an updated strategic and financial outlook for the company, we're working expeditiously, but conscientiously and recognition of the vital importance of achieving an optimal.
Resolved.
Since announcing the review last November we have among other steps rigorously engage with our shareholders to listen reflect and inform our business review commitments and priorities, we're committed to maintaining a similar level of engagement as we navigate through and beyond the review.
We know that rebuilding trust is vital.
We've positioned Dominion energy for long Dominion Energy, Virginia for long term success by working collaboratively with key stakeholders to simplify the regulatory framework provide meaningful rate relief to customers and ensure the stability that will allow our company to confidently continue to allocate billions of dollars of annual investment in.
Sort of the economic prosperity of the citizens of the Commonwealth of Virginia to the benefit of both customers and capital providers. We've confirmed our commitment to the current dividend, we've committed to and taken steps to improve operating earnings quality.
We continue to focus on cost control by looking for what more can be done without losing sight of the absolute necessity of meeting high customer service standards and against the backdrop of the significant operational and cost efficiencies we've achieved over the last several years.
So consistent with prior comments, while there may be some potential in that area, we do not see it as a game changer.
We've included our O&M performance metrics in the appendix of todays materials for reference.
And we've committed to an improved credit profile and taken the first step toward that goal by announcing an agreement to sell our remaining interest in Cove point.
Each will generate approximately $3 $3 billion of cash after tax, which we will use to reduce debt. This highly credit accretive transaction was the result of a robust and competitive sale process. The sale represents an attractive exit from what has been an excellent investment for our shareholders with this sale we've.
I called nearly $9 billion of cash flow since 2018, which is well in excess of our total investment in the facility inclusive of the export project construction cost of approximately $4 billion.
We've included the Investor slides, we published at the time of the announcement and the appendix of todays materials there.
The request for HSR clearance and the D. O E notification have both been filed and we expect the transaction to close later this year.
We will continue to announce updates as events warrant as we work to finalize additional business review inputs in advance of the Investor day with that I'll turn it over to Steven to address financial matters.
You, Bob and good morning, all.
Second quarter 2023 operating earnings as shown on slide six were <unk> 53 per share.
As Youre aware, we revised our second quarter guidance on June 30th from a range of 58 to 68 cents per share to a range of 44 to 50 cents per share to reflect our expectation for the negative impact of weather and unplanned outages at millstone.
First on weather I'll, just note that second quarter weather was the mildest relative to 15 year normal in the last 50 years and amounted to an eight cent headwind during the quarter.
With regard to millstone.
We experienced both an increase to the duration of a planned outage at unit two and in it and an extended unplanned outage at unit, three which taken together amounted to an additional eight cent headwind during the quarter.
These outages are uncharacteristic for Millstone, which has a strong history as the largest zero carbon electricity resource in new England of exemplary safety and reliability performance.
Senior leadership, including Eric Carr, who recently joined as our new Chief Nuclear Officer. After several years at P said, most recently as their chief Nuclear Officer has instituted a thorough and peer involved review of the plants operating practices to ensure that despite the unusual nature of these outages. This.
Station is prepared to consistently operate at its maximum potential for years to come.
Higher sales and lower O&M contributed to the modest outperformance relative to the revised guidance range relative to the second quarter last year positive factors include higher sales and O&M timing negative factors include higher interest expense lower D. E V margins for certain utility customer contracts with market based rates higher.
Nation, the absence of solar investment tax credits and as discussed whether in millstone.
Second quarter GAAP results reflect a net income of 69 cents per share, which includes the positive noncash mark to market impact of economic hedging activities and unrealized gains in the value of our nuclear decommissioning Trust funds, a summary of all adjustments between operating and reporting results as included in schedule two of the earnings release kit.
Moving now to guidance on slide seven.
Given the pending business review, we are not providing full year 2023 earnings guidance for the third quarter 2023, we expect operating earnings to be between 72 cents in 87 cents per share last year's third quarter operating earnings were $1 11 per share let me walk through some of the key drivers of this year over year change all of which we've identified.
<unk> previously.
First approximately 12 cents from higher interest expense as a result of higher market rates approximately nine cents related to the $350 million rider revenue reduction, which became effective July 1st approximately six cents related to the removal of Cove point from operating earnings effective July 1st due to the sale agreement.
About half that is related to the absence of a three cent help this quarter relative to last year from higher variable revenue and other additional services.
This number also doesn't capture the impact of expected lower interest expense due to parent debt retirement from sale proceeds later this year, which we estimate at approximately five to six cents per share on an annualized basis.
Approximately four cents from the elimination of nonregulated solar investment tax credits and approximately two cents from an O&M related to the Millstone fall planned outage.
Before moving to sales trends, let me emphasize one of our business review priorities, a durable high quality and predictable long term earnings growth profile with consistent execution, we recognize the critical importance of meeting any post review financial targets, even if and when unexpected headwinds occur.
Turning to slide eight I'll address electric sales trends.
When we announced the review in November we described the long term scope and duration of our resiliency and de carbonization capital investment opportunity as very much intact.
In May we discussed Pjm's updated electric load projections that forecast summer load growth in the Dom zone of 5% per year for the next 10 years.
Those estimates reflect the very robust demand growth, we're observing in real time across our system weather normalized sales in Virginia increased 5% over the last 12 months through June as compared to the prior year.
For full year 2023, we expect the growth rate of <unk> to be around 5%.
It's worth noting that just last week, we registered new summer peak demand records on consecutive days.
And just as we expect our customers likely would have no idea given the high quality operational performance delivered by our colleagues under these demanding load conditions.
The unique intersection of industry, leading demand growth and strong policy support for resiliency de carbonization affordability and economic growth combined.
Combined with the durability of the Virginia regulatory structure represents an unprecedented opportunity for our company, our customers and our capital providers. It.
It will drive growth for many years to come demand prudent capital allocation and require a strong balance sheet, which brings me to my next topic credit.
Our commitments and priorities with regard to credit are unchanged.
Reiterate them here as.
As we've discussed despite meaningful qualitative improvement over the last several years, our credit metrics need 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 improve our balance sheet and fund our robust capital investments, while seeking to minimize any amount of external equity financing need.
As Bob mentioned, the Cove point transaction was strongly credit accretive improving consolidated <unk> to debt as measured by Moody's by 70 basis points.
Post sale comments by the rating agencies, with whom we maintain frequent engagement highlighted the credit positive nature of the announcement, but noted as we expected that additional steps are required to ensure that our metrics sustainably meet and exceed our downgrade thresholds going forward.
As it relates to credit the objective of the business review is to create a robust balance sheet foundation that can both withstand potential temporary headwinds and also sustainably support this significantly elevated levels of regulated capital investment over the next few years with that I will turn the call back over to Bob.
Turning to slide nine let me start by updating you on the implementation of the Virginia rate reform legislation that became effective on July one.
The New Virginia Law provides significant bill relief for our customers and supports the long term stability of our largest utility segment.
With nearly unanimous bipartisan support for legislation provides the certainty we need to fund and execute the critical energy investments that support the robust electrical demand growth in Virginia.
As of July 1st Vellore directly enabled nearly $14 reduction to the typical dominion energy residential customers monthly bill.
Half of this decrease results from the cessation of certain riders that represent approximately $350 million of annual revenues.
The other half of the reduction comes from a downward adjustment to the component of electric rates that were covers the cost of power station fuel and purchase power.
The Commission has allowed this interim adjustment to take effect, while it considers the fuel securitization proposal <unk> filed on July 3rd.
By arranging for certain unrecovered fuel cost to be paid off over time.
<unk> would avoid the possible alternative an abrupt rate increase that would amount to about $15 per month for typical residential customers. We expect a final order by early November .
<unk> also submitted its biennial review filing on July 3rd initiating a review of base rates, which represents about one third of Dev's total rate base.
Filing highlights dev's exceptionally reliable and affordable service consider these facts, 99.9% average reliability delivered at rates, 22% below the national average I'd note our track record of operating efficiently as reflected in our competitive rates as I mentioned previously.
Since 2010, the typical residential bill has grown by only about one 2% year over year.
Less than half of the two 6% increase in the general inflation rate.
We're proud of our record and the work we do to serve customers every single day, we expect a final order by March 3rd of next year.
Turning to offshore wind on slide 10, the project remains on time and on budget consistent with the timelines and estimates previously provided we continue to work closely with the Bureau of Ocean Energy management and other stakeholders to support the project timeline.
But all of them receive comments from all agencies on the draft of the final E. I S and is on schedule to deliver the final <unk> by the end of September and the record of decision by the end of October we continue to be encouraged by the administration's timely processing of offshore wind projects.
In July the FCC approved our updated offshore wind rider and the application D V requested and received an annual revenue requirement of $271 million for jurisdictional customers.
Im pleased to update that our current project costs, excluding contingency are now more than 90% fixed our procurement and manufacturing processes are well underway. In fact, we expect the first monetize to be delivered to the port of Virginia later this year.
Our current contingency reserve is still about equal to our original reserve despite having progressed the projects significantly and fix more costs taken together and despite trends we see elsewhere in the offshore wind market, we do not see anything that changes our confidence in delivering the project on time and on budget.
Project to date, we've invested approximately $1 $7 billion, which we expect to grow to around $3 billion by year end.
As a reminder, we updated our expected L Coa and our most recent regulatory filing to the low end of the 80 to $90 per megawatt range to account for PTC value based on the inflation reduction Act.
Our Jones Act compliant installation vessel is currently 74% complete no change to our expectation of completion well in advance of the need to support the currency of our construction schedule and timely completion by the end of 2026.
Turning to other notable updates on slide 11.
We've continued to see strong regulatory outcomes related to nuclear life extension clean energy and grid transformation on data centers. We continue to advance a series of infrastructure upgrade projects that will enable incremental increases in power for data center customers in eastern Loudoun County for.
<unk> projects had been completed ahead of schedule and additional project is on schedule to be completed by the end of 2023, we continue to develop a new 500 kv transmission line with an expected in service date of late 2025.
Given the unprecedented growth in areas served by our electric transmission, we continue to see an acceleration of and long term increase in electric transmission investment opportunities throughout our service area.
As such we recently submitted a significant number of additional projects as part of Pjm's transmission planning process that we believe will ensure the electric grid in Virginia, as reliable resilient and able to adapt to the increasing energy demand, while also transitioning to a cleaner energy resources.
Turning to Dominion Energy South Carolina on Slide 12 in addition to delivering safe and reliable energy D. S sees electric rates for residential customers are 9% below the national average as of July 1st well.
We're proud to meet the energy needs of the robust economic development and population growth in South Carolina.
On the regulatory front, we will complete the testimony and hearings phases in our natural gas general rate case in the next few weeks, we expect an order from the commission by October <unk>.
Following commission approval of the electric fuel settlement. The annual fuel adjustment was effective in May and is designed to eliminate all previous under collections. During this fuel year.
Finally at our gas distribution business strong economic development is driving attractive customer growth year over year of two 4% in North Carolina, and two 3% in Utah.
It's all our gas business as we continue to see strong support for timely recovery on prudently incurred investments that provide safe reliable affordable and increasingly sustainable service, including pipeline replacement efforts and expansion of service to rural communities.
<unk>, we have six R&D projects currently injecting gas with 18 other projects in various stages of development.
With that let me summarize our remarks on slide 13, our safety performance. This quarter was outstanding we reported operating earnings of 53 cents per share we.
We continue to execute on our de carbonization and resiliency investment programs to meet our customers' needs, while creating jobs and spring new business growth.
Our offshore wind project continues to move forward on schedule and on budget and the business review is proceeding with pace and purpose I'm 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.
Thank you at this time, we will open the floor for questions. If you would like to ask a question. Please press the Starkey followed by the one key on your Touchtone phone now if at any time, you would like to remove yourself from the queue. Please press star two again to ask a question. Please press star one and our first question comes from Shar <unk> with Guggenheim partners.
Hey, guys. Good morning, good morning Shar.
Good morning, Bob.
One of my favorite questions to ask you is obviously as we're getting closer to the Investor day.
Is there any changes to your expectations for kind of this turnkey that now that you've sold coal.
Or could there still be some contingencies on potential ongoing sale process. So with all of our questions be answered as we think about the balance sheet base earnings growth rate et cetera, as we head into that event.
Yes, no change Shar and we would expect to your questions be answered as we've said our objective is to.
Eliminate as many input variables as possible by the time, we get to that Investor day.
We're on track to do that so no change okay.
Okay. Good and then let's get to see on the offshore wind you guys have locked in additional costs, there and I don't need to like asking one question like this but I might as well but.
Can you just tell us if you've had any interest in the wind steak option at all at this point just given what we've been seeing around.
Yes, Shar as we've said throughout the business review.
We're reviewing from top to bottom taking a look at everything in the business.
By statute there is an option for us related to our offshore wind and we're reviewing that as part of the business review, but I can't update you anymore on it.
Okay. Okay, and then just just lastly, one of the Millstone units, obviously heading for another outage. This fall I mean can you just talk about sort of talk to the quantum with like that O&M, there and it seems like there's been some issues with their units. This year is there any is there any kind of major capital investments you may be facing there. Thanks.
Yes.
Sure. This is Steve I'll take with regard to the fall outage I mentioned, we'll see about two cents of that hurt in Q3, and the remainder of the hurt in Q4, it's fairly standard and think about.
Typical planned outage is about a $50 million O&M hurt given how we accelerate that work during that time period, and then of course on top of that there's loss margin from the unit not actually producing electricity to sale, but there's nothing unusual about the planned outage in the fourth quarter as I mentioned.
The performance of Millstone in the second quarter is very uncharacteristic in it it was.
Something we're taking very very seriously as I mentioned in the prepared remarks.
Those units will continue to operate at very high reliability going forward there was no.
The fundamental issue that we discovered that we expect is going to require massive amounts of capital investment going forward to remediate going forward.
Okay, Alright, perfect guys Thats, all I had so we wait for the Q3 update thanks I appreciate it thanks sure.
And our next question comes from Jeremy Tonet with J P. Morgan.
Yeah.
Hi, good morning.
Morning, Jeremy Jeremy.
I was just wondering if you could help me help me out a bit with I guess earnings trajectory for the business overall, if we look at kind of year to date results and <unk> guide.
<unk> was flat year over year, it seems like it's down a bit year over year.
So just wondering if you could share any other thoughts as far as trajectory and what could revert next year to two maybe with 24.
Hey, Jeremy Steve.
That's a really good question. Thanks for that so let me start with this at the Investor Day, which we intend to have in the third quarter, we're going to provide very clear direction on our company's post review earnings and earnings growth outlook.
Including a build up of the parts to that consolidated forecast.
I would just say that 2023 is very much a transition year for us and I understand that does make it more challenging to model.
But since the initiation of the review I think we've tried to be very transparent as we've delivered results around key drivers that are going to impact 2023 results.
Including the D V. A rider role in interest expense and we don't see that those major categories.
Have changed much so.
We havent given full year guidance as we mentioned.
But I would say, we're cognizant of the investment community's interest in what the earnings potential of the company is going to be in and the good news is is that we're going to be very comprehensive in how we address that as part of the Investor day.
Got it makes sense, we will stay tuned for that.
Maybe looking in the rearview at this point if you are able to offer more commentary in Virginia now that now with our.
Being approved what is the.
The reaction from regulators and stakeholders bend to the CEB.
Rate reduction there just trying to get a temperature check on everything in Virginia.
As you would expect people are pretty positive about a rate reduction.
I think that if you look at the.
History of our.
Regulatory outcomes in Virginia over the last few years, you see approval of.
The variety of new clean energy programs approval of.
Subsequent license renewal investment.
Approval of transmission projects.
We've I believe worked well with stakeholders and the regulatory process and achieved strong outcomes.
And I think if you look at the Big picture.
As we mentioned in our prepared remarks, our reliability is high.
Our rates are competitive substantially below the national average that's a very good place to be.
When you're in front of your regulators.
Got it that's very helpful I'll leave it there thanks.
Thanks, Jeremy.
And our next question comes from Carly Davenport with Goldman Sachs.
Hey, good morning, Thanks for taking the questions.
Wanted to just start off on the demand side.
Do you feel like Pjm's forecast kind of accurately capture the growth that youre seeing in Virginia, and maybe how do you think about that in the context of your forecast for electric sales growth in Virginia going forward. It seems like it's pretty in line for 2023, but just kind of as you think about 2024 and beyond.
We've spent a lot of time.
Talking to PJM over the last few years on what we were seeing in terms of data centers.
And we believe that is reflected in their most recent sales forecast which is robust.
But we're seeing robust interest.
And as we described in our prepared remarks, we're seeing.
Strong demand growth this year in line with what we would expect over the course.
The next few years, there's just no evidence that we can see that this kind of growth is abating.
More and more interest from data center customers in our service territory and.
So I would say the PJM forecast is pretty reflective of what we expect the future will look like.
Great. That's helpful. And then maybe just a follow up kind of I. Appreciate all the updates that you provided on on Virginia, and just wanted to.
To touch on the nuclear life extension program can you just talk about kind of what investments are included in our initial $1 2 billion.
And then what what other potential phases of that program could look like.
Yes, so the overall investment we expect to be $4 billion and it is a variety of programs at a chunk of what's in that early $1 2 billion. For example is.
We have a lot of big piping at our stations that we've put out sort of carbon fiber.
Inlay in.
That will allow them to be quite reliable for many many years.
There are a host of other <unk>.
Projects.
Large and small that will be included in that.
<unk> 4 billion.
But we will put us in a strong position to be able to operate at north Anna and at Surrey for an additional 20 years. We can give you some more specific detail post call if youre looking for it.
Got that in the filings.
Great. Thanks, so much I'll leave it there.
Thank you. This does conclude this morning's conference call you may now disconnect your lines and enjoy your day.
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