Earnings Call Transcript - D Q1 2022

David McFarland, Director, Investor Relations

Good morning, and thank you for joining today's call. Earnings materials, including today's prepared remarks, may 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; Jim Chapman, Executive Vice President, Chief Financial Officer; and Diane Leopold, Executive Vice President and Chief Operating Officer. I will now turn the call over to Jim.

James Chapman, CFO

Thank you, David, and good morning. Before I begin, I'll remind everyone of the extensive disclosure package and growth capital roll forward we shared on last quarter's call. We're very focused on overall execution of those plans, including extending our track record of delivering results in line with our financial guidance as we did again this quarter. I'll begin with a recap of our compelling investment proposition and again, highlight our focus on the consistent execution of our strategy. We expect to grow our earnings per share by 6.5% per year through at least 2026, based largely on our continued execution of our $37 billion 5-year growth capital program, as shown on Slide 3. As a reminder, over 85% of that capital investment is emissions reduction enabling and over 75% is rider recovery eligible. The resulting approximately 10% total shareholder return proposition is combined with an attractive pure-play state-regulated utility profile and an industry-leading ESG profile. This utility profile is centered around five premier states, as shown on Slide 4. All of these states share the philosophy that a common-sense approach to energy policy and regulation puts a priority on safety, reliability, affordability, and sustainability, as Bob will touch on in his remarks in just a moment. Turning to Slide 5. We see up to $73 billion of green investment opportunity across our entire footprint through 2035, nearly all of which will qualify for regulated rider recovery. We believe we offer the largest, broadest in scope, longest in duration, and most visible regulated decarbonization opportunity among U.S. utilities, which, as you will hear in today's prepared remarks, is continuing to steadily transform into reality. The successful execution of this plan is already benefiting our customers, communities, the environment, and our investors. Before handing it to Bob for his business update, I'll discuss our first-quarter results and related financial topics. Our first-quarter 2022 operating earnings, as shown on Slide 6, were $1.18 per share, which included $0.01 of help from better-than-normal weather in our utility service territories. Weather-normalized results were at the midpoint of our quarterly guidance range, extending to 25 consecutive quarters, our track record of delivering on our financial commitments to our investors. Positive factors as compared to last year include growth from regulated investment across electric and gas utility programs, interest expense, and modest margin help. Other factors as compared to the prior year include capacity expense and share dilution. First-quarter GAAP earnings were $0.83 per share and reflect a noncash mark-to-market impact of economic hedging activities, unrealized changes in the value of our nuclear decommissioning trust fund and other adjustments. A summary of all adjustments between operating and reported results is as usual, included in Schedule 2 of the earnings release kit. Turning now to guidance on Slide 7. As usual, we are providing a quarterly guidance range, which is designed primarily to account for variations from normal weather. For the second quarter of 2022, we expect operating earnings to be between $0.70 and $0.80 per share. Positive factors as compared to last year are expected to be normal course regulated rider growth, sales growth, and a return to normal weather. Other factors as compared to last year are expected to be a millstone planned outage and some tax timing. We are affirming our existing full-year and long-term operating earnings and dividend guidance as well, with no changes here from prior guidance. Turning to Slide 8. Let me take a minute to recap our O&M management and highlight our strong performance relative to our guidance of keeping O&M flat normalized for riders. Since our 2019 Investor Day, when we spent some time describing our flat normalized O&M target, we created a material value for our customers and shareholders by removing about $250 million in costs, a reduction of over 8% during that 4-year period, something we view as quite an accomplishment. Looking forward, we're focused on keeping normalized O&M flat by driving down costs through improved processes, innovative use of technology, and other best practices or cost-cutting initiatives. It's a dynamic process. We very intentionally go through each of our segments, each of our assets, each of our locations to find opportunities to leverage technology to improve business processes and to improve in areas like smart buying across our platform. Finally, consistent with our current guidance, we expect to achieve flat normalized O&M through 2026, with no changes here also from prior communications. Next, I'll touch on inflation, one of the more prevalent themes for this earnings season, it seems. While we don't have a crystal ball on where inflation rates are heading, how high and for how long, let me share some color on the way we think about the impact of inflation on our business. As I mentioned, a substantial portion of our existing rate base and over 75% of our growth capital is rider eligible, which allows for timely annual true-ups, including recovery of any changes to cost and interest rates without the need to wait for less frequent base rate proceedings. So how about inflationary impacts on our largest single rider project, regulated offshore wind? As discussed on our fourth quarter call, that project has been largely derisked from inflationary impacts at this point. Our five major fixed cost agreements collectively represent about $7 billion of the total budget. Within those contracts, only about $800 million remains subject to steel and metals commodity indexing, and this component of the budget already reflects commodity cost increases observed in 2021, leading up to our filing date. So what about interest rates? Inflation is, of course, generally accompanied by a rise in rates. And we reflect market expectations, so increases in our planning process and in guidance. We, of course, don't just model flat rates. About 80% of our balance sheet is fixed rate and is long in duration, over 13 years in average tenure. Looking ahead to future issuances of long-term debt, we manage that interest rate exposure through a variety of hedging and treasury activities including, at this time, about $10 billion notional of pre-issuance interest rate hedges, which will help us keep future costs low. So what does that mean? That portfolio allows us to lock in treasury rates for issuances between now and 2026 at rates as low as almost 1%. This year, we have already issued $1 billion of long-term debt at Dominion Energy Virginia at a weighted average cost of 2.6%, consistent with our 2022 financing plan guidance. As it relates to additional fixed income issuances remaining for the year, we will continue to monitor market conditions and look for opportunities to further derisk our plan and create shareholder value. Finally, a reminder that economic growth, inflation, and higher interest rates are all part of the mix when it comes to determining authorized ROEs across our utility businesses in our periodic rate proceedings. So in summary, the current inflation environment is, of course, dynamic, and we are monitoring it closely. At present, however, due in part to the factors I've just described, we're not currently forecasting a material earnings impact associated with inflation. I would also note the impact that the current inflation environment can have on our customer bills. We, of course, prioritize customer affordability and implement various mitigation strategies as Bob will discuss in a moment. And with that, I'll turn the call over to Bob.

Robert Blue, CEO

Thank you, Jim. I’ll start by discussing safety. As of April 2022, our OSHA recordable rate was 0.52. Although current results are slightly higher than last year, they are still low compared to historical trends and significantly below industry averages. Safety is a top priority for our over 17,000 employees, their families, and the communities we support, which is why it is our foremost core value. Now, let's move on to updates regarding our growth plan. Our regulated offshore wind project is on track and within budget. Major project milestones are outlined in our latest presentation. Contracts with key offshore equipment suppliers were finalized in late 2021, covering multiple components essential to the project. We are encouraged by the progress of the State rider approval review, having received intervener and staff testimonies, and a hearing set for later this month, with the final order from the SEC anticipated in early August. The federal permitting process is also moving forward, with the draft environmental impact statement expected in the latter half of this year. It is crucial to emphasize that offshore wind offers zero fuel costs and significant economic and job benefits, which are especially needed at this time. This project positions Virginia to be a major hub for the growing offshore wind market along the East Coast. Importantly, this investment is 100% regulated and eligible for rider recovery in Virginia, and we believe we have met the VCEA's specific prudency requirements for investment significantly. Regarding our Jones Act vessel, the SEC approved our application in March, and we anticipate delivery in late 2023, ensuring we are ready for the 2024 turbine installation season. On updates related to clean energy investments, we submitted a settlement for the pending nuclear subsequent license renewal rider filing, supported by the SEC staff and Consumer Council. This nuclear life extension entails nearly $4 billion in capital investment through 2035, with the first phase accounting for about $1 billion. If approved, this agreement would resolve all outstanding issues in that case, and we believe that maintaining existing nuclear facilities is essential to achieving greenhouse gas reduction targets. The Virginia units have excelled over the years, supplying over 30% of our energy needs at a low cost and without carbon emissions. In terms of solar energy, we were pleased to receive SEC approval for our latest clean energy filing, which encompasses nearly 1,000 megawatts of solar and energy storage capacity, marking our fifth consecutive approval. We also recently issued an RFP for an additional 1,200 megawatts of solar and 125 megawatts of energy storage. Our upcoming clean energy filing is planned for later this year. Currently, our utility-scale project development portfolio represents over 7 gigawatts of capacity, contributing significantly towards achieving the 10 gigawatts of utility-owned solar planned by 2035, as mandated by the VCEA. On the solar supply chain, we continue to face challenges, as supply remains tight and prices for certain components have risen. We expect preliminary findings on the Department of Commerce's anti-circumvention review as early as late August, which will clarify whether tariffs will apply to panels imported from specific Southeast Asian countries. While panels are currently available, the potential impact of tariffs remains uncertain. Our projects for 2022 are not affected by this review since the necessary panels are already in the country. For our 2023 projects, we have ensured that a significant portion is contracted and largely sheltered from these potential tariff impacts. In the scenario where tariffs do apply, we are well-positioned to manage cost impacts through our strong supplier relationships, with panels representing just 30% of a project's total costs. For our nonregulated solar projects, we are committed to working with our customers to minimize any potential impact stemming from tariffs. Moving forward into 2024 and beyond, we feel confident that we can adapt to any developing situation regarding tariffs and manage costs effectively. If delays do occur related to the tariff review, we plan to expedite other capital projects to maintain our financial performance and customer affordability. We are also looking to apply additional operational control measures to manage expenses effectively. It's important to note our ongoing engagement with the Biden Administration to ensure that energy policies promote a stable and affordable clean energy transition. Lastly, regarding Virginia's withdrawal from Reggie, we filed with the SEC to suspend our rider Reggie and proposed alternative recovery of costs incurred up until July 31, which could provide customer bill reductions while supporting our decarbonization efforts. In our gas distribution operations, we are making strides to enhance sustainability and reduce emissions through various initiatives. Our recent projects include the launch of a carbon offset program in Utah, and we remain the largest developer of agriculture-based renewable natural gas in the U.S., with several RNG projects underway. Dominion Energy South Carolina is delivering excellent operating results, with no injuries reported this quarter. Our customer service metrics are strong, showing significant improvement in outage times and earning recognition for being easy to work with. The generation modernization program in South Carolina is progressing as planned, with the replacement of older turbines to enhance efficiency and reliability. Turning to customer rates in Virginia, we are committed to providing safe and reliable energy at affordable prices. Over the past decade, our rates have increased by less than 1% annually, below the national average. As we look ahead, we intend to continue offering value to our customers amid growing demand for data center services and electric vehicle adoption. Lastly, the recent passage of House Bill 894 in Virginia promotes utility infrastructure investment and supports the development of advanced small modular nuclear reactors, aligning with our goals to further reduce carbon emissions. In conclusion, safety remains our main focus, and we are committed to executing our projects effectively while adhering to our financial guidance and growth plans. We’re prepared to answer any questions.

Operator, Operator

Our first question will come from Shahriar Pourreza with Guggenheim Partners.

Shahriar Pourreza, Analyst

That was quite a comprehensive update there. Bob, I guess if we could start with offshore wind. There's obviously been some back and forth in the docket and the testimonies, which I think was to be expected, but maybe start there. And I'm also curious if there are any updates on the remainder of the pricing that was indexed to commodities?

Robert Blue, CEO

Yes. So Shar, you're right. The back and forth was expected. It's a regulatory proceeding. There's always a bit ask there. What I would say though is if you look at our rebuttal testimony, and we were of this view when we filed the case, but I feel even stronger now as all the testimony is in, we have a very strong case on offshore wind. The legislation, the Virginia Clean Economy Act lays out the parameters for spending that is presumed prudent and we've clearly met all of those. And we showed in our rebuttal testimony under a variety of scenarios that this project is customer beneficial, particularly when you think about the updated PJM load forecast, which shows increased sales in Virginia. So this project will help us meet that need. It will provide incredible economic benefits for the state. It is strongly supported, and we feel very comfortable with where we are on this as you recognize a fully regulated offshore wind project. On pricing. Yes, as you point out, there are portions of our contracts that have some indexes. They sort of move around but we contracted late last year, as you know, on these projects. And as we said in our prepared remarks, there's no change or update to budget or schedule on offshore wind. So we're still in what we believe was a very strong position we were in when we filed the case.

Shahriar Pourreza, Analyst

Got it. I just want to confirm your level of interest in any offshore wind opportunities outside of your current structure, especially since one of your peers in the Northeast has put their wind business up for sale.

Robert Blue, CEO

We're a state-regulated pure-play utility, and we're interested in state-regulated projects like the one that we're doing in Virginia. That's our interest in offshore wind.

Shahriar Pourreza, Analyst

Got it. And then just real quick classic for me. Just in light of, obviously, the rising financing costs, I mean, at the parent and obviously, an extremely favorable commodity backdrop. I hate to sound like a broken record, but the backdrop for assets kind of remains really hot at this kind of a gas price environment. So any updated thoughts on Millstone in light of the current paradigm? And even co-point, just given the value of LNG assets given what we're seeing overseas. You clearly have incremental spending needs. I mean your capital growth is extremely healthy and eventually, you may need some sort of financing. So just curious on maybe the other parts of the business that may be seen as not a base or core, right?

Robert Blue, CEO

Yes, Shar. I appreciate your ongoing inquiries about this. It’s great to see your consistency. We will provide the same response and strive for consistency as well. We believe in the assets we have to deliver the performance we’ve outlined. Our focus is on execution. Specifically regarding Millstone, as we have mentioned previously, we view Millstone as vital for Connecticut and the region to achieve its decarbonization objectives. Recently, the Connecticut legislature overwhelmingly approved a bill proposed by Governor Lamont for zero carbon by 2040. Last year, the Department of Energy and Environment in Connecticut conducted a study on reaching that 2040 goal and demonstrated that scenarios including Millstone are highly beneficial for customers. Thus, we consider Millstone to be a strong asset that has operated effectively. Overall, we are confident in the asset mix we possess to meet the goals we have established.

Shahriar Pourreza, Analyst

Perfect. And Bob, yes, that was consistent from a couple of weeks ago.

Operator, Operator

Our next question will come from Steve Fleishman with Wolfe Research.

Steven Fleishman, Analyst

Just regarding the offshore wind, should we expect a litigated outcome in August? Or is there any possibility of reaching a settlement with the parties?

Robert Blue, CEO

Yes, Steve, as you know from our approach that we've taken on regulatory issues, if there's a way to find a constructive settlement, we're all in favor of that. This project has a litigated timeline or a litigation timeline that has a hearing set for a couple of weeks from now and then an order in early August. And that's obviously the presumption on any regulated proceeding. If there were an opportunity to settle in a constructive way, we'd obviously do that. I expect you to hear that from every party to every litigated matter. But we've got a schedule, and that's what we're following.

Steven Fleishman, Analyst

That was a very helpful update on the solar project situation for the company. Do you think that when you receive a preliminary decision in August, regardless of the outcome, it will provide enough information to move forward with project decisions, as it would likely indicate the rough range of outcomes?

Robert Blue, CEO

Yes. We would think that would give us a very good sense.

Steven Fleishman, Analyst

Okay. I'm also curious about how the commercial and industrial customers, particularly in the data center sector, are responding. Many of these customers have ESG-related requirements. Are they understanding that it might be a bit more expensive due to the need for flexibility? Additionally, the gas prices have increased significantly since this all began.

Robert Blue, CEO

Yes, Steve. Our data center customers are very sophisticated energy buyers. They understand market dynamics. Given their own clean energy goals and the complexity of their operations, they certainly grasp the current market situation.

Steve Fleishman, Analyst

Okay. I'll leave it there.

Operator, Operator

Our next question will come from Durgesh Chopra with Evercore ISI.

Durgesh Chopra, Analyst

I want to second Steve's comment there on the crisp solar disclosures. I have two questions, both on that solar front. Bob, you mentioned narrowing the scope of the investigation last week. Maybe just elaborate on that as to sort of why do you think that's a positive update? And how does that impact you and others in the industry?

Robert Blue, CEO

Yes, I can't provide many specifics, but it increases our confidence as we narrow down their focus. Initially, there was some uncertainty about that, and this clarification is helpful. Overall, it's a positive direction, although I can't point to a specific number that it changes for us.

Durgesh Chopra, Analyst

Got it. I guess it sounds like they narrowed the scope and it seems like you feel like the items to be debated are somewhat less. Is that like...

Robert Blue, CEO

You got it.

Durgesh Chopra, Analyst

Understood. The 2023 plan includes over one gigawatt, and we're currently at 60% secured. How do you reach that 60%? Is it due to procurement being primarily from domestic sources? We’ve heard from other companies that there's a significant tightening in the market for solar panels, and with the uncertainty regarding tariffs, it makes procurement challenging. I'm interested in how you feel confident in that 60% figure for 2023.

Diane Leopold, COO

This is Diane Leopold. So our 2023 projects are really all under contract. And for 60% of them, we know where our panels are coming from and we know definitively that 60% are not subject to this particular review given the four countries that are under review. So it doesn't mean that the 40% definitely are affected by it, but we do have contracts for our 2023 projects, and 60% of them are secured from areas not in this investigation.

Durgesh Chopra, Analyst

Okay. That's very helpful color. I appreciate that.

Operator, Operator

Our next question will come from Jeremy Tonet with JPMorgan.

Jeremy Tonet, Analyst

Just want to keep going with the solar a little bit here. And I know you guys provide a lot of great details, so thank you for that. But just picking up, I guess, in your conversations with key stakeholders here, especially the commission. Since the start of the DOC investigation, just wondering if you could provide a bit more color on how that's going? And do you anticipate the next clean energy filing in 2022? Or are those following in 2023 to differ from the latest clean energy filing? And really, how is the commission viewing the higher solar costs relative to other means of generation at this point?

Robert Blue, CEO

Yes, Jeremy, I'll begin and Diane can add any details if needed. Our Clean Energy II filing that was just approved had slightly higher prices compared to our Clean Energy I filing from the previous year. We'll be submitting our third round later this year, which has also been approved. The commission reviewed the associated cost inputs and accepted this filing. We haven't had specific discussions with the commission about this, but our next round of solar filing will be similar in scale to what we've submitted before. If there are any additional cost pressures, we will clarify the reasons for them. It's important to note that Virginia's Clean Economy Act requires us to file for solar each year to meet the specified targets. There seems to be a mutual understanding of this among all parties. We continue to view solar as a valuable option for our customers in the context of the overall clean energy transition. We are making progress on the next filing, which will be completed later this year, and we are still on track.

Jeremy Tonet, Analyst

Got it. That's very helpful there. And then just pivoting here towards the hope gas. Just want to see if there's any updates that you could provide us there in the process or any expectations, if anything's changed or just on track at this point?

James Chapman, CFO

Jeremy, that process is very much on track. It's going well. We cleared the HSR hurdle already. We are in the process of discussing that and doing a load of filings with the Western Commission. So far, that seems to be progressing well, and we very much expect closing by the end of the year.

Jeremy Tonet, Analyst

Got it. That's very helpful. I'll leave it there.

Operator, Operator

Our next question will come from Paul Zimbardo with Bank of America.

Paul Zimbardo, Analyst

I definitely can pass on the solar question. Thanks for the details there. On your commentary about O&M, I was curious, what has the pension performance been year-to-date? And are you thinking there could be a benefit or a headwind for '23 when you factor in the asset performance and also changes to the discount rate?

James Chapman, CFO

That's a great question. We've noticed similar inquiries from some of our peers this earnings season. Our perspective is that it's too early to make a definitive judgment. As we wrap up Q1, while assets are declining and discount rates are increasing, we believe it's premature to assess what this will imply for the 12/31 remeasurement date. To provide a bit more detail, at year-end, we were approximately 110% funded. Based on preliminary calculations, with current mark-to-market figures showing a slight decrease in assets, lower returns, and higher discount rates, we still anticipate remaining around that 110% funding level. However, regarding the natural pension expense for next year and later, it's important to note that it is marked-to-market only once a year on 12/31, so there is still time before we reach that date. Both asset performance and discount rates will have an impact; declines in assets will increase pension expenses, while rising discount rates will reduce them. So far, these two factors have largely balanced each other out in the preliminary mark-to-market during the initial months of the year. Ultimately, it is too soon to draw any significant conclusions, and what truly matters will be our standing at the end of the year.

Paul Zimbardo, Analyst

Okay, great. And then a bigger picture, longer-term question, if I could? I noticed there's a fair amount of storm damage in the quarter and also last year as well. Are there any kind of initiatives, whether capital or O&M that you can take to kind of preemptively mitigate some of this like more strategic undergrounding or other avenues such as that?

Robert Blue, CEO

Yes. Certainly, things that we look at. Obviously, we have a grid transformation program underway. That'll be a decade long. Strategic undergrounding is an important part of that, being able to sectionalize lines more quickly and isolate faults and restore service without as much human intervention will be part of it. Some of the just basics of bigger poles, stronger conductors will also help. So yes, we've got programs underway that we will continue and always look for ways that we can cost-effectively strengthen our system for customers.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's event. Thank you for joining us. You may now disconnect.