Coastal Virginia Offshore Wind And Rate Reforms Will Drive Progress

Key Takeaways

• Dominion Energy's key projects, including CVOW and a new gas facility, are positioned to significantly drive future revenue growth and capacity utilization.
  
• Long-term contracts with high-energy users, especially data centers, ensure steady revenue streams, reducing the risk of stranded costs.
  
• Regulatory and political uncertainties, tariff costs, and potential dilution from equity issuance could adversely impact Dominion Energy's margins and shareholder earnings.

Catalysts

Provides regulated electricity and natural gas services in the United States.

• Dominion Energy's Coastal Virginia Offshore Wind (CVOW) project is a key growth catalyst. It is progressing on time and is expected to deliver almost 3 gigawatts of electricity by the end of next year, which should drive future revenue growth through increased capacity utilization.
  
• The creation of a new rate class for high energy users, including data centers, is expected to stabilize and increase revenue streams. Contracts are set for 14-year terms, ensuring consistent revenue from these high-demand customers and minimizing risk of stranded costs.
  
• Dominion Energy Virginia's request for its first base rate increase since 1992 could improve revenue and net margins, given that residential rate increases have lagged inflation by approximately 40% over the past decade.
  
• The Chesterfield Energy Reliability Center, a proposed 1 gigawatt gas-fired generating facility, if approved, will add another significant growth opportunity post-2029 when it comes online, contributing to future earnings.
  
• Continued strong demand from data centers in Dominion's service area highlights a positive revenue outlook. Requested power commitments and contracts help secure long-term revenue streams, potentially leading to improved earnings stability.

Dominion Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dominion Energy's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.6% today to 18.8% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $3.86) by about May 2028, up from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 1.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Dominion Energy Future Earnings Per Share Growth

Risks

• The Coastal Virginia Offshore Wind project might face substantial tariff-related costs, potentially $500 million, which could impact Dominion Energy's net margins and earnings if tariffs continue or increase.
  
• Dominion Energy's increased base rate request, its first since 1992, may not be approved, potentially affecting future revenues if regulatory challenges are not successfully managed.
  
• The potential need to issue additional equity might dilute existing shares, which could impact shareholder earnings and overall net margins.
  
• The project's success relies on regulatory and political support, which could change, thus affecting project completion timelines and impacting projected revenues and earnings.
  
• Unforeseen economic conditions or changes in tax transferability could affect tax credits underpinning financing plans, impacting net margins and overall financial planning.

Valuation

• The analysts have a consensus price target of $59.12 for Dominion Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $69.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.2 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $54.68, the analyst price target of $59.12 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.