The Completion Of The Coastal Virginia Offshore Wind Project Will Diversify Energy Generation By 2026

Key Takeaways

• The Coastal Virginia Offshore Wind project and increased capital investment in infrastructure and nuclear could drive future revenue growth due to rising energy demands.
  
• Strategic balance sheet management and strong credit ratings position Dominion Energy for low-cost capital and solid future earnings growth.
  
• Increased capital expenditures and debt, rising project costs, regulatory challenges, and reliance on data center demand pose risks to Dominion Energy's future earnings and profitability.

Catalysts

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

• The Coastal Virginia Offshore Wind project is on schedule for a 2026 completion and is supported by Virginia law, potentially driving future revenue growth as it represents a new source of generation to meet increasing energy demands.
  
• Dominion Energy is set to increase its capital investment by 16% from prior guidance, with a large focus on transmission, distribution, and nuclear renewal, which could bolster future revenue and reliably meet growing energy demand.
  
• The robust growth in data center demand in Virginia increases the potential for additional investment and revenue generation, as data centers are a significant source of electricity demand and currently represent 26% of Dominion Energy's sales.
  
• Dominion's strategic focus on a conservative balance sheet and maintaining strong credit ratings positions the company to secure low-cost capital for future investments, potentially enhancing net margins.
  
• The reaffirmation of 5% to 7% annual operating earnings growth guidance through 2029, supported by increased regulated capital investment opportunities, indicates a positive outlook for future earnings growth.

Dominion Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dominion Energy's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.8% today to 19.4% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $3.8) by about April 2028, up from $1.8 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 25.9x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 1.65% 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 increased capital investment forecast for 2025-2029 raises concerns, as it relies significantly on recovering costs through regulatory approval under rider mechanisms, which could impact future earnings if approvals are delayed or not granted.
  
• The Coastal Virginia Offshore Wind (CVOW) project costs have risen from $9.8 billion to $10.7 billion, with potential for further increases depending on PJM cost assessments. This introduces uncertainty around project expenses and future profitability, affecting net margins if costs aren't effectively managed.
  
• Higher interest rates present a headwind that could increase the cost of debt and negatively affect net margins and earnings, particularly as Dominion plans to modestly increase external financing to meet capital investment needs.
  
• Concerns about regulatory lag and under-earning of allowed returns, specifically in South Carolina, suggest revenue and earnings might be affected if regulatory frameworks aren't adjusted to better align with investment and operational needs.
  
• The reliance on data center demand for revenue growth, while currently robust, could pose risks related to market volatility, customer concentration, and infrastructure investments, potentially affecting future revenues if demand slows unexpectedly.

Valuation

• The analysts have a consensus price target of $59.245 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 $17.7 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 $56.26, the analyst price target of $59.24 is 5.0% 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.