Q3 2021 Dominion Energy Inc Earnings Call

November 5, 2021

[music].

Welcome to the Dominion Energy third quarter 2021 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 will now turn the call over to David McFarland, Director Investor Relations.

I will now turn the call over to David Mcfarlane Director Investor Relations.

Good morning, everyone and thank you for joining the 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.

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 Treasurer and other members of the executive management team. I will now turn the call over to Jim.

Joining today's call are Bob Blue Chair, President and Chief Executive Officer, Jim Chapman Executive Vice President Chief Financial Officer, and Treasurer and other members of the executive management team I will now turn the call over to Jim.

Thank you David. Good morning, everybody. Let me begin with a recap of our compelling investment proposition. And highlight our focus on the consistent execution of our strategy.

Good morning, everybody.

Let me begin with a recap of our compelling investment proposition.

And highlight our focus on the consistent execution of our strategy.

We expect to grow earnings per share by 6.5% per year through at least 2025. Growth was driven by a $32 billion five year growth capital plan.

Growth was driven by a $32 billion five year growth capital plan.

As outlined on our fourth quarter call in February, over 80% of that capital investment is emissions reduction enabling. And over 70% is rider recovery eligible.

And over 70% is rider recovery eligible.

We offer a dividend yield of 3.5% and expect dividends per share to grow 6% per year based on a target playout ratio of 65%. Taken together, Dominion energy offers an approximately 10% total return.

Taken together Dominion energy offers an approximately 10% total return.

Premise on a pure play state regulated utility profile, operating in premier regions of the country. Our industry, leading ESG positioning includes the largest regulated decarbonization investment opportunity in the nation.

Our industry, leading ESG positioning includes the largest regulated decarbonization investment opportunity in the nation.

Which as you'll hear today as you will hear in today's prepared remarks is steadily transforming from opportunity to reality. We have quite a few exciting developments related to that transformation to discuss this morning. Including the pending settlement of our Triennial review and our offshore wind application in Virginia.

We have quite a few exciting developments related to that transformation to discuss this morning.

Including the pending settlement of our Triennial review and our offshore wind application in Virginia.

In addition to other positive updates across our operating segments. Before handing it to Bob, for those and other business updates I'll discuss our third quarter results and related financial topics.

Before handing it to Bob for those and other business updates I'll discuss our third quarter results and related financial topics.

First our strong quarterly earnings. Our third quarter 2021 operating earnings as shown on slide four were one dollar and 11 cents per share.

Our third quarter 2021 operating earnings as shown on slide four.

We're one dollar and 11 cents per share.

Which for this quarter represented normal weather in our utility service territories. These strong results were slightly above the top end of our quarterly guidance range.

These strong results were slightly above the top end of our quarterly guidance range.

Positive factors as compared to last year. Include growth from regulated investment across electric and gas utility programs. Higher electric sales due to increased usage from commercial and industrial segments.

<unk> growth from regulated investment across electric and gas utility programs.

Higher electric sales due to increased usage from commercial and industrial segments.

And the impact of the share repurchase completed late last year. Negative factors as compared to last year include higher depreciation expense and a return to normal weather.

Negative factors as compared to last year include higher depreciation expense.

And a return to normal weather.

This is our 23rd consecutive quarter. So almost six years now of delivering weather normal quarterly results that meet or exceed the midpoint of our quarterly guidance ranges.

Note that our third quarter and year to date GAAP and operating earnings together with comparative periods are adjusted to account for discontinued operations, including those associated with the sale of our gas transmission and storage assets.

Third quarter GAAP earnings were 79 cents per share. And reflect the noncash mark to market impact of economic hedging activities, unrealized changes in the value of our nuclear decommissioning trust funds. The contribution from quest, our pipeline, which we will continue to be accounted for as discontinued operations until divested at year end. And other adjustments.

And reflect the noncash mark to market impact of economic hedging activities.

Unrealized changes in the value of our nuclear decommissioning trust funds.

The contribution from quest, our pipeline, which we will continue to be accounted for as discontinued operations until divested at year end. And other adjustments.

And other adjustments.

A summary of all adjustments between operating and reporting results as usual included in schedule two of the earnings release kit. Turning now to guidance on slide five. As usual, we will providing our quarterly guidance range, which is designed primarily to account for variations from normal weather.

Turning now to guidance on slide five.

As usual, we will providing our quarterly guidance range, which is designed primarily to account for variations from normal weather.

For the fourth quarter of 2021, we expect operating earnings to be between 85 and 95 per share. Positive drivers as compared to last year are expected to be normal course regulated rider growth. Continued modest strengthening of sales from commercial and industrial segments and slight margin help within contracted assets. Negative drivers as compared to last year are expected to be a slight catch up in COVID deferred O&M and tax timing.

Positive drivers as compared to last year are expected to be normal course regulated rider growth.

Continued modest strengthening of sales from commercial and industrial segments and slight margin help within contracted assets.

Negative drivers as compared to last year are expected to be a slight catch up in <unk>.

Covid deferred O&M and.

And tax timing.

Given where we are in the year, we're narrowing our 2021 full year guidance range to $3.80 to $3.90 per share. Preserving the same midpoint as our original guidance.

Preserving the same midpoint as our original guidance.

Assuming normal weather for the remainder of the year, we expect operating earnings per share for 2021 to be in the upper half of this narrowed guidance range.

We're also affirming long term operating earnings and dividend growth guidance no changes here from prior communications. We will, as usual, provide 2022 guidance on our fourth quarter call early in the new year, but we continue to expect the midpoint of our 2022 guidance range to be 6.5% higher than the midpoint of our '21 guidance range.

We will as usual provide 2022 guidance on our fourth quarter call early in the new year, but we continue to expect the midpoint of our 2022 guidance range.

To be six 5% higher than the midpoint of our 'twenty one guidance range.

We continue to be very focused on extending our track record of achieving whether normal results at or above the midpoint of our guidance on both a quarterly and annual basis.

On slide six we've summarized several important financial milestones achieved since our last call. First, we issued $1 billion in 10 year Green bonds at our parent company at a cost of 2.25%. This follows right on the heels of the $6.9 billion in sustainability linked credit facility, which we announced on last quarter's call.

First we issued $1 billion in 10 year Green bonds at our parent company.

Our cost of 2.25%.

This follows right on the heels of the $6.9 billion in sustainability linked credit facility, which we announced on last quarter's call.

So a lot of activity at Dominion on these types of innovative financings that support our ESG objectives. Thanks to all who participated in this important offering. And as a reminder, we will have additional fixed income issuance at Dominion Energy Virginia. Dominion Energy, South Carolina, and at our parent company during the remainder of this year. In October we announced the sale of CoStar pipelines to southwest gas holdings.

Thanks to all who participated in this important offering.

And as a reminder, we will have additional fixed income issuance at Dominion Energy Virginia.

Dominion Dominion Energy, South Carolina, and at our parent company during the remainder of this year.

In October.

We announced the sale of Costar pipelines to southwest gas holdings.

This all cash transaction was valued at nearly $2 billion. Including the assumption of about $430 million of existing debt. Proceeds from the sale will be used primarily to reduce parent level debt. We very much expect to close by the end of this year subject only to HSR approval.

Including the assumption of about $430 million of existing debt.

Proceeds from the sale will be used primarily to reduce parent level debt.

We very much expect to close by the end of this year subject only to HSR approval.

Obviously, there's quite a bit of press attention currently on some of the dynamics unfolding around various shareholders of southwest gas. There's quite a bit of press attention currently on some of the dynamics unfolding around various shareholders of southwest gas.

There's quite a bit of press attention currently on some of the dynamics unfolding around various shareholders of southwest gas.

But I would highlight that there is no early termination mechanism in our purchase and sale agreement. As a reminder, this transaction does not impact Dominion Energy's existing financial guidance this quarter or otherwise.

As a reminder, this transaction does not impact Dominion energy's existing financial guidance this quarter or otherwise.

CoStar pipelines had has been and will continue to be accounted for as discontinued operations excluded from our company's calculation of operating earnings.

Next, as a result of our continuous focus on both our capital allocation process and on our corporate credit profile. We've elected to monetize additional value from our investment in Cove point by financing our stake with an attractive nonrecourse term loan.

And on our corporate credit profile.

We've elected to monetize additional value from our investment in Cove point.

By financing our stake with an attractive nonrecourse term loan.

We have received binding commitments on a 2.5 billion dollar nonrecourse term loan which is at the entity that holds our 50% noncontrolling equity method investment and the Cove point facility.

Proceeds from this EPS neutral financing are being used to reduce parent level debt. Over the past few years, we've taken intentional and significant steps to effectuate fundamental change to lower our business risks to maximize the recycling of capital into our attractive regulated utility businesses.

Over the past few years, we've been take we've taken intentional and significant steps to effectuate fundamental change to lower our business risks to maximize the recycling of capital into our attractive regulated utility businesses.

And to improve our credit metrics. And this financing is another step along that same path. We expect this nonrecourse recapitalization to be completed by year end. Bigger picture, this financing provides a good opportunity to take a quick look back on the capital flows from that asset good point.

And this financing is another step along that same path.

We expect this nonrecourse recapitalization to be completed by year end.

Bigger picture.

This financing provides a good opportunity to take a quick look back on the capital flows from that asset good point.

As you will recall, we invested approximately $4 billion in the construction of the Cove point liquefaction project.

And through the combination of prior stake sales and the project financing we're announcing today, we will have monetized well over $6 billion of capital to date.

Even before accounting for any distributions. Turning now to electric sales trends. Weather normalized sales increased 2.4% year over year in the third quarter in Virginia. And 1% in South Carolina.

Turning now to electric sales trends.

Weather normalized sales increased 2.4% year over year in the third quarter in Virginia.

And 1% in South Carolina.

In both states consistent with the trends seen last quarter, we've observed increasing usage from commercial and industrial segment overcoming declines among residential users as the stay at home impact of COVID waned.

Looking ahead, we continue to expect electric sales growth in our Virginia, and South Carolina service territories to continue at a run rate of 1% to 1.5% per year.

Similar to what we were what we were observing pre pandemic. So no changes there from prior communication. Next, let me discuss what we're seeing around rising natural gas prices is where we're hearing a lot about this topic across the industry this quarter.

Next let me discuss what we're seeing around.

Rising natural gas prices is where we're hearing a lot about this topic across the industry this quarter.

We prioritize our customer rate affordability. And implement price mitigation strategies across our businesses in a variety of ways to account for the impact of changes in gas prices.

And implement price mitigation strategies across our businesses in a variety of ways to account for the impact of changes in gas prices.

So across our electric and gas utilities, we have very clear cut pass through mechanisms for fuel costs. So this is less of an issue as to how the recent price increases may impact earnings if they are sustained. But rather how they'll impact our customer bills, something we obviously care about and we watch very closely.

So this is less of an issue as to how the recent price increases may impact earnings if they are sustained.

But rather how they'll impact our customer bills something we obviously.

Care about and we watch very closely.

So let me just share a little bit of color on what measures we have in place to mitigate those kinds of impacts.

In our gas distribution service territories, we expect the bill impact of rising fuel prices to be less pronounced than what some recent headlines suggest due to few things the proximity of gas resources.

Our widespread use of storage to offset peak day requirements. And the effectiveness of our gas supply hedging strategies. In our Western States are unique state regulated cost of service gas production also helps customers avoid price spikes.

And the effectiveness.

The effectiveness of our gas supply hedging strategies.

And our Western States are unique state regulated cost of service gas production also helps customers avoid price spikes in fact.

In fact, we estimate that our customers saved over $100 million. Over just the seven day period during the winter storms experienced last February thanks to this regulatory structure.

Over just the seven day period during the winter storms experienced last February thanks to this regulatory structure.

In our electric service territories, we also have long standing risk mitigation strategies, including hedging in storage with most fuel cost true up to customer bills audited on a delayed basis. A structure, which helps to smooth out the bill impact of commodity swings.

Structure, which helps to smooth out the bill impact of commodity swings.

In summary, we certainly don't want to see any increased cost for any of our electric and gas customers. So we will continue to employ these mitigation measures to keep any increases as muted as possible.

But for the avoidance of doubt, we currently don't see any impact on our two our de carbonization focused growth capital investment plan.

And wrapping up. We will plan to use our fourth quarter call early next year to provide a comprehensive update and roll forward of capital investment financial outlook and related disclosures.

We will plan to use our fourth quarter call early next year to provide a comprehensive update and roll forward of capital investment financial outlook and related disclosures.

Again to the format of our last fourth quarter earnings call, which we believe was well received. Investors should expect further evidence in support of several fundamental Dominion Energy themes.

Investors should expect further evidence in support of several fundamental Dominion energy themes.

Compelling and earnings and dividend growth combined with the largest regulated decarbonization opportunity in the industry. And an unyielding focus on extending our track record of successful project, regulatory and financial performance. With that, I'll turn the call over to Bob.

And an unyielding focus on extending our track record of successful project.

Our regulatory and financial performance.

With that I'll turn the call over to Bob.

Thanks, Jim. I'll start as usual by commenting on our safety performance. As shown on slide seven, I'm very pleased that our results over the first three quarters of this year are tracking closely to the record setting osha rate that we achieved in 2020.

I'll start as usual by commenting on our safety performance as shown on slide seven I'm very pleased that our results over the first three quarters of this year are tracking closely to the record setting osha rate that we achieved in 2020.

As it relates to our electric utilities, I would note that through the first three quarters of this year. We're in the top quartile of performance for the south-eastern electric exchange and combined incident rates in fact, we're number one.

Now I'll turn to updates around the execution of our growth plan as shown on slide eight. At gas distribution in North Carolina, we reached a comprehensive settlement with the public staff last month for our gas operations of rates based on a 9.6% ROE to be effective this month and generally in line with our financial plan expectations. The agreement also includes three new clean energy programs, a new hydrogen blending pilot.

Our gas distribution in North Carolina, we reached a comprehensive settlement with the public staff last month for our gas operations of rates based on a 9.6% ROE to be effective this month and generally in line with our financial plan expectations. The agreement also includes three new clean energy programs, a new hydrogen blending pilot.

Which like our existing blending pilot in Utah is part of our goal to be ready to blend hydrogen across our entire gas utility footprint by 2030, a new option to allow our customers to purchase RNG attributes and a new and expanded energy efficiency programs. The settlement is pending commission approval.

Settlement is pending commission approval.

In Utah, we received approval for a program that would enable customers to purchase voluntary carbon offsets for $5 per month on a typical residential bill. Customers who opt into the program will fully offset the carbon impact of their gas distribution use. This program, which like our existing GreenTherm program allows customers to make choices about how to manage and lower their individual carbon profiles. It's just one example of our gas distribution service intersects with an increasingly sustainable energy future.

how to manage and lower their individual carbon profiles. It's just one example of our gas distribution service intersects with an increasingly sustainable energy future.

In South Carolina, and new rates were effective beginning September 1st after the South Carolina Public Service Commission with the support of all parties unanimously approved the proposed comprehensive settlement and a general electric rate case.

It's also worth noting that in September we filed an interim update to our modified 2020 IRP and resource plan eight remains the preferred plan, calling for the retirement of all coal fired generation in our South Carolina system by the end of the decade.

Turning now to Virginia, last month we announced the comprehensive rate settlement agreement in our pending triennial rate case. In conjunction with the State Corporation Commission staff. The office of Attorney General and other intervenor parties. We appreciate the balanced reasonable and cost effective approach among the parties, which allowed an agreement which supports continued capital investments in Virginia, in order to meet the Commonwealth's clean energy priorities and the needs of customers. Those investments include the development of offshore wind, which I'll touch on in a few minutes as well as growing one of the leading state regulated utilities solar and battery portfolios in the country.

Once in Virginia in order to meet the Commonwealth's clean energy priorities and the needs of customers. Those investments include the development of offshore wind, which I'll touch on in a few minutes as well as growing one of the leading state regulated utilities solar and battery portfolios in the country.

The settlement also provides significant customer benefits as shown on slide nine and supports our existing financial earnings guidance. We're very pleased to be extending the track record of constructive regulatory outcomes to the benefit of all stakeholders. We look forward to a final order likely around the end of the year.

We'll now move to our clean energy filings in Virginia as shown on slide 10. In September we made our largest to date multi-project clean energy rider approval submission.

In September we made our largest to date multi project clean energy riding approved rider approval submission.

The filing included about 1000 megawatts of solar and battery storage and we expect to receive an order from the SEC in the second quarter of 2022.

In October we filed for rider cost recovery for the capital investment associated with extending the lives of our two nuclear units at the Surry power station and our two nuclear units at the North Anna Power station. Each for an additional 20 years. These units will be upgraded to continue providing significant environmental and economic benefits for many years to come. We expect to receive a final order by mid 2022.

a final order by mid 2022.

Lastly, we've made progress on our grid transformation plans. We participated in hearings with the commission and based on our filings and testimony. The SEC staff supports or does not oppose approval for nearly all of our capital requests. We expect a final order late this year.

Turning to offshore wind, where we have an exciting announcement. Today, we are filing our offshore wind application with the FCC consistent with the project schedule that we communicated previously. Key project milestones are shown on slide 11.

The filing will outline the important details of our process and costs, including contractor selection in terms, project components, transmission routing capacity factors and permitting. Due to the importance of todays filing milestone and especially given the sizable volume of information, which will be included in this filing, I'm going to spend a little more time than normal this morning summarizing the important aspects. Some background, first this project represents a viable and needed opportunity for Virginia to achieve its clean energy goals. Once complete in late 2026, this project will generate enough clean energy to power up to 660000 customer homes and avoid as much as 5 million metric tons of carbon dioxide emissions annually, which is the carbon equivalent of removing more than a million cars off the road each year.

Due to the importance of todays filing milestone and especially given the sizable volume of information, which will be included in this filing I'm going to spend a little more time than normal. This morning summarizing the important aspects. Some background first this project represents a viable and needed opportunity for Virginia to achieve its clean energy goals once complete in late two.

26, this project will generate enough clean energy to power up to 660000 customer homes and avoid as much as 5 million metric tons of carbon dioxide emissions annually, which is the carbon equivalent of removing more than a million cars off the road each year.

Further the project is essential to meeting the policy goals set forth in the VCEA and other legislation mandating the development and deployment of renewable generation resources.

Lastly, as was comp contemplated in the BCEA, this investment will be 100% regulated and eligible for rider recovery. As a reminder, capital invested underwriters allow for more timely recovery of prudently incurred investments and costs. They're filed and true up annually in single issue proceedings. In Virginia rider recovery mechanisms use forward-looking test period and allow for construction work in progress, all of which minimizes traditional regulatory lag.

mechanisms use forward-looking test period and allow for construction work in progress, all of which minimizes traditional regulatory lag.

As outlined on slide 12, we estimate this project will create hundreds of jobs, hundreds of millions of dollars of economic output and millions of dollars of tax revenue for the state and localities, as well as supporting Virginia in becoming a major hub for the burgeoning offshore wind industry in North America.

For example, last week, Siemens Gamesa announced plans to establish the first offshore wind turbine blade factory in the United States. The facility located in Hampton Roads, Virginia will create new jobs and supply turbine blades to offshore wind projects in Virginia and throughout the North American offshore wind industry.

Our filing details how we've satisfied the requirements for offshore wind, but let me touch on three key tasks required for rider cost recovery.

First we've complied with the competitive procurement and solicitation standards for the project.

Second our projected levelized cost of energy or LCOE of $87 per megawatt hour is substantially lower than the $125 per megawatt hour maximum established by the VCEA. More on that theme in a moment. And third, the VCEA requires that the project's construction commences prior to 2021 for US income tax purposes or is it planned to enter service prior to 2028, our project schedule satisfies both milestones.

income tax purposes or is it planned to enter service prior to 2028, our project schedule satisfies both milestones.

The long term cost to our customers of this project, which we believe is the most important metric for regulated project of this nature is $87 per megawatt hour. And remains within previously guided level is cost of energy range of $80 to $90 per megawatt hour. Potential savings realized through future tax legislation could also be passed on to customers. For example, it's still early but we estimate that further expansion to tax credits benefiting offshore win would reduce the cost of our customers to $80 per megawatt hour.

customers. For example, it's still early but we estimate that further expansion to tax credits benefiting offshore win would reduce the cost of our customers to $80 per megawatt hour.

We've developed the project to its current stage, we've gained critical insights from two primary sources.

First, our 12 megawatt pilot project, which consist of the only operating turbines in federal waters has provided considerable benefit to the development and planning of the full scale development. For example, the pilot project is providing better information about the wind resources off the coast of Virginia.

Initially, we assumed a lifetime capacity factor of 41.5% for the full scale deployment. After further evaluation of turbine design in win resources. In addition to the real time data we've gathered from our test turbans, we've determined that our original assumption was too low. We've revised the lifetime capacity factor to be 43.3%.

This is beneficial both for the project as well as our customers because higher generation will result in a lower LCOA.

Secondly, we've contracted with firms that have significant experience in offshore wind farm design, construction and operations to support the project.

When we announced the project in September of 2019, the initial pre engineering and pre-RFP estimated cost was approximately $8 billion. Since that time through the process of detailed engineering and most importantly through competitive solicitations for all components and services. We've now developed a detailed budget of approximately $10 billion. As I've been discussing across several quarterly calls now, the cost increase can be attributed to among other things commodity and general cost pressures as seems to be the case across a number of industries right now. And the completion of the conceptual design phase for the onshore transmission route which has gone through extensive stakeholder engagement with consideration given for resiliency and connection into our existing 500 KV system.

$10 billion as I've been discussing across several quarterly calls now the cost increase can be attributed to among other things commodity and general cost pressures as seems to be the case across a number of industries right now and the completion of the conceptual design phase for the onshore transmission route which has gone through extensive stakeholder.

Engagement with consideration given for resiliency and connection into our existing 500 kv system.

As well as to minimize impacts on the surrounding communities, including environmental justice communities, private lands and environment scenic and historic resources. A summary of the major components of the competitive bidding process are outlined on slide 14.

These five major agreements collectively represent about $6.9 billion. The remaining project costs include $1.4 billion for onshore transmission, substation facilities and currently projected system upgrades as well as approximately $1.5 billion for other project cost including contingency.

The onshore transmission facilities are necessary to interconnect the offshore generation components reliably and to maintain the structural integrity and reliability of the transmission system and compliance with mandatory Newark standards.

As we observed within the industry recently, utility systems are only as good as they are resilient. Our decision to connect this project to the 500 KV transmission system meets these goals and provides the best mechanism to ensure that the projects power will be dispersed and used by customers throughout our service territory. We believe the decisions we're making around onshore engineering configurations will result in the best value for customers.

Our decision to connect this project to the 500 kv transmission system meets these goals and provides the best mechanism to ensure that the projects power will be dispersed and used by customers throughout our service territory. We believe the decisions, we're making around onshore engineering configurations will result in the best value for customers.

As it relates to our Jones Act compliant wind turbine installation vessel, construction remains on track with delivery expected in late 2023, and we continue to expect it to be an invaluable resource to the growing US offshore wind industry.

Turning to slide 15, let me discuss how our project cost compares to the other US offshore wind projects. A few observations. First, most of these unregulated or merchant projects remain in the permitting and approval process. For our project I would note that it is the only state regulated offshore wind project, we've made considerable progress on development to date and remain on track to complete construction in late 2026.

<unk> to date and remain on track to complete construction in late 2026.

Next, these offshore wind projects located up and down the east coast, obviously differ significantly in their timing or vintage size and scope. For example, the announced capital cost and expected LCOEs for some projects include the costs for necessary onshore transmission upgrades in interconnections as our budget does but some do not.

And some headlines focused on the year one PPA pricing for many of these unregulated or merchant projects without reflecting the full cost of incorporating such factors as pricing escalation, which we incorporate.

Regardless, we show here a comparison based on publicly available information, including all such factors of the level is cost of energy of those merchant projects to our own regulated project.

Turning to slide 16, let me address customer rates in Virginia inclusive of our offshore wind project. First a reminder, that between 2008 and 2020, our typical residential customer rate increased on average by less than 1% per year, which is much lower than the average annual inflation over that period of closer to 2%.

First a reminder, that between 2008 and 2020, our typical residential customer rate increased on average by less than 1% per year, which is much lower than the average annual inflation over that period of closer to 2%.

Second, based on EIA data, our typical customer rate is 17% lower than the national average and 36% lower than other states like Virginia have joined Reggie.

And third going forward, we see typical residential rates increasing by a compound annual growth rate of around 2.1% through 2035, which is a comprehensive estimate and includes among other factors the impact of the de carbonization of investment programs like our offshore wind projects discussed today.

If we move the starting point back to 2008, that rate of increase falls to 1.8%, which is lower than projected inflation for 2021. In summary, we continue to be on an unwavering path to meet Virginia's clean energy goals by 2045, and it's incumbent upon us to deliver energy that is safe, reliable, increasingly sustainable and affordable.

In summary, we continue to be on an unwavering path to meet Virginia's clean energy goals by 2045, and it's incumbent upon us to deliver energy that is safe reliable increasingly sustainable and affordable.

With that let me summarize our remarks on slide 17. Our safety performance year to date is tracking closely to our record setting achievement from last year. We reported or 23rd consecutive quarterly result, the normalized for weather meets or exceeds the midpoint of our guidance range. We narrowed the range of our 2021 earnings guidance and affirmed our existing long term earnings and our dividend growth guidance. We're focused on executing on project construction and achieving regulatory outcomes that serve our customers well and we're aggressively pursuing our vision to be the most sustainable regulated energy company in America.

earnings and our dividend growth guidance. We're focused on executing on project construction and achieving regulatory outcomes that serve our customers well and we're aggressively pursuing our vision to be the most sustainable regulated energy company in America.

Lastly, we look forward to seeing many of you next week in person at the EDI financial conference. With that, we're ready to take your questions.

Thank you, at this time, we'll open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone now. Again that is star one. If at any time, you would like to remove yourself from the questioning queue, please press star two. Again to ask a question, please press star one now. Thank you. Our first question will come from Shahriar Pourreza with Guggenheim partners.

Again to ask a question. Please press star one now.

Thank you our first question will come from Shar <unk> with Guggenheim partners.

Okay.

Good morning, Shar.

So Bob or Jim, you got the settlement, which as you mentioned in the prepared remarks does de risk even the second triangle review. I guess I just wanted to touch a little bit on the level of confidence in your plan now. How does that sort of tie in to the 6.5% EPS growth target that's been out there? And could we see some changes around the capital program as a result of this settlement maybe when you report year end results?

And Queen could we see some changes around the capital program as a result of this settlement maybe when you report year end results.

Yeah. Thanks, Shar. When we set that 6.5% rate in July of last year, July of 2020, and we were confident then.

When we set that six 5% a rate in July of last year July of 2020, and we were confident then.

And we were asked some of that in and we said that you know there's no obviously, one input we were asked a lot about this triangle at the time there is no one input to setting a growth rate like that. It's a variety of inputs and one of the things that we mentioned at that time was we assume that we're gonna have constructive regulatory outcomes and we've had those. We had one in South Carolina and in North Carolina and in this Virginia Triennial. All of that is supportive of that 6.5% growth rate. So we were confident at the time.

to setting a growth rate like that. It's a variety of inputs and one of the things that we mentioned at that time was we assume that

we're gonna have constructive regulatory outcomes and we've had those. We had one in South Carolina and in North Carolina and in this Virginia Triennial. All of that is supportive of that 6.5% growth rate. So we were confident at the time.

We announced it we we remain confident we think we've executed well on regulatory outcomes.

And this most recent triennial settlement is a good example of that. As the capital we will update our capital on the fourth quarter call as we mentioned in our prepared remarks. So the bottom line is we remain as confident in 6.5% as we did when we announced it.

The bottom line is we remain as confident and six 5% as we did when we announced it.

Got it, and then just lastly on coastal wind, it's a huge T. The dump. So I appreciate that incremental color you provided. The 87 dollar LCOE capital costs are higher so obviously, you're seeing some cost pressures despite being below the projections and still within the range, right? And I think the initial cost correct me if I'm wrong was 8 billion. Can you touch on sort of the customer bill impact here as costs are higher? Just isolating this project. And it seems that the input cost pressures or kind of widespread so how do you sort of think about mitigating factors assuming these cost headwinds have some persistency?

The 87 dollar L. C O E capital costs are higher so obviously, you're seeing some cost pressures despite being below the projections and still within the range right and I think the initial cost correct me. If I'm wrong was 8 billion can you touch on sort of the customer bill impact here as costs are higher just IC.

<unk> This project and it seems that the input cost pressures or kind of widespread so how do you sort of think about mitigating factors assuming these cost headwinds have some persistency.

Yeah. So the cost you are right the capital cost number is, that we estimated earlier now that we've done all of the competitive bidding process and move from conceptual to a firm contract. Has gone up some. But as we mentioned, the production expectation, that capacity factor out of this has also gone up as we've got more data, which means that the customer bill impact is the same.

That we estimated earlier now that we've done.

All of the competitive bidding process and move from conceptual to a firm contract.

Has gone up some but as we mentioned the production expectation that capacity factor out of this has also gone up as we've got more data, which means that the customer bill impact is the same.

As we said it would be in an 80 to $90 per megawatt hour range and we're squarely within that at 87. So you can't focus just on the capital and put here on a project like this. You also have to focus on how much electricity is it generating since it's going to be generating more than we had previously assumed that's what lands that customer impact right, where we'd been talking about in the 80 to $90 range.

impact right, where we'd been talking about in the 80 to $90 range.

Okay, great terrific. I think that sort of touch on that. Se you in a few days. Thanks Shar.

Thank you. Our next question comes from David Peters with Wolfe Research.

Yeah, Hey, good morning, guys.

Morning, David.

First question I have is just on the the recent election outcomes in Virginia, you know, obviously a lot of focus there nationally. And given that you now have a Republican governor and I think the general Assembly flip too.

And given that you you now have a Republican governor and I think the general Assembly flip too.

Wondering if you could maybe just provide some perspective on what do you think may or may not change going forward, you know, particularly with respect to our energy policy in the state.

What do you think may or may not change going forward, you know, particularly with respect to our energy policy in the state.

Yeah. Thanks, David. And the last if you look back over the last 15 years or so in Virginia, I think the party in power in the Governor's mansion is changed twice and the Virginia House of delegates, it's changed twice.

And the last if you look back over the last 15 years or so in Virginia.

I think the party in power in the Governor's mansion is changed twice and.

In the Virginia House of delegates, it's changed twice.

And the state Senate, it's changed several times. The Senate wasn't up for election this time it was the governor and house of delegates.

What's remained consistent throughout that period is that our company has maintained constructive relationships with our members of both parties. And we don't see any reason that that would change. And the reason is that what has remained also consistent over that period and even before is a bipartisan commitment to economic growth and jobs. And the economy in Virginia.

Any reason that that would change and the reason is that what has remained also consistent over that period and even before is a bipartisan commitment to economic growth and jobs.

And the economy in Virginia.

And if you look at what Governor elect young can ran on, not surprisingly given his extensive business background. He ran on a platform of increasing jobs and economic growth and we obviously support that. We're going to do everything we can to to help him achieve the objectives of growing Virginia's economy.

We do that by providing a reliable electricity by keeping energy prices affordable we've done that over the years that was our reliability and affordability were recognized by the FCC staff and the recent Triennial review. So we have a track record there.

So what I would expect a is that Virginia will can continue that bipartisan commitment to jobs and economic development is as witnessed in the announcement, we talked about in our prepared remarks, the Siemens Gamesa.

Offshore wind blade, finishing factory that was the result of bipartisan work. Both parties are deserve credit for that kind of job creation in Tidewater, Virginia, We would expect that that's going to continue going forward.

Great second question, just switching gears a little bit. Just on kind of what's being proposed in Washington to this potential reconciliation bill. I'm wondering Jim maybe if you could comment on how meaningful something like a direct pay option would be for potentially loosening you know future equity needs given the many renewable projects that you guys have here kind of omnicom.

Comment on how meaningful something like a direct pay option would be for potentially loosening.

Listening you know future equity needs given the.

The many renewable projects that you guys have here kind of omnicom.

Yeah, David. It's a good question. A lot of commentary on that topic so far this this earning season. I've been listening to some of that and I agree with. Certainly one thing that's come up a lot that it's super hard to speculate on moving target pending in draft legislation, so it hasn't landed yet.

A lot of commentary on that topic. So far this this earning season.

I've been listening to some of that and I agree with.

Certainly one thing that's come up a lot that it's super hard to speculate on moving target pending in draft legislation, though as it landed yet.

Its funny a couple of quarters ago on this call we were.

We we're all speculating as the impacts of the straight up corporate rate increase corporate tax rate increase so how things have changed but have you thought it's hard to say exactly what's going to be in the final version.

But it does seem to us that something is going to pass.

So we will see here the next month or two we imagine it will include the clean energy tax incentives and the direct pay feature of your you're talking about.

So that kind of thing and extension of the tax credits and the refundable basis. It's pretty clear that is gonna be valuable and will benefit probably both our customers and shareholders.

That kind of thing and extension of the tax credits and the refundable basis. It's.

It's pretty clear that is gonna be valuable and will benefit probably both our customers and shareholders.

We expect I mean, the incentives are going to reduce the cost of renewables to our customers.

Could accelerate everything we're doing in our clean energy transition.

And probably provide some pretty nice cash flow features to fund additional capital investment so.

So it's all seems pretty pretty good. Details to come. Now in the same package there is the minimum tax. So not too disturbing for us we're already a cash taxpayer. Not everybody is.

Details to come now in the same package there is the minimum tax.

So not too disturbing for us we're already a cash taxpayer.

Everybody is.

But you know that that's going to be based on GAAP earnings. It doesn't start till '23 is the current proposal. So it's still early. How exactly that's going to work, there's a lot of detail to come. bBut even that part we expect as part of this overall package. We think this is all pretty manageable within our existing financial profile and financial trajectory. So we will get more clarity over time, maybe next quarter we can be talking about facts instead of speculation, but it all it all looks like it's manageable as a package.

Pretty manageable within our existing financial profile and financial trajectory. So.

We will get more clarity over time, maybe next quarter, we can be talking about facts instead of speculation, but it all it all looks like it it's a manageable as a package.

I appreciate that detail. Thank you, guys.

Thank you.

Thank you. Our next question comes from Paul Zimbardo with Bank of America.

Hi, good morning.

Hey, Paul and Paul.

Thanks for the time and nice sort of updates overall. I wanted to follow up on charters offshore wind question. How should we think about the earnings potential and also credit consideration from that the $2 billion increase in that estimated cost?

I wanted to follow up on charters offshore wind question.

How should we think about the earnings potential and also credit consideration from that the $2 billion increase in that it made it cost.

Yes.

Yeah, Paul. Let me talk to that. So as we mentioned a couple of times here, where we're going to provide a pretty comprehensive update on our fourth quarter call on all of those details the we're going to do a one year roll forward of our capital plan.

On our fourth quarter call on all of those details the we're going to do a one year roll forward of our capital plan.

We will go through everything that's related to that in detail like we did last year or the early this year.

So the the increase in the capital calls just one part of the LCOE. The increase in the capital costs on offshore wind. So a couple of things, keep in mind that spread over six years.

So when we do a one year roll forward is going to include that 2026 year previous version only went through '25, so that'll be included. But keep in mind that there are there are some other gives and takes and some other moving parts in our plan.

Oh it previous version only went through 25, so that'll be included but keep in mind that there are there are some other gives and takes and some other moving parts in our plan.

For example. We announced in our IRP in September that we were undertaking a postponement for further evaluation of a couple of things. Like some cities in Virginia and pump storage project. So that's not in the current version of the near term plan.

We announced in our IOP in September.

That we were undertaking a postponement.

For further evaluation of a couple of things.

Like some cities in Virginia and pump storage project. So that's.

Not in the current version of the near term plan.

So a lot of gives and takes and puts and takes. We're going to go through all of that on the fourth quarter call, but for the avoidance of doubt, we expect all of those updates are going to be supportive of EPS and dividend growth guidance, but you needed to look at it holistically and not just based on the impact of the offshore wind project alone.

Okay. Great, that's great. I'm looking for kind of an update. And then I know you commented on that Westar pipe in prepared remarks, but if you could elaborate a little bit on the confidence in the transaction closing given some uncertainty as you mentioned, confirming that counterparty could not proactively pay a termination fee to exit. Thank you.

And then I know you commented on that Westar pipe in prepared remarks, but if you could elaborate a little bit on our confidence in the transaction closing given some uncertainty as you mentioned.

Confirming that counterparty could not proactively pay a termination fee that exit thank you.

Yeah.

Yeah, sure let me answer that a little bit higher level just for for everyone's benefit if they're not following maybe as closely. So we mentioned on our last call very robust participation in this auction we ran. We feel very good about the announcement, we made in October to sell that asset to southwest gas holdings, all cash transaction almost $2 billion.

And it is on track. We expect that to close this quarter subject only to HSR clearance. So yeah, there's a lot of back and forth right in the press, we get that but we don't see any impact on our transaction agreement is intentionally on both sides, it's airtight. Southwest gas has fully committed financing. It's not dependent on completing equity issuance or anything like that.

Clearance. So yeah, there's there's a lot of a lot of back and forth right in the press, we get that but we don't see any impact on our transaction agreement.

Is intentionally on both sides it's airtight.

Southwest gas has fully committed financing is not dependent on completing equity issuance or anything like that.

There are no conditions other than HSR, and there's no kind of provision where they could be terminated early. So we feel we feel really good about that pretty straightforward. So we look forward to closing later this quarter.

It could be terminated terminated early so we feel we feel really good about that pretty straightforward. So we look forward to closing later this quarter.

Okay. Thank you, very clear.

Thanks, Paul. Thank you. Our next question comes from Jeremy Tonet with JPMorgan.

Thank you. Our next question comes from Jeremy Tonet with J P. Morgan.

Hi, good morning. Good morning, Jeremy. Just wanted to follow up with offshore wind a little bit more here if I could. Just wanted to see how do you see customer bill impacts due to the completion of this initial offshore wind pays. And just thinking what would be the bill impact under the 80 STO scenario? I think you might've touched on there with tax credits.

Good morning, Jeremy.

Just wanted to follow up with offshore wind a little bit more here if I could.

Just wanted to see how do you see customer bill impacts due to the completion of this initial offshore wind pays and.

Just thinking what would be the bill impact under the 80 S. T O scenario I think you might've touched on there with tax credits.

Yeah, obviously that would improve the customer bill impact associated with the project as you correctly identify. If there's a tax benefit that gets passed onto customers, we're still sorting through that.

The customer bill impact associated with.

The project is as you correctly identify if theres a tax benefit that gets passed onto customers, we're still sorting through that.

But again, based on the inputs that we've defined here, we're just staying right in that 80 to $90. Our range. So we get the lower end, better for customers. And obviously, we'll have to see how that plays out.

Based on the inputs are.

We've defined here, we're just staying right in that 80 to $90.

Our range. So we get the lower end are better for customers.

And obviously, we'll have to see how that plays out.

Got it. Thanks for that and then just understanding there's a cost focus with the offshore win here. Could you outline how the economic benefits and supplier agreements you outline have evolved since the project was first announced?

Thanks for that and then just understanding Theres this cost focus with the offshore win here could you outline how the economic benefits and supplier agreements you outline have evolved since the project was first announced.

Yeah, I think that they've evolved to be pretty consistent with what we expected when the project was first announced. So you know we had a pretty good idea of what would be involved in terms of construction.

Construction.

And our construction on onshore for the electric transmission there may be some additional benefits probably with our onshore electrical because that's gonna be given what we had to do to route this and to make sure we're connecting to the 500 KV. That's part of what's driving the overall capital costs being greater so bigger investment there, more job creation there.

Electrical because that's.

Gonna be given what we had to do to route this and to make sure we're connecting to the 500 kv. That's part of what's driving the overall capital costs being greater so bigger investment there more job creation there but.

But you know I think the bottom line is a this is going to be good for the Hampton roads economy. Good for the Virginia economy, and I think that that Siemens Gamesa announcement is really important because it starts the process here in Virginia, a state that is very well-positioned given its location on the East coast, given its port and the access to the port unobstructed by bridges in the deep water port to be a real hub of offshore wind economic activity. We certainly support that. We supported that and working with Siemens Gamesa to put that blade factory here. So the more the better.

on the East coast, given its port and the access to the port unobstructed by bridges in the deep water port to be a real hub of

To be a real hub.

offshore wind economic activity. We certainly support that. We supported that and working with Siemens Gamesa to put that blade factory here. So the more the better.

Got it maybe just one last quick one if I could. Could you speak a bit more to the R&D and hydrogen pilots how they progressed over the past quarter?

Hi, Good morning, Jeremy. This is Diane Leopold. I'll take that one. So R&D.

So R&D.

Our program, I think is far beyond the pilot now and we're up and running. We have one project that's already in service. So obviously, starting very small, but we have five projects that are under construction now two of which should be entering service in the next couple of months.

And four more that are expected to be under construction by year end. And this is across both our our swine in our dairy projects. All projects are doing well on time on budget and were expecting to keep up that rough pace next year.

So that's on the R&D side. On hydrogen now, that certainly is that the pilot phase, our Utah pilot, which was at a training facility in Salt Lake City. It is just about complete and the tests focused on residential and use appliances leak survey equipment nitrous oxide emissions.

It is just about complete and the tests focused on residential and use appliances leak survey equipment nitrous oxide emissions.

The results of those tests confirm that 5% hydrogen blend would not adversely affect the distribution system. All appliances operated safely, there weren't a lot of changes to you know in the system when the hydrogen was added.

Appliances operated safely there weren't a lot of changes to you know in the system when the hydrogen was added.

So we're still doing a few additional tests. We did increase hydrogen blend up to 10%. And still did not see any significant impacts from that testing, but we wanted to keep doing some more testing on final results that with that.

So on next steps we've been looking at several isolated regions on system to do a live test and started the initial design phase. We're meeting with the regulators on our test results and on our plan to test. And we will be meeting with them over there the coming months, so that we can launch an expanded pilot probably in early 2023.

The coming months, so that we can launch an expanded pilot probably in early 2023.

And then finally, as Bob mentioned, our North Carolina we're gonna start a similar initial project in North Carolina subject to commission approval of our settlement.

Got it that's very helpful on hydrogen project side. Thank you so much and looking forward to seeing the team at EI.

Jeremy. Thanks a lot, see you down there.

Thank you. This does concludes this morning's conference call. You may now disconnect your lines and enjoy your day.

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Q3 2021 Dominion Energy Inc Earnings Call

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