Dominion Energy Inc (D) — Q2 2019 Earnings Call Transcript

Good morning, and welcome to the second quarter 2019 earnings conference call for Dominion Energy. I encourage you to visit our Investor Relations website to view the earnings press release, a slide presentation that will follow this morning's prepared remarks, and additional quarterly disclosures. Schedules in the Earnings Release Kit are intended to answer detailed questions pertaining to operating statistics and accounting, and the Investor Relations team will be available immediately after the call to answer additional questions. The earnings release and other matters that will be discussed on the call today 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 projections, forecasts, estimates, and expectations. Also on this call, 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 are able to calculate and report, are contained in the Earnings Release Kit. Joining today's call are Tom Farrell, Chairman, 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.

Good morning. Dominion Energy reported second quarter 2019 operating earnings of $0.77 per share compared to our guidance range of $0.70 to $0.80 per share. Performance across our businesses was aided by better-than-normal weather, which increased utility earnings by about $0.02 per share. Adjusted for normal weather, operating earnings for the fourth quarter were $0.75 per share, which is also the midpoint of our guidance range. Operating segment performance for the second quarter is shown on Slide 4. GAAP earnings for the quarter are $0.05 per share, which were driven primarily by charges related to the SCANA integration and the voluntary retirement program, which I will discuss in a moment. A reconciliation of operating earnings to reported earnings can be found on Schedule 2 of the Earnings Release Kit. I will now provide updates on several ongoing initiatives. Turning to Slide 5. As announced at our Investor Day in March, we continue to work towards completing the restructuring of our reporting segments. During our fourth quarter earnings call early next year, we expect to provide our 2019 full year results as well as our 2020 guidance in conformity with these updated segments. As discussed previously, we believe that this new reporting structure will make our company more transparent to all stakeholders and will highlight the premium nature of each of our distinct businesses. Similar to last quarter, the Alternate Breakdown Structure or ABS will be posted to our Investor Relations website shortly after this call. This document provides a preliminary view of our future intended reporting segment results. The ABS, which is not reflective of how we currently manage our businesses, is not intended to replace Dominion Energy's current operating segment disclosures. Turning to Slide 6. We have concluded the previously announced voluntary retirement program or VRP. Though some retirements will become effective only in the coming months, most of our colleagues who elected to participate have already begun to enjoy their retirement. Roughly 12% of our total workforce elected to participate, which compares to an average annual retirement rate over the last 5 years of just over 3%. We, of course, wish them all the best in retirement and also thank them for their many years of dedicated service. We expect this VRP to be impactful to our company and our workforce in a number of ways, in particular as we embark on industry-leading innovation initiatives highlighted by Tom and other members of our senior management team at our Investor Day in March. As it relates to thinking about the potential financial impact of the program, I would ask that you note the following: first, while the VRP's financial impacts are incremental to our previously announced Flat O&M initiative, I reiterate my comments from the first quarter call that these savings should not be considered passive to existing earnings guidance. Rather the savings from the VRP are available to overcome potential unexpected challenges and derisk the execution of our earnings growth plan. We view this approach as supportive of our objective to consistently and predictively deliver results in line with our guidance, which we expect would be a driver of premium equity valuation. Second, the bottom line impact of this program will be influenced by near-term backfilling of up to one-third of the vacated positions given operational and safety requirements. Further, O&M savings in our regulated businesses accrue to our customers immediately, in the case of rider programs, and over longer time frames via rate proceedings. Finally, VRP savings in our Southeast Energy Group are supportive of the expected transaction accretion of approximately $0.10 per share in each of the first two years following merger closing. Turning to financing. In June, we successfully placed approximately $1.6 billion in equity-linked units, consistent with our financing plan guidance. Due to a high-quality order book that was many times oversubscribed, we were able to achieve record pricing in terms of spread to common yield for security of this type. As a reminder, this transaction does not result in any near-term common stock issuance, and the financial impacts of this issuance were already contemplated in our existing earnings guidance. As discussed during our Investor Day, over the next several years, on average, we continue to expect nonmarketed equity issuance via DRIP of about $300 million per year and via our aftermarket program of some $300 million to $500 million per year to help prudently fund our sizable regulated capital investment program. Moving now to operating earnings guidance on Slide 7. As usual, our operating earnings guidance ranges assume normal weather, variations from which could cause results to be toward the top or the bottom of these ranges. For the third quarter, we are initiating guidance of $1 to $1.20 per share. Positive factors compared to last year include growth from regulated investment across electric and gas utility programs, the contribution from the Southeast Energy Group, and the impact of O&M initiatives. Negative factors compared to last year include the impact of 2018 asset sales, share issuances, timing of a farm-out, and return to normal weather. As you evaluate the cadence of our quarterly earnings as compared to last year, particularly as it relates to the second half of the year, please keep in mind the following factors, some of which have been quantified on the right-hand side of Slide 7: the timing of the Millstone refueling outage, which occurred in spring this year as compared to the fall last year; the favorable net impact of PJM capacity prices, including our new Greensville power station's participation in the capacity market for the first time since it's in service late last year; the contribution of the Southeast Energy Group; earnings growth from continued regulated investment across electric and gas businesses; higher realized prices at our Millstone Power Station driven primarily by an expected October 1 effective date for the 10-year, 9 million megawatt-hour, zero-carbon contract with Connecticut utilities; and finally, the continuation of our Flat O&M and other expense control initiatives. We expect that savings from the VRP, net of the mitigants just discussed, will be between $0.05 and $0.06 per share during the second half of this year. These savings are available to address unplanned challenges that may arise, for example, items like the $0.04 of negative weather experienced so far this year. We are also affirming our expectations for full year 2019 operating earnings per share between $4.05 and $4.40. Similarly, we also reiterate our long-term EPS growth expectation of approximately 5% per year through next year and 5%-plus thereafter. I will now turn the call over to Tom.

Thank you, Jim, and good morning. First, a reminder that safety is our first core value. It is at the heart of our corporate culture, and we will continue to improve until we achieve the only acceptable safety statistic, zero injuries. Though 6 months remain, year-to-date safety results are consistent with the record-setting results we have achieved in the last few years. Of particular note, the Southeast Energy Group overall safety performance has improved from what was already solid results, overcoming the loss of a colleague in the tragic event in Durham on April 10 from a third-party contractor and avoiding distractions from merger activities. I want to commend the women and men of the Southeast Energy Group who have responded so positively, providing safe, reliable, and efficient delivery of energy to customers who are experiencing lower bills and seeing increased community giving, just as we committed prior to completion of the merger. Turning to Slide 9. Earlier this month, CNBC released their 2019 update to America's Top States for Business. We were pleased, though not surprised, to see 4 of our 5 primary state-regulated jurisdictions ranked in the top 10 of the list, including Virginia, which was recognized as the nation's number one state for business. You might recall from our Investor Day that 65% to 70% of our company's expected 2020 operating earnings are from state-regulated operations centered around these 5 key states, including 40% to 45% attributable to our Virginia-phased utility. This is just one more validation of the theme we have highlighted regarding the differentiated nature of our high-quality regulated operations. Another topic we regularly highlight to all Dominion Energy stakeholders is our ongoing ESG efforts. We're continuously enhancing our strategy in this area and increasing our communications regarding the progress we have made and will continue to make. For example, to our knowledge, we were the first utility company, and we believe the only U.S. company in any sector, to hold a dedicated ESG-focused Investor Day meeting. We created a new Board-level Sustainability and Corporate Responsibility Committee that oversees our approach to these matters. We have updated our emissions reduction goals to be more aggressive. We have improved our disclosures across-the-board, including inclusion of comparable ESG metrics. They are included in the appendix of these earnings call materials. We have directly engaged with our largest institutional investors outside of proxy season in discussions about Dominion's industry-leading positions on these issues. And we are only one of three utility companies that have implemented an environmental justice policy, which ensures that all stakeholders, including local communities, have a voice in decisions on infrastructure investments. We believe that as investors become increasingly discerning around ESG criteria, Dominion's industry-leading efforts will be rewarded with a differentiated positive investment outlook. I will turn now to recent updates related to our major investment initiatives. Earlier this month, we began construction of our $300 million offshore wind pilot project. The project was approved by Virginia regulators in November of last year and is a critical initial step in what has the potential to become a multiyear, multibillion dollar capital deployment in zero-carbon offshore wind energy. Recall that our Virginia offshore lease should accommodate over 2 gigawatts of generation capacity based on expected technology advancements, which is significantly more than what we have accounted for over our 5-year planning horizon. We continue to make progress on the $2 billion to $3 billion new pump storage facility. It would be an excellent complement to the intermittency of the increased wind and solar resources across our system. During the second quarter, we narrowed the search for a potential location, and we'll spend the remainder of this year and part of next conducting more extensive surveys. The Virginia General Assembly has found the construction of such a facility to be in the public interest. Next, relicensing of our existing regulated nuclear units in Virginia is an up to $4 billion capital program that supports safe, reliable, and affordable energy for customers and is an important source of zero-carbon electricity production. During the second quarter, our nuclear station in Surry County generated its 500 billionth kilowatt-hour of zero-carbon electricity. Put that into context, 500 billion kilowatt-hours would power the entire state of Virginia for 5.5 years in a carbon-free manner. Later this week, we will file our first battery pilot program. We will pair batteries with solar facilities to begin the integration of peak shifting and clipping as well as test the reliability benefits of batteries on our distribution grid. On Slide 12, we have charted positive trends across 2 significant growth drivers for our power delivery business. On the left side, you can see the growth in electric transmission rate base, which will continue as we execute on the 5-year, $4.3 billion capital plan we shared at our Investor Day in March. These transmission investments improve system reliability to the benefit of our customers. On the right side, you see the impressive growth in data center capacity, which we also expect to continue for years to come. Our capital planning calls for $1.7 billion of investment associated with customer growth, including data centers, over the next 5 years. And finally, with regard to the Atlantic Coast Pipeline and Supply Header. Our customers continue to meet this project's capacity to serve their existing customers, move toward a low-carbon future and enable new economic development. It is noteworthy that natural gas prices in the region that will be served by the project remain among the highest in the country. We are pleased that the Solicitor General filed an appeal to the Supreme Court of the Fourth Circuit Cowpasture decision as it relates to ACP's crossing underneath the Appalachian Trail. To date, 16 states, the AGA, INGA, the Chamber of Commerce, several unions, the National Association of Manufacturers, Mountain Valley Pipeline have all filed amicus briefs. History indicates cases appealed by the Solicitor General have an approximately 70% chance of being considered. We expect that in October or November, the Supreme Court will schedule arguments to occur in the spring of next year with a final decision no later than June 2020. We are confident that the Fourth Circuit's ruling will be overturned. And though at present, we are not publicly discussing potential administrative or legislative alternatives, the options that have been described by the developers of the Mountain Valley Pipeline should be expected to be applicable to the Atlantic Coast Pipeline. We are disappointed that last week, the Fourth Circuit vacated the project's biological opinion. Over recent months, we have been taking steps to bolster the official record of the case in the event the court ruled negatively. These steps include the additional surveying of the rusty patched bumblebee along the Project corridor, which has been underway since mid-June. There's nothing in the court's opinion on the poor species that we expect would prevent the biological opinion from being reissued in time to recommence construction by year-end and complete critical path tree filling during the November through March window. We have included in the appendix a list of select outstanding regulatory reauthorizations, including resolution timing expectations. Based on the assumptions, our current project cost and in-service timing expectations remain consistent with the guidance we provided earlier this year on our fourth quarter earnings call. Before I complete my remarks, I would like to add my personal thanks and well wishes to our colleagues who have opted to retire on an accelerated timeline. Your legacy of living our core values will leave a lasting impression at Dominion Energy, and you will be missed. With that, I will summarize today's release as follows: we are on track to achieve full year safety results that are consistent with the record-setting performances of recent years. We are actively engaged throughout the company on initiatives that are focused on creating shareholder, customer and other stakeholder value by making Dominion Energy more efficient, sustainable and transparent. We achieved operating earnings per share above, or on a weather-normalized basis, at the midpoint of our guidance range. We are affirming our full year operating earnings per share guidance and our long-term growth rates. Our key regulated jurisdictions stand apart as premium locations in which to do business. We are making progress across our capital investment programs to the benefit of our customers. And we have a strong environmental, social and governance track record and strategy, and we will continue to increase our engagement with customers, shareholders and other stakeholders on those topics. We will now be happy to answer your questions.

I have two questions, one related to numbers. Looking at the adjustments from GAAP to operating, you had a really great quarter, congratulations on that. However, there were significant charges associated with merger and integration costs, along with retirements, etc. Are those numbers in line with your expectations for the year regarding the difference between GAAP and operating? Additionally, should we anticipate any substantial incremental charges for the remainder of the year and into 2020?

Yes, Greg. It's Jim, good morning, thanks. The future nonoperating charges are, of course, difficult to predict so we don't know exactly what those will be, it’s the nature of the beast. I would expect some continued charges related to our integration of SEG the former SCANA business mostly in terms of accounting systems and implementations and things along those lines. The major charges related to customer benefit, and VRP and related restructuring have been kind of tackled in the first half of this year. So some numbers would continue but they will be, we expect, more modest than what we've seen so far.

My second question pertains to your confidence in your ability to have the Fish and Wildlife Service effectively address the concerns related to the second certification of their permits from the Fourth Circuit. In reviewing that document, I have encountered differing opinions on the difficulties the Fish and Wildlife Service faces in issuing a valid permit, considering the strong language within it. Although it provided a detailed brief explaining their perspective that the decision was arbitrary and capricious, some believe that the standards imposed on the Fish and Wildlife Service and the specific issues they have raised could be challenging to overcome. Could you share your thoughts on why you believe, based on your evaluation and that of your experts, that you can meet these challenges by providing additional information on the three other species and adequately conducting the survey on the bees? I apologize for the lengthy question.

Well, all right. Go ahead, Diane.

This is Diane Leopold. As we examine the four species, we engaged in extensive information gathering and analysis during our formal consultation with the Fish and Wildlife Service. Given the data they possess and the surveys we've conducted, we are confident that there is nothing unexpected that would suggest they cannot address the situation with the substantial analysis and information at their disposal.

I will just add one thing. The surveys highlighted that there was concern about the number of surveys conducted regarding the bees, and we have been carrying out those surveys since mid-June. They will be completed this quarter, and we believe there will be enough facts to justify issuing the Biologs Opinion.

Could you guys maybe just give a little color on how you'd characterize your natural gas midstream system in light of some of the concerns on Appalachia gas? I know it's mainly regulated and with long-term contracts. But just obviously, you saw Blue Racer very timely. Just maybe give some color and context of that.

Diane Leopold again. What I would do is say that part of the reason that we divested Blue Racer is that really wasn't core to us. When we look at our gas infrastructure, our high focus in both our existing customers and our growth projects has been in end-use markets, and end-use markets actually benefit from the low gas prices that you see. So while we understand the Appalachian gas prices are quite low, what that's done is it's driven a higher industrial growth in that region and more end-use and PowerGen customers. So as Tom talked about in the Analyst Day back in March, a lot of our focus is towards the end use rather than the producers.

Okay, great. And then I guess, the other question would be just on the savings for the voluntary retirement and the benefits of that. So when you look at unexpected pressures, the only one that I could think of right now would be ACP-related. I guess since they're unexpected, there's not any other that you see right now that could be out there in terms of dealing with using these benefits or needing the benefits.

That's correct, Steve. Unexpected situations are difficult to comment on. To provide some context, we previously mentioned that the net impact for this year is estimated to be in the $0.05 to $0.06 range for the second half of the year. You can easily project that for future years. Over time, this amount will eventually be returned to our customers through rates. For 2020, we anticipate roughly double that amount, so around $0.10 to $0.12. To clarify further, weather-related impacts equated to about $0.04 this year over six months, and we are uncertain about the remainder of the year. In 2020, similar impacts are expected to be available to offset as well. Regarding ACP, last year our guidance for its contribution in 2018 was $0.07, and this year it has increased to $0.11. We have some visibility for next year, though not in detail regarding the exact timing of activities and capital spending throughout 2020. While we cannot specify the contribution for 2020 just yet, we anticipate it to be in the mid-teens to high teens at most. Therefore, the $0.10 to $0.12 available could help offset various unforeseen obstacles, which provides context when compared to ACP, which is relatively smaller.

Real quick, Tom. You commented, Tom, a little bit on sort of briefly touched on the administrative path and potentially looking at like a land swap similar to what we've seen with MVP. Are there other sort of administrative solutions that you could be looking at outside of just the land swap?

Yes, there are a number. And as we said before, we really don't want to get into a lengthy discussion about what all those options are. There has been some discussions from the developers of the MVP pipeline that, as I've said a few minutes ago, we would expect all of those solutions to be available to us as well.

And then just from a timing perspective of when you're ready to discuss publicly the administrative or legislative path, is that sort of at a point when SCOTUS affirms whether they would hear this case or not?

We're currently concentrating on this issue. We believe the Fourth Circuit decision sets a poor precedent for energy policy in the United States, establishing a 2,000-mile barrier to transport energy resources from the Midwest and South, as well as the western regions, to the East. We don't think that's what Congress intended. Therefore, it is crucial that this precedent does not remain in place.

Got it, okay. And then I don't know if you can comment on this, but there have been some headlines around the retail business and the possibility of a transaction there. Is there anything you can elaborate on regarding how the process is going?

Certainly. While we typically don't discuss significant mergers and acquisitions, I can provide some insight on our perspective. We're consistently evaluating opportunities to enhance shareholder value and reduce risks in our strategy, aiming to transition our involvement in regulated and similar businesses, which currently stands at 95%, closer to 100%. Last year, we made considerable strides in this area, and that momentum continued this year on a new level. Our main focus now is on the remaining 5% of assets that are either non-core or not regulated. For instance, we sold a 15-megawatt fuel cell asset in Bridgeport, Connecticut for $35 million, and we also divested our interest in the NedPower wind facility in West Virginia, although the amount was not disclosed. We're currently evaluating our Indiana wind asset, Fowler Ridge, but no decisions have been made yet. We're always contemplating actions like these, but they tend to be on a modest scale. To address your question regarding retail, there have been reports about possible sales of our retail gas operations. We have received inquiries regarding the segment in Georgia that was formerly part of SCANA, as well as our legacy Dominion business, and we are considering our options. However, there is no concrete decision at this time. We are thinking about how to approach this, exploring whether to retain the business, how to foster growth, possibly through joint ventures or other structures. Our focus is more on strategic thinking rather than immediate sales, as selling is probably not the best move for us right now. There are no decisions made at this point, just ongoing discussions, and I'm not sure there will be any updates to share.

Got it. And then as we think about like redeployment of proceeds in case there is a process, is that strictly into delevering and strengthening the balance sheet?

I would call it yes, but I would put that in the kind of the general corporate when we're talking about not huge numbers in the scope of all of Dominion.

Just a couple of follow-up questions. The $0.10 to $0.12 of voluntary savings, the voluntary retirement savings, you said that you expect to eventually see it in a few years as the savings are shared with customers. How much do you think you'll retain though longer term once most of those savings have been shared?

Yes, Michael, we don't really have such a number. I mean it over the years, we don't have material rate cases with all that much frequency. So it will be chipped away over time, but we don't have a specific number to bifurcate between what's kept long term and what's not.

But just, I mean, roughly speaking, half, would you think, or below half or more than half maybe?

Half would be fair. We don't really have a number in mind.

Okay. How much capital has been invested in ACP so far? What assumptions are factored into the mid-teens EPS estimate that you mentioned earlier from AFUDC for next year?

Yes. As of June 30, the total cash invested capital stands at $3.4 billion from all parties and various sources. Half of that amount, which is $1.7 billion, is funded through the construction facilities at the project level, and you'll notice this in our quarterly reports. The remaining half comes from equity contributions from the sponsors, which accounts for 48% of that total. We currently do not have detailed guidance on capital spending for the end of this year or its distribution through 2020, but the plan assumes that construction will restart by the tree clearing season in the fourth quarter of this year.

So when you say mid-teens on the next two years, that's sort of an assumption that you are going to get most of this built up into the Supreme Court decision?

It's mid- to high teens so mid would be with less under construction during 2020 or later in 2020, and higher would be again most of it.

So perhaps just to follow up on some of the last questions here. Can you talk a little bit more about what else might be considered sort of not necessarily noncore but as you think about kind of fine-tuning the portfolio here within the regulated bees. And more specifically, I'd be curious, given some of the developments here around Millstone that have been achieved, is there any way to derisk some of the volatility ahead as well over time, for instance, within that example?

Well, I'll talk about Millstone. We have derisked Millstone with the legislative and regulatory solution that's in its final weeks right now with a very significant portion of the output being sold to the utilities for a 10-year period. So we'd consider that to be more than sufficient derisking of the Millstone asset. I'll let Jim and others answer the rest of the questions.

I think that's a good answer. And going back to the way I've started my answer to Shar, I mean, we don't comment on material M&A. But the review of real material things, which are noncore, including Blue Racer, as we talked about last year, and our last remaining fossil merchant plant last year, I mean, for big items, that pretty much exhaust the list.

And then just coming back to the question around VRP, I know it's been asked a few different ways. But as you look in the back of this year, could you think about like the pluses and minuses here? Clearly, it's a big plus. Any offsets in terms of execution? That it sounds like that's already been largely recognized in the first half to achieve this? And maybe the punchline is how do you think about this trending for the full year '19, given the 3Q guidance you've already issued and what that means for 4Q as well.

Okay. Let me talk about that a little bit. I know it's a little bit funny to talk about that savings as being kind of available for unforeseen headwinds, whether it's the most prevalent. We always talk about the potentially material impact of weather now in Virginia and South Carolina on our earnings guidance ranges and where we end up. So it's hard to point any one thing because we feel pretty good about where we are at this stage, given what's to come in the next 2 quarters. And let me address that a little more. So last year, as we sat here on our second quarter call and we looked at kind of what was remaining, what we needed to do after our first two quarters to get to the midpoint of our guidance range, we needed $2.03. So this year, as I mentioned in my prepared remarks, the cadence is different. We have a back-end loaded profile to our EPS accrual through the second half of the year. So last year was $2.03. This year, it's $2.36, so bigger company, more earnings, but we also need have a little bit of catch-up, it's back-end loaded. The reasons for that and the reasons we are comfortable with that are these things that are generally set out in that right-hand side of Page 7 in our deck. So the Millstone outage, $0.08 to $0.10. Last year was in the fourth quarter, and for the most part, this year, done in spring. The net capacity expansion, PJM with Greensville in the next now starting in June, $0.06 to $0.08. The VRP also in the mix, $0.05 to $0.06. Southeast Energy Group didn't have it last year, $0.04 to $0.06. And then another basket of things are smaller but regulated investment across our utility business for the next 6 months: the Millstone PPA we mentioned, assuming that comes into place October 1; and then the continued impact of O&M to the next 6 months. So in our minds, we don't really have one thing that the VRP will offset. It's just there and available. So we anticipate, Julien, that a question, which was what if nothing comes up this year or next year? And there also, we're saying, I've said that it's not additive to our guidance. So if nothing comes up and we're in the lucky position of not having any headwinds that aren't expected or such event, what I would do is identify areas in O&M to advance spending in order to use that VRP savings to derisk our guidance, our earnings guidance for a longer period of time. So not a very direct answer to your question but that's the way we think about the VRP savings and what it will potentially help us with over the next period.

Right. So maybe said differently, 2019, there's a lot of puts and takes. You feel very comfortable still. I don't want to put words directly in your mouth for '19. And then you've been a story for '20, again, this is going to be more about accelerating forward O&M that you might otherwise need, for instance, in '21 or something.

Yes, if no other headwinds pop up, that's right.

Just had one follow-up on Atlantic Coast Pipeline. Assuming that a revised biological opinion and incidental take statement is issued but is stayed by the court yet again, what would the next process steps be at that point? Is there an appeal process or where would you go at that point if the unrevised is yet again stayed?

You can appeal a stay, but it will depend on the specifics of the stay if one was issued. It’s unclear whether it would apply to the entire 600 miles or just a portion. Answering that question is somewhat challenging. There are various remedies we could consider, but without more detailed information, it’s difficult to provide a clear response.

Moving a little bit away from ACP, wanted to touch on offshore wind. I know you talked about it and emphasized on the call the opportunity on offshore wind. Firstly, wanted to understand the economics that you're seeing and the benefits you're seeing on the technology side. And given the investment that you've talked about as a potential opportunity, is that going to put pressure on bills and would that constrain the opportunities? So just a little bit color on that will be helpful.

This is Paul Koonce. Of course, we're under construction on the two offshore wind turbines now, doing the onshore construction next summer will complete the two test turbines. In terms of the offshore wind economics, we've been watching very closely what's been happening throughout New England. I would say that the life cycle cost equivalent, LCOE, in those markets have been, call it, $85 and potentially higher. There's some speculation about what may happen with production tax credits for offshore wind. Might they be renewed or not? We don't know. In Virginia, we're looking at the need to get the life cycle cost equivalent down closer to maybe the $80 range, which means we need to see about a 15% to 20% capital cost improvement. We think that those costs can move in that direction once we stand up the U.S. supply chain. That's been a real benefit that they've seen in Europe is being able to scale up the supply chain. And we also think that the development of larger turbines, 11 megawatts and greater, will drop those costs down closer to what we think we need in order to really see the build-out in Virginia. So we're watching all of that very closely. We think the timeframe that we have in mind, which is '23, '24 and kind of beyond, we think that those cost reductions are achievable. So we're bullish but we're going to do what's right for our customers.

Got you. That's super helpful color. Just can you put in context what could be the size of the opportunity from an investment perspective post that 2022, '23 timeframe?

Well, I think what we said at the March 25, really, we've only given sort of guidance out to 2023, which is $1.1 billion. Now $300 million of that $1.1 billion is the offshore wind pilot that we're doing. That leaves $800 million to go toward the first phase. But I think in round numbers, we've said in excess of 2,000 megawatts. The limiting factor becomes sort of the wake effect that you have with one turbine sort of stacked up behind the second. But we clearly see line of sight in excess of 2,000 megawatts. And I would pencil out maybe a $3,000 per kilowatt-hour installed. And if you do that, you come up with a sizable investment but that would be out over the entire decade.

Thank you for everyone's time this morning. We know it's a busy earnings day and the Investor Relations team is available, of course, to answer questions throughout the rest of the day. Thank you.