Stonepeak, Dominion Energy to Partner on Virginia Offshore Wind Project

Editor's note: This article was updated to include comments and analysis. 

Virginia-based utility company Dominion Energy said Feb. 22 it has agreed to sell a 50% non-controlling interest in the approximately $10 billion Coastal Virginia Offshore Wind (CVOW) project to infrastructure investor Stonepeak.

The move lines up a partner to help pay for construction costs for the massive project.

Consisting of 176 turbines and three offshore substations on a nearly 113,000-acre lease area off Virginia Beach, the 2.6-gigawatt (GW) CVOW is the largest offshore wind project developing in the U.S. When complete, the project is expected to provide enough power for about 660,000 homes.

“Stonepeak has a track record of investment in large and complex energy infrastructure projects, including offshore wind,” Dominion Energy CEO Bob Blue said Feb. 22 on the company’s earnings call. “Their significant financial participation will benefit both our project and our customers.”

The deal was reached following a challenging year for the offshore wind sector. Projects were delayed as some developers of U.S. projects sought to renegotiate prices amid rising interest rates, inflationary pressure and supply chain obstacles.

Dominion Energy posted fourth-quarter 2023 revenues of $3.53 billion, down from $3.81 billion a year earlier. Fourth-quarter profit was $273 million, down from $344 million.

Dominion will retain full operatorship and control of construction for CVOW, while Stonepeak said it will extend its expertise in investing in and delivering large, complex renewable energy projects. The company will invest in a newly formed public utility subsidiary of Dominion Energy Virginia.

“Having previously partnered with Dominion Energy, we look forward to extending our relationship through CVOW, which is a fitting addition to our global renewables strategy given its potential to provide meaningful renewable capacity to the U.S., advanced stage of development, and downside-protected fundamentals,” said Rob Kupchak, senior managing director at Stonepeak,in a statement.

‘High-quality partner’

The transaction, which requires state and federal approvals, is expected to close by year-end 2024 if all approvals and consents are secured.

As part of the agreement, which provides for cost-sharing and mandatory capital contributions, Dominion said it expects to receive proceeds of about $3 billion at closing, representing half of the project’s construction costs incurred through closing less than the initial withholding of $145 million. The initial withholding will be $100 million if final construction costs are $9.8 billion or less, excluding financing costs, Dominion Energy said. If project costs exceed $11.3 billion, Dominion said it will receive no withheld amounts.

Blue said he is confident the partnership is in the best interest of Dominion’s customers and shareholders.

“First, it adds an attractive, well capitalized and high-quality partner. It brings a track record of investment in large and complex infrastructure projects, including offshore wind, that will further de-risk what is already a significantly de-risk and well-developed project,” Blue said. “Second, it provides for robust cost-sharing and provides meaningful protection from any unforeseen project cost increases. And third, it improves our quantitative and qualitative business risk profile via a highly credit positive partnership.”

The transaction is expected to improve the company’s estimated 2024 consolidated FFO-to-debt by about 1.0% and reduce its overall financing needs during construction.

‘On time, on budget’

Developers expect to complete CVOW in 2026.

The project is currently proceeding on time and on budget, having hit several significant milestones. These include receiving final approval of the project’s construction and operation plan by the Bureau of Ocean Energy Management, which allows offshore construction to begin in the second quarter, and a permit from the U.S. Army Corps of Engineers that allows onshore construction to ramp up. Construction of the Charybdis, the Jones Act-compliant installation vessel, is 82% complete with all four legs installed, engine startup complete and jackup system commissioning underway. Construction is expected to be complete by late 2024 or early 2025. Turbine installation is scheduled to start in 2025.

CVOW’s expected levelized cost of energy remains unchanged at $77 per megawatt hour.

“We remain well below the legislative prudency fee cap on this metric. Project to date, we’ve invested approximately $3 billion, and we expect to spend an additional 3 billion by year-end 2024,” Blue said. “Although more than 92% of project costs are now fixed, we’ll gradually increase that percentage over the remainder of the project construction timeline.”

Speaking on the partnership process, Blue said there was much interest from financial and strategic counterparties. “What was really encouraging to me was to hear unanimously from parties who participated how well this project is going,” he said.

The partnership marked the final strategic step of Dominion’s business review. The review also included the gas utilities sales, with three transactions on track to close in 2024.

“The review will comprehensively and finally address foundational concerns that have eroded investor confidence in our company over the last several years. We will not pursue a series of partial solutions that will leave key elements and risks unaddressed,” Blue said. “Instead, we’ll deliver a comprehensive result that will provide a durable and high quality strategic and financial profile that optimally positions Dominion Energy to provide compelling long-term value for shareholders, customers and employees.”

An investor meeting is scheduled for March 1 when a strategic and financial update will be given.

Vinson & Elkins LLP served as legal adviser to Stonepeak. Mizuho Securities USA, through its affiliate Greenhill & Co., and Santander US Capital Markets LLC served as co-financial advisers.