Dear CII Member,

We wanted to make you aware of a filing by Majority Action calling on shareholders of Dominion Energy (D) to support the shareholder proposal for an independent board chair (Proposal 5). See the full filing here.

In this time of unprecedented transformation in the electric utility industry, Dominion Energy, Inc.’s (“Dominion’s”) long-term prospects depend on robust independent oversight. The presence of underqualified directors with connections to one another and to the Chair/CEO casts doubt on the board’s ability to provide such oversight. At the upcoming annual general meeting, Dominion shareholders have the opportunity to vote for a proposal that would enhance oversight through independent board leadership.

We recommend that shareholders support the proposal for an independent chair (Proposal 5):

Independent board chairs can strengthen board oversight of management and improve corporate accountability. This structure is increasingly common, with the proportion of S&P 1500 companies with an independent chair growing from 20 percent in 2008 to 35 percent in 2017. Proxy advisor Institutional Shareholder Services (ISS) has recommended Dominion shareholders support this proposal, citing Dominion’s lackluster shareholder returns.

In addition, shareholders should support this proposal because the current board composition, as well as directors’ qualifications and outside connections, raise questions about whether the board is currently capable of providing necessary oversight.

The four longest serving directors other than Chair/CEO Thomas Farrell control key leadership positions on the board: Each serves as chair of a committee, and together they comprise the Compensation, Governance and Nominating Committee. The directors are John Harris (Lead Director and Chair of the Compensation, Governance and Nominating Committee), Helen Dragas (Chair of the Sustainability and Corporate Responsibility Committee), Mark Kington (Chair of the Finance and Risk Oversight Committee), and Robert Spilman (Chair of the Audit Committee).
Two of those four committee chairs, Dragas and Kington, have no outside experience serving in board or executive leadership of publicly-traded companies. Harris’ only recent (prior 10 years) public company experience is service on the board of a fossil fuel company, Piedmont Gas. Along with Dominion, Piedmont Gas is a part-owner of the controversial Atlantic Coast Pipeline joint venture LLC, the economic viability of which could be threatened by a shift away from fossil fuels. Spilman’s executive leadership is at a furniture company with a market capitalization approximately 0.3% the size of Dominion’s.
These and other directors also have a number of outside connections and board interlocks with one another and the Chair/CEO Thomas Farrell, including:

Dragas and Kington served together on the University of Virginia (UVA) Board of Visitors as Rector (equivalent to board chair) and Vice-Rector, respectively, their terms overlapping with Farrell’s service on the same governing board. The failed attempt to remove UVA’s President during the time Dragas and Kington led the board demonstrated questionable judgment, provoked widespread criticism and led to Kington’s resignation.
Farrell and Kington served together as trustees of the Colonial Williamsburg Foundation, to which Dominion recently made a $1.4 million donation. Kington remains a trustee.

Dominion faces unprecedented challenges and opportunities due to climate change, but its targets fall short of investor demands and its current strategy and activities are generating controversy and risk

Dominion is one of the largest US investor-owned utilities by generation and a significant contributor to greenhouse gas emissions. The Company’s long-term prospects depend on its ability to rapidly transform its business model in response to the disruptions and decarbonization policy imperatives caused by climate change. The US energy policy landscape is shifting significantly, as states are adopting ambitious targets for complete decarbonization of electricity within their jurisdictions. The falling costs of renewable energy sources and systems are rapidly upending fundamental assumptions underlying utility investments in fossil fuel-based infrastructure, and corporate customers are increasingly demanding power generated from only renewable sources, at times going around electric utilities to obtain clean power directly.

Utilities that fail to adjust capital expenditures to this new reality risk investing in long-lived capital assets that will be uneconomic to operate and may be unable to pass on costs associated with those investments to ratepayers. In addition to these substantial business risks, utilities and their investors face further danger from the devastating effects changing environmental conditions can have on electric utility infrastructure.

At the same time, electric utilities have much to gain from the economy-wide transition away from fossil fuels. Electrification can support transformation of other sectors, such as transportation, boosting demand for electric power. More capital intensive renewable generation can support higher earnings growth, as regulated utilities generally can earn a rate of return on capital investments but not fuel and other operating costs.

In early 2019, Dominion set a long-term target of reducing its carbon emissions by 80 percent by 2050 from 2005 levels. This target falls short of that demanded by investors representing $1.8 trillion in assets under management, which called on U.S. investor-owned utilities to commit to achieving net-zero carbon emissions by 2050. In fact, according to research from the Energy and Policy Institute, Dominion’s announced targets actually represent a significant slowdown of its decarbonization rate, with a targeted reduction of only 1 percent per year between now and 2030. Moreover, Dominion does not explain how its new target is in line with the goals of the Paris Agreement of limiting warming to well below 2˚C and aiming for 1.5˚C, in accordance with requests made by the Climate Action 100+, a coalition of investors representing $33 trillion in assets under management. Dominion has published no roadmap detailing how it would achieve its stated emissions reductions, though its plans submitted to regulators include building between four and seven gas generation plants.

Indeed, Dominion’s progress in reducing carbon emissions to date has relied almost entirely on switching from coal to gas fired generation, and only four percent of the Company’s generation were from renewable sources in 2017 (the most recent figures provided by the company in its 2019 investor day presentation). Dominion’s investment plans and corporate strategy have generated public controversy and risk political backlash in a critical market. The Company’s commitment to natural gas infrastructure is driving increases in policy and regulatory risk, reputational risk, and competitive risks.

For example, Dominion has come under extended community criticism related to the Atlantic Coast Pipeline (ACP). Concerns about the environmental impact of the construction and the need for additional gas capacity in the affected states have led to multiple legal challenges against the ACP. Originally estimated to cost $6.0-6.5 billion, challenges to various permits have increased the cost of the ACP to $7.0-7.5 billion, and the project is now unlikely to be in-service until late 2020.

The siting of the Union Hill-Atlantic Coast Pipeline compressor has been particularly controversial, with worries that the compressor will impose disproportionate harm from toxic air pollution on communities of color in Union Hill, Virginia. Concerns about controversial projects like the ACP, and a growing unease regarding Dominion’s influence in state politics, led 13 newly-elected members of the Virginia General Assembly to refuse donations from Dominion in 2017. According to Activate Virginia, the organization promoting the pledge, 15 sitting House of Delegates members have pledged to refuse Dominion’s donations, as have two sitting members of the U.S. House of Representatives. Twenty-five non-incumbent candidates for the Virginia Senate and 45 candidates for the VA House of Delegates in 2019 have done the same.

The overreliance on building new gas infrastructure creates risks that these assets will become stranded in a carbon constrained future. Dominion appears not to have published any report in which it assesses whether the investment case for the ACP has been stress-tested against a future in which use of gas as a fuel is rapidly phased out as part of a transition to net-zero carbon emissions. Indeed, the Company’s most recent Climate Report, issued in November 2018, claims that pipeline capacity, in particular the ACP, will remain central to Dominion’s plans even in a world with significantly greater reliance on renewable energy. Analysts at the Institute for Energy Economics and Financial Analysis (IEEFA) have warned that “The biggest threat to the project’s profitability may come if and when the project is ever completed. The demand outlook for gas has changed dramatically since the project’s inception and much of the project’s original justification has evaporated. Indications are that the project’s affiliated utility customers may struggle to convince state regulators to pass the full cost of pipeline transportation agreements through to utility customers.”

Given these key risks and challenges facing Dominion, independent oversight is crucial. We believe that an independent chair would strengthen the board’s ability to provide such oversight.