Dominion expected to seek more asset sales after $3.3B Cove Point deal

Divesting a 50% stake in export terminal operator Cove Point LNG LP for $3.3 billion will not be enough on its own to repair Dominion Energy Inc.'s balance sheet and recover investor confidence in the utility holding company, industry experts said.

The sale to Berkshire Hathaway Inc., which now owns 75% of Cove Point's limited partner units and already controlled the general partnership, was announced after the market closed July 10 as Dominion undergoes a "top-to-bottom" business review that it expects to conclude before an investor day to be scheduled during the third quarter.

Analysts at Guggenheim expressed surprise in a July 11 note that only one transaction was unveiled, because "Berkshire has been publicly reported as an interested party in Dominion's ongoing [local distribution company] sale processes," which had a May 11 indicative deadline.

Dominion's stock rose less than 1% on July 11 following the deal's disclosure. Since announcing the strategic review Nov. 4, 2022 — with Dominion management providing little detail on what parts of the company might be for sale or the impact on earnings growth — the company's shares have plummeted over 22% to settle at $51.58 on July 10.

Since the review began, sector analysts have speculated that Dominion's gas local distribution companies (LDCs), contracted solar portfolio, renewable natural gas business and planned Virginia Beach Offshore Wind Project could all be sold to remedy underperformance and pay off debt.

"Dominion's credit repair pathway remains a heavily nested decision tree with multiple possible permutations depending on the valuation of several potential sources of funding," Guggenheim told clients July 11. After the approximately 70-basis-point "uplift" that Dominion estimated will come from the Cove Point transaction, the company has to unload another 150 basis points to achieve its targeted funds from operations-to-debt ratio, the analysts said.

KeyBanc, on the other hand, wrote July 10 that Dominion still has to shed another 200 basis points, or about $8 billion, of leverage, which implies that "the sale of some LDCs remains very much on the table."

Dominion's Utah, Wyoming and Idaho LDCs "are likely to attract strategic and financial buyers with a presence in the region" and could fetch a combined $17 billion to $20 billion, analysts said.

Morningstar told clients July 11 that it expects appetite for the LDCs and the planned 2,587-MW, $10 billion offshore wind project to "remain challenging." CreditSights' Andrew DeVries said in a June email that there are likely "zero buyers" for the wind project even though it is regulated.

BMO Capital Markets analysts suggested the Cove Point deal value may be disappointing to investors and wrote that "higher interest rates and lower legacy contract cash flows placed downward pressure" on the sale price.

Dominion President and CEO Robert Blue said Cove Point was no longer a core asset because of Dominion's decision to focus on state-regulated utility operations. Cove Point LNG in Maryland has generated $8.9 billion in cash flow over the past five years for Dominion on a $4.1 billion construction budget, Blue added in a news release announcing the sale.

Brookfield Infrastructure Partners LP owns the other 25% of the limited partnership.

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