Dominion winds down business review with offshore wind stake sale

Dominion Energy Inc.'s sale of a stake in its nearly 2.6-GW offshore wind project brings an end to a "top-to-bottom" business review that has tested the patience of Wall Street analysts and investors since it was launched in November 2022.

Dominion on Feb. 22 announced a deal to sell a 50% noncontrolling stake in the 2,587-MW Coastal Virginia Offshore Wind project to global alternative investment firm Stonepeak Partners LP.

As part of the deal, Stonepeak will invest in a newly formed subsidiary of Dominion Energy Virginia in exchange for a noncontrolling equity interest and customary minority rights in the massive offshore wind project, sited 27 nautical miles off the coast of Virginia Beach, Va. Dominion will continue to oversee Coastal Virginia Offshore Wind's operations and construction.

"I'm confident that this partnership is in the long-term best interest of our customers and our shareholders," Dominion Chair, President and CEO Robert Blue said Feb. 22 on the company's fourth-quarter 2023 earnings call.

The transaction achieved several key objectives, according to the CEO, including the addition of "an attractive, well-capitalized and high-quality partner" with a history of investing in large infrastructure projects, including offshore wind.

"Second, it provides for robust cost sharing and provides meaningful protection from any unforeseen project cost increases," Blue added. "And third, it improves our quantitative and qualitative business risk profile via a highly credit-positive partnership."

The transaction also is expected to improve Dominion's estimated 2024 consolidated funds from operations-to-debt by about 1%.

"In other words, this partnership will reduce our company's business and financial risk profile, which benefits our customers," Blue said.

Abundant interest

A Virginia law passed in 2023 set the stage for Dominion to sell a stake in the project to a noncontrolling equity financing partner.

"We attracted quite a bit of interest from financial and strategic counterparties," Blue said in response to an analyst's question on the call. "And what was really encouraging to me was to hear unanimously from parties who participated [in these talks] how well this project is going."

As the management team evaluated a potential partnership, it focused on "the importance of having pro rata sharing of costs, and we've achieved that here," Blue added. "The cost-sharing, with protection from any hypothetical or unforeseen project cost increases but having a well-capitalized partner to help us there, was critical."

Transaction terms

Dominion expects to receive about $3 billion in proceeds from the deal, representing half of the project's construction costs incurred through the expected year-end 2024 closing, less a $145 million initial withholding.

"This nearly $3 billion project cost reimbursement will be used to reduce parent-level debt," Blue said.

The utility will receive $100 million of the initial withholding if final costs are within the $9.8 billion project budget. The initial withholding to be received will be adjusted downward if total project costs, excluding financing costs, exceed $11.3 billion.

Following deal completion, Dominion and Stonepeak will each contribute 50% of the remaining capital necessary to fund project construction up to $11.3 billion. For project costs between $11.3 billion and $13.7 billion, Stonepeak has the option to make additional contributions, with Dominion contributing between 67% and 83% of such capital and Stonepeak funding the remainder.

The transaction requires approvals from the Virginia State Corporation Commission and the North Carolina Utilities Commission as well as certain consents from the US Interior Department's Bureau of Ocean Energy Management and other regulatory agencies.

The Bureau of Ocean Energy Management recently provided final approval of the construction and operations plan for the project, which allows the company to begin offshore construction. The approved project includes 176 turbines, with maximum output of just under 2.6 GW.

Dominion Energy Virginia is expected to begin initial offshore construction activities in the second quarter. The wind farm is expected to come online in 2026.

At the finish line

The offshore wind stake sale represents the last strategic step in Dominion's business review. The company will host an investor day March 1 to officially conclude its business review, discuss its overall strategy and provide multiyear financial guidance.

"I would reiterate what we've shared since the beginning of the review, that we're seeking to meet and exceed our downgrade thresholds while we can also minimize the amount of external equity need," Dominion Executive Vice President and CFO Steven Ridge said. "We think that the transactions we've announced to date have been very supportive of our objective."

The Richmond, Va.-headquartered multi-utility agreed in July 2023 to sell its 50% stake in export terminal operator Cove Point LNG LP to Berkshire Hathaway Energy in a $3.3 billion deal.

Dominion used the after-tax proceeds from that transaction to reduce debt, according to management.

In September 2023, the company decided to offload three gas utilities to Canada's Enbridge Inc. in a deal valued at $14 billion.

Dominion earmarked 100% of after-tax proceeds, or about $8.7 billion, from the sale of gas utilities in Ohio, North Carolina and the western US for debt reduction.

"The review will comprehensively and finally address foundational concerns that have eroded investor confidence in our company over the last several years," Blue said.

Results

Dominion on Feb. 22 reported fourth-quarter 2023 operating earnings of $267 million, or 29 cents per share, compared to $652 million, or 76 cents per share, for the same period in 2022. The S&P Capital IQ consensus normalized EPS estimate for the quarter was 36 cents.

The company reported full-year 2023 operating earnings of $1.74 billion, or $1.99 per share, compared to operating earnings of $2.63 billion, or $3.06 per share, for the same period in 2022. The S&P Capital IQ consensus normalized EPS estimate for the year was $2.50.