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Dominion to fuel growth with clean energy after abandoning $8B pipeline


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Essential Energy Insights - October 2021

Dominion to fuel growth with clean energy after abandoning $8B pipeline

Dominion Energy Inc. plans to sharpen its focus on cleaner energy resources and its state-regulated utilities following separate decisions to abandon the Atlantic Coast natural gas pipeline project and sell its gas transmission and storage assets.

Dominion Chairman, President and CEO Thomas Farrell II told analysts and investors on a July 6 conference call that the company will continue to "aggressively" pursue renewable energy, storage, nuclear license renewals, electric vehicle infrastructure and energy efficiency programs.

Dominion Energy and Duke Energy Corp. on July 5 announced the cancellation of the 604-mile Atlantic Coast natural gas pipeline project based on ongoing delays from legal and regulatory challenges, as well as increasing cost uncertainty.

The decision came a little more than two weeks after the 1.5-Bcf/d pipeline project won a 7-2 victory at the U.S. Supreme Court. The Supreme Court reversed and remanded a ruling by the U.S. Appeals Court for the 4th Circuit that canceled a U.S. Forest Service-issued permit that enabled Atlantic Coast Pipeline LLC, or ACP, to cross the Appalachian Trail and sections of national forest.

Many analysts, however, remained skeptical that the project would cross the finish line even as Dominion announced earlier in 2020 that it would increase its stake in the $8 billion project as part of a $175 million transaction with Southern Co.

Duke Energy, which owns 47% of ACP, expects a pretax hit to its 2020 earnings of about $2 billion to $2.5 billion as a result of the cancellation of the project, the company said in a July 6 Form 8-K filing. One objective of the pipeline was to carry gas to North Carolina, where Duke's regulated electric utilities have been replacing coal-fired power plants with natural gas-fired resources. Another was to provide fuel for heating demand in North Carolina.

Dominion on July 6 reported it will recognize estimated pretax charges in the range of $2.7 billion to $3.2 billion related to the ACP Project and the associated Supply Header project, mostly in the second quarter of 2020. Separately, subsidiary Dominion Energy Gas Holdings LLC said it will recognize estimated pretax impairment charges in the range of $400 million to $500 million related to the Supply Header project, which is expected to be reported in second-quarter 2020 earnings. The proposed Supply Header project would have provided approximately 1.5 million Dth/day of firm transportation service to various customers in connection with the proposed Atlantic Coast Pipeline project.

Dominion's sale of gas transmission, storage assets

Separately on July 5, Dominion announced the sale of its natural gas transmission and storage business to Berkshire Hathaway Energy in a deal with an enterprise value of about $9.7 billion, including the assumption of $5.7 billion of existing debt. The subsidiary of Warren Buffett's Berkshire Hathaway Inc. will acquire 100% of Dominion Energy Transmission Inc., Questar Pipeline Co. and Dominion Energy Carolina Gas Transmission LLC; and 50% of Iroquois Gas Transmission System LP.

The deal also includes the sale of a 25% of Dominion's operating interest in the Cove Point LNG export, import and storage facility in Maryland. Dominion will retain 50% ownership in Cove Point, with Brookfield Asset Management Inc. continuing to own the remaining 25% share. The transaction is expected to close in the fourth quarter. At that time, Berkshire Hathaway Energy will become the operator of the Cove Point facility.

Scotia Capital (USA) Inc. analyst Andrew Weisel said the financial implications to Dominion from the decision to cancel ACP are "overshadowed" by the asset sales.

"By divesting these midstream assets, the company will generate 85%-90% of consolidated EPS from state-regulated electric and gas utilities, a materially improved earnings mix and more in line with peers," Weisel wrote in a July 5 research report.

Dominion said it plans to use proceeds from the sale of the gas assets to repurchase about $3 billion in common stock.

"[T]his sale does highlight the growing pressure on utilities to decarbonize, particularly in a blue state like Virginia and with President Trump trailing Joe Biden in the polls by double digits," Height Securities LLC analyst Josh Price wrote in a July 6 report.

Dominion has said it will shut down coal plants and ramp up investments in renewables to hit its net-zero emissions target for both its power generation and natural gas operations.

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The financial picture

To reflect the ACP cancellation and sale of its gas assets, Dominion revised its 2020 operating earnings guidance to $3.37 per share to $3.63 per share. The company's previous guidance was $4.25 per share to $4.60 per share.

Dominion said the EPS impact from ACP was 20 cents per share. Still, the company expects 2021 operating EPS to grow 10% to 11% over 2020 and to grow by about 6.5% annually starting in 2022, off a 2021 base.

The company also said it expects to target an approximately 65% dividend payout ratio effective upon completion of the gas transaction, which implies a 2021 dividend payment of about $2.50 per share. Beginning in 2022, Dominion said it expects annual dividend-per-share increases of about 6% per year.

"We don't take a reduction of the dividend lightly by any means," Dominion Executive Vice President, CFO and Treasurer James Chapman said in response to an analyst's question. "It's not really a permanent reduction. It's a pause, if you will. And in seven years, we're back to where we are today."

Dominion's stock closed down 11% at $73.59 on July 6, on 7x average volume.

"We admit we're surprised by the magnitude of the negative stock reaction ... though the stock has been quite crowded, the sale multiple was light, and the dividend cut will hurt income investors," Weisel wrote in a July 6 report. "Still, we view the transformation positively."

Still growing

Farrell said Dominion still sees "plenty of growth opportunities" with its remaining LDC and renewable natural gas businesses.

"But transforming our electric companies to more renewable energy, more robust grid protections ... that's also obviously a very large opportunity for us," the CEO said. "That's where we will be concentrating our capital investments over the next at least decade. It's tens and tens and tens and tens of billions of dollars over the next decade."

Dominion has outlined up to $55 billion in growth capital between 2020 and 2035 supportive of its net-zero emissions plan.

Dominion subsidiary Dominion Energy Virginia, known legally as Virginia Electric and Power Co., on May 1 unveiled plans to add about 5,100 MW of offshore wind, nearly 16,000 MW of solar and about 2,700 MW of energy storage to its portfolio through the end of 2035.

The plan aligns with the Virginia Clean Economy Act state legislation that took effect July 1 and requires Dominion Energy Virginia to procure 100% of its electricity from renewable resources by 2045.

Overall, Dominion serves about 7 million regulated electricity and natural gas customers in eight states.

'Beginning of a new era'

Environmental groups, communities and landowners who staged a six-year grassroots campaign against the Atlantic Coast Pipeline applauded the project's cancellation.

The abandonment of the project is "a recognition that investments in new massive fossil fuel infrastructure are a bad bet," Kelly Martin, director of the Sierra Club's Beyond Dirty Fuels initiative, said during a July 6 media briefing. The decision also represents "the beginning of a new era" for clean energy investments, jobs and environmental justice in the region, where many farmers and communities would have suffered from the pipeline project, she said.

"The Atlantic Coast Pipeline is an anvil that would have stopped and slowed down the transition to renewable energy for decades," added Greg Buppert, a senior attorney at the Southern Environmental Law Center. "Now the deck is cleared and Virginia and North Carolina can move forward to a clean, renewable energy future and people all along the route can rest."