PIPELINE FALLOUT: DOMINION SHIFTING STRATEGIES, WALL ST. TAKING NOTICE
Dominion Energy’s move out of the gas pipeline business set off a stock market scramble Monday that saw its shares falling roughly 11% — a loss of roughly $900 for even a small investor, with just 100 shares.
But the shift in business strategy that led the energy giant to cancel its controversial Atlantic Coast Pipeline and sell its multi-state gas transmission operation also reflects a change in the way Dominion wants Wall Street to see it, chief executive Thomas Farrell said in a conference call to financial analysts.
The sale to Berkshire Hathaway will yield Dominion $4 billion in
cash and let it shed $5.7 billion in debt. Canceling the Atlantic Coast Pipeline venture with Duke Energy will save billions more.
It also makes Dominion a pure play for investors, Farrell said, using the Wall Street jargon for a company that basically operates in one sector.
In Dominion’s case, that’s the monopoly electric and gas utility business, in which regulators allow the company to set rates that aim for a pre-approved profit, a business model that’s long appealed to conservative investors.
Farrell said Dominion’s multi-billion-dollar push toward net-zero carbon emission operation by 2050 should also attract a new breed of investor.
“We’re moving aggressively in the direction of state policy toward renewable and zero carbon forms of electric generation,” Farrell told the analysts.
“We believe that Dominion Energy offers one of the industry’s most compelling profiles for ESG-focused investors and stakeholders,” he added, using the jargon for investors with environmental, social and governance concerns.
In the short term, though, Dominion’s move means it expects to earn a smaller profit this year than it had been telling investors — about 20% less, based on projections chief financial officer Jim Chapman gave the analysts.
The company also expects a 33% cut in its next quarterly dividend, something investors never like.
Key parts of Dominion’s investor base had been attracted because of its unusually high dividend payout, which stood at about 85% of net income, compared to a range of 62% to 66% for other large utility companies. Dominion’s new rate probably will be around 65%, Chapman said.
Another large group of investors liked the gas business for its rich if more volatile profits.
“Over time, we believe some legacy investors should flush out, and (Dominion) will likely attract a fresh new set of investors that previously shied away from external binary risks that sometimes come with (Federal Energy Regulatory Commission) regulated natural gas pipelines and storage and those who did not want to take on the volatility of lumpy gas infrastructure projects that usually take years to build,” analysts at Guggenheim Securities wrote, in one of the first notes financial analysts circulated to clients.
“Given the bent towards decarbonization efforts in the country, the move away from natural gas, and investor demand for more simplified utility structures, we believe this is the correct move for Dominion to make,” the Guggenheim analysts said.
Kit Konolige, senior utility analyst at Bloomberg Intelligence, said he wasn’t surprised by Dominion’s decision to pull the plug on the Atlantic Coast Pipeline, adding that the sale of its gas transmission business will “take pressure off the strained balance sheet.”
Dominion and financial analysts said the decision to cancel the Atlantic Coast Pipeline came in response to a Montana court ruling this spring that invalidated a type of Army Corps of Engineer permit that pipelines need to cross waterways and wetlands.
Environmental groups said the decision was a victory for their years of opposition.
“Dominion … tried to squeeze the last bit of profit out of the fossil fuel era, but today we see they failed,” said Greenpeace USA Climate Director Janet Redman.
“If anyone still had questions about whether or not the era of fracked gas was over, this should answer them,” Sierra Club Executive Director Michael Brune said.
Virginia Natural Gas, which had planned to use the pipeline to help hold down costs to customers and to supplement the often congested other pipelines that serve the state will have to reevaluate ways to meet demand going forward, spokesman Rick DelaHaya said.
Columbia Gas of Virginia’s territories in Tidewater and central Virginia and Tidewater regions, “are increasingly constrained by a lack of supply. The ACP would have helped to relieve those bottlenecks, allowing us to provide additional supplies of economically-priced energy for new homes, new businesses and manufacturers,” said spokeswoman Monique Finneran.
Dominion had already spent roughly $1.8 billion on the pipeline, and the projected cost of building it in partnership with Duke Energy was on track to nearly double from the original estimate to $8 billion.
Meanwhile, in written material for the financial analysts, Dominion said it is looking at a $47 billion bill for new wind, solar and battery storage equipment and improvements to nuclear plants for its electric utility business in Virginia and the Carolinas, as well as $6 billion tab for new pipes for its gas utility customers in the Carolinas, Idaho, Ohio, West Virginia, Utah and Wyoming. Dominion is also investing $2 billion in facilities to recycle methane, a potent greenhouse gas, including a project underway with Smithfield Foods.