Business Strategy & Outlook
After exiting its oil and gas exploration and production business, selling and retiring its no-moat merchant generation, and selling its Questar assets, Dominion’s investors are left with a predominantly regulated utility, which has been in the best interests of investors. Like its peers, Dominion has accelerated its capital expenditure growth program. Over the next five years, management plans to invest $37 billion of growth capital, with nearly 90% focused on decarbonization. Favorable regulatory mechanisms mean that over 75% of Dominion’s investments are eligible for timely cost recovery from customers, reducing regulatory lag and improving free cash flow. In Virginia, the company’s most important jurisdiction, over 90% of its planned investments are eligible for rate riders at higher allowed returns on equity.
Over the next 15 years, Dominion forecasts $73 billion of capital investment opportunities, including up to $21 billion for offshore wind farms in the U.S. Unlike other offshore wind projects, Dominion’s will be rate-regulated, mitigating investor risk for a project with greater execution risk than onshore renewable energy development. Investors must carefully watch for cost increases at its offshore project. While costs will rise for the project, there remains significant headroom for the $125 per megawatt hour allowed regulated cost cap. Costs over the cap would require regulatory approval. A recent settlement with key counterparties should help resolve a proposed capacity factor guarantee, if approved. Roughly 90% of earnings will be from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas. The balance of earnings will come from contracted assets with long-term agreements with mostly investment-grade counterparties that provide steady, regulated-like returns. In November, management unexpectedly announced a strategic review of the company’s current business mix and capital allocation. Management did not indicate a potential outcome or direction of the review, creating what is unnecessary investor uncertainty.
Financial Strengths
Even with its large capital expenditure program, Dominion maintains a strong balance sheet and an investment grade credit rating. Dominion is to maintain a capital structure in line with regulatory requirements at its utility subsidiaries. Total debt/capital was 58% at year-end 2021, and it expects to remain below 60%. With $37 billion in expected growth capital expenditures over the next five years, Dominion will be a frequent debt issuer. Exclude $3 billion of growth capital from the estimate as management will look to mitigate customer bill impacts while potentially lengthening the trajectory of its capital investment program. Dominion’s debt maturity schedule is manageable, and Dominion will be able to refinance its debt as it comes due. Dominion surprised investors with a 33% dividend cut in late 2020 after the company abandoned the Atlantic Coast Pipeline and decided to exit its gas pipeline business. Its current 65% payout ratio is in line with peers, and 6% dividend is to grow.
Bulls Say
- Dominion’s dividend yield and earnings growth could deliver high-single-digit total annual returns for conservative investors for the foreseeable future.
- Growth capital investments focused on renewable energy and carbon reduction are estimated to be $73 billion over the next 15 years and should provide solid earnings and dividend growth for the foreseeable future.
- Public support for renewable energy and Virginia legislation has resulted in Dominion planning to build the largest wind farm in the U.S.
Company Description
Based in Richmond, Virginia, Dominion Energy is an integrated energy company with over 30 gigawatts of electric generation capacity and more than 90,000 miles of electric transmission and distribution lines. Dominion owns a liquefied natural gas export facility in Maryland and is constructing a 5.2 GW wind farm off the Virginia Beach coast.
(Source: Morningstar)
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