Dominion says exiting pipeline business will improve focus and finances
Shedding its tidy portfolio of pipelines and other natural-gas infrastructure will make Dominion Energy a more focused company that will play to its strengths in the regulated-utility sector, corporate officials told investment analysts on July 6.
Dominion caused some fireworks in the energy industry over the July 4 holiday weekend when it announced that it and partner Duke Energy had canceled the Atlantic Coast Pipeline (ACP) project, and then followed up on the same day that it had sold its entire gas pipeline business to Berkshire Hathaway Energy in a blockbuster cash deal worth nearly $10 billion. The company brass was on the phone the following morning to reassure Wall Street that the divestiture would pay off for investors in the form of short-term stock buybacks and long-term financial stability.
“This is the right step at the right time,” Thomas Farrell, Dominion’s Chairman, President, and CEO, said on the July 6 conference call with investment analysts.
Dominion transferred more than 7,700 miles of gas-storage and transmission pipelines to Berkshire Hathaway Energy in the deal; it was the first acquisition for the company led by Warren Buffet since the financial world was upended by the coronavirus pandemic earlier this year. The assets included: Dominion Energy Transmission; Questar Pipeline; Carolina Gas Transmission; and 50 percent of the Iroquois Gas Transmission System. In addition, Berkshire acquired 900 billion cubic feet of operated gas storage with 364 billion cubic feet of company-owned working storage capacity for a total expenditure of approximately $9.7 billion.
Dominion also sold Berkshire a 25 percent stake in the Cove Point liquefied natural gas (LNG) terminal in Maryland, one of six such export facilities in the United States, and Berkshire will take over operational control. Dominion held on to 50 percent of Cove Point with the other quarter still held by Brookfield Asset Management.
While Farrell indicated that there were no near-term plans to further divest its share of Cove Point, Dominion had soured on the overall idea of being in the gas business. “We made a decision five years ago to create an MLP (master limited partnership) and we had some robust growth,” he said.
Recent actions by the Federal Energy Regulatory Commission (FERC) regarding taxes as a factor in rate decisions took the bloom off the rose. “FERC changed the dynamic of that a couple of years ago and destroyed the MLP,” Farrell said.
In addition, a new wave of nationwide legal challenges against pipeline projects, including the ACP, along with state policies to aggressively reduce the use of gas and other fossil fuels made the pipeline business even less appealing; and when Dominion saw a chance to bail out at the right price, the company took it. “We thought that if we could exit this business … that the best thing to do was to exit and concentrate on these state utilities,” Farrell said.
Farrell and the Dominion leadership team expect the deal to provide some new firmness to its finances despite losing the cash flow of its pipeline portfolio, which accounted for about 20 percent of Dominion’s annual business. Analysts were told that a short-term stock buyback and assumption of debt by Berkshire would maintain Dominion’s credit profile and provide a competitive dividend in the coming years.
The transaction is expected to close in the fourth quarter and, Farrell said, will not require the approval of FERC or any state energy regulators. Once the deal is completed, Dominion will derive about 90 percent of its earnings from its state-regulated utilities at a time when it is planning to retire 4 gigawatts of coal and oil-fired power generation.
“Over the next 15 years, we plan to invest up to $55 billion in emissions reduction technologies including zero-carbon generation and energy storage, gas distribution line replacement, and renewable natural gas,” Farrell said. “This narrowing of focus will also allow us to increase our long-term earnings growth rate guidance by around 30 percent.”
In return, Berkshire made some attractive additions to its energy holdings, which is currently valued at $100.8 million.
“Acquiring this portfolio of natural gas assets considerably expands our company’s footprint in several eastern and western states as well as globally, increasing the market reach and diversity of Berkshire Hathaway Energy,” President & CEO Bill Fehrman said in a written statement.
