Dominion Energy (D 0.80%) announced a series of moves over the weekend, highlighted by the sale of its gas transmission and storage assets to Berkshire Hathaway (BRK.A 0.67%)(BRK.B 0.83%). The transaction will transform the company by refocusing its efforts on expanding its core regulated electric and natural gas utility operations.
This move, along with others Dominion Energy announced, will significantly enhance its financial profile while dramatically reducing its business model's risk. Those factors will make it an ideal investment option for retirees.
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Pivoting away from gas infrastructure
Dominion Energy is effectively exiting the natural gas infrastructure business. The company will sell its entire portfolio of operating interstate natural gas transmission pipelines and storage assets to Berkshire. That sale also includes a 25% interest in the Cove Point LNG facility, reducing its stake to 50%. It's also selling its remaining natural gas gathering and processing assets and the acreage it had farmed out to natural gas drillers.
In addition to selling those operating assets, Dominion and its partner Duke Energy (DUK +0.22%), have canceled their Atlantic Coast Pipeline project. The companies initially expected to invest $4.5 billion-$5 billion to build the pipeline, which would have transported natural gas from the Marcellus and Utica shale regions to market centers in North Carolina and Virginia. However, legal challenges upended their timeline and budget, with the latest construction cost estimate at $8 billion. Because of that, they've decided to pull the plug on the project rather than risking more investor capital.
As a result of these moves, Dominion expects 90% of its future earnings to come from its portfolio of state-regulated electric and natural gas utilities. The other 10% will come from non-regulated operations. These include its remaining interest in Cove Point and its fleet of nuclear and solar power generation assets, which produce stable earnings supported by long-term, fixed-price power purchase agreements.
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Reshaping the risk profile
The sale of Dominion's gas transmission and storage operations to Berkshire will also dramatically reshape the utility's financial profile. Berkshire is assuming $5.7 billion of debt as part of the transaction, which includes a $4 billion cash payment. Dominion expects to use the bulk of the after-tax proceeds -- roughly $3 billion -- to repurchase stock.
The debt reduction and stock buyback will help offset some of the income Dominion will lose by selling these assets to Berkshire. However, it won't entirely counteract the earnings transfer as the company now expects its 2020 operating earnings to be between $3.37-$3.63 per share, well below its previous $4.25 to $4.60 per share guidance. Because of that, the company plans to rebase its dividend upon closing the transaction. It will reduce the payout from the current level of $3.76 per share to $2.50 per share. That new rate will improve its dividend payout ratio from 85% to 65%, with the latter more in line with the utility industry's leaders.
In addition to enhancing its financial foundation, Dominion's pivot away from gas infrastructure will also reduce the risks to its growth profile. Despite being a cleaner-burning fuel, environmentalists have been increasingly opposed to the construction of new natural gas pipelines. This resistance has caused significant delays and driven up construction costs for projects like the Atlantic Coast Pipeline, which has affected Dominion's earnings growth. The company faces much less opposition to building new electric infrastructure, making those investments lower risk. Thus, it has much more confidence in its long-term earnings growth prospects, with it planning to invest $55 billion over the next 15 years to clean up its utilities' carbon footprint.
Dominion now expects its operating earnings to expand by 10% to 11% next year, powered in part by the share repurchase program. Meanwhile, it sees earnings growing at a 6.5% annual clip post-2021. That's a 30% increase from its prior view. This growth rate should support dividend increases of about 6% per year starting in 2022 from the reset base.
Transforming back into a low-risk utility
Dominion Energy has made several aggressive moves in recent years aimed at powering accelerated growth, including buying fellow utilities Questar and SCANA and making some bold bets on gas infrastructure by sanctioning Cove Point and the Atlantic Coast Pipeline. Unfortunately, not all these moves paid off as expected, putting some pressure on its financial profile. Because of that, it's stepping back by resetting its risk profile toward the lower end of the utility spectrum. That will make it a much safer investment option for retirees.
