At one point in its history, Dominion Energy (D -1.02%) was a highly diversified energy company, with operations that even included oil drilling. For decades it has been slimming down and, in 2022, management said it was looking to simplify its business even further. However, it gave investors little information other than a bland statement about reviewing its operations. The sale of Dominion's stake in a liquified natural gas (LNG) export facility to Warren Buffett's Berkshire Hathaway provides some clues, but the process isn't over yet.
The sale at hand
Dominion has agreed to sell its 50% noncontrolling limited partner interest in Cove Point LNG to Berkshire Hathaway Energy for $3.5 billion. This is an LNG facility that Dominion built to take advantage of the increasing global demand for natural gas as a power source. Berkshire Hathaway is the general partner and has a 25% limited partner interest in the asset. The deal will basically give Berkshire Hathaway total control of Cove Point.
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Dominion expects the after-tax proceeds of the sale to be roughly $3.3 billion. It will use $2.3 billion to pay off debt related to Cove Point. The rest is likely to be used to pay off other Dominion debts, helping to improve the utility's overall leverage metrics. That's notable for a couple of reasons. First, Dominion's leverage is a concern among investors. Second, reducing debt is a key priority for the company in its recently announced plan to evaluate its business.
As noted, Dominion has been on a long-term path of simplification. Only it had originally suggested that the process was complete in 2020 when it sold the vast majority of its midstream pipeline business to Berkshire Hathaway for roughly $10 billion. In fact, following a dividend cut related to the sale of this operation, Dominion told investors to expect regular dividend growth going forward. Dividend growth ended in 2022 with the company's new plan to further simplify its operations.
New goals
Dominion has again moved the end post, this time explaining that it wants to focus on the great opportunities it believes it has in the regulated utility space. There are, indeed, material opportunities, as the company, along with the rest of the industry, continues to embrace renewable power. Investing in such assets on the regulated side of the business is far more predictable than doing so in the competitive power space. This is because regulated utilities, as monopolies, have to have rates and capital investment plans approved by the government. However, once approved, the returns are largely locked in and set at a level that balances the need for profits with the need for reliable power.
Clean energy assets built outside of the regulated space have to compete on price with other non-regulated assets. Clean energy construction has been material, leading to falling returns. So, in some ways, Dominion's plans make sense. And while Cove Point wasn't exactly a clean energy asset, it wasn't a regulated asset, either and could easily have been viewed as a distraction or, at the very least, a quick source of capital. Reducing leverage is, after all, a key goal as Dominion repositions its business.
The interesting thing here is that Dominion's business is roughly 90% regulated utility and only about 10% non-regulated, contract-based assets (that figure includes Cove Point). Management isn't providing much information about its plans, but the clear path is to sell the 10% of the business that isn't regulated.
The sale of Cove Point was an easy first step, given the relationship with Berkshire Hathaway. The rest of the non-regulated assets may be harder to sell, but given the goal of becoming a pure-play regulated utility, they are likely on the block, too. While Dominion says it is trying to be transparent by telling investors about the review, it's unclear why management is taking an indefinite amount of time to reach a decision on which assets to sell.
So far, the market has been playing a guessing game to fill in the void. Clearly, the fear among investors is likely that the changes will be even larger than expected and that the dividend may end up getting cut again. Management has said that the dividend is going to be held at the current level, but then not too long ago it also said the dividend would be increased regularly.
More waiting
With Dominion specifically saying that the review process timeline has not changed, investors are left to wait some more. However, the uncertainty has put Dominion stock in the Wall Street dog house, with the shares down around 33% over the past year. The average utility is only down about 5% or so. Dominion has a solid regulated utility business and the plan to reduce debt isn't bad. But investors clearly dislike the wait-and-see game that is playing out given the very obvious part of the business that doesn't fit the regulated mold.
At this point, dividend growth investors should avoid Dominion. Conservative investors should probably hold off until the new business plan has been explained. But more aggressive investors willing to own a turnaround story might find the 5% dividend yield attractive. That dividend, however, depends on Dominion keeping its word, which hasn't exactly panned out in the recent past.
