Home Energy assets Dominion Energy Retools, relying on state regulation for gains

Dominion Energy Retools, relying on state regulation for gains

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Energy of Domination
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a large electric and natural gas utility, slashed its dividend last year, and the stock lags behind its ho-hum utility peers.

This hardly sounds like the makings of a bullish argument for any stock, but investors can miss out on a tantalizing opportunity.

“Dominion is well positioned to take advantage of some of the age-old trends impacting the entire industry, the main one being clean energy and decarbonization,” says Sarah Akers, senior equity analyst at Wells Fargo Securities, who assesses the stock is overweighted.

Utilities did not do well in 2021, in part because of concerns about inflation and rising interest rates, as these stocks are often seen as proxies for bonds. The


Utilities Select the SPDR sector

the exchange-traded fund (ticker: XLU) had a one-year return of around 6% as of November 17. Dominion (D) ‘s return over the same period was negative 7%.

“Investors in utilities have very long memories,” says Jeremy Tonet, who covers North American utilities for JP Morgan. “It takes a period of execution to go beyond historical views. We believe this has fueled some of the stock price malaise. Tonet is pricing Dominion Overweight with a target price of $ 88, down from around $ 75 recently.

Based in Richmond, Virginia, Dominion’s portfolio includes utilities in Virginia, North Carolina, and South Carolina. These units contribute approximately 70% of its operating profit. Another 17% comes from the distribution of natural gas in six states. It also owns several nuclear power plants and a 50% interest in a natural gas liquefaction facility in Maryland.

The market does not give Dominion credit for some strong attributes, including the company’s target of annual earnings per share growth of 6.5% through at least 2025. Add a dividend yield of around 3.4%, and an annual yield of 10% is possible if the company meets its goals.

Another advantage for Dominion is that approximately 90% of its operating profits come from state-regulated utility operations, giving some reliability to the returns on capital expected from the business.

Environmental, social and governance, or ESG, considerations have become closely linked to the future of the business. Dominion is committed to achieving net zero carbon dioxide and methane emissions from its power and gas generation infrastructure by 2050, aided by a multi-billion dollar construction of various renewable energy assets such than offshore wind.

Dominion Energy key data
Headquarter Richmond, Virginia
Recent price $ 75.19
52 week change -7.0%
Net income 2022E (in billions) $ 3.4
2022E BPA $ 4.11
2022E P / E 18.3
Market value: (bil) $ 62.5
Dividend yield: 3.4%

E = estimate.

Source: FactSet

In JP Morgan’s most recent utility rankings on environmental issues, “Dominion was one of the leading names when it comes to the green rate of change,” Tonet says. Just over half of the utility’s five-year, $ 32 billion capital growth spending plan is allocated to zero-carbon energy production and storage projects, including solar panels, storage. batteries and offshore wind power.

Dominion aims to complete an estimated $ 10 billion wind farm about 30 miles off the coast of Virginia by the end of 2026, a project the company says will generate enough energy to power up to 660,000 homes. . Bobby Edemeka, portfolio manager at the


PGIM Jennison Utility

(PRUAX), which owns Dominion, calls it “one of the most attractive investment opportunities” among regulated US utilities.

Regulated utilities such as Dominion typically rely on state utility commissions to approve rate increases, which depend on an operator’s “rate base”, essentially the prudent investments it makes in its network and other assets, less any impairment. A utility is allowed to earn a rate of return on its asset base.

“Their renewable energy growth is going to be 100% regulated, which most utilities cannot say,” Edemeka said, noting that the regulation reduces risk.

The Virginia Clean Economy Act, passed in 2020, calls on utilities to withdraw power generation units in the state “that emit carbon as a by-product of burning fuel to generate electricity.” – a coal-fired power station, for example. It also requires Dominion to have offshore wind projects capable of generating 5,200 megawatts by 2034. A megawatt is a unit of power equal to one million watts.

Dominion streamlined its business portfolio by selling assets, including much of its natural gas transmission and storage assets to Berkshire Hathaway Energy in a deal initially valued at around $ 10 billion the last year. The Questar Pipeline part was eventually scuttled due to antitrust concerns and is now acquired by


Southwest Gas Holdings

(SWX).

While Dominion’s retooling to focus on regulated utilities makes sense, it had an unpleasant consequence. When it sold its gas assets last year, the cash flow that came with it disappeared and led Dominion to cut its quarterly dividend to 63 cents per share from 94 cents. Nonetheless, Dominion has said it plans to increase its dividend at an annual rate of 6% going forward.

A recent overhang of the stock was a triennial review with the State of Virginia. The most recent settlement, which includes a proposed 9.35% return on equity for Dominion, up from 9.2% previously, is expected to help the stock price eventually.

Meanwhile, the stock recently traded at 18.3 times the 2022 FactSet consensus earnings estimate of $ 4.11, in line with its five-year average. Akers of Wells Fargo expects Dominion to command a modest premium multiple from its mid and large cap peers, helped by “this clean energy story.”

Write to Lawrence C. Strauss at [email protected]


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