Dominion's Regulatory Uncertainty to Persist With Short-Term Legislative Fix

Strategist

Andrew Bischof

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Dominion Energy is a predominantly regulated utility. Dominion has accelerated its capital expenditure growth program. Over the next five years, we expect the utility to spend $36 billion in regulated investments, with most focused on decarbonization.

New Virginia legislation brings changes to the regulatory construct in the state. The legislation brings allowed returns on equity more in line with industry peers for the next two years. The legislation also replaces the triennial review process with traditional base rate cases. The triennial reviews create significant uncertainty because of the risk that Dominion might have to return cash to customers if it earns more than its allowed returns. The legislation only brings clarity for investors for the next two years, after which regulators will have greater control determining Dominion's returns and investments.

Over the next 15 years, Dominion forecasts more than $70 billion of capital investment opportunities. 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. And given the project's cost relative to alternative generation options, the project has increased political risk for Dominion.

Roughly 90% of Dominion's earnings come from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas. We expect this to increase to more than 95% after completion of management's strategic review, which was announced in November 2022. 

Management was later than other utilities to assess alternative options to finance its capital investment plan, lower its floating-rate debt exposure, and offset the likely negative impact from its triennial review in Virginia. We think management preferred to sell a minority interest in one of its natural gas distribution utilities, but market volatility in 2022 reduced valuations for these assets. We now expect Dominion to divest its commercial renewable energy portfolio and remaining interest in Cove Point LNG.

Business Strategy & Outlook

We assign Dominion Energy a narrow moat. 

Service territory monopolies and efficient-scale advantages are the primary sources of economic moats for regulated utilities such as Dominion, which derives nearly all its income from rate-regulated utilities in six states.

Dominion Energy Virginia generates and distributes electricity in Virginia and North Carolina. Dominion's regulated natural gas distribution utilities have service territories in Ohio, West Virginia, North and South Carolina, Utah, and Wyoming. Service territory monopolies and efficient-scale advantages are the primary moat sources for these regulated utilities.

State and federal regulators grant regulated utilities like Dominion exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their power generation, transmission, and distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities like Dominion to achieve at least their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing. Intuitively, utilities should have an economic moat based on efficient scale, but in some cases regulation offsets this advantage, preventing excess returns on capital.

The risk of adverse regulatory decisions precludes regulated utilities from earning wide economic moat ratings. However, the threat of material value destruction is low and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning narrow moats to Dominion and many similar regulated utilities.

Narrow

Economic Moat

Dominion Energy

Dominion Energy, Inc. engages in the provision of electricity and natural gas to homes, businesses, and wholesale customers. Its operations also include a regulated interstate natural gas transmission pipeline and underground storage system. It operates through following business segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, Contracted Assets and Corporate and Other. The company was founded by William W. Berry in 1983 and is headquartered in Richmond, VA.

Earnings data Q2 2023

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Dominion Energy, Inc. engages in the production and distribution of energy. It operates through following business segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, Contracted Assets, and Corporate and Other. The Corporate and Other segment focuses on corporate, service company, non-controlling interest in Dominion privatization, and non-regulated retail energy marketing operations. The company was founded by William W. Berry in 1983 and is headquartered in Richmond, VA.

Dominion Energy (D) is expected to benefit from the addition of clean assets in its portfolio and an increasing customer base. However, rising interest rates pose a concern.

Dominion (D) Benefits From Investment in Renewable Assets

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RICHMOND, Va. , May 10, 2023 /PRNewswire/ -- The board of directors of Dominion Energy (NYSE: D) has declared a quarterly dividend of 66.75 cents per share of common stock.

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Dominion Energy, Inc. (NYSE:D ) Q1 2023 Earnings Conference Call May 5, 2023 10:00 AM ET Company Participants David McFarland - Vice President of Investor Relations Robert Blue - Chairman, President & Chief Executive Officer Steven Ridge - Senior Vice President & Chief Financial Officer Conference Call Participants Shahriar Pourreza - Guggenheim Partners Steve Fleishman - Wolfe Research Jeremy Tonet - JPMorgan Operator Welcome to the Dominion Energy First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David McFarland, Vice President, Investor Relations.

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First-quarter 2023 GAAP net income of $1.17 per share; operating earnings of $0.99 per share Company initiates second quarter 2023 operating earnings guidance of $0.58 to $0.68 per share RICHMOND, Va. , May 5, 2023 /PRNewswire/ -- Dominion Energy (NYSE: D) today announced unaudited net income determined in accordance with Generally Accepted Accounting Principles (reported earnings) for the three months ended March 31, 2023, of $997 million ($1.17 per share) compared with net income of $711 million ($0.83 per share) for the same period in 2022.

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News for Dominion Energy Stock (D)