Lowering Dominion’s Moat to Narrow on Likely Divestures

We are lowering our Dominion Energy fair value estimate to $59 per share from $70 after changing our economic moat rating to narrow from wide. Dominion’s stock trades in line with our new fair value estimate.

Our moat downgrade was triggered by our expectation that Dominion’s next most likely strategic move is divesting part or all its nonutility contracted assets portfolio, which previously supported our wide moat rating. Additionally, while we think Virginia regulation will remain constructive and support long-term growth, political headwinds lead us to believe Virginia will no longer be one of the best regulatory environments for investor-owned utilities. No U.S. utility has a wide moat rating.

Dominion was later than other utilities to explore alternative options to fund its capital investment program, reduce floating-rate debt exposure, and offset the likely negative impact from returning to customers excess earnings as part of the utility’s triennial review in Virginia. We think management preferred to sell a minority interest in one of its natural gas distribution utilities, but market volatility has reduced valuations for these assets. We now expect Dominion to divest its commercial renewable energy portfolio and its remaining interest in Cove Point LNG.

We now expect earnings to decline in 2023 and 2024, due to lost earnings from divested assets and a reset in regulated earnings. We expect a return to earnings growth in 2025. Dominion’s slow earnings and dividend growth trajectory throughout our forecast leaves it with one of the lowest total return profiles in the sector despite its 4.6% dividend yield.

We believe Dominion’s strategic review and Virginia legislative proceedings must be resolved before investors can feel comfortable with Dominion’s long-term outlook. We incorporate this in our Medium Uncertainty Rating, higher than most utilities. Management must also restore trust with investors, which we think will take time.