On Sunday, Virginia-based utility Dominion Energy Inc announced plans to sell almost all of its natural gas pipeline and storage assets to Warren Buffett’s Berkshire Hathaway Inc for $4 billion. At the same time, the Virginia-based utility said that it’s killing the Atlantic Coast gas pipeline despite a Supreme Court ruling that would grant it passage underneath the Appalachian Trail.
There are a number of factors motivating Dominion’s strategy. The first is that permitting for gas infrastructure is “increasingly litigious, uncertain, and costly,” Chief Executive Officer Thomas Farrell said during a call with analysts to discuss its plans. The second factor is that the economics of operating a midstream pipeline—even one that has had no trouble attracting customers—aren’t great, Farrell admitted.
The whole thing is part of a strategy to generate more of its earnings from assets with a return on equity that’s determined by state regulators. That may sound unexciting, but that’s part of the point. It’s predictable, and it gives Dominion a clear story to tell capital markets: for every dollar we invest in regulated assets, we’ll receive X amount back, guaranteed.
There’s a slide in Dominion’s analyst presentation that illustrates this idea. It shows the company’s past acquisitions of mostly-regulated companies such as gas distributor Questar and electric and gas utility Scana leading directly to Dominion’s decision to sell its midstream gas interests and other assets. The result, it hopes, is that 90% of its operating earnings will come from state-regulated operations.
There’s a financial strategy at work here too, one that I’ve written about before. It has three parts, the first of which is that returns on equity—both what utilities ask regulators for and what they’re awarded—have been falling for decades. Not only that, the spread between asked and awarded is also fairly tight, and definitely tighter than it was in the mid-2000s and in the mid-1990s. That’s good for messaging: it means you can say that what you want is pretty close to what regulators think you deserve.