Dominion Energy (D 2.62%) is one of the largest regulated electric utilities in the United States. As a regulated entity, it has to get its spending plans approved by the government. That can, sometimes, lead to unexpected outcomes given the inherently political nature of the government. One of Dominion's biggest projects just got a huge curveball, and investors need to watch the related developments carefully.
Getting simple
At one point in its life, Dominion Energy owned oil wells, but it sold those assets to focus on regulated and fee-based businesses. Then it sold its fee-driven midstream pipeline assets so it could focus on just regulated utility operations. The goal was to provide investors with a low-risk business model that could support a growing and fairly attractive dividend. Today, the company is basically an ordinary utility.
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In theory, that means that it has a fairly low risk profile. It operates assets like electric systems, that have monopolies in the regions they serve. In exchange for those utility monopolies, Dominion Energy has to accept government regulation. In effect, that means that rate hikes and spending plans require regulatory approval. With all this in mind, investors should expect Dominion Energy to provide slow but steady earnings and dividend growth over time. Dominion management currently projects 6.5% earnings growth and 6% dividend growth through at least 2026. For a utility, those are pretty good numbers.
What's backing the growth?
Yet the key here is an investment plan that has to be approved by regulators. The current capital investment budget for Dominion totals $37 billion over the next five years, with 85% of that spending "decarbonization-focused." That's the good news.
The bad news is that included in Dominion's plan is a $10 billion investment in offshore wind to be located off the coast of Virginia. That's nearly 30% of the total. So this project is very important to the utility's growth plans. And it just hit a potentially big road block, one large enough to get mentioned during Dominion's second-quarter 2022 earnings conference call. Management specifically used the term "extremely disappointed."
The problem: Regulators recently handed down a ruling that requires Dominion to guarantee that the wind farm lives up to the company's expected generation projections. If there's a shortfall in generation capacity, Dominion would be required to bear the cost burden. This could be a make-or-break issue for the project.
The regulators' stance appears to be that Dominion has used these projections to justify the construction of the project. If the wind farm can't actually produce the amount of electricity that has been promised, the regulators want to protect consumers from the costs that would arise from any shortfall. Dominion sees this as being asked to be responsible for the weather, since wind is what will drive the actual electricity output of the offshore wind farm. And weather is, well, notoriously unpredictable. Dominion finds that unreasonable and has threatened to stop development if an alternative can't be found.
At this point, it seems that this is more a war of words than something that's going to immediately affect Dominion's project. In fact, material construction efforts aren't slated to start until 2023 or 2024, so there's still time for both sides to negotiate. However, given the size of the project, this isn't an issue that investors should ignore. Dominion's long-term earnings and dividend growth are tied to this project in a meaningful way.
Positive, for now
When it comes to investing, sometimes there are things that are scary, and sometimes there are things that you need to watch before they get scary. Dominion's Virginia offshore wind project, for now, falls into the latter category. But given the project's size, you should make sure you monitor the news for developments. You don't want to be blindsided by something scary that was telegraphed long before it got to that point.
