Dominion Energy's decision to sell its gas business to Berkshire Hathaway for $9.7 billion illustrates the enormous challenges US utilities face in meeting daunting state clean energy goals. Dominion is likely to be one utility among many taking extreme actions to prepare for and pay for the massive energy transition ahead.
Dominion said July 5 it will sell its natural gas transmission and storage business as it seeks to comply with the state of Virginia's 2045 net-zero target for both carbon and methane emissions by investing up to $55 billion over the next 15 years in emissions reduction technologies including zero-carbon generation, energy storage, gas distribution line replacement, and renewable natural gas.
Dominion, along with Duke Energy, also announced the cancelation of the Atlantic Coast Pipeline due to "ongoing delays and increasing cost uncertainty which threaten the economic viability of the project." The cancellation of the ACP pipeline came just a few days after the state of Virginia's Clean Economy Act went into effect July 1.
Related: Berkshire, Dominion deal includes gas pipelines, storage, Cove Point LNG share
Dominion said it has agreed to sell its gas transmission and storage assets to Warren Buffett's BHE in what it called a "strategic repositioning toward a 'pure-play' state-regulated, sustainability-focused utility operation."
It said the transaction is valued at $9.7 billion, "including the assumption of $5.7 billion of existing indebtedness."
"Despite last month's overwhelming 7-2 victory at the US Supreme Court, which vindicated the project and decisions made by permitting agencies, recent developments have created an unacceptable layer of uncertainty and anticipated delays for ACP," the company said.
The company told analysts Monday, however, that it will retain a 50% "non-operating and unlevered interest" in its Cove Point LNG terminal located on the Chesapeake Bay in Lusby, Maryland.
SALE TO HELP CARBON TRANSITION: MOODY'S
In divesting itself of "substantially all" of its natural gas transmission and storage business, Dominion is "narrowing its focus," according to CEO Thomas Farrell, which "will allow us to increase our long-term earnings growth rate guidance by around 30%."
Farrell said, "We offer an industry-leading clean energy profile which includes a comprehensive net-zero target by 2050 for both carbon and methane emissions as well as one of the nation's largest zero-carbon electric generation and storage investment programs."
The sale of assets to BHE is expected to close by year-end 2020, the company said, and is subject to the Department of Energy and Federal Communication Commission approvals, as well as Hart-Scott-Rodino antitrust clearance.
On Monday Ryan Wobbrock, Moody's Investor Service's senior credit officer, said the transaction is "mostly neutral to Dominion's financial metrics, with a ratio of cash flow to debt expected to be around 14%." Moody's affirmed the company's Baa2 senior unsecured rating.
The credit analyst said that from an environmental, social and governance, or ESG, standpoint, "the sale also helps Dominion's carbon transition, since it will eliminate ownership of roughly 21 million dekatherms per day of natural gas throughput and nearly 900 billion cubic feet of underground storage capacity that the company was responsible for in 2019."
MEETING STATE MANDATES
The Richmond, Virginia-based utility company became one of a growing number of investor-owned utilities and public power businesses that have adopted 2050 net-zero carbon emission goals over roughly the past two years. Dominion did so on February 11.
The company said at the time it had previously committed to cut methane emissions from its natural gas operations by 50% between 2010 and 2030 and carbon emissions from its power generating facilities by 80% between 2005 and 2050.
It said that progress toward those goals has been "significant," as it had cut carbon emissions approximately 50% since 2005 and reduced methane emissions by nearly 25% since 2010.
However, on April 12, Virginia Governor Ralph Northam, Democrat, signed the Virginia Clean Economy Act. That law requires almost all of the coal-fired generation in the state to be closed by 2024, and requires Dominion Energy Virginia to be 100% carbon-free by 2045, and Appalachian Power to be 100% carbon free by 2050.
The new law forced Dominion, which currently owns approximately 20 GW of power generation in Virginia, to "change its plans," as one of the company's business development executives told Platts in late June.
The new law requires the company to meet an interim 2035 goal of installing 16.1 GW of new solar generation and onshore windpower, 2.7 GW of electricity storage and 5.2 GW of offshore wind.
To aid in reaching its ultimate carbon-free goal, the company has said it will work toward extending the operating licenses of its four nuclear facilities.
The state's only 2045 mandate is reaching the 100% carbon-free emissions RPS. While the state does not mandate specific generation installation targets for 2045, Dominion has set out scenarios in its integrated resource plan that suggest it will need a total of 30 GW of mainly solar generation from now until 2045 to meet the state's goal.
