Gas to nuclear? Dominion looks beyond pipeline’s demise

By Heather Richards, Peter Behr | 07/07/2020 07:16 AM EDT

In killing the stalled $8 billion Atlantic Coast pipeline proposal and selling its existing gas pipe and storage business for $9.7 billion to Berkshire Hathaway, Dominion Energy Inc. has positioned itself for the big move into renewable power that the state’s Democratic leadership has demanded.

A depiction of Dominion Energy's Coastal Virginia Offshore Wind project.

A depiction of Dominion Energy's Coastal Virginia Offshore Wind project. Dominion Energy/YouTube

In killing the stalled $8 billion Atlantic Coast pipeline proposal and selling its existing gas pipe and storage business for $9.7 billion to Berkshire Hathaway, Dominion Energy Inc. has positioned itself for the big move into renewable power that the state’s Democratic leadership has demanded.

But will it deliver?

The Atlantic Coast pipeline died amid a rapidly changing outlook for coastal states along the Atlantic seaboard, where the promise of large pulses of clean power from massive offshore wind installations has been folded into state climate goals eschewing fossil fuels.


Dominion and Thomas Farrell, its chief executive, faced a new clean energy imperative following the enactment in April of the Virginia Clean Economy Act, which mandated that Dominion convert to renewable energy by 2045, making Virginia one of the first states in the South to set such a binding target. Virginia is also joining the Regional Greenhouse Gas Initiative, a compact among Eastern states to reduce climate-affecting carbon dioxide power plant emissions.

By contrast, the pipeline — proposed six years ago and mired in opposition — had become a potential liability.

"The pipeline was speculative, risky," said Steve Haner, senior fellow on state and local tax policy at the Thomas Jefferson Institute for Public Policy and a former Virginia lobbyist.

Dominion is shifting to "where the return is guaranteed and where political muscle in statehouses provides the largest rate of return," he said.

Dominion’s shareholders did not agree, at least based on first impressions. Yesterday, news of the deal sent the Richmond company’s shares skidding downward by 11% on a day when the overall market moved up.

The purchase of Dominion’s gas business by Warren Buffett’s Berkshire Hathaway conglomerate is just another example, if any were needed, of Buffett’s affinity for companies with a large, secure "moat" that offers defenses against competitors, said David Kass, a financial professor at the University of Maryland’s Robert H. Smith School of Business.

"This action will result in Berkshire Hathaway carrying 18% of the nation’s natural gas deliveries, doubling the size of their business in this area," Kass said in an interview. "They understand the economics of that [gas] business," he said, and that reduces corporate risk.

If big new natural gas pipelines aren’t entering the picture on the East Coast to stir up competition, that looks like the same advantage offered by railroads, given that the United States isn’t going to be laying new intercontinental tracks, either. Buffett sees a similar wide moat as a key plus for ownership of BNSF Railway — the old Burlington Northern Santa Fe line — Kass noted.

Berkshire Hathaway’s energy subsidiary will take over 7,700 miles of Dominion’s gas pipelines and 900 billion cubic feet of natural gas storage capacity, but not any part of the Atlantic Coast pipeline project. It will also get 25% of the Cove Point liquefied natural gas terminal on the Chesapeake Bay and will run the export hub when the transaction closes, the companies said. It is one of six LNG export terminals in the United States.

Kass also liked Dominion’s decision. "Looking to the future of the country, it is moving toward renewables. Why not sell part of the fossil fuel business and use that to make an investment in wind power?" Kass asked.

It’s not so simple, however, as saying Berkshire Hathaway just gave Dominion almost $10 billion to build offshore wind turbines, Kass added.

Of that purchase price, fully $5.7 billion is in Dominion debt that Berkshire Hathaway will take over, plus $4 billion in cash.

Dominion will plow $3 billion of the cash into buying back its shares, a move that has a bad aroma with clean energy advocates who will demand of the company’s regulators why that money isn’t being spent on turbines.

On the other side of the United States, decisions by Pacific Gas and Electric Co. to buy back more and more of its shares in recent years infuriated California’s political leadership when PG&E’s chronic underinvestment in safeguarding aged power lines was blamed for the state’s horrific wildfires beginning in 2017.

If it needs a defense, Dominion is likely to point to its decision to reduce its shareholder dividend at the same time it is repurchasing shares in the hope of increasing the value of the stock that remains. Yesterday, Dominion shareholders didn’t like the trade.

Although the swap of gas assets for cash doesn’t create a direct money pipeline into big offshore wind investments, the purchase does give Dominion more flexibility and breathing room to raise capital for the offshore wind project, Kass said.

Offshore wind

For a lot of observers, Dominion’s direction makes plenty of sense: The pipeline is a way of the past; offshore wind is a lucrative future, they say.

"There is always competition for capital, and tens of thousands of megawatts of wind, solar and battery facilities secure the company’s future," said Haner of the Thomas Jefferson Institute.

But Dominion is also now facing larger challenges because of an energy shift.

Dominion’s home state of Virginia has moved firmly blue in the last few years, and Richmond has repositioned the commonwealth to chase offshore wind power’s economic boon of jobs and new businesses. The utility is poised to take advantage of that, gobbling up opportunities to provide clean power demanded in new state policy goals and building the first U.S.-constructed vessel to raise turbines — allowing Virginia to help fill a critical gap in the expected boom of offshore wind installation in the Atlantic.

The offshore wind addition would presumably diversify the energy mix and add to grid security regionally, said Rafael McDonald, a power and renewable analyst at IHS Markit.

But if you also are rapidly retiring fossil fuel generation — as states like Virginia have promised to do — it’s going to "cause some issues," McDonald said.

"Any state, any utility that has an 80% or 100% carbon-free goal will admit that," he said. "The last 20% they don’t have a solution for yet."

For Haner, the elimination of the pipeline and its expensive promise of new natural gas conduits may elevate the importance of the utility’s nuclear assets to provide stability in the power supply. The company noted earlier this year that its four nuclear units will be a stabilizer in the green shift, and relicensing those aging reactors remains part of the company’s long-term power plans.

"If they are not extended, Virginia’s energy future is truly dire," Haner said of licensing agreements. The nuclear assets are also a benefit if Dominion is to keep to emissions elimination across the states where it operates, experts say.

Offshore wind has often been flagged as a problematic replacement for traditional energy sources because of its tremendous potential to pulse large amounts of power intermittently.

In the long run, however, those problems may not be Dominion’s to deal with, compared to other power providers in the region.

"It’s almost easier to be out in front," said McDonald of IHS. "You have the backup of everyone else on the grid."

Dominion declined to comment for this story. But Farrell said in a statement Sunday that it was with regret that the company had made its final decisions on the pipeline, noting its "billions" in investment in the pipeline project, which over the course of six years grew from a $4.5 billion to $5 billion estimated project cost to $8 billion.

He blamed "legal uncertainty" around energy and industrial infrastructure projects in the country for the project’s ultimate failing.

In response to the sale of assets, however, Farrell’s tone was positive, labeling the sale as a sign of Dominion’s growing "clean-energy profile" and pledge to hit net-zero carbon and methane emissions by 2050.

"This transaction represents another significant step in our evolution as a company, allowing us to focus even more on fulfilling utility customer needs and positioning us for a bright and increasingly sustainable future," he said.

‘The wrong way to go’

The pipeline cancellation hasn’t suddenly eradicated Dominion’s fossil fuel portfolio, which still boasts more than a dozen coal and gas power plants in addition to its three nuclear stations, according to Dominion’s website.

As recently as May, Dominion revealed intentions to keep some of its natural gas power burning in the interest of reliability past a new state cutoff in 2045 for fossil fuel power.

The pipeline’s demise also doesn’t change the fact that ratepayers will be on the hook to pay for the remaining cost of those power generation sources — plus a profit — even if resources like gas plants are phased out due to new policies, said Thomas Hadwin, an energy expert and an independent consultant on power issues for advocacy groups.

But renewable energy advocates are celebrating the Atlantic Coast pipeline’s death, arguing that now they won’t end up saddled with another fossil fuel asset that could become stranded in the broader energy transition.

"We have long argued that investing this amount of money in this kind of project at this time — when climate change is the existential threat that it is — is clearly the wrong way to go," said Will Cleveland, a senior attorney at the Southern Environmental Law Center, which has been favorable to the offshore wind proposal from Dominion.

The utility’s path has cheered advocates because it represents this greater, if complicated, shift in energy’s political power for the Mid-Atlantic, he said.

For years, Dominion dominated Virginia politics and energy policy. Now the company is transitioning toward a purely state-regulated utility, just as state lawmakers elected in a blue wave are strengthening their oversight over utilities, he said.

"Those tides are turning," said Cleveland. "Maybe Dominion wants to be at the forefront of that energy transition."

Others remain skeptical of the impact the transition will have on the average ratepayer if the power mix swings too heavily in one direction.

Wind is a cost as much as a benefit, they say.

Dominion’s pilot offshore wind project of two turbines on which construction was recently finished was billed at $300 million, far higher than estimated offshore wind development costs in the United States elsewhere and only cleared by regulators with a strong — if toothless — admonishment that it was an overpriced gambit.

The large offshore wind project to come is currently estimated at as much as $8 billion.

"We are on a long-term march to much higher energy prices here in Virginia," said Hadwin.