Dominion Energy: Natural Gas Distribution Sale Highlights End of Strategic Review

We keep our $56 per share fair value estimate for Dominion Energy D after it agreed to sell three natural gas distribution utilities to Enbridge. Dominion will sell East Ohio Gas Company, Public Service Company of North Carolina, and Questar Gas natural gas distribution utilities for $14 billion, including $4.6 billion in debt. Aftertax proceeds of $8.7 billion will be used to repay parent debt.

We don’t expect additional strategic asset sales for Dominion given the size of this transaction and the previously announced sale of the Cove Point LNG facility. Management noted the transaction would improve funds from operations to debt by 3.4%, a notable improvement.

The transaction implies a 16.6 times 2024 earnings multiple and 1.5 times rate base, which is in line with natural gas distribution utility market valuations, representing a fair outcome for Dominion. However, the valuation remains below the 19 times Dominion paid for the Questar assets in 2016. The valuation attributed to Questar assets was 15.1 times earnings with a higher valuation applied to the North Carolina and Ohio utilities.

With Dominion trading at just 13.2 times our 2023 earnings estimate as of Sept. 5, the asset sale was more attractive than issuing market equity since the stock has been depressed during the strategic review. We viewed Dominion as having few options as it was late in recognizing the need for external financing amid a deteriorating regulatory environment in Virginia. Dominion so far has not sold a minority interest in its offshore wind project. We think this is due to a lack of buyers and another sign that there are increasing concerns about the economics of offshore wind projects.

Selling the natural gas distribution utilities is in line with our consolidated 16 times fair value estimate for Dominion, leaving our fair value unchanged. Our valuation discount relative to peers reflects Dominion’s lower total projected return during the next five years relative to its utility peers.