In a major surprise on Sunday, Virginia-based Dominion Energy and North Carolina-based Duke Energy, faced with a setback in federal court and falling natural gas prices, cancelled their 600-mile, $8 billion Atlantic Coast natural gas pipeline project. Shortly after that announcement, Richmond-based Dominion announced it was getting out of the competitive gas business, agreeing to sell its gas pipeline and storage interests to Warren Buffett’s Berkshire Hathaway for $4 billion in cash and the Omaha-based company’s assumption of $5.7 billion in debt.
The announcement to kill the project to move gas from fracking sites in West Virginia to eastern North Carolina, including passing under the Appalachian Trail, came after a Montana federal court in late May ruled that the Army Corps of Engineers’ Nationwide 12 blanket permit to cross stream and rivers was invalid. The case involved the Keystone XL oil pipeline from Canada. That would have driven up regulatory and litigation costs at a time of very soft gas prices, Dominion and Duke concluded.
The two utilities in June won a major decision at the U.S. Supreme Court, which ruled that the project could cross the Appalachian Trail on federal Forest Service land. That appeared to clear the way for the project, until the Montana federal court overturned the blanket water permit program.
In a conference call this morning, Dominion CEO Tom Farrell said “increasing legal uncertainty” now overhangs the project, despite the 7-2 Supreme Court victory. Permitting gas transportation and storage has become “increasingly litigious, uncertain, and costly.”
In the call, Farrell said they began considering getting out of the competitive gas business entirely “in the second half of last year. Early this year, Berkshire indicated their interest.” The two companies then negotiated the details, which came together just as the Dominion and Duke decided to kill the Atlantic Coast project.
The exit from gas transportation and storage, keeping local gas distribution companies, Dominion said in in a press release is a strategic retreat into a largely state-regulated business environment. Farrell said, “Over the past several years the company has taken a series of steps – including mergers with Questar Corporation and SCANA Corporation, and the divestiture of Blue Racer Midstream and merchant generation assets – to increase materially the state-regulated nature of our profile, enhance the customer experience, strengthen our balance sheet, and improve transparency and predictability.”
Dominion will retain a 50% interest in the existing Cove Point gas liquefaction plant, free of debt.
Dominion said it will use $3 billion of the $4 billion in Buffett’s cash to buy back the company’s stock. The company’s shares have trended around $80/share during all of 2020. Farrell said the new company focus will “allow us to increase our long-term earnings growth rate guidance by around 30 percent.” The company expects to see its earnings for 2020 to be in the range of $3.50/share, compared to earlier projections of $4.50. The utility said it will cut its fourth-quarter dividend to 63 cents, down from 94 cents it paid earlier this year.
From Berkshire Hathaway’s perspective, the move represents an easy way to increase its growing presence in natural gas markets. The Omaha conglomerate will transport 18% of all interstate gas in the U.S., up from a current 8%. The deal represents Berkshire’s first major acquisition since the coronavirus pandemic. The company is sitting on a $137 billion pile of cash.
— Kennedy Maize