Dominion commits to renewables

Dominion Energy (US:D) was incorporated in 1983 and has grown to be the United States’ third-largest utility company by market capitalisation. The group’s operations cover power generation, electricity transmission and distribution, gas infrastructure and supply. 

Dominion has seen its utility and retail energy customer base increase by around 50 per cent to 7.5m following its $13.4bn acquisition of gas business Scana. The acquired group was left floundering after Japanese-owned nuclear reactor group Westinghouse entered administration in 2017, leaving it unable to complete a power plant project the two had been working on. The project ultimately did not go ahead, but Dominion stepped in to rescue Scana, and it will now start reporting as Southeast Energy, Dominion’s fourth operating segment. 

The transition to renewable energy in the US is behind that of the UK. Coal, oil and gas accounted for a combined 60 per cent of US energy consumption in 2017, compared with less than 48 per cent in the UK. However, Dominion is attempting to be a sector leader in the move to low-emissions generation, recently announcing its decision to close coal and gas-fired generation units in Virginia. It has also committed to cutting CO2 emissions by 80 per cent by 2050 and methane by half by 2030.

As investors with experience of UK utilities might expect, the group offers a healthy dividend payout that has grown consistently for the past 15 years. In recent years this payout has seen steady growth – it climbed a tenth last year, and is due to do so again in 2019 – but it’s not due to last.

As management explained at a recent investor day, it had initially intended to increase its payout by 10 per cent annually from 2018-20, a slight improvement on the growth seen in prior years. However, as the dividend payment has grown, it has pushed the payout ratio to levels far out of line with peers. Adjusted EPS guidance points to a payout ratio of 87 per cent, compared with a peer group average of 69 per cent. Management is planning to cut the rate of increase to 2.5 per cent annually to bring this back into line, allowing the ratio to fall to the low 70s over time.