Tough Breaks Lead to Fair Value Cut for Dominion Energy

Regulators and legislators have recently been tougher than expected on

Virginia Electric Power Co. rate riders that will go into effect on April 1 remain attractive, but not as good as they used to be. The base ROE for the riders is 9.2%, down from last year’s 9.6%. Vepco's recently completed or modified power plants will continue to receive a minimum 100-basis-point incentive, bringing the new rate rider ROE to at least 10.2%. This remains well above most other U.S. utilities' rates.

On March 9, Virginia Gov. Ralph Northam signed new utility legislation that reboots the earnings review process in 2021. Strong growth in Vepco’s service territory, driven in large part by new data centers and automatic rate riders, provided 10% adjusted EBIT growth in 2016 and 5.4% growth last year despite mild weather. We expected earnings growth to remain in the high single digits with the review suspension, topping most U.S. utilities' growth rates. We now expect a more pedestrian 5% annual growth rate.

Dominion Midstream Partners' unit price fell almost 9% in the two days after the Federal Energy Regulatory Commission tax allowance policy change, due in large part to potential impact on the Carolina Gas, Questar, and Iroquois pipelines with mostly cost-of-service rates. Rates at the Cove Point LNG facility are FERC-regulated but aren't subject to the policy revision. However, we expected Cove Point drop-downs to start midyear financed in part by the issuance of new DMP units. The drop in DMP's unit price and potential for lower cash flow reduces its usefulness as a financing vehicle.

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