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Morningstar | Another Setback for Atlantic Coast Pipeline Creates Buying Opportunity for Wide-Moat Dominion Energy

We are reaffirming our $84 fair value estimate and wide moat rating for Dominion Energy after another setback for the Atlantic Coast Pipeline. The delay led us to cut our earnings estimates and reduce our assumed return on the ACP investment. We also incorporated higher pension expense. None of the changes had a material impact on our fair value estimate. We think the stock's recent weakness creates a buying opportunity.

The U.S. Court of Appeals for the Fourth Circuit denied ACP’s motion for clarification on the court’s stay of the revised U.S. Fish & Wildlife Service’s Biological Opinion. Dominion and its partners, Duke Energy and Southern Company, asked the court to limit the scope of the stay to the 100 miles that four endangered species occupy.

Work remains halted on the 600-mile pipeline from West Virginia to North Carolina, but we believe a route revision is the likely compromise. However, this delay and the U.S. Forest Service permit invalidation for 21 miles of Forest Service property on Dec. 13 will likely push the completion into 2021 and increase the costs modestly above the high end of the latest $6.5 billion to $7 billion range.

The ACP work stoppage and higher pension expense due to weak capital markets in late 2018 led Dominion to lower its earnings growth guidance through 2020 to the lower half of its 6%-8% range. This implies $4.35-$4.47 EPS in 2020. We lowered our 2020 EPS estimate below Dominion’s guidance to $4.27 from $4.43 based on our assumption that the ACP is not completed until 2021. We now assume ACP's first full year of earnings contribution in 2022, dropping our EPS estimate by $0.07 to $4.90.

We expect the pipeline capacity contracts with subsidiaries of Dominion, Duke, and Southern allow for higher rates due to additional environmental costs. But we think regulators might balk at passing all the higher costs through to ratepayers, leading us to cut our assumed return on capital for the ACP to 9% from 10%.

For more detail, see our report, “Market Still Not Appreciating Dominion Energy’s Strategy Pivot.”