Dominion Energy (NYSE: D) recently unveiled a bold plan to decarbonize its portfolio. The utility company could invest up to $72 billion through 2035 to transition its primary power source from fossil fuels to emissions-free alternatives. It represents the country's largest decarbonization investment and a massive spending plan for Dominion, especially considering that its enterprise value currently stands just shy of $100 billion.
The utility believes this investment could pay big dividends for shareholders over the long term. It should clean up its emissions profile while helping it generate powerful total returns.
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A bold bet on clean energy
Dominion outlined its massive decarbonization plan on its recent fourth-quarter conference call. The company expects to invest $32 billion through 2025 to clean up its emissions profile. That's a $10 billion, or 43%, increase from its initial five-year plan that it unveiled in early 2019 after adjusting for last year's sale of its natural gas transmission and storage assets to Berkshire Hathaway.
The utility plans to allocate that capital into the following initiatives:
- $17 billion for zero-carbon generation -- offshore wind, nuclear power life extensions, and solar energy -- and energy storage
- $6 billion on electricity transmission and distribution projects such as making its system more resilient to cyber and climate threats
- $6 billion on customer growth and other related activities
- $3 billion on natural gas distribution modernization and renewable natural gas systems
More than 80% of those investments will reduce emissions.
Dominion estimates that this investment level should grow its earnings per share at around a 6.5% annual rate through 2025. That should give it the fuel to increase its 3.5%-yielding dividend by 6% per year. As a result, its dividend payout ratio would remain around the industry average of roughly 65% of its earnings. That combination of dividend yield and earnings growth should power a total shareholder return of about 10% annualized, which is strong for a utility.
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An even bigger long-term opportunity awaits
Looking further out, Dominion sees an even larger decarbonization opportunity. Executive chairman Thomas Farrell said on the call that the company has:
Identified over $70 billion of green investment opportunity between 2020 and 2035, nearly all of which will qualify for regulated cost of service recovery. This is, as far as we can tell, the largest regulated decarbonization investment opportunity in the industry. And the accelerating electrification of the transportation sector promises to drive growing demand for utility-scale, zero and low-carbon generation for many years to come.
The company ran through this opportunity set on the call, noting that it could invest up to:
- $17 billion for offshore wind projects, including an estimated $8 billion to build a 2.6 gigawatt (GW) offshore wind project in Virginia that it hopes to complete by the end of 2026
- $20 billion on solar projects, with the company anticipating expanding its capacity from 2.2 GW to 13.4 GW by 2035
- $7 billion for energy storage projects
- $4 billion to extend the life of its zero-emission nuclear power plants
- $15 billion on electric grid transformation projects
- $9 billion on natural gas distribution modernization projects and renewable natural gas
Add it all up, and the total investment opportunity comes to around $72 billion by 2035. That would increase its zero-carbon power sources (renewable energy and nuclear) from 45% last year to 70% by 2035 while improving its zero- and low-carbon sources (which include natural gas) from 90% to 95%. Dominion is also investing in early-stage hydrogen projects to see whether that emission-free fuel could replace natural gas in its gas distribution network and for power generation.
Assuming Dominion earns similar returns on these investments, the utility could continue delivering around mid-single-digit earnings per share and dividend growth each year. That would give the company the power to continue generating double-digit total annual shareholder returns.
An intriguing utility stock for long-term investors
Dominion Energy plans to pour as much as $72 billion into cleaning up its generation profile and modernizing its distribution networks over the next decade and a half. It believes that these investments will produce attractive returns, enabling it to grow its earnings and high-yielding dividend at healthy rates. That increases the attractiveness of Dominion's stock, especially for investors seeking dividend growth powered by clean energy.
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Matthew DiLallo owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Dominion Energy, Inc and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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