Why Did Buffett Buy Dominion?

Dominion Energy Inc (NYSE:D) is a Virginia-based energy company that supplies both electricity and natural gas across the U.S. Its acquisitions of Questar Corporation and SCANA Corporation expanded it beyond its region to become a diverse company and component of both the S&P 500 and Dow Jones Utility Average (DJUA).

On July 5, 2020, Warren Buffett’s Berkshire Hathaway bought Dominion’s natural gas storage and transmission assets in a $10 billion deal.

This deal gave Berkshire Hathaway Energy 18 percent of all interstate natural gas transmission in the United States. It was the first post-pandemic purchase the holding firm made with its massive cache of liquid assets.

It marked the end of a doomed project called the Atlantic Coast Pipeline, as Dominion shifts to a renewable future through utility-owned solar and wind power generation. It expects to have 5.2 GW of offshore wind production by 2035, 16.1 GW of solar or onshore wind by 2036, and 2.7 GW of energy storage.

This is on top of its current 27.1 GW of nuclear, coal, petroleum, gas, and renewable energy.

The question is why did Buffett buy Dominion’s assets and not the company itself.

Why Did Buffett Buy Dominion?

Berkshire Hathaway lost nearly $50 billion in the first quarter of 2020, and Buffett famously halted any investments during the pandemic’s early stages.

“We have not done anything because we don’t see anything that attractive to do,” the Berkshire Hathaway head told investors at its May shareholder meeting. “If we really liked what we were seeing, we would do it, and that will happen someday.”

You can’t keep a good dog down though, and it wasn’t long before Buffett got back in the spending mood. He saw the opportunity to shore up and strengthen his existing energy business. It didn’t take long to find a seller in the form of Dominion.

The deal made headlines, as it was the first major purchase Buffett made since the coronavirus crash in March. It also put his money where his mouth is by showing what he believes will be profitable over the next decade. As the world works, studies, and plays at home, energy spending is going up.

Utility investments gained popularity in 2020, and regional companies operating in Florida, California, and more earned attention in the form of more trading volume. Some major hedge funds placed investments into energy companies.

But Buffett didn’t invest in the company itself. He just wanted a specific set of assets – its natural gas pipeline.

How Much Of Dominion Does Buffett Own?

To be clear, Buffett didn’t buy Dominion – Berkshire bought Dominion’s gas transmission and storage business. It includes Dominion Energy Transmission, Questar Pipelines, Carolina Gas Transmission, and Iroquois Gas Transmission.

Combined, they represent 10 percent of interstate gas transmission in the U.S., compared to Berkshire Hathaway’s previous total of 8 percent. It now owns 18 percent of this important utility, including the pipeline through the Rocky Mountains.  

It also acquired the ACP, which was approved by the Supreme Court to be constructed 600 feet beneath the Appalachian Trail. Dominion had a 53 percent interest in the ACP, and it cost approximately $8 billion to build, much higher than the $4.5 billion to $5 billion estimates.

This is no problem for Buffett and Berkshire’s $137 billion cash pile. It can easily finance whatever it needs, a benefit of having so much unused money laying around. It also kept Buffett in his comfort zone of buying familiar assets.

Perhaps he just needed the same normalcy we all do during the pandemic. Except Buffett is a billionaire investor who specializes in corporate takeovers and making money. 

Buying out the bulk of its natural gas assets leaves investors wondering whether to invest in Berkshire Hathaway or Dominion after the deal.

Is Dominion a Good Investment?

Dominion has a market capitalization of over $60 billion by year end, and it spent the back half of the year trending down. D share price bottomed out at $57.79 before bouncing back. It has still never reached pre-pandemic highs though.

In fact, the effects of Buffett’s buyout only hit the company temporarily in July before it rebounded upwards through November. By the time successful vaccines were announced in December, the stock continued deflating.

Buffett could have stolen its heart, or it could just be a side effect of pandemic stocks struggling in a post-pandemic society. Except electric utilities are hardly pandemic-specific, and Dominion already crashed in 2018 over pipeline controversies.

Maybe it also has something to do with the Securities and Exchanges Commission handing Dominion a $25 million civil fine over fraud related to three years of artificially propping its stock price up while its nuclear program collapsed.

This makes it a turbulent stock with unstable pricing that’s not easy to stomach. It explains why Buffett wanted a piece of the company’s assets but not the company itself. 

Being a volatile stock also makes it a great options play for advanced traders. The average retail investor may want to avoid it though.

Why Did Buffett Buy Dominion: The Bottom Line

Buffett didn’t buy equity in Dominion – he simply bought some of its most valuable assets. Its natural gas pipelines increased the size of Berkshire Hathaway’s interstate natural gas transmission to 18 percent of the total market.

Utility companies aren’t necessarily buzzworthy, but they gained pizazz when the pandemic pushed everyone to virtual work and school schedules. That naturally led to more energy usage.

Dominion has fines coming up that will eat into the money Buffett gave it. Infrastructure upgrade costs are going to eat into profits too. Berkshire Hathaway is probably a better investment than Dominion at this point. There’s a good reason Buffett didn’t buy the whole pie just took a slice based on what he inevitably sees as a high return on assets.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.