All the leveraged finance artists, who mushroomed over the cheap money years, have been mouthing off about how they will become post-coronavirus-crash value investors. The same people who overpaid for assets with “cheap” debt believe they can flip the script to underpaying in liquidation sales.
Warren Buffett, or, more accurately, Berkshire Hathaway, is rejecting this pitch with the purchase — for cash — of most of Dominion Energy’s midstream gas businesses. Centred in the eastern states, the purchase includes a 25 per cent share of the Cove Point LNG port in Maryland, interstate pipelines that snake from the Marcellus gasfields to eastern markets, some gas gathering pipes and processing plants, and a small tail-end of producing fields.
The package was priced at $9.7bn, of which $4bn was cash and $5.7bn an assumption of existing debt. Usually utility deals do not shock, but Dominion’s shares sold off 10 per cent on the news. To add to Dominion shareholders’ pain, the dividend was cut by 34 per cent. And of the $4bn in cash paid by Mr Buffett, $1bn had to go to taxes.
Just in October, Dominion had sold off another 25 per cent share of the Cove Point plant to Brookfield for $2bn, a then-consensus pricing of about 11 times ebitda. Now Dominion is selling an (at least partly comparable) group of assets for 8 to 9 times ebitda. “I just don’t get it, I just don’t get it,” said one pipeline finance person. “I mean, it’s a great deal from Buffett’s point of view, but why did Dominion do it?”
Several reasons. First, Dominion will now get more than 90 per cent of its earnings from state-regulated utility assets, up from 70 per cent. In what is likely to be a more Democratic-governed, pro-regulation country, that is a good thing.
Also, Dominion should get some of that vague ESG virtue-value from disposing of hydrocarbon related stuff. Not long after selling the gas assets, Dominion, along with its partner Duke Energy, announced its abandonment of the Atlantic Coast pipeline project. Much hated by the enviros, Atlantic Coast would have required tunnelling under scenic mountains and fighting through endless minefields sown by the greens’ lawyers.
And, perhaps most critical, Dominion Energy gets a high triple B rating and sheds some debt. Take notice, private equity guys. Junk and leveraged loans do not look as good as they did.
I do not mean to be overly critical of Dominion. From what I see, the company has sound and innovative engineering management, and its Virginia-centric regulated electric utility assets are in an area with good long-term growth.
But the people with real cash on hand are on top right now. Berkshire could flop a cheque book on to the conference table on the spot. Junk financing does not really work well for regulated pipelines. Private equity leveraged magic can become embarrassingly unglued in the regulated energy world. Just ask KKR about their adventures in Texas during the last economic cycle.
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For a cash rich investor (and operator) such as Berkshire, though, the Dominion gas asset acquisition could be the base for a strategic expansion throughout the eastern states. The Dominion pipeline package was made even more valuable by the abandonment of the Atlantic Coast project, which, arguably, would have competed for gas production from the Marcellus fields. Now Buffett’s new pipes can count on being filled to more than 90 per cent of capacity.
Andy DeVries of CreditSights, a research firm, says that is not the end of it. “As soon as the Dominion deal was announced, bankers were getting deal pitches ready for Buffett for other distressed midstream (pipeline) assets in the East.”
What about any risk to the gas pipeline trade from a Democratic-led decarbonisation push? Yes, that exists, but that is most likely to be expressed as reluctance to license new interstate pipelines. Owners of existing pipelines should be able to increase their economic rents, or at least ensure they are more secure.
There is a pattern here, leverage freaks? You are not the ones who will be cut in on the massive bargains on offer in the energy sector. Yes, Americans get to reinvent themselves, but maybe, finally, you have run out of luck.
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