Is Dominion Energy's ROE of 8.6% Sustainable Amid High Debt Load?

Dominion Energy’s return on equity (ROE) of 8.6% in 2025, while modestly above the utility industry median of 8.21% [1], raises critical questions about its sustainability in the context of the company’s elevated debt load. With a debt-to-equity ratio of 1.56 as of Q3 2025 [2], Dominion’s capital structure is heavily reliant on leverage, a strategy that amplifies returns in stable environments but introduces vulnerability during periods of rising interest rates or regulatory shifts.

Debt Dependency and Risk-Adjusted Returns

Dominion’s ROE of 8.35% as of September 2025 [3] is driven in part by its aggressive use of debt, which inflates equity returns but also increases financial risk. The company’s interest coverage ratio—measured at 2.27 in June 2025 [4]—falls below the Utilities - Regulated industry median of 3.69 [5], signaling limited capacity to service debt obligations. While a 3x coverage ratio reported in Q2 2025 [6] suggests slight improvement, it remains below Ben Graham’s conservative threshold of 5x [7]. This discrepancy highlights the volatility in Dominion’s earnings and the potential for margin compression under stress scenarios.

The company’s weighted average cost of capital (WACC) of 6.53% [8] indicates that Dominion must generate returns above this hurdle rate to create shareholder value. While its ROE of 8.6% exceeds WACC, the narrow margin—coupled with a cost of debt of 4.2178% [9]—leaves little room for error. For context, peers like Edison International and American Electric Power achieve ROEs of 17.82% and 13.18%, respectively [10], demonstrating that Dominion’s performance lags in a sector where capital efficiency is paramount.

Credit Ratings and Industry Comparisons

Dominion’s credit ratings—Baa2 (Moody’s) and BBB+ (S&P/Fitch)—reflect a moderate risk profile, though Moody’s negative outlook underscores concerns about leverage trends [11]. Total debt of $46.5 billion [12] and a debt-to-equity ratio of 150.8% [13] place Dominion in the upper range of industry norms, where utilities typically balance debt with stable cash flows. However, the company’s reliance on debt financing becomes a double-edged sword: while it boosts ROE in low-interest environments, it also exposes Dominion to refinancing risks and higher interest expenses.

A key consideration is the regulatory environment. Utilities operate in a capital-intensive sector where returns are often capped by rate approvals. Dominion’s ROE of 8.6% aligns with the 8.9% industry average for Integrated Utilities [14], but it falls short of the 9.75% benchmark derived from 2025 rate cases [15]. This gap suggests that Dominion’s debt-driven ROE may not fully reflect its long-term value proposition, particularly if regulators tighten return authorizations or if interest rates rise further.

Conclusion: A Delicate Balance

Dominion Energy’s ROE of 8.6% is technically sustainable in the short term, as its interest coverage and WACC suggest manageable risk. However, the company’s high debt load and relatively low coverage ratios create a fragile foundation for long-term growth. For investors, the critical question is whether Dominion can maintain its earnings momentum while deleveraging or whether its debt dependency will erode risk-adjusted returns. In a sector where stability is prized, Dominion’s strategy appears to walk a tightrope—one that could tip if earnings or credit conditions deteriorate.

Source:
[1] Dominion Energy (D) ROE % : 9.46% (As of Mar. 2025), [https://www.gurufocus.com/term/roe/D]
[2] Dominion Energy debt - 2025 NYSE(D), [https://www.macroaxis.com/invest/bond/D]
[3] Dominion Energy, Inc. - ROE, [https://www.wisesheets.io/roe/D]
[4] D (Dominion Energy) Interest Coverage, [https://www.gurufocus.com/term/interest_coverage/D]
[5] D (Dominion Energy) Interest Coverage, [https://www.gurufocus.com/term/interest_coverage/D]
[6] Dominion Energy (D) Balance Sheet & Financial Health, [https://simplywall.st/stocks/us/utilities/nyse-d/dominion-energy/health]
[7] D (Dominion Energy) Interest Coverage, [https://www.gurufocus.com/term/interest_coverage/D]
[8] D (Dominion Energy) WACC %, [https://www.gurufocus.com/term/wacc/D]
[9] D (Dominion Energy) WACC %, [https://www.gurufocus.com/term/wacc/D]
[10] Dominion Energy, Inc. - ROE, [https://www.wisesheets.io/roe/D]
[11] Credit Rating Summary, [https://investors.dominionenergy.com/fixed-income/dominion-energy/default.aspx]
[12] Long Term Debt - Dominion Energy Inc (NYSE:D), [https://www.alphaspread.com/security/nyse/d/financials/balance-sheet/long-term-debt]
[13] Dominion Energy (D) Balance Sheet & Financial Health, [https://simplywall.st/stocks/us/utilities/nyse-d/dominion-energy/health]
[14] How Did Dominion Energy, Inc.'s (NYSE:D) 7.3% ROE Fare Against The Industry?, [https://finance.yahoo.com/news/did-dominion-energy-inc-nyse-140041996.html]
[15] Utilities − U.S. Powering the Future Capital Investment ..., [https://gabelli.com/research/utilities-%E2%88%92-u-s-powering-the-future-capital-investment-super-cycle-eps-cagrs-to-rise/]