Formed by the merger of three electrical streetcar lines in Richmond, Virginia in 1909, Dominion Resources (NYSE:D) has grown into one of the largest US multi-utility energy companies with exposure to regulated electricity distribution, merchant power generation, electrical transmission, regulated natural gas distribution, natural gas pipelines, and natural gas storage. With a current industry-average dividend yield of 4.3%, the main attraction to investors will be consistent earnings growth that will fuel future dividend growth. As overall market conditions may deteriorate while our national policy leaders "negotiate" and posture during the Fiscal Cliff and Debt Ceiling debate, look to pick up D shares on price weakness.
Focused on the Midwest, Mid-Atlantic and Northeast, Dominion Resources services 2.4 million electric customers in Virginia and North Carolina along with 1.3 million natural gas customers in Ohio and West Virginia. Augmenting the regulated retail/commercial electrical and natural gas distribution business is 19,000MW of regulated power generation, 8,500MW of unregulated merchant power generation, and 6,500 miles of electrical transmission lines. Dominion operates 950Bcf of natural gas storage, making it the largest in the storage industry and manages 11,000 miles of gas pipelines. The company owns one of the largest natural gas LNG import facilities that has applied for licenses to export natural gas.
Regulated electric generation and distribution assets will provide about 63% of operating profits in 2012, led by its crown jewel Virginia Electric Power. Transmission assets will kick in 14%. Merchant power combined with East Ohio natural gas will contribute an additional 12%, with non-regulated business and Cove Point LNG making up the balance. An in-depth description of its thirteen businesses from its website is found here.
Dominion jettisoned its natural gas exploration and production business in 2010 and 2011, generating $14 billion from the sale and the proceeds were used to lighten its debt load, to buy back shares and an increase in the dividend. Dominion retained infrastructure assets including pipelines, processing, and storage facilities in the Marcellus and Utica shale areas. As this budding natural gas play increases production, Dominion's infrastructure assets should continue to expand.
From 2012 to 2016, management is budgeting $11.6 billion in capital expenditures, including $4.3 billion for power generation, $4.0 billion for electrical transmission, $3.4 billion for natural gas distribution and $1.0 billion for natural gas infrastructure projects. This will increase the company's regulated asset rate base from $22.1 billion to $26.5 billion. The company expects to generate $4.1 billion from new debt and $1.2 billion from new equity, focused on employee stock purchase and dividend reinvestment plans. The downside to shareholders of this aggressive expansion will be the potential of a 4.2% dilution over the next 3 years.
With the sale of the commodity influenced natural gas E&P, Dominion is well positioned in the upper end of regulated return on equity (ROE) projects. Virginia Power's regulated ROE is 14.9%, FERC-regulated transmission ROE is 14.5%, with Cove Point LNG and East Ohio ROE at 10.7% and 9.8%, respectively. These businesses will receive the majority of capital investments over the next 3 years.
Dominion is not without its intrigue. The company has requested a permit to convert the Cove Point LNG facility to a bi-directional plant that can both import and export natural gas. Located on the Chesapeake Bay south of Baltimore, the facility was recently upgraded to process 1.8 bcf/day with storage facilities of 14.6 bcf. The company has requested permits to export about 1.0 bcf/day and is seeking a long-term buyer of the export LNG capacity. The Sierra Club has challenged the LNG export permits, believing it has veto power over any additional permitting at Cove Point. Find additional information on Sierra Club's position here and Dominion's legal reply here. The company is seeking to start construction by 2014 with initial LNG exports in 2017. Stay tuned.
Management has announced it will close a nuclear power generation plant in Wisconsin due to a lack of a buyer. Last year, the company announced it was putting the Kewaunee facility up for sale due to very weak merchant power market in the Midwest and the expiration of long-term power purchase agreements. The closure created a charge against earnings of about $281 million. In addition, the company is attempting to sell three other generating plants - Kincaid, Elwood and Brayton Point. These are coal-fired plants and on the recent conference call management indicated it had received significant interest. However, based on the number of merchant coal-fired plants currently on the block, sale prices are not expected to be robust.
Earnings in 2012 are expected to be flat with 2011 at $3.05 per share. Next year earnings are expected to increase to $3.20 to $3.50 with long-term eps growth rates in the 5.0% to 6.0% range.
Listed below are current valuation comparisons with competitive regulated utilities Con Ed (NYSE:ED), Duke (NYSE:DUK), Northeast (NYSE:NU), Southern (NYSE:SO), Xcel(NYSE:XEL), and Wisconsin (NYSE:WEC):
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Standard & Poor's ranks Dominion Resources A- for 10-year consistency in earnings and dividend growth. Utility investors should treasure these factors as a key matrix for investment consideration. The only other two firms with an A ranking in the Electrical and Gas Distribution Peer Group are Avista Corp (NYSE:AVA) and Sempra Energy (NYSE:SRE).
Stock price targets range from $55 to $62 over the next three years. If D reaches the $62 price target, total stock return could be in the 12% range, more than acceptable for a stable, large-cap utility investment. Dominion Resources is currently valued in line with its competitors and could be considered fully valued. As a potential core utility holding, buying on dips should strongly considered.
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