Dominion Resource: Adding Cheap Renewable Resources To Generation Mix

| About: Dominion Resources, (D)


Dominion Resources Inc. has recently acquired the two biggest solar projects in southwest Tennessee that will add 32 megawatts of renewable energy to the company’s generation mix.

Solar energy is cheap and does not make Dominion susceptible to volatile fuel prices such as natural gas and supports the company’s bottom line.

The company currently has a consensus rating of “hold” by the twenty rating firms that cover the company.

Dominion Resources Inc. (NYSE:D), a producer and transporter of energy in the U.S., has recently acquired the two biggest solar projects in southwest Tennessee. Upon completion, these projects will churn out 32 megawatts of renewable energy combined. Additionally, the company has also filed a request for a rate increase for its Dominion Virginia Power customers. In this article I will discuss the recent activities of the company.

Details on the Acquisition of Solar Projects in Tennessee

The company's recent acquisition consists of the two stand-alone, fixed-tilt photovoltaic solar projects called Mulberry Farm and Selmer Farm. These are located in McNairy County, near the town of Selmer. The two projects are currently at advanced stages of development by Strata Solar of Chapel Hill, N.C. Strata Solar is a national frontrunner of utility scale solar energy systems and installations. Dominion did not disclose the acquisition price for the two developments.

The engineering, procurement, and construction of the acquired projects will be handled by Strata Solar of Chapel Hill, N.C. while the commercial operation of the projects is expected later in FY 2014. The required land has been acquired and no additional permits are needed to begin construction which is expected to start shortly.

All power and environmental features from both projects will be bought by the Tennessee Valley Authority [TVA] under its renewable standard offer program. Integration to the electric grid will transpire through facilities owned and operated by Pickwick Electric Cooperative of Selmer, TN.

According to the CEO for the Dominion Generation, David Christian, this move is another significant addition to Dominion's growing portfolio of solar energy. These two projects strategically line up with the company's regulated and unregulated generation portfolio. The company acknowledges the requirements to develop and maintain a diverse generation mix, ranging from conventional sources to renewable energy sources.

These latest acquisitions bring Dominion's total solar generating portfolio to 212 megawatts. Including the Tennessee projects, the company has 41 megawatts of solar energy facilities operating at sites in Georgia, Connecticut, and Indiana, and another 139 megawatts are under development in California. The company also has numerous projects under construction in Virginia as part of the company's Solar Partnership Program.

Prospects for the Company

As stated earlier, all of the power and environmental features from both projects will be bought by the Tennessee Valley Authority. The authority serves around 9 million customers in seven southeastern states. As one megawatt can power around 250 homes, the 32 megawatts will enable the company to power around 8000 homes. Photovoltaic systems, as acquired by the company by this deal, produce power directly from sunlight, which is a renewable energy and is not a purchased power, the costs of which are impacted by volatility of fuel prices. Therefore, additional shares of solar energy in Dominion's generation mix will support the company's bottom line.

The EIA anticipates persistent vigorous growth in solar electricity generation (see chart below). Although the solar growth concentrated in customer-sited distributed generation installations in utility-scale solar capacity doubled in 2013. The EIA currently forecasts that utility-scale solar capacity will rise by 56% between the end of 2013 and the end of 2015.

Source: EIA

According to clean energy professional Jigar Shah, one of the most deeply undervalued solar markets in the world today is the U.S. The expert expects to see extraordinary growth in the U.S. solar energy generation in the coming years up until 2016. Shah predicted even further healthy industry growth aided by the forthcoming expiration of the federal investment tax credit, ITC. Everyone is presuming the 30% tax credit to expire and to move to a 10% federal tax credit in 2016. The majority of solar industry players are really looking forward to that expiration. Paula Mints, founder and chief analyst for SPV Market Research, also believes the looming expiration of the ITC will bring in vigorous growth in the U.S. solar demand over 2014 and into 2015. The analyst expects to see a furious haste to reap the benefits of the ITC.

Request for Rate Increase

Dominion announced recently that it is requesting a 4.1% rate increase for its Dominion Virginia Power customers to mainly cover the costs of this year's harsh winter. The appeal stems from this winter's "polar vortex" phenomenon, and the higher cost of fuel that the company's power stations were required to use as customers activated thermostats to fight the cold. In addition to this, where gas was available, pipeline constraints at certain points on the coldest days impacted the supply of fuel, and that caused further troubles.

If this rate proposal hike is approved, Dominion Virginia Power residential customers will have their power bills increase over a two-year period, beginning July 1st, 2014. According to the company's statement, a usual residential bill would increase by about $4.46, from $107.99 to $112.45 per month if the request is approved. For business owners, the 4.1% increase could have a larger impact, because fuel costs constitute a greater percentage of their overall power bills.

According to the officials, Dominion has planned to spread the requested fuel charge hike over two years in order to ease the impact on its subscribers. According to the law, the fuel charge only recovers the company's actual costs on a dollar-for-dollar basis. According to Dominion, the fuel charge generally presents around 27% of a typical residential bill and denotes the variable cost of fuel for the power stations along with power purchases on wholesale energy markets.

If the fuel charge hike is not extended over two years, the average residential customer's monthly bill would increase by around $2, or 6% to $114.45, according to the company. Dominion Virginia Power, the state's biggest electric utility that serves around 2.4 million customers, is projected to spend $267.8 million more in the 12-month fuel year that will end on June 30th, 2014 than it will recover by the existing customer fuel charge. Dominion Virginia Power expects to incur a total of $1.9 billion in fuel expenses during the 2014-15 fuel year.

Dominion has also filed an additional request to the SCC to allow for a 1.7% ($1.91) increase in its transmission rider to be applied from September 1st, 2014. This request was made to back the company's ongoing efforts to strengthen its transmission network and ensure secure and unfailing delivery of power to customers.

Combined, both of these requests would mean a $6.37 monthly addition to the customers' bill by September 1st, 2014. According to Dominion, even if these requests are accepted, its new rates would remain much lower than state, regional, and national averages. Dominion Virginia Power is also considering the use of more long-term contracts to hedge against natural gas volatility. The company is also expanding its portfolio towards solar and wind power, as they are free and do not require fuel rate adjustments.

The potential timing of any order related to Dominion's fuel case will hinge on when the SCC arranges the case for hearing as the state regulatory agency has no deadline to rule on. The commission has three months to decide the transmission rate request. According to Dominion Virginia Power's spokesman, the company expects a ruling by the start of August 2014.

Overall Performance of the Company and Concluding Remarks

Dominion released its Q1 FY 2014 results a few weeks ago, and the company posted $1.04 earnings per share for Q1 FY 2014 beating the analysts' consensus estimate of $0.97 by $0.07. During Q1 FY 2013, the company reported $0.83 earnings per share. On average, analysts expect the company will post $3.54 earnings per share for FY 2014. The company currently has a consensus rating of "hold" by the twenty rating firms that cover the company.

The company's recent acquisition will support its bottom line and it will add more solar energy to the company's generation mix. This is because solar energy is a renewable source that is not susceptible to volatile fuel costs such as natural gas. The rise in natural gas prices as a result of harsh winters affected the company's bottom line and has caused Dominion Virginia Power to file a request for a rate increase. If the proposal is approved by the regulators, this may result in a 4.1% increase in customers' bills for two years starting from July 2014. Considering the company's efforts to improve its performance and position by adding cheap renewable resources to its generation mix, I believe the company is a worthwhile investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.