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Dominion 4Q a Penny Ahead

Zacks Equity Research

Dominion Resources Inc. (D) reported fourth quarter 2012 operating earnings of 69 cents per share, a penny above the Zacks Consensus Estimate. The results were also above the year-ago figure of 58 cents per share.

Including impairment charges, restoration costs and other charges of $1.35 per share, the company reported a net loss of 66 cents per share compared with earnings per share of 35 cents a year ago.

The results were driven by lower operations and maintenance expenses and benefit from the contribution of assets to the Blue Racer Midstream joint venture. However, these positives were partially offset by lower contributions from unregulated retail energy marketing operations and an extended outage at Millstone Unit 2.

Full year 2012 operating earnings came in at $3.05 per share, flat year over year. The figure, however, missed the Zacks Consensus Estimate of $3.10. Including one-time charges of $2.04 per share, GAAP earnings per share were $1.01.

Operational Update

Dominion’s operating revenue was up 1.2% year over year to $3.17 billion in the fourth quarter. Revenue, however, lagged the Zacks Consensus Estimate by $527 million. Full year operating revenue was $13.09 billion, down 7.4% year over year. The top-line results also missed the Zacks Consensus Estimate of $14.7 billion.

Total operating expenses in the fourth quarter was $3.60 billion, up 29.3% year over year. The increase in revenue could not offset the rise in operating expenses. Therefore, Dominion incurred a loss from operations of $440 million versus a profit of $340 million in the comparable quarter last year.

Segment Update

Dominion Virginia Power segment revenue in fourth quarter 2012 was $843 million, down 6.4% year over year. Operating earnings in the quarter were up 17% year over year to $131 million.

Dominion Energy revenue was $764 million, down 1.4% year over year.  Operating earnings came in at $189 million, up 23.5% year over year.

Dominion Generation revenue declined 7.9% year over year to $1.5 billion. However, segment operating earnings were up 17% over the prior-year quarter to $137 million.

Other Key Highlights

Dominion’s business segments continued to make significant progress on various projects.

At the Generation segment, the 585-megawatt Virginia City Hybrid Energy Center came on line on schedule. The construction of the 1,329-megawatt, gas-fired power station in Warren County, Va. and the Brunswick County Power Station which is a combined-cycle facility continues on schedule. The gas-fired power station is expected to come on line in 2014 and the combined-cycle facility is expected to come on line in 2016. Additionally, the coal-to-biomass conversions of Altavista, Southampton, and Hopewell are on schedule. These projects are expected to come on line by the end of 2013.

At the Energy segment, the Appalachian Gateway Project was placed into service. This project transports natural gas produced in West Virginia and Pennsylvania. Two other projects, the Ellisburg to Craigs project and the Northeast Expansion that provides transportation services also came on line in 2012.

The construction on Phase 1 of the Natrium natural gas processing and fractionation plant is almost complete. Apart from these achievements, the segment entered into a joint venture with Blue Racer Midstream, LLC to provide gathering and processing services to producers in the Utica shale region.

The third segment Dominion Virginia Power completed phase 2 of the Mount Storm-to-Doubs modernization project. Also, the segment was able to place into service approximately $400 million of new electric transmission assets.

Financial Update

Cash provided by operating activities in 2012 increased to approximately $4.1 billion from $3 billion in 2011. Capital expenditure amounted to $4.1 billion, up from $3.7 billion in 2011.

Long-term debt at end of Dec 2012 decreased to $16.9 billion from $17.4 billion at the end of Dec 2011.

In Dec 2012, Dominion Resources provided a fresh dividend outlook which includes the achievement of a targeted dividend payout ratio of 65% to 70%. The company also hiked its dividend rate to $2.25 per share for 2013 reflecting a 6.6% increase from $2.11 per share in 2012. The hiked quarterly dividend payment of 56.25 cents per share will be paid in Mar 2013 subject to the board statement in January 2013. The current dividend policy is a replacement of the one set in Dec 2010 which involved the realization of a 60% to 65% payout ratio.

Looking into 2013

Dominion expects to deliver first quarter 2013 operating earnings in a range of 80 cents to 95 cents per share. Dominion expects 2013 operating earnings in a range of $3.20-$3.50 per share. The guidance reflects normal weather in its regulated service territory, benefits of higher revenues from rider and energy growth projects, and sales growth in electric service area. The company expects these to be primarily offset by higher depreciation and operations and maintenance expenses, financing costs and a higher effective income tax rate.

Our Take

Though by a penny, Dominion’s bottom line was above the Zacks Consensus Estimate. However, the top line missed the expectation. Going forward, Dominion’s strategy to focus on growth of its regulated business, infrastructure development projects and its diminishing reliance on commodity based earnings would act as key growth drivers. Also, we expect the current dividend policy would win the confidence of the company’s shareholders and will add value to their wealth accretion. However, lower merchant generation margins and a higher tax rate remain matters of concern. The company presently retains a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks to consider are Ameren Corporation (AEE) with a Zacks Rank #1 (Strong Buy), and The AES Corporation (AES) and CMS Energy Corp. (CMS) that carry a Zacks Rank #2 (Buy).


Read the Full Research Report on AEE

Read the Full Research Report on CMS

Read the Full Research Report on AES

Read the Full Research Report on D

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