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Dominion Gains from investments, Drop in Tax Credits a Woe

Zacks Equity Research

Dominion Resources D is poised to benefit from its investments in electric transmission, natural gas facilities and midstream assets. The company is also gaining from positive returns from its regulated growth projects. However, lower solar tax credit and drop in margins in Millstone could adversely impact earnings.

Recent Earnings

First-quarter earnings of 97 cents was higher than the Zacks Consensus Estimate and the year-ago earnings of 96 cents by 1.04%. The increase is primarily due to higher revenues from regulated growth projects, lower electric capacity expense and the addition of Dominion Questar.

Factors to Consider

Dominion’s portfolio realignment strategy, focusing on regulated assets, is evident from its investments in regulated infrastructure. Dominion has decided to invest nearly $13–$15 billion during the 2017–2020 time period in various growth projects.

During 2016, Dominion started operating six major pipeline expansion projects, adding nearly 1.2 billion cubic feet per day of capacity. Going forward, the company plans to add another six pipeline projects to its portfolio with a $700 million investment. New pipeline projects are expected to add 900 million cubic feet per day by the end of 2018.
In the electricity transmission business, the company is expected to invest $800 million this year after spending $784 million in 2016. The planned investment in different segments and positive returns from the completed capital projects are expected to drive earnings of Dominion at 6–8% compound average growth rate from 2017 through 2020.

Dominion’s 2017 operating earnings are expected to be impacted by the reduction of Cove Point import contract revenues and lower realized margins at Millstone. The company expects reduction in solar investment tax credits of 15–20 cents per share from 2017, which will likely impact its bottom line.

Currently, several expansion projects, including pipelines, electric transmission lines, and conversion and other infrastructure projects are under various stages of development. If the company fails to obtain necessary approvals or allocate and coordinate sufficient resources or if projects get delayed for completion, it may have a material impact on the company’s financials.

Price Movement

Shares of Dominion Resources returned 5.0% in the last three months compared with the 2.8% gain of the Zacks categorized Utility – Electric Power industry.

Dominion’s consistent investment to strengthen its existing operation and return from its regulated growth projects is going to drive its performance.

Zacks Rank & Key Picks

Dominion Resources currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry are CenterPoint Energy Inc. CNP, Unitil Corporation UTL and Northwestern Corporation NWE. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CenterPoint Energy reported a positive earnings surprise of 2.78% in the first quarter. Its 2017 Zacks Consensus Estimate moved up 1.6% in the last 90 days to $1.29.

Unitil Corporation reported a positive earnings surprise of 2.33% in the first quarter. Its 2017 Zacks Consensus Estimate moved up 1.0% in the last 90 days to $2.09.

Northwestern Corporation reported a positive earnings surprise of 6.60% in the first quarter. Its 2017 Zacks Consensus Estimate moved up a penny to $3.40 in the last 90 days.

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