Dominion Resources (D, Hold) is asked by Virginia regulators to analyze and compare the risk of depending deeply on natural gas fired generation with the risk of having a nuclear plant at North Anna power facility. The results will clear if company needs base generation development having lowest cost or a fuel diversity resulting in least emissions. Meanwhile company posted second quarter earnings of $0.62 per share which remained in-line consensus expectation and management’s guidance range of $0.55 to $0.65 per share but flat to same quarter a year ago. Warm weather throughout second quarter limited earnings at least $0.02 per share. Company however confirms 2014 earnings guidance of $3.35 to $3.65 per share.
Company keeps increasing its stock of development projects during this quarter to its contracting capability of the 500 mile Southeast Reliability Development. We believe company would be able to finish the essential producer contracts in coming 60 days. Upcoming pipeline (expected to start earning in 2018) will transfer Marcellus and Utica natural gas to bazaars of Virginia and North Carolina.
In fireside chat, management informed us that Federal Energy Regulatory Commission would permit company to construct Cove Point Liquefaction facility in couple of week and company is planning to start its MLP offering i.e. Cove Point, after receiving this permit. This is likely to function since 2017.
While Virginia has arrived at target of domestic energy production, regulators have deducted incentive returns on upcoming generation investment. Additionally, lower natural gas prices still remain pain mainly at Millstone nuclear power plant. On positive side, company has opted for 65 percent to 70 percent target payout ratio for its dividend. Thus investors can look forward to receive at least 6% growth in yearly dividend. Company is likely to gain sanction for its Southeast reliability project which is surplus at least $2 billion to its rate base expenses. After analyzing plus and minus of Dominion’s prospects, we reduced price target to $72 from $74 earlier and maintain ‘Hold’ rating with no change.