3 Reasons Dominion Resources' Stock Could Rise

Dominion Resources is a big energy player in the Northeast with valuable assets that could lead to heightened investor interest and even higher stock prices.

Aug 28, 2014 at 9:17AM

Dominion Resources (NYSE:D) has a fairly diverse set of businesses, running regulated power plants, electric transmission lines, natural gas infrastructure, and a merchant energy business. Although not all of its business segments are performing well right now, there's notable value in what Dominion owns. And once investors realize just how much potential there is, Dominion shares could move even higher.

Power here, power there

Dominion Resources' core is a solid regulated energy business in Virginia and North Carolina. It has roughly 2.5 million customers across the two states. Moreover, it controls around 6,400 miles of power transmission lines, largely, though not exclusively, in its operating regions.

Source: ReubenGBrewer, via Wikimedia Commons

In the second quarter the company's Virginia Power business accounted for roughly a third of the company's earnings before interest and taxes. As the energy markets shift and change, the dynamics in this business will too. But being in a regulated market provides Dominion with a clearer picture of what to expect, even if it limits upside potential. And with the increasing prevalence of green power like solar and wind, transmission lines are viewed positively by regulators right now.

That's worth keeping an eye on because Dominion Resources is planning on spending around $3 billion on transmission assets over the next four years or so. This will be to upgrade existing assets, but new power lines will also increasingly be needed to connect renewable power sources to the grid -- you have to go where renewable power is, you just can't build it where you want it. That will make Dominion's grid assets increasingly valuable and could lead to improved performance down the line in this division.

Natural gas for everyone

Another key asset that will take on increasing prominence is the company's proposed liquefied natural gas terminal. It's well along the way on the approval process and could be among the first to export U.S. natural gas. The company already has signed agreements with Sumitomo and GAIL Global. Once this facility is up and running, Dominion Resources should see a nice revenue bump.

But that's not the only natural gas story to watch at Dominion. The company also owns gathering assets in the Marcellus and Utica shale plays, distribution assets throughout the gas constrained Northeast, and pipeline systems serving consumers. All of these have the potential to unlock value for shareholders because Dominion believes they can be dropped down into a master limited partnership (MLP) it's intending to set up. This is a great idea for Dominion for several reasons.

First, Dominion will retain its current control of the assets through its control of the MLP's general partner. Second, Dominion will receive cash from the MLP via whatever MLP units its owns, fees for running the assets, and incentive distributions most likely tied to dividend growth at the MLP. And, as if that weren't enough, it can sell more assets to the MLP over time, called drop downs.

Thus, Dominion can raise capital without losing control of valuable assets. The MLP will likely start its life with the LNG and gathering assets. However, Dominion believes it can drop down virtually all of its natural gas tied assets over time.

Diamond in the rough

Right now, Dominion's merchant power assets are a drag because power prices are low. That's a big issue and one of the reasons why the company has been shifting its exposure in the space. For example, it's been selling older coal plants and building renewable power. However, the real diamond in the rough in Dominion's merchant business is its Millstone nuclear power plant.

D Chart

Data by YCharts

This plant generates roughly 2 gigawatts of electricity, enough to power 500,000 homes. And while low merchant power prices are a drag right now, nuclear power is both environmentally friendly and always available -- unlike wind and solar. As carbon based fuels receive greater scrutiny, look for the market to assign a higher value to Millstone.

At the end of the day, Dominion has positioned itself well in today's energy markets and has key assets that should position it well for tomorrow. With a solid core and growth opportunities, investors are likely to keep pushing Dominion's shares higher.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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