There were a lot of moving parts at Dominion Resources (D 1.10%) last year, but the changes made in 2014 will help drive results through the end of the decade and beyond. And that includes, according to CEO Tom Farrell, higher growth rates and a swiftly growing dividend.
The long-term plan
The first thing that Farrell wants investors to know is that Dominion is managed not for the next quarter, but for the long term. He proudly explained why "...our management team owns the highest percentage of stock in our Company than any other utility in the sector." That's one of the reasons why he and his team walked investors through a plan "...out through 2020, a six-year plan, project by project, business unit by business unit..."
That said, Farrell isn't stuck on 2020. The plan "...actually will go well into the next decade..." He only gave hard numbers through 2020.
The MLP is a game changer
One of the biggest moves last year was the IPO of Dominion Midstream Partners LP (NYSE: DM). Right now the partnership's main asset is the Cove Point LNG facility, but that's not where the story ends. "So total cash flows back to Dominion from three sources: the dropdowns themselves, many billions of dollars; and then hundreds and hundreds and hundreds of millions of dollars coming back through the limited partnership interest that almost double over the plan; and 100% ownership of the GP."
Cove Point Construction Source: Acroterion, via Wikimedia Commons
That quick overview may sound complicated, but it really sums things up well. Dominion is the General Partner (GP), which means it runs the Limited Partnership (LP) and gets paid for doing so. It also owns limited partnership units, which means it benefits from the LP's distributions. In the end, it still controls Dominion Midstream and gets money from it, but Dominion Midstream trades as a separate company.
That gets really exciting when Dominion starts to sell more assets, called drop downs, to the LP. When that happens, Dominion gets paid for the assets, raising cash to invest in future growth initiatives. However, the new assets at Dominion Midstream will allow the LP to earn more and, presumably, pay larger distributions. Dominion, then, gets more money when distributions are increased via its LP units. But, as the GP, it also benefits from incentive payments for increasing the distribution for limited partners.
Don't forget about Virginia
While the LP really is exciting and a game changer, Farrell, paraphrasing an old joke, quipped, "Yes, Virginia, there is an electric utility at Dominion Resources." And it happens to be located in Virginia, a state the CEO described as providing one of the best environments for running a utility. And while sales growth expectations aren't huge this year at 1%, "Next year we're expecting a little bit more life in the economy, 1.5%, and then it goes to 2% in 2017 and 2% a year thereafter."
Although that's still below pre-recession levels of around 2.5%, it's an improving trend. And "...to keep this in perspective," Farrell explains, "1% growth is worth between $0.04 and $0.05 a share in earnings at Dominion Resources." So while investors are paying a lot of attention to the MLP, and rightly so, they shouldn't overlook the utility at the core of Dominion Resources. If all goes according to plan, it will be a big positive, too.
Projects, projects, projects
That said, natural gas is big news at Dominion, and that's true beyond Cove Point. Farrell noted that, "There's a lot of infrastructure demand to get the gas out of the Marcellus and Utica region.... we're going to get our share of it." For example, the company spent $100 million on five projects that got completed last year. "They were smaller projects, easier to do. We have four others that are in process. Those four will cost about $400 million. All will come online next year."
(Source: George Shuklin, via Wikimedia Commons)
So there's plenty of work going on at Dominion to build out the country's natural gas infrastructure. And those projects are just one piece of the company's aspirations, which are much, much bigger (for example the $5 billion Atlantic Coast pipeline, Dominion's share of which is roughly $2 billion). But the best part is that these assets, once completed, can be sold to Dominion Midstream to raise funds for even more projects. You can see the virtuous cycle that the LP creates for Dominion and its shareholders.
Bigger growth, dividends
Which brings things to the real meat and potatoes. According to CFO Mark McGettrick, Dominion's "...stated growth rate since 2009 has been 5% to 6% annual growth over time." But, "...we are increasing our growth rate between 2015, 2020 to 6% to 7% compounded annually." On the dividend front, "...the old dividend growth was 5% to 6%." But if the company executes as planned, look for "...an 8% annual dividend growth between now and the end of the decade."
And as a utility investor, that's often the bottom line -- what am I getting in my dividend check. 2014 was a big year for Dominion, but it won't be the last. If everything works out as planned, this utility will start paying investors quite well because of everything that took place last year.
