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A Return of Normal Weather Powers Dominion Energy Inc's Strong Q2 Results

By Matthew DiLallo - Aug 1, 2018 at 5:12PM

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The utility remains on track to achieve its full-year forecast.

Warmer-than-normal temperatures across much of the U.S. in recent years have dulled demand for natural gas and electricity to heat homes, which has impacted earnings for utilities like Dominion Energy (D 0.69%). That weather headwind, however, has started to wane over the past few months as temperatures have been much closer to normal in Dominion's service areas. The power company has thus been able to generate stronger results this year, including expectation-beating earnings in the recently completed second quarter.

A closer look at the numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Operating earnings

$560 million

$421 million

33%

Operating EPS

$0.86

$0.67

28.4%

Data source: Dominion Energy.

Heading into the quarter, Dominion thought that its operating earnings would be between $0.70 and $0.80 per share. However, thanks to more favorable weather conditions, its results came in above the top end of its guidance range and beat analysts' expectations by $0.07 per share. In addition to the weather, the company also benefited from lower-than-expected operating expenses and the impact of tax reform.

All three of the company's operating segments delivered improved results during the second quarter:

Dominion's second-quarter operating earnings by segment in 2018 and 2017.

Data source: Dominion Energy. Chart by author.

Gas infrastructure led the way, with operating earnings jumping more than 50% year over year due mainly to the commercial start-up of the company's Cove Point Liquefaction terminal in April. The company has already delivered 19 commercial cargos of liquefied natural gas to its customers since beginning service.

Power generation was also strong during the second quarter as operating earnings expanded 15% due in part to higher demand and improving margins thanks to the more normalized temperatures. Meanwhile, operating earnings in the power delivery segment increased 14% thanks to the cooler weather.

An LNG tanker leaving an export terminal.

Image source: Getty Images.

A look at what's ahead

Because Dominion Energy generated higher-than-forecast second-quarter results and delivered a high-end finish in the first quarter, the company now believes that full-year operating earnings will come in toward the upper half of its guidance range of $3.80 to $4.25 per share.

Aside from checking on whether the company achieves that aim, there are two other items investors should keep an eye on in the second half of the year. First, the company continues to make progress on its proposed merger with SCANA (SCG). Shareholders of SCANA recently voted in favor of that transaction, and Dominion has won the approval of several regulators, including the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission, and the state of Georgia. However, the company still needs to get permission for the deal in North Carolina and South Carolina, with the latter one being a key sticking point due to SCANA's failed nuclear plant in the state. While Dominion has offered several concessions in the deal to win over both customers and legislators, it might not be enough since the state wants an even bigger rate reduction. The company remains optimistic that it can close the deal by the end of this year, though it's unclear if that will happen. 

In addition, FERC threw Dominion a curveball this year by revising a long-standing policy that enabled MLPs such as Dominion Energy Midstream Partners (NYSE: DM) to collect an allowance for income taxes in addition to their cost-of-service fees on certain gas pipelines. This ruling made it unappealing for Dominion to drop down assets to Dominion Energy Midstream Partners because that entity has lost 50% of its value in the wake of the change. Currently, Dominion doesn't plan to drop any assets down to its MLP in 2018 and will instead opt to sell some noncore assets to pay down debt and provide it with funding for its expansion projects. The company plans to monitor the MLP market over the next few months, and if Dominion Energy Midstream Partners doesn't become a viable funding option, then it's possible that Dominion could take it private, which is what several peers have done this year.

A solid quarter, but there is some uncertainty still ahead

Overall, Dominion generated strong results in the second quarter, which should help power it to a high-end finish in 2018. However, there remains some uncertainty on the strategic side: It's unclear if the company will be able to complete the SCANA merger and use its MLP as a funding vehicle in the future. Those issues have weighed on Dominion's stock price this year and will likely continue to hold it back until there's some resolution.

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Stocks Mentioned

Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
D
$85.16 (0.69%) $0.58
SCANA Corporation Stock Quote
SCANA Corporation
SCG

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