Dominion Resources' (NYSE:D) third-quarter conference call started on a dour note, since the giant utility missed consensus earnings expectations. However, that wasn't the big news. And management wants you to know that it shouldn't overshadow the good things going on elsewhere at the company -- particularly on the gas side.
According to CFO Mark McGettrick, Dominion "reported operating earnings of $0.93 per share for the third quarter of 2014, which was below the midpoint of our guidance range of $0.90 to $1.05 per share." It was also light of consensus estimates, which were for $0.96 a share (generally accepted accounting principles earnings were $0.90 a share, even further off expectations). The utility missed on the top line, too.
McGettrick said "one of mildest summers in the last 30 years had a significant impact on electric sales and revenues, reducing operating earnings by $0.08 per share compared to normal." Weather is uncontrollable and just a part of doing business for a utility. So while the quarter was not good from a revenue and earnings perspective, this isn't an issue to get too caught up in.
What you need to know
The more important news was that, according to McGettrick, "we successfully completed the initial public offering of limited partner common units and Dominion Midstream Partners." This is a huge shift for the company's business that it wants to make sure you understand. And it wasn't a quick win. That's because the main asset in Dominion Midstream Partners (NYSE:DM) is the Cove Point liquefied natural gas terminal in Maryland.
The approval process for that terminal started in September 2011 continued to September of this year. Dominion CEO Tom Farrell said multiple government approvals were needed to start the project, which culminated with the recent, "authorization to begin initial site preparation at the terminal itself." Once that approval was received, construction started in October and the master limited partnership IPOed.
Finding the money
Farrell estimated the Cove Point project will cost $3.4 billion to $3.8 billion over the next three years or so. The project is expected to be completed in late 2017 and is currently on budget and on schedule, with two customers already lined up to take all of the facility's capacity. More important, according to CFO McGettrick, the IPO's "Net proceeds of just under $400 million will be used to help fund construction of our Cove Point liquefaction project."
And this hints at the really big news for the company and its shareholders: Dominion has a new way to raise growth capital while retaining control of its assets. It's as "simple" as selling assets, also called dropping down, to the LP, which Dominion Resources controls as general partner.
According to the CEO, Cove Point is just the first of many opportunities here. For example, when discussing the Atlantic Coast Pipeline project, he noted that "we plan to contribute [it] to the MLP." In fact, most of the company's natural gas assets could eventually be dropped down to the MLP. That would give Dominion a cash infusion and allow it to continue to control the asset, and it still benefits from successfully managing what Dominion Midstream Partners owns.
It's not always about the bottom line
That's because Dominion Resources owns units in the new entity and is the general partner. So it is paid to run the assets, benefits from unitholder distributions, and will receive incentive pay (incentive distribution rights, or IDRs) for increasing the LP's distributions over time. That's a sea change for the company that Farrell expects to "enhance Dominion's earnings and dividend growth rates" and "allow us to strengthen our balance sheet."
Investors need to pay close attention to the bottom line, but that isn't always the big story. For Dominion, right now and for the next couple years, the big story will likely be natural gas and Dominion Midstream Partners. Management is clearly pleased with the progress it is making here and wants shareholders to know that it thinks the changes that are likely to come from this new relationship will be good for their investment in Dominion Resources.