Dominion Resources (NYSE:D) reported operating earnings of $0.99 a share in the first quarter, down from $1.04 last year but $0.03 better than analyst estimates. Revenue of $3.4 billion was $200 million lower than projected. However, the real story at this giant utility is growth spending.
A solid quarter
Although operating earnings were down year over year, that was largely related to a one-time gain from an asset sale in the year-ago period worth about $0.06 per share. Other negatives and positives largely balanced out. In the end, the core business performed pretty well.
But the real story still isn't the top and bottom lines, at least not directly. Last year, Dominion led an IPO of Dominion Midstream Partners LP (NYSE:DM). This new limited partnership owns the under-construction Cove Point liquified natural gas terminal and other natural gas assets. Dominion proper is the general partner and continues to own a large number of units in the new entity. Although getting that transaction done was important, it hasn't marked the end of the changes taking place at Dominion Resources.
Building from the ground up
Indeed, the long-term story at Dominion remains its growth spending. That includes indirectly owned Cove Point, on which CEO Thomas Farrell says the engineering is 80% complete and construction is on time and budget. But it also includes the nearly 1.4-gigawatt power plant being built in Brunswick County, Va. This project is almost 60% complete and is expected to be up and running in the middle of next year. It, too, is on time and on budget.
Looking longer term, Dominion is seeking approval for a 1.6-megawatt gas plan in Greensville County, Va., and plans to construct 400 megawatts of solar power in the state. On the gas infrastructure side, the utility is working toward the approval of its $5 billion Atlantic Coast Pipeline project. It expects to "file with the Federal Energy Regulatory Commission later this year."
So near-term revenues and earnings are important, but the underlying story to watch is the progress of growth spending -- which, according to the CEO, is going well right now.
The big, big picture
You also need to keep in mind that all of these projects tie in with the Dominion Midstream spin off. How's that? Because the goal of the spin off was to create a public entity to which Dominion could sell natural gas assets so it could raise cash for growth spending. So while all the projects are going on, make sure to keep an eye on the relationship between Dominion Midstream and its former parent.
The really exciting thing, however, is that Dominion Resources still benefits from the assets "dropped down," as such sales are called in the industry, because it's the general partner, or GP, of Dominion Midstream and owns a large number of units. As the GP, Dominion Resources gets paid to run the assets. Owning units means it gets a piece of the cash Dominion Midstream passes on to unit holders. And it gets incentive payments for increasing that distribution over time -- which normally means drop downs.
Dominion Midstream's April acquisition of Dominion Carolina Gas Transmission, LLC, from Dominion Resources is a prime example of what to look for. This deal was financed with debt and Dominion Midstream shares, so it doesn't really provide cash up front for Dominion Resources. However, it's these types of transactions that will grow Dominion Midstream's business, thus allowing for distribution increases and more cash to flow to Dominion Resources. Larger assets, such as the Atlantic Coast Pipeline, would be much bigger deals to watch for.
Dominion Resources is a giant U.S. utility. Like the industry in which it operates, there's a lot of change going on right now. And while you do want to keep an eye on earnings, the underlying story is far more important for the company's future. Right now, that means building and making the best use of Dominion Midstream. On that score, Dominion Resources appears to be doing very well right now.