Note: All new or revised material since the last report is highlighted.
Reason for Report: 1Q18 Earnings Results
Prev. Ed.:Non-Earnings Update was done on Apr 4, 2018.
Brokers’ Recommendations: Neutral: 80.0% (8 firms); Positive: 20.0% (2); Negative: 0.0% (0) Prev. Ed.: 9 2; 0
Brokers’ Target Price: $73.75 ($3.25 from the last edition; 8 firms) Brokers’ Avg. Expected Return: 12.3%
Note: 1Q18 Earnings Flash was done on Apr 30, 2018.
Portfolio Manager Executive Summary
Dominion Energy is one of the largest producers and transporters of energy in the United States. The company’s portfolio comprisesnearly 26,000 megawatts of generation assets, 14,800 miles of natural gas transmission, gathering and storage pipeline and 6,600 miles of electric transmission lines. It operates one of the largest natural gas storage systems in the country with a capacity of 1 trillion cubic feet and serves more than 2.6 million regulated electric and 2.3 million regulated gas customers.
Of the 10 firms covering the stock, eight provided neutral ratings and two assigned positive ratings. The average Zacks Digest price target is $73.75 ($3.25 from the last report and 12.3% up from the current price). The price target ranges from $67.00 (2.2% upside from the current price) to $87.00 ( 32.7% upside from the current price).
Neutralor equivalent (80.0%; 8/10 firms): The bearish firms appreciate Dominion Energy’s favorable natural gas infrastructure and strong electric generation asset that have strong growth potential at low risks. The firms believe if the SCANA deal receives a regulatory nod, it will boost earnings and create long-term growth opportunities for the company.
Buy or equivalent (20.0%; 2/10 firms):The bullish firms believe that the synergies from the acquisition of Questar will boost the performance of the company. Dominion has agreed to acquire SCANA in an all-stock deal. The deal is expected to increase earnings per share for the combined company. Positive firms believe that SCANA is a good fit for Dominion. The positive firms are also encouraged by the company’s midstream growth opportunities. Moreover, they view the company’s strategy of focusing on expanding the regulated business as a positive factor as it will aid in reducing earnings volatility and lower risks.
May 4, 2018
Overview
The firms have identified the following factors for evaluating the investment merits of Dominion:
Key Positive Arguments / Key Negative ArgumentsLargest Storage: Dominion operates the largest underground natural gas storage system in the U.S.
Portfolio Realignment: Dominion Energy’s strategy of realigning its portfolio in order to focus on regulated assets will drive earnings growth.
Acquisitions: The company acquired Questar Corporation which will allow the former to diversify its business into regulatory jurisdictions. SCANA acquisition when completed will boost earnings.
Master Limited Partnership (MLP): Dominion’s formation of the Master limited partnership and recent dropdown of Questar Pipeline to the partnership have increased its liquidity by $1.725 billion.
Growth-centric Projects: The company’s solar projects, Cove Point liquefaction project and 1,588-MW Greensville County project are on time and budget, which are expected to improve the performance of the company.
Liquidity Profile: Dominion maintains a sound liquidity profile to support its growth ventures.
Investments: The company continues to invest in the electric transmission and distribution businesses, which reinforces the infrastructure and provides continuous services to its customers. / Economic Slowdown: While Dominion’s capital investment program remains on track, with many of its projects approved by regulators, it may need to reduce its capital expenditure if credit markets remain tight and the current economic slowdown persists.
Adverse Regulatory Effects: Stringent federal and environmental regulations lead to the incursion of capital expenditure, thereby impacting the company’s margins.
Unfavorable Weather: Unfavorable weather can pose a serious threat to electricity sales.
Dependence on third party: Dominion Energy and its gas unit depend on third-party producers for the supply of natural gas. If a producer refuses to deliver a specific quantity of natural gas or NGL to Dominion, it will certainly affect revenues in case Dominion fails to replace lost volumes.
Richmond, VA-based Dominion Energy together with its subsidiaries produces and transports energy in theU.S. It is a major energy company engaged in regulated and non-regulated electricity distribution, generation, and transmission businesses. Dominion is one of the nation’s largest energy producers. In addition, it sells electricity at wholesale prices to rural electric cooperatives, municipalities, and through wholesale electricity markets.
Dominion Energy is one of the largest producers and transporters of energy, with a portfolio of nearly 26,000 megawatts of generation assets, 14,800 miles of natural gas transmission, gathering and storage pipeline, and 6,600 miles of electric transmission lines. It operates one of the largest natural gas storage systems in the United States with a capacity of 1 trillion cubic feet and serves more than 2.6 million regulated electric and 2.3 million regulated gas customers.
In connection with its corporate rebranding, Dominion Energy changed the names of its principal operating segments to Power Delivery, Power Generation, and Gas Infrastructure from Dominion Virginia Power, Dominion Generation and Dominion Energy, respectively. In addition, Corporate and Other includes specific items attributable to Dominion’s operating segments that are not included in profit.
Power Delivery includes Virginia Power’s regulated electric transmission and distribution operations, which serve residential, commercial, industrial and state customers in Virginia and North Carolina.
The Power Generation operating segment includes power generation and related energy supply operations of the Virginia Power regulated electric utility and its related energy supply operations. The generation mix is diversified and includes coal, nuclear, gas, oil and renewables.
Gas Infrastructure includes Dominion’s regulated natural gas distribution companies, regulated gas transmission pipeline and storage operations, natural gas gathering and by-products extraction activities and regulated LNG operations. Gas Infrastructure also includes production services, natural gas supply, and engages in natural gas trading and marketing activities along with natural gas supply management and provides price risk management services to Dominion affiliates. Further information on the company is available at its website:
May 4, 2018
Long-Term Growth
Management is committed to electric and gas service expansion strategies in Dominion's regulated service territories. The firms believe that the company's platform for growth is solid and have confidence in the ability of the management to provide shareholders with an increased value over the long term.
Dominion Energy is making significant demand-driven investments in its regulated lines of business. The firms believe that the company is well positioned to generate both steady earnings and dividend growth over the next few years. They are of the opinion that the company’s focus on expanding the regulated portion of its business by investing in regulated transmission and generation will help it to reduce earnings volatility and lower the risk profile.
Dominion has a significant number of projects in the pipeline to drive future earnings growth. Dominion Energy’ portfolio realignment strategy focusing on regulated assets is evident from its investments in regulated infrastructure and other fields whose outputs are sold under long-term purchase agreements (PPAs). In the last two years, the company disposed of some of its merchant generation facilities and the electric retail energy marketing business. The firms expect secured earnings from regulated assets to drive Dominion’s earnings growth.
Dominion Energy reviewed its capital expenditure plans and aims to reduce it by $1 billion over the next two years. However, these reductions will have no impact on its previously disclosed growth capital estimate.
Dominion Energy’s 1,588 MW Gas Fired Combined cycled Greensville County project is 84% complete and the construction is on time and within its estimated budget. This $1.3 billion project is anticipated to begin commercial operations in late 2018.
The company is also working to expand its existing gas infrastrcuture. Its Cove Point liquefaction project is complete and has started commercial operation. Atlantic Coast Pipeline and Supply Header project is progressing per schedule and is expected to come online in the second half of 2019. Further, the company has emerged as a big name for having a large-scale renewable and clean energy generation portfolio.
Dominion Energy completed a merger with Questar Corporation. The high-performing regulated assets of Questar will provide enhanced scale and diversification into constructive regulatory jurisdictions and is well aligned with Dominion's existing strategic focus and core energy infrastructure operations. This acquisition helped Dominion to expand its operation in Western U.S.
Dominion Energy entered into an agreement to merge with SCANA Corporation. The successful completion of the deal will allow the combined entity to serve nearly 6.5 million customers in eight states. This deal will enable Dominion Energy to further expand its operation in the fast-growing Southeastern United States.
May 4, 2018
Target Price/Valuation
Rating DistributionPositive / 20.0%
Neutral / 80.0%
Negative / 0.0%
Avg. Target Price / $73.75
Highest Target Price / $87.00
Lowest Target Price / $67.00
No. of Brokerage firms with Target Price/Total / 8/10
Factors that might impede the achievement of target price include adverse regulatory decisions, rising long-term interest rates, weakening power prices and mild weather.
Recent Events
On Apr 27, 2018, Dominion Energy reported first-quarter 2018 operating earnings of $1.14 per share, beating the Zacks Consensus Estimate of $1.03 by 10.7%. Earnings were near the top end of the guided range of 95 cents to $1.15 per share.
Dominion’s total revenues came in at $3,466 million, beating the Zacks Consensus Estimate of $3,355 million by 3.3% and improving 2.4% year over year.
On Mar 1, 2018, Dominion Energy announced that Dominion Energy Carolina Gas Transmission (DECGT) completed the Charleston project and it has been brought into service. This natural gas infrastructure project is 100% dedicated to customers in South Carolina, with nearly 94% of its capacity serving South Carolina Electric & Gas and its customers.
Revenue
Dominion’s total revenues came in at $3,466 million, beating the Zacks Consensus Estimate of $3,355 million by 3.3% and improving 2.4% from the year-ago quarter.
Source: Company release
In the reported quarter, Power Delivery’s electric customer base increased by 26,966 from the prior-year quarter. Electricity consumption volumes also improved 7.96% year over year to 22,162 GWh in the first quarter.
Margins
Total operating expenses increased 12.4% from the prior-year quarter to $2,591 million primarily due to higher purchased gas and electric fuel prices.
Interest and related charges in the reported quarter were $314 million, up 7.5% from the year-ago quarter.
Net income in the reported quarter was $741 million, up 21.3% year over year.
Earnings Per Share
Dominion Energy Inc. reported first-quarter 2018 operating earnings of $1.14 per share, beating the Zacks Consensus Estimate of $1.03 by 10.7%. Earnings were near the top end of the guided range of 95 cents to $1.15 per share.
Operating earnings increased 17.5% from 97 cents reported a year ago. The year-over-year improvement was attributable to higher merchant generation margins, normal weather in its regulated service territory and the impact of tax reform.
GAAP earnings were 77 cents per share compared with $1.01 in the year-ago quarter. The difference between GAAP and operating earnings was due to one-time adjustments of 37 cents.
Segment Details
Power Delivery: Net income from this segment was $156 million, up 24.8% year over year.
Power Generation: Net income from this segment was $348 million, up 33.3% from the year-ago quarter.
Gas Infrastructure: Net income from this segment was $327 million, up 24.3% year over year.
Corporate and Other: Net loss was $90 million compared with a loss of $38 million in the year-ago quarter.
Looking Ahead
In second-quarter 2018, Dominion expects operating earnings of 70-80 cents per share.For the full year, Dominion reiterated its earnings per share guidance in the range of $3.80-$4.25.The company expects its earnings growth rate to remain 6-8% for the 2017-2020 period. Dominion Energy expects the completion of the merger with SCANA Corporation to take this earnings growth rate beyond 8%.
Source: Company release
Outlook
The bullish firms raised their earnings estimates as they expect Dominion Energy to benefit from regulated utility infrastructure spending and from growth in its master limited partnership. In addition, the firms believe that the agreement of Dominion Energy to combine with SCANA Corporation will boost earnings further. These firms believe that Dominion can grow its earnings annually by 8% through the end of the decade.
The firms with the neutral outlook also raised earnings estimates and believe that Dominion Energy is well poised for long-term earnings growth given its premier Virginia electric franchise, favorable natural gas infrastructure footprint and premier MLP.
Research Analyst / Jewel SahaCopy Editor / Shremoyee Mandal
Content Editor / Jewel Saha
QCA / Jewel Saha
No of brokers reported/Total brokers / 10/10
Reason for Update / 1Q18 Earnings
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