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Dominion Resources D (NYSE) Eric Sterns Alex Abramowitz Ryan Dubin Penn State Investment Association Utilities Sector

Dominion (D) Bench

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Page 1: Dominion (D) Bench

Dominion Resources

D (NYSE)Eric SternsAlex Abramowitz

Ryan Dubin

Penn State Investment AssociationUtilities Sector

Page 2: Dominion (D) Bench

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Team Recommendation: Buy

Introduction

Description

Key Drivers Valuation Conclusio

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•Regulated EPS Growth

1

•Favorable Operating Environment

2

•Downside Protection

3

•12 Month Price Target:

$50.09

•Appropriate Entry Price:

< $44.50

Top Three Reasons to Purchase:

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Company Description► Dominion Resources, Inc., together with its

subsidiaries, engages in producing and transporting energy in the United States. It operates in three segments: DVP, Dominion Generation, and Dominion Energy. The DVP segment includes regulated electric transmission and distribution operations that serve residential, commercial, industrial, and governmental customers in Virginia and northeastern North Carolina. The Dominion Generation segment includes the electricity generation through coal, nuclear, gas, oil, and renewables; and related energy supply operations. The Dominion Energy segment includes the company's Ohio and West Virginia regulated natural gas distribution companies

Introduction

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Revenue Breakdown

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Delivery; 57.37%

Generation; 25.89%

Energy; 16.73%

Revenue

Supplementary Breakdown► 47% Regulated Electric► 25% Unregulated Electric► 13% Unregulated Nat Gas

Distr.► 10% Nat Gas

Transport/Storage► 3% Commodity Sales► 2% Regulated Nat Gas

Distr.

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Geographic Breakdown

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Regulated EPS Growth► Dominion expects between 5-6% regulated EPS growth

thru 2016► Encouraging rebound in sales to commercial and

industrial customers► 2010-2015 $10+ billion cap-ex program budgeted for

regulated infrastructure in electric service area and in regulated gas business

► Regulatory outcomes important for growth► Fundamentally, transmission growth and renewable

generation are where you want to be► Highest realized ROE’s and greater probability of

favorable rulings► New projects include two natural-gas plants, one

coal/biomass plant, and several small renewable generation projects as well as transmission

► Dominion is in the early stages of developing a 4-megawatt solar facility in Halifax County and is evaluating biomass and onshore wind farms as well

► Meadow Brook to Loudoun line and Carson to Suffolk line are scheduled to be in service mid-year 2011. The two 500-Kilovolt transmission lines are on time and budget

► Dominion Zone expected electric load growth 2.1% per year

► Highest in the PJM Interconnection’s 20 zones► Forecasted peak demand growth equivalent to adding

1.1M homes to the system

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► Operates in Virginia and northern North Carolina► Virginia Economy

► Unemployment rate 6.3% in March► Consistently ranked one of the best states for

business► Aggressive economic development program► State ranked 2nd by Forbes and CNBC for

business► Due to proximity to Washington, area is largely

recession-resistant► Geographic advantage

► Serves Midwest, Mid-Atlantic and Northeast United States

► Potential market of 50 million homes where 40% of the nation’s energy is consumed

► Access to Marcellus Shale through its WV and OH regulated distribution business

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Favorable Operating Environment

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Favorable Operating Environment► Operates several merchant generation plants in power

constrained New England► Significant opportunity for value if power prices see

a rebound► Until then, still generating good cash flows for the

company► Virginia and North Carolina are historically very friendly

to utilities► Dominion has sold $18 billion of unregulated energy

businesses since 2006 as it shifts towards a regulated utility in the wake of a favorable shift in Virginia regulation

► Current allowed ROE through forward-looking rider is 12.3% for the regulated utility

► Recent settlement keeps Dominion’s rate base in Virginia in place until at least December 2014 and eliminates 2009 as a rate base review year

► Settlement highlights Dominion’s ability to work with stakeholders to maintain a supportive regulatory environment

► Dominion is also planning ~$5B in environmental compliance CAPEX which is recoverable in Virginia through rate riders

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Downside Protection► Less exposure to volatile market trends

► Reduction in market cap and dividend risk► 8% hike in annual dividend to $1.97

► Dividend yield of 4.40% vs. NLF Utilities 2.86%► Targeting a payout ratio of 60-65% in earnings

► Dominion will diversify the Utilities portfolio► High dividend yielding stock► Makes up 6.62 % of the XLU► Less reliant on robust economic trends

► Organic Growth Opportunities ► Company is still a growth oriented utility targeting 5-6%

EPS growth► Continuing to shift into regulated business model► Management continues to add shareholder value ► Projected 400M-700M in buybacks in 2011, following

900M in 2010► ROE 24.23% vs. Industry average 14.04%

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Comparable Analysis

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Ratio Analysis

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Five Year Summary & CAGRs

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Growth Analysis & CAGRS

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Projections

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Discounted Cash Flow

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Company Risk► Commodity Risk

► Dominion generates power from coal, natural gas, nuclear, and oil

► Increases in inputs of power generation will result in less revenue from individual households

► Diverse portfolio of inputs reduces overall risk

► Regulation► Disallowance of major capital spending projects

which are priced into earnings growth outlook will have a negative impact

► Unfavorable changes to Virginia’s regulatory framework, which continue to be propose periodically in the legislature, would also be a negative

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Sector Risk► Dominion is the 3rd largest component in the XLU Benchmark► Dividend yield of 4.41% versus NLF Utilities 2.86%► EPS Growth rate of 5-6% versus XLU Utilities mean of 4%► Dominion generates 28% of power from nuclear, however over half of the XLU

benchmark has nuclear exposure. D’s business model has shown future generation projects will be fueled by natural gas and other renewable sources

► Holding Dominion reduces our market cap and benchmark risk, and gives us a 4.41% yield while having strong regulated EPS Growth

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Correlation & Debt Distribution

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Risk Analysis

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0 1 2 3 4 5 Notes

Favorable Virginia economy

$26.37 B market cap

Beat 2010 Earnings expectations

Beta = 0.78

28% of Generation from Nuclear Reactors

Benchmark Risk

Sub-Sector

Geographic

Valuation

Market Cap

Company Specific

Valuation

Earnings

Volatility (Beta)

Acquisitions

Momentum

Industry Specific

Input Costs

Regulation

Environmental Impact

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Stock Chart

Introduction

Description

Key Drivers Valuation Conclusio

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•Regulated EPS Growth

1

•Favorable Operating Environment

2

•Downside Protection

3

•12 Month Price Target:

$50.09

•Appropriate Entry Price:

< $44.50

Top Three Reasons to Purchase:

Team Recommendation: Buy

Introduction

Description

Key Drivers Valuation Conclusio

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Page 22: Dominion (D) Bench

Questions or Comments?