Dom. Resources Focus on Virginia - Analyst Blog

Dominion Resources Inc. (D) plans to spend more than $1.7 billion over the period 2011–2012 to improve and expand the infrastructure of its subsidiary Virginia Power. The company plans to strengthen its electric grid to support growing demand for electricity and improve service reliability for its 2.4 million customers in Virginia. The company expects to improve service reliability as measured by time affected by an outage not caused by a major weather event by 15% between 2003 and 2010 for the average customer.

Virginia Power's planned capital expenditures are expected to total approximately $2.2 billion, $3.0 billion and $3.3 billion in 2011, 2012 and 2013, respectively. Virginia Power's expenditures would be focused on construction and expansion of electric generation facilities, environmental upgrades, construction improvements and expansion of electric transmission and distribution assets and purchases of nuclear fuel.

The regulatory framework in Virginia is one of the most supportive in the U.S. The state allows for premium return on equity and riders for timely recovery of new generation projects. Dominion's service territory continues to prove its relative resilience to recession, largely owing to a favorable customer mix.

Dominion's key strategy is to be a leading provider of electricity, natural gas and related services to customers, primarily in the eastern region of the U.S. In an effort to make its mark, Dominion is primarily focused on expanding its regulated electric generation, electric and natural gas transmission infrastructure within and around its existing footprint.

Dominion's overall planned capital expenditures are expected to total approximately $3.9 billion, $4.7 billion and $4.4 billion in 2011, 2012 and 2013, respectively. The company expects to fund its capital expenditures with cash from operations and a combination of securities issuances and short-term borrowings.

We continue to like Dominion for its strong regulated growth opportunities, driven by a favorable economic and regulatory environment in Virginia; a solid dividend; and the absence of high-risk oil and gas Exploration and Production (E&P) activities in the hurricane-prone Gulf of Mexico.

We believe that the company's strong fundamentals and diverse range of businesses will continue to drive earnings growth going forward. Furthermore, Dominion is expected to benefit from the potential carbon legislation given its nuclear heavy merchant asset base.

However, we expect the company's merchant generation and E&P businesses to face downward earnings pressure in the near term due to the roll-off of favorable hedges. We maintain our Neutral recommendation on Dominion. Over the near-term we have a Zacks #3 Rank (short-term Hold recommendation) on Dominion Resources shares.

A window of opportunity however, is offered by its Zacks #2 Rank (short-term Buy recommendation) peers like The AES Corporation (AES) and Central Vermont Public Service Corporation (CV).