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Hold Off on Dominion Energy for Now

March 12, 2012 | About:

The U.S. Environmental Protection Agency has been lobbied hard by energy companies in the past few months, as those companies seek to put off closure of plants that use coal to produce electricity. The measures are thought likely to cost the industry billions of dollars as plants are forcibly retired and replaced by cleaner fuel operations. With the Air Toxics Rule and the Cross State Air Pollution Rule now postponed for enactment for three years, many energy producers are breathing a sigh of relief as they have more time in which to prepare and deal with the problem.

Not so Dominion Energy (NYSE:D), whose subsidiary Dominion Virginia Energy has already put in motion plans for new plants. It had first said that it planned to close some of its coal fired power plants and replace them with new, cleaner, facilities back in September. It is now showing its hand and pressing ahead with its plans.

The largest supplier of power in Virginia, Dominion has a hybrid energy plant opening in Wise County in the middle of this year, and has been given approval to build a power plant in Warren County. This plant is expected to be operational by December 2014.

A 1300 megawatt plant – expected to produce enough energy to meet the requirements of 325,000 homes – is also being planned for Brunswick County. With the Warren County plant already approved, it is expected that approval for this plant will be forthcoming also, and the company plans for it to be producing energy as early as mid-2016.

The costs for these plants will run into billions of dollars and could be a drag on earnings in the short term. But this cost will be taken sooner rather than later, the plants come on line more quickly, and profitability achieved with greater speed.

It is expected that by 2022, Dominion will be supplying 4000 megawatts more energy in times of peak demand than it does now. Dominion are gearing up to meet that demand.

And the company is progressing with business plans in other fields of energy, too.

It expects to receive a license to export natural gas from a facility that was originally designed to import natural gas. Again, the modification needed to allow the plant to do this will be an expense to the company, but with expectations for exports from the facility centering around 365 billion cubic feet of natural gas per annum, the operation will very quickly become earnings positive. Dominion is already negotiating with potential customers in Europe and Asia, where prices for natural gas are higher and demand stronger.

Dominion paid a dividend of $2.11 last year, on earnings per share of $2.45. At the current market price of $50.50, shares yield 4.2%. Earnings through 2012 are expected to rise to $3.23, placing the shares on a forward price to earnings multiple of 14.73 as against the current trailing price to earnings ratio of 20.62.

With a healthy dividend and a forward-looking management, shares seem reasonably valued. However, the costs of plant retirement and renewal may be a drag on earnings in the short term. Whilst I don’t expect the dividend to suffer through this period of transition, the shares may, in the short term, underperform peers. However, on a longer-term view, I believe that the actions the company is taking now will stand it in good stead.

For those looking to buy shares of Dominion, there will be opportunities to do so at mores advantageous prices through the next few months. Every dollar saved now is a dollar earned in the future: precisely the strategy that Dominion is employing. Those investors that already hold shares should stick with them. HOLD.

About the author:

I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.

I fundamentally analyze every business from the top down.

In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.

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