1. 1
CFA Institute Research Challenge
Hosted by
Local Challenge (e.g., CFA Society, New York, NY)
Team B.
2. 2
Table of Contents:
Business Description..............................................................................................................................................................8
Valuation. ...............................................................................................................................................................................8
Management & Governance. ................................................................................................................................................9
Industry Overview and Competitive Positioning. ...............................................................................................................9
Financial Analysis................................................................................................................................................................10
Investment Risks..................................................................................................................................................................12
Figure 8: Income Statement............................................................................................................................................14
Figure 9: Balance Sheet...................................................................................................................................................15
Figure 1-: Statement of Cash Flows ...............................................................................................................................16
3. 3
NYSSA Student Research
This is report is published for educational purposes only
by students competing in the New York Society of Security
Analysts Investment Research Challenge
Team B.
Highlights.
Valuation: Several valuation metrics strongly support a probative BUY rating for Dominion
Resources. The following sum of parts valuation—including, dividend discount model, 2017
price to sales projection estimates, and earnings valuation estimates—indicate undervaluation.
Moreover, revenues appear to shrink in recent years. Still, net income, counterintuitively, seem to
thrive. If accurate, the abovementioned metrics, bolstered by supporting evidence of Dominion—
a highly diversified, vertically integrated company—dominating both energy and utilities
industries, strengthens this conclusion.
Competitive: Dominion outpaces the energy and utilities industries as with top competitors
for both sectors in various measurable categories including:
(1) Profitability;
(2) Dividends;
(3) Shareholder Returns.
If accurate, these metrics further support the plausible inference of Dominion as a buy, with
anticipated growth bolstered by market perception to recent political influences. Dominion’s
apparent diversification strategy catalyzes its competitive advantage, which, may decrease its
susceptibility to losses from possible interest rate increases. Additionally, while excess debt
ranks among Dominion’s noted weaknesses, its vulnerability to insolvency, if anything
buttresses a buy consistent with value investment principles.
Source. iii
Ticker: ● D (NYSE) Recommendation: ● BUY
Price: ● $75.81 Price Target: $77
Earnings/Share
Mar. Jun. Sept. Dec. Year P/E
Ratio
AV2014A $1.03 $.60 $.95 $.46 $3.05 22.45
2015A $.91 $.70 $1.00 $.60 $3.20 19.68
2016E $.88 $.73 $1.10 $.94 $3.65 19.77
2017E $1.10 $.80 $1.15 $.95 $4.00 19.61
Figure 1 – Per Share Overview. i
Date
12-mos
Rolling
EPS
Dividend
P/E
Ratio
09/2016 3.32 0.700 22.37
06/2016 3.22 0.700 24.20
03/2016 3.18 0.700 23.62
12/2015 3.21 0.648 21.07
09/2015 3.01 0.648 23.38
06/2015 2.92 0.648 22.90
03/2015 2.50 0.648 28.35
12/2014 2.24 0.600 34.33
Figure 2 – Annual Summary Data
(Millions). ii
Year Sales
Net
Income
EPS
12/2011 13,765.00 1,408.00 2.45
12/2012 12,835.00 302.00 0.57
12/2013 13,120.00 1,697.00 3.09
12/2014 12,436.00 1,310.00 2.24
12/2015 11,683.00 1,899.00 3.21
Growth Rates -4.02 7.77 6.99
Dominion Resources Inc.
52 Week Price Range 67.58 - 78.97
Average Daily Volume, After 30 days 2,360,000
Beta 0.21
Earnings Per Share, EPS, 5-years -9.25
Payout Ratio 63.62%
Dividend Growth Rate, 5-Year 7.19%
Dividend Yield (Estimated) 3.69%
Shares Outstanding 626,750,000
Market Capitalization 47,260,000,000
Weighted Average Cost of Capital, WAAC 3.30%
Institutional Holdings 67%
Book Value per Share (9/2016) $23.86
Current Ratio, Liquidity 0.42
Return on Equity (9/2016) 18.9%
Market Profile
Industry: Electric Utilities
4. 4
Introduction.
Dominion Resources, Inc., (“Dominion”) headquartered in Richmond, Virginia, reputedly ranks among, “the
largest U.S. energy producers and transporters.” Dominion’s massive reach encompasses 14 different states
revealing a diversified mix of business operations. These include but are not subject only to the selling,
generation, transmission, transportation, distribution of electrical energy and natural gas. Established in 1787,
Dominion reportedly became a major electricity supplier by 1909. Some of Dominion’s ostensible features
include:
• Regulated electric transmission & distribution operations;
• Residential, commercial, industrial, governmental services in VA & NC;
• Merchant fleet, energy marketing, & price risk management for its assets;
• Gathering & processing natural gas, with liquefied natural gas operations;
• Wholesale electricity market prices for electric cooperatives & municipalities.
A. Primary Trade Exchange.
Dominion (D) operates as a publicly traded holding company on the New York Stock Exchange (NYSE),
allegedly trading since 1983. iv
B. Primary Sector/Industry Operation.
Dominion specializes in bulk power transmission & control electric services. v
C. Investment Recommendation.
Several valuation metrics strongly support a buy rating for Dominion.
D. Current Stock Price.
As of Jan. 25, 2017, Dominion allegedly closes at $75.81. vi
E. Market Capitalization.
Yahoo Finance! alleges a market cap of $47.5 billion for Dominion on Jan. 20, 2017.
F. Target Stock Price.
NASDAQ estimates Dominion’s 12-month target price at $77.
G. Major Shareholders.
According to Yahoo! Finance, the following major shareholders comprise Dominion:
“.39%” of shares from insiders & 5% owners;
“61.3%” of shares from institutional & mutual fund owners;
“61.54%” of total shares available for institutional & mutual fund trading;
“964” institutional shareholders. vii
Accordingly, Figure 3 – Dominion Shareholders, memorializes Dominion’s shareholders.
Figure 3—Stock Ownership. viii
Type Date No. Owners
Shares Held
(000s)
% Own
Institutional 09/30/16 1040 411,610 65.67
5. 5
DIRECT HOLDERS Shares Date Reported
FARRELL THOMAS F II 989,013 3-Feb-16
MCGETTRICK MARK F 282,242 3-Feb-16
KINGTON MARK J 38,366 20-Feb-15
KOONCE PAUL D 137,122 3-Feb-16
CHRISTIAN DAVID A 131,375 3-Feb-16
LEOPOLD DIANE 37,171 1-May-16
DRAGAS HELEN E 27,124 10-Mar-15
BARR WILLIAM P 35,419 11-May-16
BLUE ROBERT M 37,561 5-Feb-16
HEACOCK DAVID A 29,814 3-Feb-16
TOP INSTITUTIONAL HOLDERS Shares Date Reported
Vanguard Group, Inc. (The) 39,489,005 29-Jun-16
Capital Research Global Investors 34,842,509 29-Jun-16
State Street Corporation 29,919,066 29-Jun-16
Wellington Management Company, LLP 29,222,869 29-Jun-16
Capital World Investors 25,312,923 29-Jun-16
Bank of America Corporation 18,056,405 29-Jun-16
Franklin Resources, Inc 16,949,508 29-Jun-16
BlackRock Institutional Trust Company, N.A. 16,309,679 29-Jun-16
BlackRock Fund Advisors 14,346,101 29-Jun-16
Northern Trust Corporation 7,650,177 29-Jun-16
TOP MUTUAL FUND HOLDERS Shares Date Reported
Capital Income Builder, Inc. 15,773,888 29-Jun-16
Vanguard Total Stock Market Index Fund 12,223,352 29-Jun-16
Washington Mutual Investors Fund 10,267,000 29-Jun-16
Franklin Custodian Funds-Income Fund 10,000,000 29-Jun-16
Vanguard/Wellington Fund Inc. 9,856,740 30-May-16
Investment Company Of America 8,996,324 29-Jun-16
Select Sector SPDR Fund-Utilities 8,200,112 30-Jul-16
Vanguard 500 Index Fund 8,083,673 29-Jun-16
Income Fund of America Inc 7,335,000 29-Jun-16
Vanguard Institutional Index Fund-Institutional Index Fund 6,587,114 30-May-16 ix
Investment Summary.
A. Dominion—Investment Profile.
Over the past decade, Dominion experienced exponential price growth, which remained largely steady through
2014, though plateauing, increasing at diminished rates from 2015 to present. x
If true, the evidence suggests
potential pinnacle prices for Dominion as it perhaps progresses to market maturity. Though such a conclusion
may appear conjectural, perhaps too premature to espouse, the following evidence comports with this inference.
B. Valuation Summary.
In February 2016, Dominion received an underweight rating due ostensibly to capital expenditure escalation.xi
Capital expenditures include fixed asset investments such as preserving land, building, and/or equipment. xii
Underweight implies projected company underperformance—an undervalued price—compared to competitors
in the same industry. xiii
If accurate, Dominion presumably constitutes a strong buy because it supposedly trades
lower than industry average projections. Why? If true, lower comparative trade prices imply potential growth
on the assumption of buying lower now to advantage an upswing on possible price surges later.
Figure 4 – Dominion Resources, Inc.—Shareholders
Th
ere are no sources in the current document.
6. 6
Conversely, Dominion’s ratings reversed by April 2016. xiv
Indeed, underweight appeared 18 times from
January 31, 2013–November 9, 2015. But the incidence of 15 marketweight and 4 overweight referenced
throughout this period plausibly offset underweight classifications. xv
If accurate, this offsetting effect may
suggest an overall neutral “marketweight” average, plausibly suggesting prices aligned with general “market
expectations.” xvi
C. Significant Recent Developments.
On Nov. 10, 2016, after the election, a first indication of buy manifested as Dominion’s price fell to $70.98,
perhaps consistent with initial market reaction. xvii
Additionally, analysts predict a buy. A buy/sell indication
might appear too premature, perhaps speculative to infer at present with the assumed confluence of emerging
political and social change imminently approaching. Nevertheless, several significant events—Hurricane
Matthew, the 2016 election, and Federal Reserve interest rate spikes—transpired to plausibly influence
Dominion’s valuation, which collectively, support a buy.
(a) Hurricane Matthew.
Initially, late 2016 trends showed recent price declines for Dominion. On Aug. 8, 2016, Dominion’s price
target diminished from $82 to $79. Since Sept. 22, 2016 Dominion’s price declined from $77.04 to $74.27 by
Sept. 30. Prices continued to decrease, staggering between $72 and $73 throughout Oct. 2016. Hurricane
Matthew may correlate as a contributing factor to Dominion’s struggles surpassing the near $73 mark in
October. xviii
But Dominion’s declivity since July 1, 2016 from nearly $78 to a stagnant $72-$73, supports, in
the short-run, under $78, assuming this short-term pattern continues. xix
Interestingly, Dominion’s price soared
to $75.31 for Oct. 31 and $75.50 on Nov. 8, 2016, consistently remaining around $74, before dramatically
plummeting after Nov. 8th
. However, evidence of rising prices over time combined with allegedly low implied
volatility may suggest a long-term valuation exceeding $75.
Dominion almost closed its price-target threshold on Dec. 29, 2016, and as of Jan. 4, 2017, hovered near
$76.6. xx
From Jan. 5-9, prices remained in the high $76 range, before plummeting to $75.42 by Jan. 10, 2017.
If true, the latest trends most strongly support a valuation of at least $75, assuming no anomalous changes.
Several contributing factors, including, the election, and hopes of a stronger economy consistent with regime
change, plausibly correlate with this recent growth phenomenon. Yet, many variables may impact value
fluctuations.
(b) 2016 Election.
Politics questionably correlates to this sudden slide, specifically, initial ambivalence perhaps about the
ideological impact of President-elect Trump with a Republican congressional majority. The Dow Jones
dropping nearly “650 points” on Nov. 8-9 plausibly suggests probative psychological response to market
uncertainty—regime change presumably correlated with apprehensive perceptions. xxi
Apparently, the election
took some by surprise. xxii
Typically, U.S. elections remotely affect market outcomes, particularly, one energy
company, since Congress “repealing solar ITC and Wind PTC,” constitutes a “highly unlikely,” scenario. xxiii
Despite unwarranted fears, likely an overreaction—“climbing the wall of worry,” with “unfolding election
uncertainties”—concern presumably abounds about “renewable energy.” xxiv
If true, these uncertainties may
reflect Dominion’s initial downward path from Nov. 8–14 2016. xxv
This assumed ambivalence, however,
appears to contradict reality, because analysts appear optimistic about Trump “removing regulatory
impediments,” while “emphasizing expanded U.S. oil and gas production.” xxvi
Contrariwise, Dominion’s valuation appeared to largely skyrocket from Nov. 14–Dec. 2, 2016. Prices reached
$76.11 on Nov. 29, 2016, before trailing $74 into early December. The Thanksgiving-week Black-Friday and
Cyber-week deals might account for some of this price hypertrophy. But accelerated growth apparently
resumed throughout Dec. 2016, attenuating the inference of post-election paranoia. For example, Dec. 8–13,
Dominion’s price presumably climbed from $73.50 to $76.51 by Dec. 19th
, pinnacling at $76.99 on Dec. 29,
2016, before closing the year with $76.59. xxvii
The Dow Jones nearly eclipsing 20,000 points in an epic
historic record, post-2016 election, might partially explain Dominion’s recent momentum. The holiday season
perhaps also contributed, assuming heightened utility expense plausibly inferred from weather and/or travel.
But the Dow transcending 20,000 on 1/25/2017 strengthens a conclusion of correlation, plausibly influencing
Dominion’s latest soar to $75.86 at 11:43 A.M. that day. xxviii
The historic 2017 post-inaugural event during
Trump’s first week as President strengthens this inference, if attributed to hopes of successful capitalistic
growth from laissez-faire tax-cuts. If accurate, this assumption of energy expansion in reduced tax and
occupational opportunities comports with Dominion’s growth projection potential, plausibly reinforcing a buy.
(c) Energy Expansion.
However, the unified Republican party majority in an incumbent Trump administration supports continued
growth for Dominion, assuming heightened domestic investments, tax cuts, and employment. Furthermore,
Dominion appears more apt to hypertrophy from the unprecedented potential of alternative energy exploration
as the North Dakota Bakken in subsidizing these domestic incentives. The largely untapped Bakken
presumably harbors at minimum 4.3 billion barrels of shale oil, a copious energy cornucopia to enhance
natural gas production, if efficaciously harnessed through fracking. xxix
This conclusion comports with
8. 8
Business Description.
A. Dominion Services.
As a leading U.S. energy distributor, Dominion’s preeminent portfolio presumably accommodates
approximately 25,700 megawatts of generation. xxxix
Dominion’s natural gas storage systems distinguishes
among the nation’s largest. Currently, its estimated 1 trillion cubic feet storage capacity allegedly surpasses
6 million customers in utility and retail energy services throughout 14 states. xl
Other services include:
14,400 miles in natural gas transmission; xli
Gathering & storage pipeline;
6,500-mile electric transmission lines;
57,300 miles of electric distribution lines. xlii
B. Dominion Financials.
Forecasts estimate P/E Ratio declines for Dominion from actual 2015 results in every year after 2015. xliii
The
P/E ratio refers to stock price divided by earnings; price/earnings. Generally, lower P/E means the stock price
diminished compared to earnings, and vice versa for higher P/E. For example, if denominator earnings
increase while price remains unchanged, the P/E ratio diminishes consistent with mathematical logic, e.g., ½
> ¼. Conceptually, price per earnings, P/E, estimates what an investor typically wishes to pay proportionately
for the stock’s price. Dominion Resources presently purports a 22.9 P/E. xliv
If true, a high P/E reveal stock
prices increasing compared to earnings by investor valuations.
Valuation.
A. Sum of Parts.
Several valuation metrics strongly support a BUY rating for Dominion Resources. The following sum of
parts valuation—including, dividend discount model, 2017 price to sales projection estimates, and earnings
valuation estimates—indicate undervaluation. For example, the dividend discount model purports an
estimated 2017 valuation for Dominion of $93 despite prices within the $74-$76 range by Jan. 25, 2017. xlv
Wells Fargo’s estimated valuation range between $77 and $80 strengthens this inference since Dominion
presently staggers between $75-76, pinnacling at $76.99 on Dec. 29, 2016.xlvi
Currently, Dominion’s 2015
projections for 2017 estimate price to sales at $78.27, excluding the presently unavailable 2016 reports. xlvii
Similarly, 2017 sales projections estimate $13.3682 billion compared to $11.683 billion for actual 2015 sales.
xlviii
Additionally, earnings valuation estimates $82.15, with NASDAQ’s current conservative 12-month
target price listed at $77. xlix
Present trends suggest Dominion trading at a premium compared to its
competitors, specifically, “15x” vis-à-vis the “10.5x industry average.” l
Dominion’s stock presumably rose
“13%” and yields “3.7%,” a stock which Hedge Fund Analyst Correspondent Jim Cramer apparently
endorsed among his portfolio picks. li
Growth prospects suggest virtually, “10% recovery since the election,”
with a “3% premium to it both 50-day and 200-day moving averages by Jan. 4, 2017.” A moving average
forecasts growth from the arithmetic average of most recent data periods. If true, these prospects plausibly
suggest strong growth, assuming Dominion remains within moving average levels because stocks surpassing
moving average levels typically portend bullishness.
B. Dividend-Growth.
Additionally, the earnings potential assumed in new growth projects reported plausibly support attractive
dividend growth. lii
For example, Dominion’s quarterly cash dividend presumably grew “by nearly 8.1% to
$.70 per share,” in Dec. 2015. liii
From these reports, Dominion estimates its dividend payout target between
“70-75% of operating earnings,” projecting an “8% annual dividend growth rate from 2014 to 2020.” liv
Moreover, Dominion reported a dividend yield of “3.77% on Oct. 21, 2016,” maintaining 3% minimum over
five years, steadily distributed “every quarter since Nov. 2011.” lv
Investopedia reportedly ranks Dominion
among the top 3 dividend utilities stocks, strengthening the inference of competitive investment growth.lvi
Ultimately, if accurate, Dominion’s steady dividend growth reflects its overall growth—solvency assumed in
an ability to pay shareholders—strengthening the inference of buy. The projected growth potential implies
progressive valuation increase with time, assuming this pattern continues. Accordingly, this prospective
growth pattern comports with present trends, assuming political predictions attributed to a predominantly
Republican Congress and incumbent Trump administration unifies conservative de-regulation. If so,
Dominion likely benefits purportedly from the laissez faire environment of diminished energy regulations,
possible tax-rate attenuation, and/or subsidized domestic energy initiatives incentivizing business.
While the energy and utilities sectors stand to benefit at large from relaxed regulation, Dominion’s alleged
competitive edge, again, positions it strategically for proportionate gains. Therefore, assuming the above,
Dominion’s reputed record of outpacing rivals likely continues, and possibly broadens if its diversification
strategy further mitigates losses perhaps otherwise incurred.
9. 9
C. Rapid Revenue Reductions.
Moreover, Dominion’s revenues reportedly shrank steadily from $13.06 Billion in June 2014 to $11.05
Billion by June 2016. Dominion’s assumed excess debt perhaps correlates with reduced revenue. lvii
If
anything, assuming the above, reduced revenue more strongly supports a buy consistent with general value
investment principles, buying low to advantage potential upswing growth. Likewise, Dominion’s ability as a
utilities monopoly to securitize practical services, discontinuing services of customers defaulting on monthly
bills, presumably distinguishes it among “value investments.” lviii
Management & Governance.
A. Corporate Governance.
Corporate governance refers to a regulatory system that balances company, stakeholder, and government
interests. lix
It assumes an agency relationship whereby one or multiple persons, including companies—
agents—provide services on another’s behalf—principals. lx
Here, principal beneficiaries entrust agents with a requisite fiduciary responsibility—relationship based on
duty, loyalty, and obedience—trust in confidence—to act on their behalf. On Oct. 1, 2016, Institutional
Shareholder Services (ISS) Governance QuickScore assigned Dominion an overall Corporate Governance
rating of 6. lxi
According to ISS QuickScore, 6 falls just shy of high-corporate governance risks. lxii
However, Dominion also respectively received “8”—high governance risks—for “Board” and “Shareholder
Rights” subsets as an assumed arithmetic average factored into this rating. lxiii
QuickScore Methodology
presumably evaluates company “governance structure” through annual, “year-round,” data-driven
inspections, incorporating nearly “200 factors,” to analyze risks, assigning weights based on the following:
“Input from ISS’ global governance experts;”
Perceived “impact of governance practices,”
“ISS voting policy” consistent with “prevailing” regional “governance standards.” lxiv
Industry Overview and Competitive Positioning.
The energy industry as inferred from high metrics appears competitive, presumably catalyzed by
technological advances. Dominion appears to outpace its competitors and the overall industry as inferred
from its financials including:
2016-17 BUSINESS RATIOS—DOMINION v. Energy Competitors. lxv
2016-17 BUSINESS RATIOS—DOMINION v. Electric Utilities Competitors. lxx
Financial Ratios: Dominion American Electric Power DTE Energy Industry Average
12-month Dividend Yield 3.69% 3.63% 3.12% 3.25%
Return on Equity, ROE 15.38% 15.38% 10.35% 9.78%
EV/EBITDA 15.28 lxvi
15.71 lxvii
11.48 lxviii
12.35 lxix
Market Capitalization $ 47.57 Billion $ 30.79 Billion $ 17.57 Billion $ 14.98 Billion
Financial Ratios: Dominion National Grid Exelon Industry
12-month Dividend Yield 3.7% 4.7% 5.0% 3.59%
Return on Equity, ROE 15.38% 16.07% 4.80% 8.93%
EV/EBITDA 15.28 lxxi
10.10 lxxii
8.22 lxxiii
11.57 lxxiv
Market Capitalization $ 47.3 B 43.92B 33.05B $6.75 B lxxv
10. 10
The following SWOT summary itemizes Dominion’s comparable industry competitiveness:
For Dominion’s industry competitiveness, please see p. 11, Figure 7, DOMINION—PORTER’S FIVE FORCES.
Financial Analysis.
A. Analyst Summary.
Current projections depending on market conditions, might suggest declining growth for Dominion, possibly
stemming from market cycle maturity. If true, the “bullish” analyst summary leaning toward “buy,” plausibly
supports this inference because declines may suggest short-term upswing growth opportunity, if prices later
climb. lxxvii
The last shareholder exchange filed on 11/15/16 indicating “purchase,” may support this conclusion.
lxxviii
If so, shareholders plausibly perceive an opportunity for continued growth, presumably advantaging
Dominion’s latest upswing growth consistent with overall political and economic trends. If true, de-regulation
inferred from impending regime change may support this conclusion, assuming shareholders factored market
perception into their investment decision.
B. Competitive Comparables.
Consider Dominion’s metrics versus its rivals. Recall our foregoing P/E discussion. Historically, Dominion
boasts a P/E ratio greater than 20 over the past few years. If accurate, analysts’ buy indication might appear
optimistic because value investing principles suggest buying low, and selling high to avoid risk of loss.
Typically, a P/E ratio exceeding “17” may signal danger. lxxix
But the energy industry average indicates a 19.8 P/E as of 12/16/16. Even so, Dominion’s P/E presumably
ranks highest among its 10 competitors at 21.89. But this conclusion assumes P/E constitutes the primary
valuation benchmark. Ultimately, valuation metrics accompanied by key shareholder behavior consistent with
politicized psychological influence on present market trends correlate to buy, justifying “A- buy street rating.”
lxxx
After all, Dominion’s competitiveness evidenced in its # 1 return on equity, 15.38% ROE, demonstrates
growth potential, which if true, plausibly reinforces a buy. To strengthen this conclusion, Dominion’s 3Q 2016
Net Income reportedly grew “21.54% faster than the average growth of its competitors.” lxxxi
Assuming the
pattern persists, Dominion’s growth potential suggests a buy given its opportunity for sizeable gains.
Conversely, Dominion’s maturity, high-debts, and possible struggles increasing, “15% ROE faster than 15%,
without borrowing funds or selling more shares,” might mitigate this inference. lxxxii
However, Dominion’s
purported “15.38%” ROE dominates the energy industry. Likewise, reported revenue losses reveal
opportunities for significant long-term growth compared to competitors, advantaging potential upswing growth,
perhaps further precipitated by politicized energy expansion initiatives. Additionally, Dominion’s attempts to
differentiate with diversified derivatives, as abovementioned, reduces investment loss risks, plausibly
enhancing competitiveness if upswing growth materializes. Dominion also purportedly boasts the highest
market capitalization. While companies with high market capitalization may yield limited short-term returns,
“they generally reward investors,” providing “consistent share value increases and dividend payments.” lxxxiii
Additionally, Dominion’s alleged lower net income compared to the industry supports a buy consistent with
value investment, with opportunities for growth if energy expansion accelerates. Dominion’s exhibited metrics
support this conclusion. Consider the following financial ratios as additional evidence to Dominion’s buy-
rating consistent with upswing growth assumed in continued competitiveness:
Strengths.
Energy/Utilities Leader
Highly Diversified.
Pipeline Capacity.
Customer Expansion.
Sustained Growth.
Weaknesses.
Excess Debt.
Governance Issues.
Mature Company.
High P/E Ratios.
Analyst Optimism.
Opportunities.
U.S. Regime-change.
Nuclear /Solar-Wind Power.
Globalization.
Climate Change.
Technological Innovations
Threats.
Environmental Policies.
Global Competitors.
Volatile Sector. lxxvi
Weather Sensitivity.
Force Majeure:
(Terrorism, natural disaster, etc.).
11. 11
2016 -17 BUSINESS METRICS—DOMINION V. ENERGY PEERS. lxxxiv
2016-17 BUSINESS METRICS—DOMINION v. INDUSTRY PEERS. lxxxv
C. Revenues.
According to Business 2016-17 Metrics, Dominion’s 5-year revenue Compound Annual Growth Rate (CAGR)
referenced 5.1% decline—almost inversely proportionate with the industry, which revealed 5.6% gains. FY
2012 serves as a benchmark year elucidating Dominion’s alarming revenue decline after abandoning the
unregulated market for both electric and natural gas services. As FY 2015 concluded, Dominion’s unregulated
electric revenue presumably plummeted 45.73% compared to 2012. Total revenues reportedly declined every
year since 2010, ostensibly at an average rate of 5%. If accurate, these progressive, annual declines reported
plausibly correlate with Dominion’s excess debts, perhaps reflected in a “large capital investment plan,” and
“high consolidated leverage.” lxxxvi
See below, Figure 5. But Fitch also projects “consolidated leverage
improvement,” over the next several years. lxxxvii
If true, that assertion assumes debt-reduction in a more
balanced capital structure, which assuming so, implies growth potential, strengthening the buy-rating inference.
Political trends comport with this conclusion.
Furthermore, Questar’s regulated gas operations purportedly comprise 35% of Dominion’s EBITDA,
strengthening a buy-rating inferred from operation expansion if Dominion allegedly acquires Questar.lxxxix
If
accurate, however, attempts to strategically diversify long-term investment risks with excess debts securitized
via self-regulated operation expansion and acquisition reasonably support Dominion’s revenue loss. But loss
may avail upswing cyclical growth consistent with value investment principles. If true, the evidence
strengthens a buy-rating because investors may buy Dominion low now and advantage subsequent
exponential growth, assuming it remunerates its debts.
D. Sales Growth
Dominion Virginia Power’s infrastructural investment, if successful, support substantial growth. Capital
expenditures serve to subsidize underground program plans for electricity distribution in locations where
Dominion operations. These plans include a Capital Expenditure (CAPEX) of $113 million to 4,000 miles in
underground tap lines. xc
If successfully administered, perhaps further precipitated by plausible political
support, total electrical distribution may yield Growth CAPEX of the following from 2016-2020:
Dominion Virginia Power: $6.1 Billion;
Dominion Generation: $ 4.1 Billion;
Dominion Energy: $ 5.5 Billion;
Total Dominion Capex: $15.7 Billion. xci
Financial Ratios: Dominion Nextera Energy Southern Company Industry Average
12-month Dividend Yield 3.71% 2.92% 4.56% 3.59%
Return on Equity, ROE 15.38% 15.38% 10.35% 9.78%
Market Capitalization $47.57 billion $57.06 billion 47.75 billion $6.75 Billion
Financials Dominion National Grid, PLC Exelon Industry Average
Net Income $2.023 Billion $2.048 Billion $1.240 Billion $3.484 Billion
5-Yr Rev CAGR -5.1% +1.1% +9.6% +5.6%
Market Capitalization $ 47.57 Billion $46.009 Billion $45.046 Billion $12.71 Billion.
Figure 6 – Key Financial Ratios and Statistics. lxxxviii
Profitability 2015 Leverage 2015
Net Inc/Common Equity 0.28 Total Liability/Total Assets 0.78
Net Inc/Total Assets 0.03 Curr Debt/Equity 0.45
Net Inc/Inv Cap 0.04 Total Debt/Equity 2.31
12. 12
E. Cash Flow
Cash flow from investment activities report losses since 2015, with losses expected continue, assumed in
capital expenditure investment. Nevertheless, financing activities reveal steady growth since 2012. For
additional information, see Appendix, Figure 10—Cash Flows, p. 14.
Investment Risks.
A. Financial Risk—High Debt.
Dominion’s purported high-leverage appears troubling. xcii
High leverage assumes an unbalanced capital
structure, specifically, disproportionate debt investment compared to equity—high debt/equity ratio. High-
leverage means the company takes on higher debt expense compared to equity in financing operations.
Generally, high-leverage implies high-default risk. xciii
Assuming this conclusion, if Dominion’s debt
exceeds its cash flows, the company may become unviable, specifically, insolvent, if unable to repay
creditors.
Additionally, Dominion’s record reveals a BBB Moody’s rating. xciv
BBB satisfies the minimum threshold
for investment grade bonds. xcv
If accurate, Dominion’s BBB rating indicates high-risk, possibly suggesting a
suboptimal investment compared to competitors.
Furthermore, “rising bond yields,” assuming the pattern continues, might pose “negative implications for
electric companies,” like Dominion because potentially “higher borrowing costs,” suggest more debt. xcvi
Again, more debt, if applicable to Dominion as an electric company, typically exacerbates default risk—
possible struggles repaying creditors—assuming money owed exceeds cash flows. Default evinced in non-
payment generally implies surmounting debt—failure to repay because money owed exceeds cash inflow—
assuming no fraudulent motive. Risk means the company’s vulnerability to certain threats, which if
unaddressed, may jeopardize its continued viability. Higher risk may aggravate volatility. If true, elevated
default potential assumed in higher debt may offset a regarded leading energy company’s high valuation.
Accordingly, these factors may collectively strengthen the conclusion of volatility evidenced in Dominion’s
historical record, namely, unpredictable fluctuations from underweight to marketweight or higher.
Nevertheless, Market Realist lists Dominion among utility stocks evincing “low implied volatility,” namely,
a year-to-date return (YTD) allegedly of “8.2%.” xcvii
Implied volatility estimates a security’s price
volatility. xcviii
If accurate, Dominion’s estimated low implied volatility suggests lower risk—less
susceptibility to price fluctuation—which, assuming this conclusion, supports increased valuation over time.
Therefore, stable prices plausibly assumed in low price volatility may signal investors to infer a higher price
for Dominion in the future. Hence, the decision to buy now appears ripe in exploiting these benefits.
B. Legal Risks—Corporate Governance.
Dominion’s above corporate governance numbers, if true, prove troubling because they suggest possible
conflict of interest fiduciary violations. Why? Officers maintain a requisite fiduciary responsibility to
company shareholders, entrusted with advancing their vested interest in the corporation. Fiduciary violations
result when a company acts adversely—contrary to its shareholders’ obligations—by corporate waste and/or
conflicts of interests—advantaging at the shareholders’ detriment. This same fiduciary relationship of trust
also applies to agent officers toward the principal corporation. Therefore, even if Dominion allegedly acts
adversely to its legal, financial responsibility, the company’s alleged liability risks brand damage. If accurate,
assuming this conclusion, even alleged liability risks discrediting Dominion, possibly denigrating its
reputation, and by greater extension, viability compared to industry competitors. Ultimately, Dominion’s
alleged failure appointing an “independent environmental expert,” for its board under SEC Rules 14a-8(i)(3)
plausibly substantiates QuickScore’s ratings of high corporate governance risks. xcix
Assuming these
considerations, Dominion’s price may diminish, which if so, possibly justifies a lower valuation than
prevailing projections. Advocating a price on these influences presently appears too speculative to
sufficiently correlate. Indeed, financial analysts reportedly “ranked Dominion # 1 among Fortune’s 2015
‘Most Admired’ electric and gas utilities,” vis-à-vis asset investment, operation, and/or allocation. c
If true,
Dominion’s assumed respectable reputation weakens the inference of reported corporate governance issues
correlating with diminished valuation. If true, these factors support a plausible buy, affording a potential
opportunity to possibly capitalize a low price from presumably diminished value. But time may tell.
13. 13
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APPENDIX.
Figure 7—DOMINION: PORTER’S FIVE FORCES. ci
Porter’s 5
Forces
Local power source
limitations.
Limited individual price
influence.
Consumer Size.
Threat of Rivalry – Low.
Threat of Entrants – High.
Threat of Substitutes – Low but Growing.
Buyer Bargaining Power – Low.
Supplier Bargaining Power – High.
Impractical
to self-create energy source.
Finite energy resources.
Commoditization.
Solar/ wind power
generation imminent.
Geographic Limits
(e.g. contract).
Large competitors.
Large Set-up Costs.
Passing Regulations.
Solar Energy (Sunrun
& Tesla in suburbs).
Oil, coal, & other resource
risks.
Larger company implies larger
order size.
Future suggests solar, wind, &
other renewable resource
capability.
14. 14
Figure 8: Income Statement
$ in millions
DOMINION RESOURCES INC (D) INCOME STATEMENT
Fiscal year ends in December. USD in millions except per share data.2011-12 2012-12 2013-12 2014-12 2015-12 TTM
Revenue 14379 13093 13120 12436 11683 11207
Cost of revenue 6412 5312 5574 5116 3606 2871
Gross profit 7967 7781 7546 7320 8077 8336
Operating expenses
Operation and maintenance 3483 4868 2459 2765 2595 2853
Depreciation and amortization 1069 1186 1208 1292 1395 1470
Other operating expenses 554 571 563 542 551 567
Total operating expenses 5106 6625 4230 4599 4541 4890
Operating income 2861 1156 3316 2721 3536 3446
Interest Expense 869 882 877 1193 904 945
Other income (expense) 179 223 265 250 196 258
Income before income taxes 2171 497 2704 1778 2828 2759
Provision for income taxes 745 146 892 452 905 672
Net income from continuing operations 1426 351 1812 1326 1923 2087
Net income from discontinuing ops -22 -92
Other -18 -27 -23 -16 -24 -64
Net income 1408 302 1697 1310 1899 2023
Net income available to common shareholders1408 302 1697 1310 1899 2023
Earnings per share
Basic 2.46 0.53 2.93 2.25 3.21 3.32
Diluted 2.45 0.53 2.93 2.24 3.2 3.31
Weighted average shares outstanding
Basic 573 573 579 583 592 609
Diluted 575 574 580 584 594 610
EBITDA 4328 2822 4971 4531 5401 5448
*Morningstar Financials. cii
15. 15
Figure 9: Balance Sheet
$ in millions
DOMINION RESOURCES INC (D) BALANCE SHEET
Fiscal year ends in December. USD in millions except per share data.2011-12 2012-12 2013-12 2014-12 2015-12
Assets
Current assets
Cash
Cash and cash equivalents 102 248 936 605 623
Total cash 102 248 936 605 623
Receivables 2035 1717 1836 1633 1369
Inventories 1348 1259 1176 1410 1348
Prepaid expenses 262 326 192 167 198
Other current assets 1683 1590 1800 1800 653
Total current assets 5430 5140 5940 5615 4191
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 42990 44321 46969 51406 57776
Accumulated Depreciation -13320 -13548 -14341 -15136 -16222
Net property, plant and equipment 29670 30773 32628 36270 41554
Equity and other investments 3844 3888 5102 5561 5774
Goodwill 3141 3130 3086 3044 3294
Intangible assets 637 536 560 570 570
Prepaid pension costs 681 702 942 956 943
Regulatory assets 1382 1717 1228 1642 1865
Other long-term assets 829 952 610 669 606
Total non-current assets 40184 41698 44156 48712 54606
Total assets 45614 46838 50096 54327 58797
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 3293 4635 3446 4150 5335
Accounts payable 1250 1137 1168 952 726
Accrued liabilities 678 636 609 566 515
Other current liabilities 1741 1355 1771 1530 1544
Total current liabilities 6962 7763 6994 7198 8120
Non-current liabilities
Long-term debt 17394 16851 19330 21805 23616
Deferred taxes liabilities 5216 5800 7114 7444 7414
Pensions and other benefits 962 1831 481 1296 1199
Regulatory liabilities 1324 1514 2001 1991 2285
Minority interest 57 57 402 938
Other long-term liabilities 2253 2454 2534 2636 2561
Total non-current liabilities 27206 28507 31460 35574 38013
Total liabilities 34168 36270 38454 42772 46133
stockholders' equity
Additional paid-in capital 5359 5655 5783 5876 6680
Retained earnings 6697 5790 6183 6095 6458
Accumulated other comprehensive income -610 -877 -324 -416 -474
Total stockholders' equity 11446 10568 11642 11555 12664
Total liabilities and stockholders' equity 45614 46838 50096 54327 58797
*Morningstar Financials.ciii
16. 16
Figure 1-: Statement of Cash Flows
$ in millions
DOMINION RESOURCES INC (D) Statement of CASH FLOW
Fiscal year ends in December. USD in millions except per share data.2011-12 2012-12 2013-12 2014-12 2015-12 TTM
Cash Flows From Operating Activities
Net income 1426 329 1720 1326 1923 2087
Depreciation & amortization 1288 1443 1390 1560 1669 1744
Investment/asset impairment charges 283 2089 48
Deferred income taxes 756 246 737 449 854 632
Accounts receivable 365 292 -98 131 294 84
Inventory -185 33 -29 -43 -26 -33
Prepaid expenses -19 -85 123 24 -25 1
Accounts payable -413 -61 50 -202 -199 -66
Accrued liabilities -216 -12 -27 -41 -52 166
Interest payable -12 -27
Other working capital -98 271 -198 -211 103 -137
Other non-cash items -204 -396 -256 446 -66 -70
Net cash provided by operating activities 2983 4137 3433 3439 4475 4408
Cash Flows From Investing Activities
Investments in property, plant, and equipment -3652 -4145 -4104 -5345 -5575 -6479
Property, plant, and equipment reductions 60 79 9
Acquisitions, net 625 272 -497 -4372
Purchases of investments -1828 -1392 -1493 -1447 -1744 -1631
Sales/Maturities of investments 1757 1356 1476 1235 1340 1412
Other investing activities 402 341 38 44 -106 -121
Net cash used for investing activities -3321 -3840 -3458 -5181 -6503 -11182
Cash Flows From Financing Activities
Debt issued 2320 1500 4535 6485 3562 8230
Debt repayment -637 -1675 -1903 -4393 -1292 -2386
Common stock issued 38 265 278 205 786 2148
Redemption of preferred stock -259
Repurchases of treasury stock -601
Cash dividends paid -1146 -1225 -1319 -1409 -1536 -1673
Other financing activities 404 984 -1498 1115 797 468
Net cash provided by (used for) financing activities 378 -151 93 1744 2317 6787
Net change in cash 40 146 68 2 289 13
Cash at beginning of period 62 102 248 316 318 238
Cash at end of period 102 248 316 318 607 251
Free Cash Flow
Operating cash flow 2983 4137 3433 3439 4475 4408
Capital expenditure -3652 -4145 -4104 -5345 -5575 -6479
Free cash flow -669 -8 -671 -1906 -1100 -2071
Supplemental schedule of cash flow data
Cash paid for income taxes -58 56 72 75
Cash paid for interest 913 852 889 843
*Morningstar Financials. civ
