Dominion: Creating Long-Term Value

 | Feb 04, 2014 | 10:30 AM EST  | Comments
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Dominion Resources (D) is adjusting their portfolio. While it may take a few quarters to complete, Dominion's position in the energy markets will be stronger and more responsive. For short-term investors, the company's bottom line may disappoint. For long-term investors, Dominion will emerge as a sovereign leader.

Here is what we know.

  1. Utility-grade Solar -- Dominion joins Berkshire Hathaway (BRK.A), Duke Energy (DUK), Exelon (EXC), NextEra Energy (NEE), NRG Energy (NRG) and others in investing in generation solar projects. Dominion wants specifically to own large, utility-grade solar power assets. Dominion expects to grow their fleet of contracted solar projects over the next 24 months by nearly 250 megawatts.
  2.  New Nuclear Power -- Dominion concluded it might not be possible to build the third nuclear plant at North Anna. As a result, Dominion seeks to write off most of the roughly $600 million the company has on engineering and development work and lower its reported earnings. If approved by the state legislature, that write-off could occur before the second quarter.
  3.  Existing Nuclear Power -- Dominion has been shrinking their merchant fleet of power plants. They disposed of two large coal-fired plants in New England. They still own two large nuclear plants in Connecticut. It is rumored those nuclear units are unprofitable. As such, The Wall Street Journal suggested last December that those units might be on the chopping block.
  4. Dominion Retail -- Dominion owns a non-regulated retail energy marketing company for electric and gas consumers. It was a strategic business. Owning both ends of the value chain makes sense. However, Dominion could not compete with Exelon, which dominates this business. The electric component was the most challenging. Consequently, Dominion elected to exit the electric energy marketing business. The sale process is underway and they expect to have the transaction complete in the next several months.
  5. Cove Point LNG Expansion -- Cove Point Liquefaction Project is an expansion of Dominion existing LNG import terminal. Dominion is adding natural gas liquefaction and LNG exporting capabilities. Major regulatory approvals have been received to export LNG. However, more approvals are needed before construction can begin.
  6. Blue Racer Midstream Expansion -- Dominion's Natrium complex in West Virginia houses 200 million cubic feet per day (MMcf/d) cryogenic processing plant, and a 46,000-barrel per day (Bbls/d) fractionator. Dominion's expansion plans include the Western Connector pipeline, the addition of Natrium II, a second processing plant which is expected to come into service by the end of Q1, and expansion to fractionation capacity at Natrium in 2015. Construction of a processing plant is underway in Ohio. Berne I is expected to come online by the end of the third quarter. Together, the Natrium and Berne sites are large enough to accommodate 1,000 MMcf/d in processing capacity.
  7.  Master Limited Partnership's IPO -- Dominion announced their plan to form a MLP in 2014. The expected cash flows from their Cove Point and Blue Racer will be used to fund distributions. However, Dominion needs to secure a Certificate of Public Convenience and Necessity from the state and an approval from the Federal Energy Regulatory Commission to proceed with these projects. Once they have those two permits that will clear the way for to do their IPO. As it stands, the IPO could take place before year-end.

Here is what is rumored.

Dominion is rumored to be on the hunt for a major acquisition. Some believe NiSource (NI) could be a possibility. On paper, it looks like a perfect marriage. But like all marriages, it comes down to willingness and compatibility. After watching Duke digest Progress Energy, some analysts think NiSource may become a better partner.

Taken together, Dominion's realignment will achieve stronger and more stable earnings. This realignment will hurt short-term earnings, however, as it provides long-term value.

For short-turn investors, Dominion's realignment may disappoint. It appears almost certain there will be write-offs. Adjustments in nuclear and solar assets will likely hurt bottom-line earnings in the short-term.

Longer term, the picture is brighter. Long-term investors need to consider two strategies. First, they should ignore most reactions of short-term traders. It turns out that short-term 'bad news' is actually good news for those looking down the road.

Second, long-term investors need to ignore standard ratios and metrics. Price earnings ratios certainly will be skewed. Any metric involving earnings may look unhealthy. After Dominion's realignment is completed, standard ratios and metrics will begin to make some sense.

Dominion is repositioning itself to provide stable and healthy earnings. It is avoiding market-based and unhedged risks. Dominion's returns will be secured by state and federal tariffs. Where tariffs are unavailable, assets are hedged against contracts.

Finally, Dominion's portfolio of resources straddles electric and gas sectors. Their strategy will tend to even out the seasonality associated each sector to provide even cash flows throughout the year. It is clear; Dominion is providing shareholders and customers with long-term value.

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