Dominion Reigns Supreme

 | Apr 27, 2012 | 5:00 PM EDT
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Cheniere Energy (LNG) received approval from the Federal Energy Regulatory Commission to export natural gas, creating some excitement among its investors. The next step will be to finance and construct the Sabine Pass liquefaction facility operated by Cheniere Energy Partners (CQP), in which Cheniere Energy holds a 91% stake. Financing will come at a cost to shareholders, however, as Cheniere is seeking both debt and equity. When big equity comes in, owners get diluted.

The first two trains at Cheniere's liquefaction facility will cost approximately $5 billion. It looks like the company has arranged $4 billion in debt from a consortium of bankers; the rest is equity.

Equity costs more than debt, which is why Blackstone Group (BX) is providing a $2 billion equity investment. Blackstone's investment is being made via "special units that will convert into common units once the facility is operating." Blackstone's equity appears to be expensive.

Cheniere's financials explain why the company may be paying an extraordinary price for equity. The company has been EBITDA positive, and while cash flow is positive, it has been volatile. The real problem is the balance sheet; Cheniere has been booking negative equity for years. You can't come to a project development party without equity, and Cheniere has none to offer.

The first rule in project finance is bankers get paid first. The second rule is bankers will hedge their investments against their customer's assets. The third rule is bankers get paid well. Until the bankers successfully exit from Cheniere's deal, there appears to be little upside for investors.

Many investors prefer Cheniere because the company is a pure play on natural gas exports. It's also a pure play on liquefied natural gas. For the U.S., Cheniere is first to market -- Alaska's Kenai liquefied natural gas export terminal was scheduled to close last month -- but being first is not always a good thing.

It seems as though Cheniere's liquefied natural gas deal has more sizzle than steak. With the bankers firmly sandwiched into the deal, it is difficult to see much upside for the first several years.

As an alternative, consider Dominion Resources (D). Similar to Cheniere, Dominion wants to convert its idle Cove Point, Maryland, import facility into a liquefied natural gas import/export terminal. According to yesterday's Wall Street Journal, Dominion already lined up two customers. One is Japan's Sumitomo Corporation, and the other wasn't named. In that same article, Dominion announced that it is moving forward with the company's Cove Point liquefaction project and claimed its proposed liquefied natural gas export facility is fully subscribed.

Unlike Cheniere, Dominion is already a major player in the natural gas transportation and storage business, and unlike exploration and production companies such as Chesapeake Energy (CHK), Dominion is not exposed to natural gas price risk but still enjoys significant access to shale and other natural gas resources.

More directly, Dominion does not need outside bankers to make its liquefied natural gas deal work. The company already owns 11,000 miles of natural gas transmission, gathering and storage assets. It owns 21,800 miles of gas distribution pipeline, exclusive of service lines of two inches in diameter or less. Dominion also operates the nation's largest underground natural gas storage system, with approximately 947 billion cubic feet of storage capacity. To top it off, Dominion serves nearly 6 million utility and retail energy customers in 15 separate states.

For Dominion, building a liquefied natural gas export facility makes a lot of sense. It is another jewel in the company's collection of incredible assets.

Speaking of assets, Dominion's equity is currently over $11 billion, and the company is sitting on over $45 billion worth of electric and gas assets. One of those assets is a regulated electric utility operating in a utility-friendly state. Talk about hedging its bets.

While Dominion does not own natural gas in the ground, it does have strategic access to Marcellus shale gas, Utica shale gas, stored gas and pipeline gas. Just because Dominion is not located near Henry Hub does not mean the company cannot find better terms for natural gas export.

Further, under the leadership of Thomas Ferrell II, Dominion has become one of the best-managed utilities in the nation. The company has reduced its risk profile by selling off marginal assets and carefully hedging its assets. Dominion is a market leader in electric and gas, wholesale and retail.

Unlike northeastern wire-only utilities such as Consolidated Edison (ED) and Northeast Utilities (NU), Dominion is a fully integrated utility in a structured environment. Similar to Duke Energy (DUK), Southern (SO) and NextEra Energy (NEE), Dominion is a real utility with added features.

For Dominion, it's all steak and little sizzle. For investors, it's a safer play for liquefied natural gas exports.


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