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Dominion Resources: Overhanging Uncertainty Could Be Resolved In Coming Months

 January 09, 2013 02:42 PM

(By Mani) Dominion Resources, Inc. (NYSE: D) could see some positive developments in the next few months, including the new legislation in Virginia, that may resolve uncertainty that has overhung the shares for some time.

In addition, approval from Department of Energy (DOE) for Dominion to export LNG from its Cove Point facility would bode well for the company.

Virginia Attorney General Kenneth Cuccinelli had proposed revisions to the state's renewable portfolio standard (RPS) as well as the elimination of incentive ROEs.

Dominion is negotiating with AG Cuccinelli to craft a proposal to bring to the General Assembly's Committee on Electric Utility Regulation (CEUR) that could incorporate the revisions while providing Dominion with additional flexibility/clarity regarding the biennial review process.

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"In our view, such clarity would remove a level of uncertainty that has overhung Dominion, particularly as it relates to the accounting for one-time charges when calculating earned ROE under the biennial review process," BMO Capital Markets analyst Michael Worms wrote in a note to clients.

Assuming Dominion and AG Cuccinelli can reach an agreement, they would present it to the CEUR, and if approved at the committee level, the agreement would be brought to the General Assembly for a vote.

The process could move relatively quickly as the legislative session begins on Jan. 9 and lasts only 45 days. Thus, there could be clarity on the one-time costs before the company files its biennial review on March 28.

[Related -High Dividend Utility Stocks – Are They A Trap For Income Investors?]

Meanwhile, Dominion recently announced that it would move forward with engineering, marketing and regulatory review processes after a declaratory judgment confirmed its right to build liquefaction facilities at its Dominion Cove Point facility in Maryland. Dominion's right to build had been contested by the Sierra Club.

"The liquefaction project is expected to cost $2.5 billion-$3.5 billion; we expect an announcement regarding a committed partner to be forthcoming shortly," Worms said.

Dominion has received DOE permission to act as an agent for LNG exports to countries with free trade agreements and is waiting approval of its application for countries without a free trade agreement, which is expected in early second half of 2013.

Dominion entered Federal Energy Regulatory Commission's (FERC's) pre-filing process in anticipation of filing an application in 2013, and the approval process is expected to take 18-24 months.

Moreover, the recent joint venture (JV) with Caiman Energy could extend growth trajectory. Both companies have formed a $1.5 billion joint venture to provide midstream services to natural gas producers operating in the Utica shale in Ohio and portions of Pennsylvania.

Dominion's contribution includes its East Ohio gas gathering network, its Natrium Extraction Plant and related facilities, and a Dominion Transmission pipeline connecting Natrium to the Dominion East Ohio gathering system.

"We expect the near-term loss of earnings for Dominion from Natrium (~$30 million pre-JV) to be offset by proceeds ($300 million cash value) and capital saved ($450 million over five years); East Ohio's pipeline has no rate base value," Worms noted.

The JV is expected to reach equilibrium in 2015 by which time the production from contracted assets should be known without Dominion having to invest any new capital, thereby allowing it to capitalize on its well-positioned assets and the growth opportunities they provide while limiting its capital exposure.

"We note that although they are expected to be favorable for Dominion, we do not believe that its 5%-6% EPS growth target will be enhanced. Rather, we expect that it could be extended beyond 2015," Worms added.



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