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LONG OPPORTUNITY: D (NYSE)

DOMINION RESOURCES SUM-OF-THE-PARTS VALUATION, LNG MULTIPLES AND AN MLP: 15% TO 40% UPSIDE


Disclaimer The opinions expressed in this presentation by Lateral Capital Management, Inc. (“LMCI�) are not an investment recommendation and are not meant to be relied upon in reaching an investment decision. LCMI and its employees, consultants and contractors are not acting in an investment, tax, legal or any other advisory capacity. The opinions expressed herein address a limited number of aspects regarding a potential investment in securities of the companies mentioned and are not a substitute for a comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations as to its accuracy. LCMI recommends that potential and existing investors conduct a thorough investment analysis of their own, including a detailed review of the companies' SEC filings, and consulting a qualified investment advisor. This material is based on information obtained from sources believed to be reliable, but the reliability of that source information. Any opinions or estimates constitute a best judgment as of the date of this presentation and are subject to change without notice. LCMI explicitly disclaims any liability that may arise from the use of this material. 1


Executive Summary 

At first glance, Dominion Resources, Inc. (NYSE:D) appears over-valued on a consolidated trading multiple basis to its large cap regulated utility peers

However, when the trading metrics are adjusted for projected earnings growth and the current dividend yield, D trades in line with comparable North American utilities

A Sum-Of-The-Parts (“SOTP”) valuation suggests that there is 10% to 30% upside to the current D stock price

Combining the D SOTP valuation with a valuation “look through” from comparable pure-play Liquefied Natural Gas (“LNG”) terminal multiples in both Australia and North America, there is a total valuation upside of between 15% and 40%

The planned public market listing of D’s midstream Master Limited Partnership (“MLP”) may crystalize for investors the contribution of D’s LNG operations to its valuation

D should also benefit from its status as a defensive stock if, and when, the current bull market in growth stocks finally comes to an end 2


Table of Contents 1. A Brief Introduction to Dominion Resources 2. Why Focus on Dominion Resources? 3. Sum-of-the-Parts Valuation 4. LNG Valuation 5. Consolidated Valuation 6. Other Share Price Upsides 7. Risks to Investment Thesis

8. Downside Protection


Section One

A Brief Introduction To Dominion Resources


Dominion Resources (D) Is One Of The Largest U.S. Regulated Utilities D’s Cove Point LNG asset (“DCP”) is currently an LNG import facility which is converting an LNG liquefaction facility. First LNG export cargoes are expected late 2017

Figure 1

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D’s Headquarters Are In Richmond Virginia Its operational focus is the upper right quadrant of the U.S. Most of its international assets have been divested in recent years

Figure 2

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The MLP Will Contain DCP And Selected Mid-Stream Assets The newly listed entity will be named Dominion Midstream Partners (“DMP�). The initial annual EBITDA of $200 million is forecast to increase to $1 billion once DCP is complete (approx. fiscal 2018)

Figure 3

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Section Two

Why Focus on Dominion Resources?


D Outperformed The Utility Sector by Almost 80% From 2008 to Mid-2014 D’s ability to materially outperform high yielding utility stocks in this market environment may be due to its regulated capex growth program ($2.5 billion per year) and the LNG export prospects

Figure 4

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D’s Growth Capex Program Is More Than Just LNG Exports Figure 5

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The Equity Market Currently Rewards High Growth Companies D has an (intangible) advantage over “glamour” growth stocks, which is the certainty of future revenues from its regulated capex program and the fully contracted output revenues from DCP

Figure 6 When the equity markets revert to a “risk off” mode, will they treat D as a “safe” regulated utility or as a “risky” growth stock?

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Despite Outperforming U.S. Utilities, D Has Underperformed the S&P500 Index This was our first data-point suggesting that D may not be as “over valued� as we had initially assumed Figure 7

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Not Surprisingly, D Trades At a Premium Multiple To Its Utility Peers Perhaps due in part to its lower relative leverage, D trades at a premium to the average large cap regulated utility. However, after adjusting for future growth and current dividend (i.e. PEGY) D trades in line with its peers

Figure 8 D’s combination of high yield and significant future growth should make it attractive to multiple investor classes

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Section Three

Sum-of-the-Parts Valuation


There Are No “Pure Play� Comparable Companies to D’s Operations We apply a premium to the trading multiples for merchant / unregulated generation companies, and a discount to the precedent transaction multiples for energy retailing companies

Figure 9

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SOTP Valuation: Enterprise Multiples Based on enterprise trading multiples, D appears fairly valued. This analysis excludes any value attributable to the MLP (DMP) and/or its LNG activities (DCP)

Figure 10

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SOTP Valuation: Equity Multiples Similarly, excluding DCP and DMP, D appears fairly valued on an equity trading multiple basis. This is somewhat unexpected (and encouraging) given the strong relative strength of the D stock price in recent years

Figure 11

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Section Four

LNG Valuation


Cashflow Available For Equity from LNG Export Project Year by year, illustrative returns to owners from a hypothetical greenfield LNG project Figure 12

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LNG Export Project DCF Valuation Over Time Using a 10% discount rate, the DCF valuation of an LNG project increases over time before declining around year 6 or 7. This is despite the fact that, in our example, the forecast cash flows are constant

Figure 13 Which begs the question, given that DCP is several years away from first cargos, how much value does the equity market currently attribute to D’s LNG operations?

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Comparable US LNG Export Terminals We focus on US export terminals because - unlike LNG projects in Australia, the Middle East, and around the world – US LNG exporters do not have commodity pricing risk. The are paid a flat fee for use of their capacity, unlike other nations where the LNG exporter has to source the gas and is paid revenues based on crude oil prices

Figure 14

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Cheniere Energy Corporate Structure Because of the differences between US and other nations in the economics of LNG export, there is only one comparable company. However, there are three different publicly traded stocks at different points in the ownership structure of that company

Figure 15

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Publicly Traded U.S. LNG Stocks All three of the Cheniere entities are “pure play� LNG liquefaction stocks but they hold different levels of beneficial interests in various LNG export projects

Figure 16

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Liquefaction mtpa Trading Multiples LNGL is a smaller, less liquid LNG comp and it trades on the ASX. As a result, its inclusion in our sample may understate our valuation of D’s LNG segment

Figure 17

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Public LNG Comps Trading Multiples Valuation A very conservative trading multiple valuation points to between $2 and $11 per share of incremental value for D’s LNG assets

Figure 18

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DCP Enterprise Valuation Sensitivities A more “realistic� LNG valuation multiple, even if combined with a higher timing discount, points to material stock price upside from current levels for D on a SOTP basis

Figure 19

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MLP Distributable Cash Flow Yield Valuation Sensitivities Figure 20

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Distributable Cashflow Yield Valuation: C-Corp versus MLP Figure 21

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Section Five

Consolidated Valuation


Consolidated Valuation Range Based on SOTP & LNG mtpa Multiples D appears currently priced somewhere between 10% over-valued and 40% under-valued. We would argue that the appropriate SOTP valuation is somewhere in the “mid” to “high” end of the range due to regulatory environments and the contracted nature of DCP’s LNG cashflows

Figure 22

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D SOTP Valuation Including LNG [ ] Figure 23

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Section Six

Other Share Price Upsides


Other Share Price Upsides 

Atlantic Coast pipeline project joint venture  90% subscribed with 20-year binding contracts, commencing late 2018

Dominion Midstream Partners (DMP) MLP IPO  IPO crystallizes contribution of LNG assets to D’s valuation  2% GP interest & IDRs  DMP ROFO on mid-stream assets  Absence of corporate taxation at DMP increases price able to pay for D assets  LNG import contract roll-off between 2017 and 2024  Additional funding flexibility

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Section Seven

Risks to Investment Thesis


Risks to Investment Thesis 

Utility sector valuations 

MLP IPO  

State &/or Federal rulings

Market risk 

Timing delays, etc

Regulatory risk 

Valuation contingent on success of DMP at assumed yield MLP tax benefits could be repealed in future years

LNG execution risks 

Future declines in comparable company public trading multiples

General equity market declines and/or movement away from growth stocks could impact the D stock price (although, D may be perceived by the investing public as a defensive utility stock providing some downside protection)

Interest rate risk  

Impact on utility valuations given high correlation with bond prices DCP financing

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Section Eight

Downside Protection


Downside Protection 

Growth transparency with fully contracted, 20-year LNG offtake

LNG cashflows commence late 2017 – no commodity price exposure

Currently undervalued (on SOTP basis) providing a measure of downside price support

In a (mild) equity market downturn –  

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Figure 24

rotation into defensive stocks may increase a material part of D’s SOTP valuation Higher credit quality stocks may be rewarded with higher PE multiples Relatively high dividend yield (3.7%) provides stock price support Preference for large cap over small cap stocks

Historical correlation with utility sector (0.82) and even less correlated with S&P500 Index (0.41) than other regulated utilities (0.48)

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