The current Treasurer of Dominion Resources Inc., Scott Hetzer, has to carefully consider all the options available for the company and come to a viable solution to present to the company's investment bankers the Cove Point Project. The Cove Point Liquefied Natural Gas (LNG) Project creates the opportunity to transform the area from an importer of gas to an exporter. If accepted, it would cost the company $3.6 billion in expenses and be the largest investment Dominion has made in 100 plus years in the industry.
Kenneth Eades and Stephen E. Maiden
Harvard Business Review (UV7087-PDF-ENG)
September 16, 2015
Case questions answered:
- What is Dominion Resources Inc.’s business model? How does regulation affect the business risk of Dominion’s utility businesses? Why did the CEO choose to focus on regulated and “regulated-like” business for Dominion?
- How would you describe Dominion’s financial policies and strategy? Are they consistent with the business risks faced by Dominion?
- How should Scott Hetzer structure Dominion’s financing strategy to best match the extra investment required for Cove Point? Should Dominion continue to pursue an all-debt strategy? A debt-plus-equity strategy? Or should Hetzer abandon Cove Point in order to safely pursue an all-debt strategy? Please be prepared with a specific recommendation along with the pros and cons for each of these strategies.
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Dominion Resources: Cove Point Case Answers
This case solution includes an Excel file with calculations.
Executive Summary – Dominion Resources, Inc.’s Cove Point Project
Dominion Resources Inc. is an energy company providing a variety of services in four segments through hydraulic fracturing (fracking), including power generation, energy network operations, energy traders, and energy service providers.
As the current Treasurer of the company, Scott Hetzer, it is my job to carefully consider all of our options available and come to a viable solution to present to the company’s investment bankers regarding the Cove Point Project.
The Cove Point Liquefied Natural Gas (LNG) Project creates the opportunity to transform the area from an importer of gas to an exporter. If accepted, it would cost the company $3.6 billion in expenses and be the largest investment Dominion has made in 100-plus years in the industry.
The question remains which financing approach to take, whether full debt finance or a mixture of debt-equity would bring the best results for the company. Another topic for concern is whether to move forward with the Cove Point Project since it has several years remaining for construction.
After careful analysis of our current options, I would recommend that Dominion Resources Inc. continue with its Cove Point project while using a Debt-and-Equity strategy to finance the remaining $3.6 billion of capital for it.
Although it won’t be completed for some time, it has already been initiated and is intended to be a long-term project for the company.
1.1 The Company
Dominion Resources Inc. is a utility company based here in the United States that focuses on the distribution and production of energy. The company specializes in fracking, which is the chief way to produce its gas supply. This process consists of combining horizontal drilling with hydraulic fracturing to remove the natural gas from shale formations. Dominion services are treated as a commodity among many energy industries.
Among other large utility companies, Dominion is closely regulated by local and national authorities such as The Federal Energy Regulatory Commission and State Corporation Commission.
Dominion Resources was founded during the colonial era and eventually became the largest producer and transporter in the country. It provided natural gas, electricity, and other services to the easternmost region of the United States.
The company supplied more than 6 million clients and operated as one of the nation’s largest underground natural gas storage systems, stretching more than 947 billion cubic feet. Nearly 52% of Dominion’s earnings come from power and energy trading. Electricity generation includes coal, nuclear gas, oil, renewables, purchasing power, etc.
Another 27% of its earnings come from the LNG Transmission Segment through energy network operations, which includes gas transmission, gathering, distributing, storing pipelines, and the aforementioned natural gas storage network.
The remaining 21% of the company’s revenue comes from the Dominion Virginia Power segment, which serves as an energy service provider. In addition, Dominion Resources regulates electric distribution in Virginia as well as Northeastern North Carolina. Lastly, it focuses on the unregulated retail market and customer service operations.
In 2007, Dominion decided to change its core business to maximize cash flows by selling off a good portion of its investments into E&P. By this, CEO Thomas F. Farrell II decided that he wanted Dominion to become a more regulated business overall.
Cove Point was a project that had a significant impact on Dominion’s long-term financing strategy and was highly considered by Treasurer Scott Hetzer. He decided to attend a meeting with a number of investment bankers to discuss the impact this project would have on the company. This liquified natural gas project would require some $3.6 billion in capital to build. This would become one of the largest investments in the company’s history.
The fracking industry had been on the rise, and Cove Point paved the way for Dominion Resources to become a primary exporter of U.S. natural gas. To rekindle, utilities were considered safe investments until the introduction of a number of regulatory changes. These utilities had also been historically considered “natural monopolies,” which had a positive impact on investors of the business.
Though the focus seemed to be on whether to finance Cove Point, the real issue at hand was how to finance the project. There were two primary options: an all-debt approach and a combination of debt and equity. Leverage ratios are the main focus when considering this decision: debt to EBITDA and FFO to debt. Credit rating agencies also find value in using these ratios.
Moreover, Dominion needs to maintain a respectable credit rating. Debt to EBITDA is currently at 4.6%, and FFO to debt is sitting at 13.6%. If these numbers are sustained and do not fall below 4.5% and 13%, the company would avoid the possibility of S&P changing Dominion’s financial risk to “aggressive.” This would result in a downgrade in their credit rating to BBB+.
This development would have the potential to damage Dominion’s interest expense. This could also put investors under the wrong impression that Dominion Resources is…
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