Dominion Resources:
Cove Point
Group 8
Colleen Conti
Austin Vutech
Jack Vaccaro
Jake Bradsell
Josh Stack
Overview
● Energy company with roots that date back to the early 1800’s
● Headquarter in Richmond Virginia with 6 million customers all along the
east coast
● CEO - Thomas Farrell II
● Portfolio of assets include:
○ 23,600 megawatts of generating capacity
○ 6,400 miles of electric transmission lines
○ 32,800 miles of natural gas transmission & distribution pipelines
● $12 Billion in revenue
● $53 Billion enterprise value
comprised of 3 business segments
Question 1: Part 1
What is Dominion’s business model?
● Generation (52% of earnings)
○ Manages the company’s portfolio and regulated utility assets
● Energy (27% of earnings)
○ Manages the company’s natural gas and pipeline assets
● Dominion Virginia Power (21% of earnings)
○ Manages regulated and non-regulated energy distribution and electric
transmissions
Question 1: Part 2
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?
● Regulated Utility vs. Non-regulated exploration and production
(E&P) of oil and gas
○ Investor split
○ Dominion undervalued
● CEO focus
○ Regulated and “regulated-like” allow a cost-plus method
○ Lock in future profits
○ Cove Point opportunity
Question 2 : Part 1
How would you describe Dominion’s financial policies and strategy?
● Use debt to finance projects (Duke Energy, Nextera Energy,
Southern Co.)
● Actively seek investments in regulated and “regulated-like”
businesses to lock in future profits
● Sold E&P oil and gas assets in 2007
● Great relationships with bondholders
● Strong reputation of EPS growth - 4.8% on average
Question 2 : Part 2
Are Dominion’s financial policies and strategy consistent with the
business risks faced by Dominion?
● In Cove Point Project, they would not assume ownership of liquefied
natural gas (LNG)
● This provides significant reduction of risk
● Long term contracts provide stable and visible earnings
● Gives Dominion increased diversability
● Potential growth opportunity outweighs any risks involved
Question 3
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?
Cove Point Project
● Bought by Dominion in 2002
● Used for importing, storing, and transporting natural gas till 2012
○ 2012 Revenue: $293 Million
○ 2012 EBITDA: $196.05 Million
● Shale fracking made US net exporter of natural gas
○ Drastically increasing global demand (Exhibit 33.1)
○ Liquefaction process improve easy of natural gas exportation
● Dominion renegotiated old contracts to clear capacity for exporting contracts
● Fully subscribe Cove Point’s production capacity 2017-2037
● DCF Model suggests project NPV = $614 Million and IRR = 11%
Global Demand for Natural Gas
● Increased prices
abroad make
exporting contracts
more profitable
DCF Model for Cove Point
● Project nearly
certain to
enrich
shareholder
value
All Debt Strategy With Cove Point
● Propose to finance extra investment in Cove Point Project
with all debt
● Would drop credit rating from A- to BBB+
○ Funds from Operations/Debt falls below 13% in 2013-2016
○ Debt/EBITDA increases to above 4.5 from 2013-2016
● Credit Downgrade would increase cost of debt by 40 basis
points
○ Costly for a utility company
○ Price decline in outstanding bonds
● Strong consistent ROE 2013 bey
● Keek value of Cove Point Project
All Debt Strategy without Cove Point
● Dominion could abandon the Cove Point Project and safely purse all
debt
● Would maintain A- credit rating 2013-2017
○ Maintained 4% cost of debt
○ Keep good relationship with bondholders
● Strong EPS growth and ROE 2013-2017
○ Dominion remains an investment grade company for institutional investors
● Lack of growth potential after 2017 without Cove Point
● Missed opportunity to take advantage of spiking global LNG demand
All Debt Financing Ratios
All Debt with Cove Point
All Debt without Cove Point
Debt plus Equity
● Propose to issue $1.15B in equity in addition to debt to fund Cove
Point
● This would keep the cost of debt at 4% instead of 4.4%
○ FFO/Debt stays above 13%, DEBT/EBITDA slightly above 4.5
(2013-2017)
● The NPV of future EPS issuing $1.15 B in equity is $14.51
● Maintain long term earnings potential of Cove Point Project
● Projected YoY EPS growth 2013-2017
Ratio Analysis
Conclusion
● Adding equity value of $1.15 Billion in combination with Debt is the
best strategy
● Financial remain strong enough to keep A- Credit Rating 2013-2017
● Maintain future growth opportunity with Cove Point LNG Export
Project
Questions?
