Dominion Cove Point Case Analysis
Submitted To
Kazi Md. Tarique
Assistant Professor
ULAB School of Business
University of Liberal Arts Bangladesh
Submitted By
Shampa Koly- 202011036
Shabil Noshin- 202011020
Nasreen Noor- 201011213
Nadia Islam Aksha- 202011007
BUS 311- Corporate Finance
Section-1
Letter of Transmittal
Adabor 06, Mohammadpur
Dhaka, 1207
Contact: 01829148327
Email: shampa.koly.bba@ulab.edu.bd
April 30th, 2022
Kazi Md. Tarique
Assistant Professor
ULAB School of Business
University of Liberal Arts Bangladesh
688, Beribadh Road Mohammadpur
Dhaka - 1207, Bangladesh
Dear Sir:
Subject: Submission of report
With humble and honored respect, we are glad to submit the report you assigned us to prepare
by April 30th, 2023.
This report has been prepared based on secondary data and mainly focuses on the Dominion
Cove Point Case Analysis. Writing this report also enriched our knowledge, and we learned a
lot while gathering the information needed to prepare this report.
We have tried our best to make this report informative, and we sincerely hope that our report
will please you. Please contact us if you have any questions or need clarification about the
report. We want to thank you for giving us the opportunity.
Sincerely,
Shampa koly (202011036)
Shabil Noshin (202011020)
Nasreen Noor (201011213)
Nadia Islam Aksha (202011007)
2
Table of Contents
Title …………………………………………………………………...…..Page
1. Introduction………………………………………………………........04
1.1. Cove Point Project...………………………………………….04
2. Financial Strategy…………………………………………………......05
2.1. EV/EBITDA ratio.….…………………………...……...........05
2.2 Price/ Earnings ratio.….……………………………...……….06
2.3. Dividend payout ratio......…………………………..………...07
2.4. Dividend Yield ratio...…...………………………..………….08
2.5. EBITDA/Interest ratio....…...……………………..………….08
2.6. Net Debt/EBIT ratio....…....……………………..…………...09
2.7. Total Debt/Capital ratio....…....................................................09
2.8. Market/Book ratio....................................................................10
2.9. Credit rating......……………………………...……………....11
3. All Debt Financing for Cove Point…….………...…………….…......13
4. Debt Plus $2 Billion Equity Financing…………………………....….15
5. Debt Plus $3 Billion Equity Financing…………………………….....17
6. Mandatory Convertible Bonds..............................................................20
7. Dominion Decision.....…...……………………………………………21
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1. Introduction
Dominion Energy focuses on supplying electricity and natural gas to customers in markets that
are both regulated and unregulated, forming the core of its business model. Dominion Energy
has three primary business segments, which include power delivery, gas infrastructure, and
power generation, where it conducts its operations. Dominion Energy's power delivery segment
is responsible for conducting regulated electric transmission and distribution operations,
whereas the gas infrastructure segment oversees regulated gas transmission and distribution
operations. On the other hand, the power generation segment handles non-regulated electric
generation operations. The level of regulation that Dominion Energy's utility businesses are
subjected to can impact their business risk. As a company operating in a heavily regulated
industry, Dominion Energy is vulnerable to significant earnings and financial position changes
due to regulatory changes such as alterations in rates, environmental regulations, and other
factors. Nonetheless, operating in regulated markets provides the utility with a guaranteed rate
of return on its invested capital, providing a certain level of earnings stability and predictability.
1.1. Cove Point Project
Through initiating the Cove Point Liquefied Natural Gas Project, Dominion Energy is aiding
the area in transitioning from gas importation to gas production. If the company decides to
proceed with the project, it will require an investment of $3.6 billion, making it the most
significant investment Dominion Energy has made in over a century of business. However, the
financing model for the project is still uncertain, as the company is deciding between debt
financing or a mix of debt and stock. Additionally, there is a decision to be made about
continuing the project, which is still in progress and will take a few more years to complete.
To start the Cove Point project, Dominion Energy will require a total of $18 billion.
The Cove Point Project involves several stages of the liquefied natural gas (LNG) supply chain,
including the production and transportation of natural gas from domestic shale reserves to the
facility, the liquefaction of the gas to make it transportable by sea, and the loading of LNG onto
specialized ships for export to international customers. Dominion Energy owns and operates
the Cove Point facility, and the project is a significant source of revenue for the company. The
facility can produce and export up to 5.25 million metric tons of LNG per year, and Dominion
has secured long-term contracts with customers in Asia and Europe to sell LNG.
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The Cove Point Project represents a significant expansion of Dominion Energy's business
model beyond its traditional focus on regulated utility operations, allowing the company to
participate in the growing global market for natural gas. However, the project also carries
significant risks, including regulatory and environmental risks associated with the construction
and operation of the facility, as well as market risks associated with fluctuations in global
demand for natural gas and changes in international trade policy.
2. Financial Strategy of the Dominion
The company's business plan must include a plan for the money. It indicates how the company
plans to pay for all of its operations to reach its goal now and in the future. A financial strategy
is a plan for how the company will make money. Not only does the financial strategy involve
managing a company's finances, but it also involves doing so to achieve the company's goals
and objectives and gradually grow shareholder value. Because financial ratios are a
mathematical way to compare data from a company's financial records, we can use this
situation to learn about a company's liquidity, business efficiency, and profitability and use that
information to describe its financial strategy. Using information from both the current and past
financial accounts, financial ratio analysis assesses the performance and financial stability of
an organization. Another practical use of ratio analysis is to compare a firm to others in the
same industry or to averages within that industry.
2.1. EV/EBITDA Ratio
Alternatively, it is referred to as the Enterprise Multiple Ratio. The EV/EBITDA ratio is a
frequently used measure to contrast a company's debt-included value to its cash profits less
non-cash costs. The ability to compare companies in the same industry is ideal for analysts and
investors. The EV/EBITDA is good at below 10.
From (Ex-6) Comparable Utilities
EV 52,757
EBITDA 4745
EV/EBITDA 11.11
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The EV for Dominion is 52,757, and EBITDA is 4745, from which we can come to the
conclusion that the EV/EBITDA Ratio for Dominion is 11.11, which results in the actual year
2012, which is greater than the 10. Here, we can say that the company is not in good health
because the ratio is higher.
2.2. Price/Earnings Ratio
The price/earnings ratio is a measure of a company's valuation that evaluates its current share
price against its earnings per share (EPS). The price-to-earnings ratio indicates how much
money an investor needs put into a company in order to receive one dollar of its profits. As a
result, the P/E ratio is sometimes referred to as the price multiple since it represents the price
at which investors are willing to accept a given dollar of profit. A high P/E ratio may imply
that a stock is overpriced and that its price is too high in comparison to its earnings. A low P/E
ratio, on the other hand, may indicate that the current stock price is undervalued in relation to
earnings.
From (Ex-6) Comparable Utilities
Stock Price 55
EPS 3.05
Price/Earnings Ratio 18.03
We may therefore conclude from this case that Dominion Company has a high price-to-
earnings ratio. It shows that the stock price of this firm is excessive in relation to profits and
may even be overvalued.
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2.3. Dividend payout ratio
The percentage of earnings distributed to shareholders as dividends is known as the dividend
payout ratio and is often stated as a percentage. Some businesses distribute all of their profits
to shareholders, while others only do so in part. If a firm chooses to distribute a portion of its
earnings as dividends, it keeps the balance for itself. A retention ratio is computed to determine
the number of earnings maintained. It's crucial to understand that although the dividend payout
ratio shows how much of a company's net earnings are distributed as dividends, the dividend
yield provides information on the straightforward rate of return in the form of cash payouts to
shareholders. From (Ex-6) Comparable Utilities, we can see that the dividend payout ratio is
69% which is comparatively lower than the other company.
Dominion Duke NextEra Southern Xcel American P.S. DTE
Energy Energy Co Energy Electric Enterp Energ
Power rise y
Group
Dividend 69% 99% 53% 73% 58% 72% 56% 68%
payout
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2.4. Dividend Yield Ratio
The dividend yield ratio of a company displays what percentage of the yearly market value of
its investors it distributes in the form of dividends. The ratio is crucial for investors who
purchase shares so they can receive dividend payments. Additionally, shares with higher
dividend yields could fetch a higher price when they're put up for sale, which often results in
bigger profits for the shareholder.
From (Ex-6) Comparable Utilities
Cash dividend per share 2.11
Market price per share 55
Price/Earnings Ratio 3.84
We can see that Dominion Company's dividend yield is 3.8%. It indicates that if the investor
purchases the company's common stock at the current market price, he will get dividends
totaling 3.8% of his investment. Investors are more likely to select a firm with a higher dividend
yield percentage. Therefore, there are plenty of opportunities for the market value of the stock
to increase, and it would appear that the company is a safer choice for an investment portfolio
than a company with a low dividend yield. As a result, we reach the conclusion that Dominion
Company is unsafe given its lower dividend yield.
2.5. EBITDA/Interest Ratio
The purpose of this approach is to assess whether a company generates enough profit to meet
its interest expenses and determine its financial sustainability.
From (Ex-6) Comparable Utilities:
EBITDA 4745
Interest expenses 832
EBITDA/Interest Ratio 5.7
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The EBITDA for Dominion is 4745, and the interest expense is 832, from which we can come
to the conclusion that the EBITDA/Interest Ratio for Dominion = 4745/832 results in the actual
year 2012 being found to be 5.7. This demonstrates that the corporation is able to pay off its
interest charges. Even if the firm has an EBITDA-to-interest coverage ratio greater than 1, it
may not be able to cover its interest payments since the company may need to spend an
important portion of its profits updating old equipment. Because EBITDA does not include
depreciation-related expenses, a ratio greater than one may not be a reliable predictor of
financial stability.
2.6. Net debt/EBITDA Ratio
There was also mention of net debt/EBITDA. Divided by a company's EBITDA, this ratio
calculates leverage by subtracting cash or cash equivalents from interest-bearing liabilities. If
net debt and EBITDA remain constant, the net debt-to-EBITDA ratio reveals how long it would
take a corporation to pay off its debt. Companies want to know how well they can pay off their
loans; therefore, they look at the net debt-to-EBITDA ratio.
From (Ex-6) Comparable Utilities:
Net Debt 21238
EBITDA Ratio 4745
Net Debt/EBITDA 4.5
Ratios higher than 4 or 5 imply that a corporation is less likely to be able to handle its debt
burden and take on further debt to grow the business. Dominium's ratio of 5.7 shows that the
corporation can't pay its obligations and takes years to do so. As shown, their debts exceed
EBITDA. It's not a suitable financial plan for this company because its valuation is over $4 and
its debts are significant.
2.7. Total Debt/ Capital Ratio
Next, A company's financial strategy can be described using the overall Debt/Capital ratio. The
total debt-to-capitalization ratio is a metric used to determine how much total corporate debt is
outstanding relative to the company's total capitalization.
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From (Ex-6) Comparable Utilities:
Total Debt 21486
Total Capital 32111
Total Debt/Capital Ratio 67%
The ratio shows the company's leverage, which is the number of loans it uses to buy assets.
Companies with a lot of debt must carefully handle it and make sure they have enough cash
flow to cover both the principal and interest payments. If a company has a lot of debt compared
to its total cash, it is more likely to go bankrupt. Based on what we know, we can assume that
this company has more debt than its competitors, which puts it at a higher risk of going
bankrupt. This is because its total Debt/Capital ratio is 67%, which is the highest among its
rivals.
2.8. Market/Book Ratio
The market/Book ratio also describes Dominion's financial approach. The market/Book for this
firm is $2.97. A low ratio (less than 1) indicates that the stock is undervalued, while a high
ratio (more than 1) indicates overvaluation. Many disagree; therefore, a corporation may
benefit from using other stock valuation methodologies instead of the Price Book ratio.
From (Ex-6) Comparable Utilities:
Market Capital 31519
Book equity 10,625
Market/Book Ratio 2.97
Low ratios may signal company issues. This ratio can also make it seem like you're paying too
much for the company's bankruptcy. Thus, this company is a good investment because its value
is greater than 1 and higher than that of its competitors. Thus, higher Market/Book ratios
indicate stronger corporate performance.
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2.9. Credit Rating
A credit rating is a numerical assessment of a borrower's creditworthiness, which can be
assigned to any individual, organization, or government seeking to borrow money. Dominion
Company, for instance, holds an A- credit rating, indicating its capacity to fulfill its financial
obligations. However, such a rating suggests a susceptibility to adverse economic conditions
and changes in circumstances. A borrower's credit rating is a crucial factor in determining their
ability to repay the loan promptly, with those with higher ratings having a better chance of
doing so. Conversely, those with poor credit ratings may encounter challenges repaying debts
in the past and in the future. Ultimately, an entity's credit rating affects its likelihood of
obtaining a loan or favorable loan terms.
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Table-1
Source: Case writer estimates
3.All Debt Financing
A corporation engages in debt financing when it borrows money that will be paid back over
time with interest. It could seem as a secured loan or as an unsecured loan. A company obtains
a loan to pay for operational capital or an acquisition. In order for Dominion to take up all debt
financing, it will have to pay a certain amount of interest consistently. The rate of interest is
4% which will continue to increase each year. Since Dominion has a credit rating of A-, their
credit rating may downgrade to a BBB+ if they take up all debt financing. The reason for this
can be seen in the first graph ‘Debt/EBITDA’ that starting from 2013 it is over 4.5, which is
the maximum ideal value. From graph 2 ‘Funds from operation/debt (%)’, we can see that the
values are under 13 except from the estimate of 2017 and it is unfavorable because the ideal
value should be over 13. As these two ratios are unfavorable it will bring upon financial risk
for Dominion and it will decrease the company credit rating, creating a negative image of the
company.
Graph-1
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Graph-2
Advantages of all-debt and credit downgrades:
I. Dominion Resources won't have a cash flow issue because they have no trouble paying back
the loan. The corporation is able to pay its bills on time, therefore they won't receive any
penalties at the same time.
II. Another benefit of debt financing is that Dominion Resources will be able to deduct the
interest payments from taxes because the company will benefit from a certain tax shield due to
the all debt financing.
Disadvantages of all-debt and credit:
I. Dominion Resources must have an acceptable credit rating to qualify for the debt.
II. Principal amount and interest payments must be made on time every time, and Dominion
Resources is required to repay the amount loaned plus interest if it has trouble completing
loan payments due to uncertain cash flows. Declines in sales might make it extremely
difficult to make loan payments on time.
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Graph-3
From the above graph, we can see that the earnings per share may increase over the year, which
is positive for the company. Although it is favorable for both investors and shareholders
because it is important for the company’s growth.
So, from the above analysis, although the earnings per share are increasing, the EBITDA/Debt
and Funds from Operations/debt (%) are not in a favorable condition, which may affect the
company’s credit rating. Hence, Dominion cannot take on all the debt financing for the Cove
Point project.
4. Debt Plus $2 Billion Financing
Equity financing involves selling stock in the company, whereas debt financing means
borrowing money. The main advantage of equity financing is that the borrowed funds are not
subject to repayment. As seen in graph 4 ‘Debt/EBITDA’ that starting from 2013 it is 4.5 which
is the ideal value, except for 2014, where it is under the said value. From graph 5 ‘Funds from
operation/debt (%)’, we can see that the values are over 13 which is ideal. As these two ratios
are favorable it will not bring upon financial risk for Dominion and the credit rating will remain
consistent throughout the timeline.
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Graph-4
Graph-5
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Graph-6
It can be seen that both debt/EBITDA and funds from operations/ (%) are in favorable
conditions. However, over the year, the earnings per share have decreased compared to the
previous all debt financing. If the EPS decreases, it is risky for the company and gives a
negative signal to the investors and the shareholders. Hence, Dominion cannot adopt the debt
plus $2 billion in equity financing.
5. Debt Plus $3 Billion Financing
Now, Dominion is considering taking on debt plus $3 billion in financing. As seen in Graph 7,
‘Debt/EBITDA’ that starting from 2013, it is below 4.5, which is the ideal value. From graph
8, ‘Funds from operation/debt (%)’, we can see that the values are over 13, which is ideal. As
these two ratios are favorable, it will not bring upon financial risk for Dominion, and the credit
rating will remain consistent throughout the timeline.
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Graph -7
Graph - 8
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Advantages of Debt Plus Equity Financing:
I. By opting for equity financing, Dominion Resources faces less risk as it is not obligated to
make monthly loan payments. This is especially crucial in the absence of initial profits,
allowing the firm to allocate resources towards expanding the business.
II. In case of credit issues, Dominion Resources considers equity financing as an option for
obtaining funds for expansion. Although debt financing is available, high interest rates could
pose a challenge.
III. Dominion Resources' equity investors prioritize a long-term perspective and do not expect
immediate returns on their investments. Their views reflect a belief that failure of the firm
would result in losses for them.
Disadvantages of Debt Plus Equity Financing:
I. Collaborating and sharing ownership can cause tension and disagreements among individuals
who may have differing visions, management styles, and approaches to managing the
company's operations. This is a crucial factor that requires careful consideration.
II. Stockholders will demand a return, and the amount given to partners may be greater than
the debt financing interest rate.
Graph - 9
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It can be seen that both debt/EBITDA and funds from operations (%) are in favorable
conditions. However, over the year, the earnings per share have decreased compared to the
previous all debt financing and all debt plus $2 billion equity financing. If the EPS decreases,
it is risky for the company and gives a negative signal to the investors and shareholders. Hence,
Dominion cannot adopt the debt plus $3 billion in equity financing.
6. Mandatory Convertible Bonds
From the above analysis, it can be seen that Dominion cannot adopt both all debt financing and
debt plus $2 billion/$3 billion in equity financing due to certain disadvantages of both.
However, the financial statements depict that the Cove Point project is good for Domino
because it may generate higher profit in the future. Hence, Dominion should adopt the Cove
Point project but in a different way, which is through mandatory convertible bonds. A
mandatory convertible bond is a corporate bond that, on or before a certain date, must be
converted into shares of common stock. Holders of traditional convertible bonds have the
choice to convert, whereas holders of mandatory convertible bonds are obliged to do so.
There are two key advantages to issuing mandatory convertible bonds for dominion.
I. The mandatory convertible essentially provided a forward equity, a commitment to
issue equity on or before the maturity date.
II. The owners of a regular convertible could choose to not convert, which would force
Dominion to pay the bonds’ principal at maturity and would present uncertainty to the
market and to the credit agencies as to whether the bonds would act as a bond or equity.
III. Mandatory convertible bonds however were viewed by S&P as 100% equity at the
times of issuance.
IV. Delaying the issuance of the equity was preferable to issuing equity immediately
because it delayed the share dilution until Cove point would begin to contribute to
dominion’s profitability. This reduced the EPS dilution effects because cove point’s
profits would serve to offset the impact of the newly issued shares.
It can be seen that if Domino adopts mandatory convertible bonds, it is safe for the shareholders
and the investors. Hence, Dominion can issue the mandatory convertible bonds in order to take
up the Cove Point project.
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7. Dominion Decision
In June 2013 and July 2014, Dominion issued $1.1 billion and $1 billion, respectively, of
mandatory convertible bonds. Unlike regular convertible bonds, where the owners had the
option of converting into a contracted number of common shares, owners of the mandatory
convertible bonds were obligated to purchase shares of Dominion common stock prior to
maturity. Finally, Dominion adopted this project successfully.
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