Bacon's Rebellion

Democracy Thrives in Sunlight

Dominion Offers New Investment Option

—

by

James A. Bacon
in

Dominion Energy has launched a new financing program, Dominion Energy Reliability Investment, that will allow investors to purchase debt issued directly by the company.

The offering bears similarities to money market funds in that investors can put in and withdraw money freely. The big advantage is that they earn significantly higher interest rates — 1.75% for accounts with balances less than $10,000, $2.0% for balances over $50,000, and $1.8% for balances in between. But in contrast to money market funds, which invest in a diversified portfolio of notes, investors enjoy no diversification and do not benefit from federal regulations protecting money market funds, so they do take on a modicum of additional risk.

The program is administered by the Northern Trust Company, so Dominion presumably does pay an administrative fee. Otherwise, middleman are cut out of the transactions to the benefit of both Dominion and its investors.

The idea is not unique to Dominion. Duke Energy, and the financial arms of Ford, GM, Caterpillar and others all have comparable programs, says Dominion spokesman C. Ryan Frazier. The initiative provides “diversified and cost-competitive funding for capital investment programs,” he says.

The company prospectus states that the company can float up to $1 billion in notes outstanding.

Bacon’s bottom line: There is a fringe benefit to this initiative that may or may not have factored into Dominion’s thinking: Expanding the number of investors in the company enlarges its political constituency. Virginians who own Dominion stock often attend public hearings and speak on the company’s behalf. This new program creates a new investment vehicle that should appeal to a new class of investor. If those investors believe they are getting a better deal from Dominion than they can from bank CDs or money market funds, it is not a stretch to think they might be more favorably inclined to Dominion’s public policy positions.

Some observers might find this insidious. I’m perfectly OK with it. I think large companies should do more to expand the investor class and build support for America’s market-based economic system, and if they cut out big bank/big finance intermediaries in the process, all the better. Anything that helps Main Street over Wall Street is a good thing.

Share this article

ADVERTISEMENT

(comments below)

ADVERTISEMENT

(comments below)

Comments

8 responses to “Dominion Offers New Investment Option”

  1. Steve Haner Avatar
    Steve Haner

    I don’t think it insidious, but the word altruism doesn’t come to mind. As I read in some recent SCC filings, the current return on equity allowed to Dominion on power plant investments is 9.2 percent, and if they are on the list for incentives it goes up to 10.2 percent. Under normal rules that would apply only to equity, not debt, and when debt is used for financing the ratepayers would only repay the interest without a profit margin. Given real regulation it would be an advantage to ratepayers for Dominion to raise low-cost capital. If the capital is otherwise invested, of course, the company and its stockholders keep the excess yield.

    This not the era of real regulation. With the SCC still tied up on the sidelines until 2022, and only partially free to act then, Dominion’s actual profit margins remain unknown and it is will be hard to follow these dollars. The ratio of debt to equity is always a sticking point in SCC cases and this may be a way around that.

    “There is a fringe benefit to this initiative that may or may not have factored into Dominion’s thinking: Expanding the number of investors in the company enlarges its political constituency. ” You are not that naive, Jim – of course they’ve thought of that.

    1. Acbar Avatar
      Acbar

      “This is not the era of real regulation.” Agreed! But suspension of the SCC’s ratemaking authority does not affect the many other aspects of Dominion that it regulates, including issuance of debt and review of affiliate relations.

      As far as the interest to be paid is concerned, I feel strongly it should match what Wall Street is demanding for Virginia Power debt issued contemporaneously. If Dominion pays less to its own customers for this debt, that should be solely because of lower issuing and transaction costs, not because it can get away with paying less to less-knowledgeable customers. In the old days debt usually cost 4-5% below equity, which would imply around 4% (a lot less than 9.2% you mention but better than banks and CDs) but my info is dated. Whatever, what Virginia Power debt (and, separately, Dominion Energy debt) sells for is a matter of easily-obtained public record.

      Totally agree with your last paragraph!

  2. TBill Avatar
    TBill

    I don’t see the advantage at the moment. You can easily get 2-3 year CD’s for almost 3% interest now…I am talking about the brokerage CD’s you can purchase online from your Fidelity or Vanguard style brokerage accounts.

    Vanguard Prime Money Market Fund is 2% and will increase steadily with the Fed’s regular approx. quarterly interest rate adjustments upwards. There is also a tax-free version of the Prime Money Market fund.

  3. TomH Avatar
    TomH

    This is another clever, creative financial move by Dominion.

    The estimated interest rate for the Atlantic Coast Pipeline is 6.8%. Dominion wants to pay individual lenders 2% or less, with no mention of whether the loan is backed by an asset. Wall Street 6.8%, Main Street 2% with Main Street maybe shouldering a higher risk?

    There have been campaigns to notify banks of the damage caused by energy projects and the potential for stranded costs as use declines before the end of the financial life of the project. Dominion might be seeing less interest on the part of the banks. In any case it is cheaper money.

    If this money was used for a utility project, it could lower the cost of financing for ratepayers, since they must repay the cost of any interest for utility projects. If it is used for the pipeline, it would lower the cost of financing the pipeline for the owners. The utilities would still have pay the contractual price for using pipeline ($4 billion for the first 20 years for Dominion ratepayers). With Dominion cancelling the plants it said it needed the ACP for and Duke cancelling half of theirs (the remaining projects are based on overoptimistic load forecasts) there is a chance the pipeline will transport very little gas. Dominion’s ratepayers will pay billion of dollars extra for something they don’t need.

    The PR aspect is never far from Dominion’s mind. All of Dominion’s charitable donations all over the state are now being made under the name of the Atlantic Coast Pipeline, rather than in Dominion’s name. The ACP is even providing volunteers to non-profits even though the ACP has no employees.

    I have suggested that Virginia set up a fund such as this paying higher than bank CD rates to investors that provide low-interest loans for energy efficiency and distributed solar projects. This would provide efficiency and solar power to customers throughout the state at a fraction of the cost of similar projects built by the utilities. With the utilities building the projects ratepayers repay 3-4 times the project investment, half of that is profit to the utilities.

  4. Acbar Avatar
    Acbar

    I don’t have a problem with approaching customers as well as Wall Street to raise debt. Utilities are capital intensive businesses and raise debt and equity nearly constantly. But this discussion is troubling.

    First, a utility’s raising debt is something that traditionally must be authorized by the utility regulatory commission (here, the State Corporation Commission). This is because the public served by and dependent upon a public utility must be protected from the risk of financial as well as physical failure of the utility. This requirement for debt approval applies to the debt of the public utility and may apply to its holding company (depending on the State’s laws). I haven’t researched the situation in Virginia today but the Utility Facilities Act is still in effect and, at the least, if an expensive new generator is being built by the utility and added to its customers’ ratebase any debt incurred for that purpose would have to be approved by the SCC. The SCC could, and should, insist that the interest paid on any utility debt sold to customers be equal to the interest rate paid on the utility’s (if none, the utility holding company’s) contemporaneous debt sold to Wall Street. And the utility’s offering to customers should so state.

    Second, utility debt normally is associated with capital investment by the utility in the utility’s regulated plant-in-service (if ratebased). If a default occured, such debt is backed by the utility’s hard assets as collateral. If the debt is incurred by the utility’s holding company for unregulated projects, like the ACP, or merchant generating plants in Virginia, or investments in wind projects in Texas for that matter, this is not regulated-utility debt and has no claim on the utility’s rate base for collateral and should not be marketed or sold to regulated-utility customers as though it did.

    Third, TomH raises a very good point: The risk of obsolescence in a merchant generating plant falls on the investor, but in the case of a ratebased utility generating plant, that risk is shifted to the utility’s customers. True, they should have a claim on the utility’s plant in service as collateral for any debt they bought; but what if the utility made bad investments in generating plants that have become obsolete and can no longer compete to sell in the wholesale electric markets? With all the turmoil in the electricity markets over zero operating cost renewables generation and the forecast exhaustion of the low cost Marcellus Shale gas supply, this is a very risky time to make an investment in debt to finance a big baseload generating plant to be amortized over 40-50 years. If the utility has an affiliate that wants to build such a plant as merchant generation, fine, go for it; the financial case can be made for such units being so profitable for the next 10 years that they will recover the investment rapidly and what happens after that is only “gravy.” That’s the upside. But what if market conditions do not permit rapid recovery of investment and then the generating plant just sits there, idle most of the time? This is the downside. The risk of obsolescence should not fall on utility customers and it should not fall on utility debt holders either.

    If customers want to invest for ideological reasons in certain types of utility ventures, like renewables generation, or customer-owned distributed generation or energy efficiency products, fine. The risk of obsolescence is low, the motivation is not entirely financial but has a feel-good component. Selling debt to customers to establish a fund to lend low interest funds to other customers for such projects (as TomH suggests) could be a successful venture, not to mention generating good press for the utility. Again, however, I think the interest paid should match what Wall Street demands for debt, and the utility should collateralize it if it is utility debt.

  5. James A. Bacon Avatar
    James A. Bacon

    Yes, investors need to take into consideration Dominion’s overall level of indebtedness — the company is highly leveraged — and they need to be aware of the risks associated with supporting that debt. Dominion Energy Reliability Investment is subordinated debt. If Dominion ran into trouble, investors in this debt might find themselves sucking hind teat.

    As for the appropriate level of interest, I think the market will sort that out. Investors will compare the interest rate offered, the level of risk they’re taking, the liquidity of the investment, and flexibility in accessing their cash.

  6. TooManyTaxes Avatar
    TooManyTaxes

    Real cost-of-service regulation includes a calculation of debt costs. If Dominion obtains a significant amount of this low-cost debt, it’s rates should be reduced. Here significant means more than what gets lost in rounding.

    1. Acbar Avatar
      Acbar

      You are correct, IF the regulator gets to look at the total picture and is not restricted to looking at costs and revenues in the myriad of pigeon-holes/silos created by all those separate riders which themselves are separate from base rates.

Leave a Reply

Read More