Why Dominion has a high leverage model with low risk

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Nov. 26 2019, Updated 9:32 p.m. ET

Dominion’s debt

Dominion Resources (D) had a total debt of $24.42 billion as of June 30, 2014. Most of the debt was raised by issuing long-term bonds and notes. Higher debt levels increase leverage for a company. As a result, the company has the ability to boost profits or magnify losses.

Debt

Credit metrics compared to its peers

Dominion’s debt to equity is 2.09x—compared to an average debt to equity ratio of 1.09x among its peers. The utility business in an asset rich business. A lot of infrastructure is needed to generate, transport, and distribute power. As a result, debt to asset can be used as a debt metric for the industry. Dominion has a debt to asset ratio of 0.47x. Edison International (EIX) has the lowest debt to asset ratio among the companies in the above chart.

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In all the metrics mentioned in the chart—excluding the debt to earnings before interest, tax, depreciation, and amortization (or EBITDA) ratio—Dominion is highly levered compared to its peers. Duke Energy (DUK) has the highest debt to EBITDA ratio of 5.60x. It’s followed by Dominion among the regulated utilities.

Superior credit rating

The credit rating defines an organization’s credit risk. Standard & Poor’s is one of the top rating companies in the world. It rates companies based on their financials. S&P assigned Dominion a credit rating of “A-” with a stable outlook. This is a higher rating compared to its peers. Only Southern Company (SO) has a rating marginally higher than Dominion.

A higher credit rating for a company with high amount of debt might seem surprising. Higher debt increases a firm’s credit risk. Dominion has been rated higher than its peers, despite its stretched financials. It has been rated higher because of it superior operating margins and low business risk.

The Utilities Select Sector SPDR (XLU) is a key exchange-traded fund (or ETF) in the power utilities industry.

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