Dominion Gas Holdings, LLC—Anticipatory Interest Rate Hedging

12 Pages Posted: 30 May 2017 Last revised: 20 Nov 2017

See all articles by Pedro Matos

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Stephen E Maiden

University of Virginia - Darden School of Business

Abstract

The case examines interest rate risk management at a U.S. utility company, Dominion Gas Holdings. In November 2012, as part of its new financing plan, it wanted to hedge the interest rate risk involved with the company's 2013 planned issuance of $1 billion in debt. While the coupon rates for the planned debt were unknown as of November 2012, the company wanted to lock in its financing costs one year ahead since interest rates were at historically low levels. The company was considering entering into a number of forward-starting interest rate swaps. The use of forward-starting interest rate swaps as a pre-issuance hedging tool could cause some accounting and regulatory risks, and some other utility companies chose not to hedge at all. A bank had approached Dominion Gas with an indicative quote for the forward-starting swap, and the Treasurer had to decide whether it was a fair rate. This case has been used in a first-year MBA class that focused on valuation of financial markets, and a more advanced second-year elective that focused on derivative securities.

Excerpt

UVA-F-1754

Rev. Nov. 3, 2017

Dominion Gas Holdings, LLC: Anticipatory Interest Rate Hedging

In November 2012, Dominion Resources, Inc. (DRI), one of the largest producers and transporters of energy in the United States, was planning the creation of a subsidiary that would consolidate the major components of Dominion's regulated gas businesses under one intermediate holding company entity. The timeline called for the formation of a new legal entity, Dominion Gas Holdings, LLC (Dominion Gas), around September 2013 by transferring several regulated gas subsidiaries from DRI to Dominion Gas. As part of its new financing plan, Dominion Gas planned to issue at least $ 1 billion in debt in November 2013. The offering would consist of senior notes, and the maturities would be a combination of 3-year, 10-year, and 30-year notes.

While the coupon rates for the planned debt were unknown as of November 2012, the company wanted to lock in its financing costs ahead of time. Interest rates were at historically low levels (see Exhibit 1), and market commentators were predicting rising interest rates with the end of the U.S. Federal Reserve's monetary quantitative easing looming. The company was considering entering into a number of interest rate swaps to mitigate the interest rate risk associated with the anticipated long-term debt issuance. One particular set of swaps the company was considering was designed as a pre-issuance hedge for the portion of the 3-year debt offering that assumed a $ 250 million principal amount of such notes would be issued in November 2013.

Dominion Gas Holdings, LLC

. . .

Keywords: hedging, derivatives, interest rate risk, financial engineering

Suggested Citation

Matos, Pedro and Maiden, Stephen E, Dominion Gas Holdings, LLC—Anticipatory Interest Rate Hedging. Darden Case No. UVA-F-1754. Available at SSRN: https://ssrn.com/abstract=2974584

Pedro Matos (Contact Author)

University of Virginia - Darden School of Business ( email )

University of Virginia
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434 243 8998 (Phone)
434 924 0726 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty-research/directory/pedro-matos/

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Stephen E Maiden

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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