Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 October 21, 2015 - 5:21 PM EDT
Print Email Article Font Down Font Up
Fitch Affirms Ratings of Dominion Resources and Subsidiaries

Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of Dominion Resources, Inc. (DRI) and the 'A-' IDRs of its subsidiaries Virginia Electric and Power Co. (VEPCo) and Dominion Gas Holdings, LLC (DGH). The Rating Outlook for all entities is Stable. A full list of ratings is provided at the end of this release.

KEY RATING DRIVERS for DRI

Diversified Asset Base: DRI owns a large portfolio of utility, power, midstream, and other energy assets. The business risk and financial profile are anchored in VEPCo, a large integrated electric utility based in Virginia that represents approximately two thirds of consolidated earnings and cash flows. Two regulated gas distribution companies, two Federal Energy Regulatory Commission (FERC)-regulated interstate gas pipelines, a liquefied natural gas (LNG) import facility (Cove Point), merchant generation, and natural gas gathering and processing facilities round out the portfolio.

Large Capex Plan: Fitch believes DRI's business risk profile will be elevated for the next few years, reflecting the construction risks associated with various large-scale projects. Growth capex aggregates to $19.2 billion over six years, excluding an estimated $1.5 billion-$2 billion for annual maintenance expenditures and environmental. The large capital plan is centered on the Cove Point LNG export facility, new utility generation and infrastructure, and expansion of the midstream natural gas and local gas distribution businesses.

Corporate Reorganization: Over the past two years, DRI has reorganized its large diversified portfolio of energy investments by forming DGH and Dominion Midstream Partners (DM) a Master Limited Partnership (MLP). Fitch considers the reorganization to be neutral for credit quality. By creating two new entities, DRI subordinated a portion of its cash flows, but also increased financial flexibility - as these entities access capital independently - and transparency. The two new entities will be self-funding, reducing parent-level debt financing, and will file separate financial statements, providing increased transparency. DRI will continue to finance the projects that fall outside of DGH and DM, including the Cove Point import and export facilities, its merchant generation facilities, and its equity investment in the recently announced Atlantic Coast Pipeline project. The Blue Racer joint venture (JV) is also self-funding.

Parent-Level Debt: The percentage of parent-level debt is high, reflecting the prior centralized funding strategy for all subsidiaries and operations, except VEPCO. Parent debt totals approximately $12.8 billion or roughly half of total consolidated debt. Parent debt is supported by dividends from VEPCo and DGH, and the earnings and distributions from the Blue Racer JV, the 4,200MW merchant generation fleet, Cove Point and other investments. In Fitch's deconsolidated financial models a portion of parent level debt is allocated across DRI's businesses, but still results in significant parent debt leverage.

Cove Point: The Cove Point LNG export facility has received all regulatory clearances and construction is underway. DRI estimates the overnight project development costs to be between $3.4 billion and $3.8 billion with commercial operation in late 2017. Capacity is fully subscribed to investment-grade counterparties under 20-year agreements and DRI takes no commodity or volumetric risks during the contract term.

Financial Profile: Consolidated leverage is high for the rating level, but should gradually improve over the next several years as approximately $2.1 billion of mandatorily convertible debt converts to equity in 2016 and 2017 and DRI realizes anticipated earnings contributions from projects currently under construction, including the Cove Point export facility. Fitch expects Debt/EBITDAR to be approximately 4.75x-5.0x in 2015 and 2016 and fall below 4.5x in 2017. The timely commercial operation of Cove Point in late 2017 would drive further improvement.

KEY ASSUMPTIONS

--DRI will raise $2.1 billion of equity through mandatorily convertible notes in 2016 and 2017;

--Debt will reside at each of the three operating subsidiaries, resulting in less parent-level debt and parent leverage;

--Organic growth capex will remain elevated through 2017 coinciding with the completion of Cove Point;

--VEPCo's base rates remain frozen through 2019;

--Timely execution of capex plan.

RATING SENSITIVITIES for DRI

Positive: Positive rating action is not expected at this time given the large capital investment plan and high consolidated leverage. However, ratings could be upgraded if adjusted debt-to-EBITDAR falls below 3.5x and funds from operations (FFO) lease-adjusted leverage below 4.25x on a sustainable basis.

Negative: Ratings could be downgraded if there are substantial cost overruns or delays in completing the Cove Point LNG export project. Weaker earnings, lower dividends from VEPCo, or FFO-adjusted leverage above 5.0x on a sustained basis could also lead to negative rating action.

LIQUIDITY

Liquidity is considered sufficient supported by operating cash flow and two separate revolving credit facilities aggregating to $4.5 billion. The credit facility supports commercial paper borrowings and up to $1.5 billion of letters of credit. The credit facilities expire in April 2019.

KEY RATING DRIVERS for VEPCo

Strong Credit Profile: Current and projected credit metrics are strong and supportive of the current rating. Fitch forecasts debt/EBITDAR to approximate 3.1x over the next few years, FFO lease-adjusted leverage 3.4x, and FFO fixed charge coverage to remain above 6.0x. By comparison, these figures were 3.4x, 3.5x, and 6.1x for the LTM ended June 30, 2015, respectively.

Constructive Regulatory Environment: Fitch considers the regulatory environment in Virginia and North Carolina to be constructive, due largely to rider mechanisms that provide timely cost recovery of invested capital including incentive returns on certain generation projects. In Virginia, VEPCo's primary regulatory jurisdiction, adjustment clauses are in place to recover costs for new generation projects, FERC-approved transmission costs, environmental compliance, energy efficiency and renewable energy programs.

Large Capex Plan: Capex is expected to remain elevated over the next six years. The timely cost recovery mechanisms available to VEPCo soften the financial strain of funding the capex plan. Growth capex over the 2015 to 2020 period includes $4.4 billion in electric transmission, $4 billion in new utility generation and $2.8 billion in electric distribution. Fitch's rating forecast assumes timely execution of the capital plan and assumes funding requirements will be managed to maintain a capital structure with approximately 50% equity.

Suspension of Biennial Review Process: Legislation enacted in Virginia in February 2015 suspends biennial reviews after 2015 until 2022 and freezes base rates through 2019. Fitch considers the impact to be neutral for credit quality. During the rate freeze period rider mechanisms remain in place and VEPCo can retain any earnings in excess of its authorized return on equity (ROE) of 10%. Conversely, VEPCo is at risk for unexpected storm costs and increased operating and capital costs not subject to rider mechanisms. The 2022 biennial review will address rates in 2020 and 2021.

Favorable Service Territory Demographics: A large government and military presence tends to limit economic and sales volatility. In addition, VEPCo's service territory has experienced strong growth of data centers due in large measure to its proximity to Washington DC and high-capacity fiber networks. Data center sales are expected to grow 9% annually. The service area also benefits from an attractive climate that drives residential customer growth. Management expects sales to increase 1% and 1.5% in 2015 and 2016, respectively, and 2% thereafter.

RATING SENSITIVITIES for VEPCo

[Positive: Positive rating action is not expected at this time. However, ratings could be upgraded if adjusted debt/EBITDAR falls below 3.25x and FFO lease-adjusted leverage below 3.5x on a sustainable basis.

Negative: An increase in debt/EBITDAR above 3.5x and FFO adjusted leverage above 4.25x on a sustainable basis could lead to a downgrade.

A downgrade of two notches or more at Dominion Resources, Inc. would also likely trigger a downgrade of VEPCo under Fitch's parent and subsidiary linkage criteria.]

KEY RATING DRIVERS for DGH

Strong Financial Profile: DGH exhibits a strong financial profile with conservative capitalization levels. The DGH credit profile reflects strong coverage metrics as DGH's debt has been issued in the current low interest rate environment. FFO fixed charge coverage averages over 7x over Fitch's three-year forecast period. Fitch expects debt-to-EBITDAR, to average 3.5x over the same period compared to 3.0x for the LTM ended June 30, 2015, as DGH establishes a more traditional capital structure as it moves to a more balanced capital structure compared to its current position with nearly 54% common equity.

Low-Risk Operations: DGH's natural gas transmission business, conducted through Dominion Transmission Inc.'s (DTI), is subject to regulation by the FERC, and its gas distribution business, Dominion East Ohio (DEO), by the Public Utility Commission of OHIO (PUCO). DEO operates with an infrastructure rider recovery for planned replacement of older cast iron and bare steel pipe which has allowed the company to avoid a base rate case since 2008. DEO also benefits from full commodity recovery mechanisms. DTI meanwhile benefits from the FERC's formula ratemaking that allows timely recovery of invested capital and above-average equity returns.

[Positive: Positive rating action is not expected at this time. However, ratings could be upgraded if adjusted debt/EBITDAR falls below 3.25x and FFO lease-adjusted leverage below 3.5x on a sustainable basis.

Negative: An increase in debt/EBITDAR above 3.75x and FFO adjusted leverage above 4.25x on a sustainable basis could lead to a downgrade.

A downgrade of two notches or more at DRI would also likely trigger a downgrade of DGH under Fitch's parent and subsidiary linkage criteria.]

Fitch affirms the following ratings with a Stable Outlook:

Dominion Resources, Inc.

--IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Preferred and junior subordinated debt at 'BBB-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Consolidated Natural Gas Co. (debt assumed by Dominion Resources)

--IDR at 'BBB+';

--Senior unsecured debt and revenue bonds at 'BBB+'.

Virginia Electric and Power Co.

--IDR at 'A-'/'F2';

--Senior secured debt and revenue bonds at 'A+'/'F2';

--Senior unsecured debt and revenue bonds at 'A'/'F2';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

Dominion Gas Holdings, LLC

--IDR at 'A-';

--Senior unsecured debt at 'A-'.

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992664

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992664

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Robert Hornick
Senor Director
+1-212-908-0523
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Committee Chairperson
Peter Molica
Senior Director
+1-212-908-0288
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (October 21, 2015 - 5:21 PM EDT)

News by QuoteMedia
www.quotemedia.com