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
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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
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