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 September 21, 2015 - 1:22 PM EDT
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Fitch Rates Dominion Resources' Senior Notes 'BBB+'

Fitch Ratings has assigned a 'BBB+' rating to Dominion Resources, Inc.'s (DRI) new issue of 2015 Series B senior notes due 2025. Proceeds will be used for general corporate purposes and to repay short-term borrowings, which as of Aug. 31, 2015 included $1.35 billion of commercial paper. The notes will rank equally with all other senior unsecured debt and will be senior in right of payment to all subordinated debt. The Rating Outlook is Stable.

KEY RATING DRIVERS

Diversified Asset Base: DRI owns a large portfolio of utility, power, midstream, and other energy assets. The business risk and financial profile is anchored in Virginia Electric and Power Co. (VEPCo; 'A-' IDR), 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 FERC-regulated interstate gas pipelines, a liquefied natural gas (LNG) import facility (Cove Point), and a merchant generation fleet round out the portfolio. Fitch considers DRI's business risk profile to be elevated for the next few years reflecting the construction risks associated with various large scale projects including the Cove Point LNG export facility. Cove Point development costs are estimated by DRI management to total $3.4 billion to $3.8 billion without financing costs, with commercial operation expected in late 2017.

Corporate Reorganization: Over the past two years, DRI has reorganized its large diversified portfolio of energy investments by forming Dominion Gas Holdings (DomGas) and Dominion Midstream Partners (DM) a Master Limited Partnership. DomGas owns most of DRI's regulated gas assets, including Dominion Transmission, Inc. (DTI), Dominion East Ohio Gas (DEO), and a 24.7% ownership interest in the Iroquois Gas Transmission System, L.P. DM's initial asset is a preferred interest in the first $50 million of earnings from Cove Point (the import facility at Cove Point generated approximately $200 million of EBITDA in 2014). DRI's ownership interest in DM is approximately 70% and it owns the General Partner interest.

The creation of DomGas which issues debt in its own name and is a direct borrower under the DRI bank facility relieves DRI of the financing obligations at DTI and DEO. Previously, DRI financed all of its businesses except VEPCo. Through DM, DRI has another vehicle to raise capital, monetize existing assets including its interest in Blue Racer, a joint venture with gathering and gas processing assets in the Marcellus and Utica shale regions, Cove Point, and its interest in the recently announced Atlantic Coast Pipeline.

The creation of DomGas and DM afford greater liquidity and financial flexibility to DRI as these entities can access capital independently and access a different investor base. Master limited partnerships (MLPs) typically have a lower cost of capital than traditional corporate entities and with its General Partner interest DRI participates in growth at the MLP through incentive distribution rights.

DRI's consolidated cash flows are largely unchanged from the corporate restructuring. However, parent level cash flows from DomGas and DM are now in the form of dividends and distributions to DRI and consequently they are subordinated to debt servicing obligations or future debt obligations of those entities.

Parent Level Debt: The percentage of parent level debt is high reflective of the prior centralized funding strategy for all subsidiaries and operations, except VEPCO. Parent debt totals approximately $12.1 billion or approximately half of total consolidated debt. Parent debt is supported by dividends from VEPCo and DomGas, the Blue Racer joint venture, the 4,000MW 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.

The development of the Cove Point export facility, weighs on DRI's already leveraged capital structure, although equity from the remarketing of mandatory convertible units will raise a total of $2.1 billion in equity in 2016 and 2017. Cove Point faces the normal risks associated with any large-scale development project including potential cost-overruns and construction delays that can occur. Delays in achieving commercial operation or cost overruns at Cove Point would have negative implications for DRI's credit profile and ratings.

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 which is expected to enter commercial operation in late 2017. Fitch expects debt/EBITDAR to approximate 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 equal annual parts 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;

--DRI's ownership of DM remains relatively unchanged;

--Timely execution of capex plan.

RATING SENSITIVITIES

Positive Rating Action: Fitch does not consider an upgrade of DRI likely over the next two years. Timely execution of new projects, particularly Cove Point, is critical to maintaining a Stable Rating Outlook.

Negative Rating Action:

--Substantial cost overruns, delays, or other problems with completing the Cove Point LNG export project;

--A greater degree of subordination of cash flows resulting from an increased pace of drop-downs into DM than Fitch has forecasted;

--Weaker earnings and or lower dividends from VEPCo could lead to a rating downgrade

--Funds from operations (FFO) adjusted leverage above 5.0x on a sustainable basis could lead to a negative rating action.

LIQUIDITY

Liquidity is considered sufficient supported by operating cash flow and a two separate revolving credit facilities aggregating $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.

Date of Relevant Rating Committee: April 21, 2015.

Additional information is available on www.fitchratings.com.

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991086

Endorsement Policy

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

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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
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (September 21, 2015 - 1:22 PM EDT)

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