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