Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of
Dominion Resources, Inc. (DRI) following the announcement of its
proposed acquisition of Questar Corp. for $4.4 billion in cash. The
Rating Outlook is Stable. The ratings of Virginia Electric and Power Co.
and Dominion Gas Holdings, LLC are also affirmed with a Stable Rating
Outlook. A full list of the ratings is provided at the end of this
release.
The rating affirmation reflects the moderate impact on consolidated
credit metrics and the strong financial position and low risk nature of
Questar Corp.'s natural gas businesses. The acquisition premium and
EBITDA multiple are below those of other recent transactions. The
purchase price equates to a premium of approximately 30% above Questar's
average closing price over the past 20 trading days. Including the
assumption of approximately $1.6 billion of Questar consolidated debt
the enterprise value of this transaction is $6 billion and the EBITDA
multiple about 9.8x.
KEY RATING DRIVERS
Moderate Impact on Credit Metrics: Based on the expected financing plan
and Questar Corp.'s strong financial position, Fitch expects
consolidated financial metrics to be moderately weaker than previously
expected, but to remain supportive of existing ratings. Fitch still
expects DRI's financial profile to begin to strengthen over the next
several years as the company realizes anticipated earnings contributions
from projects currently under construction, including the Cove Point
export facility. Fitch expects DRI's ratio of lease adjusted debt/funds
from operations (FFO) to remain below the 5.0x ratings sensitivity
previously identified for a downgrade.
Financing Plan: The financing plan includes $1.5 billion of DRI
corporate debt and $500 million of common equity. The remainder of the
initial funding will consist of a combination of mandatory convertible
debt, a term loan and equity from the drop down of Questar's pipeline
business into Dominion Midstream Partners, L.P. (DM), a master limited
partnership created by DRI in 2014. Fitch expects the equity from the
planned drop downs will be realized within a year of closing the
transaction and used to retire acquisition debt. Fitch considers
execution of the drop down and associated debt retirement to be
important to maintaining ratings. Any material deviation could adversely
affect current ratings. It should be noted that Fitch does not attribute
equity credit to mandatory convertible debt in the form of equity units
which have previously been issued by DRI and is prevalent in the sector.
Cash Flow Subordination: The subordination of cash flows through drop
downs into DM is a credit concern that grows over time. The concern is
mitigated by DRI's ownership of the general partnership and significant
portion of the limited partnership units. In addition, the planned drop
down of Questar pipeline assets will delay the previously planned drop
down of the Blue Racer joint venture assets to 2020 from 2017. The
subordination concern would heighten if DRI were to significantly reduce
its ownership in DM without reducing DRI debt or raise significant debt
at DM (DM is currently debt free).
Low Risk Assets: Questar's assets are considered low risk by Fitch and
consistent with DRI's existing risk profile. The largely regulated
businesses provide further business and geographic diversity and growth
opportunities particularly related to the Clean Power plan.
Cove Point: The expected commercial operation of the Cove Point LNG
facility in late 2017 should enhance earnings and cash flow and lower
capex. Capacity is fully subscribed to investment grade counterparties
under twenty 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 DRI realizes
anticipated earnings contributions from projects currently under
construction, including the Cove Point export facility, and
approximately $2.1 billion of proceeds from the conversion and
subsequent remarketing of mandatory convertible debt in 2016 and 2017.
Even with the acquisition financing, Fitch expects debt/EBITDAR to fall
below 4.5x in 2018 and FFO leverage to remain below 5.0x.
KEY ASSUMPTIONS
--DRI completes the drop down of Questar's pipeline business in a timely
fashion and uses proceeds to pay down acquisition debt;
--DRI raises $2.1 billion of equity from mandatory convertible notes in
2016 and 2017;
--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
Positive Rating Action: 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 FFO lease-adjusted leverage below 4.25x on a
sustainable basis.
Negative Rating Action: 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. The inability to reduce acquisition debt with
equity proceeds from asset drop downs could also adversely affect
ratings.
LIQUIDITY
Liquidity is considered sufficient supported by operating cash flow and
two separate revolving credit facilities aggregating $5.5 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.
Fitch affirms the following ratings with a Stable Outlook:
Dominion Resources, Inc.
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Preferred and junior subordinated debt at 'BBB-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Virginia Electric and Power Co.
--Long-term IDR at 'A-';
--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
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Consolidated Natural Gas Co. (debt assumed by Dominion Resources)
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
Additional information is available at '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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998849
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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