July 12, 2016 - 12:55 PM EDT
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Fitch Rates Dominion Resources' Enhanced Junior Sub Notes 'BBB-'

Fitch Ratings has assigned a 'BBB-' rating to Dominion Resources, Inc.'s (DRI) 2016 Series A enhanced junior subordinated notes due July 30, 2076. The Rating Outlook is Stable. The notes will be unsecured and will rank junior and be subordinated in right of payment to all existing and future priority indebtedness.

Proceeds will be used for general corporate purposes, including to finance the previously announced tender offer for up to a maximum $200 million of DRI's outstanding 2006 Series A enhanced junior subordinated notes due 2066 and 2006 Series B enhanced junior subordinated notes due 2066 and to repay short-term debt.

DRI has the right to defer interest payments on the notes for up to 10 consecutive years on more than one occasion. Deferred interest payments will accumulate interest at a rate equal to the interest on the junior subordinated notes. DRI may redeem the notes at 100% of their principal amount on or after July 30, 2021. The notes are also redeemable before July 30, 2021 at par in the event of a tax event or at 102% of their principal amount in the event of rating agency event as described in the documentation.

The securities are eligible for 50% equity credit under Fitch's applicable criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', dated Feb. 29, 2016. Key features supporting the equity credit are the junior subordinated ranking, the option to defer interest payments on a cumulative basis for up to 10-years on more than one occasion, and 60-year maturity.

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; IDR rated 'A-'), 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.

Pending Questar Acquisition: Due to the pending Questar and proposed financing plan, Fitch expects consolidated credit 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 and to remain supportive of the existing ratings. Fitch expects DRI's ratio of lease adjusted debt/funds from operations (FFO) to remain below 5.0x.

Cash Flow Subordination: The subordination of cash flows through drop downs into Dominion Midstream Partners, LP (DM), formed in 2014, 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).

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 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 DRI realizes anticipated earnings contributions from projects currently under construction, including the Cove Point export facility. Even with the acquisition financing, Fitch expects debt/EBITDAR to fall below 4.5x in 2018 and FFO leverage to remain below 5.0x.

Parent Level Debt: The percentage of parent level debt is high and reflects the prior centralized funding strategy for all subsidiaries and operations, except VEPCO. Parent long-term debt totals approximately $13 billion or about 50% of consolidated long-term debt (as of March 31, 2016). 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.

KEY ASSUMPTIONS

--DRI completes the drop down of Questar's pipeline business in a timely fashion and uses proceeds to pay down acquisition debt;

--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: A 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 2020.

Date of Relevant Committee: May 18, 2016.

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

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008759

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

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Fitch Ratings
Primary Analyst:
Robert Hornick, +1-212-908-0523
Senor Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Committee Chairperson:
Philip Smyth, CFA, +1-212-908-0531
Senior Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
[email protected]


Source: Business Wire (July 12, 2016 - 12:55 PM EDT)

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