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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160712006429/en/
Copyright Business Wire 2016
