NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Dominion Resources, Inc. (DRI) and assigned a long-term Issuer Default Rating (IDR) of 'BBB+' to its newly established subsidiary, Dominion Gas Holdings, LLC (D-Gas). Fitch expects to assign a 'BBB+' rating to the D-Gas senior unsecured notes which are expected to be sized and priced next week.
Proceeds will be used to repay intercompany borrowings. The notes will rank on parity in right of payment with existing and future senior unsecured debt.
The Rating Outlook for both companies is Stable. A full list of ratings is provided at the end of this press release.
KEY RATING DRIVERS:
--The establishment of D-Gas will not result in a material deviation from Fitch's earlier consolidated DRI forecast;
--D-Gas capitalization is leverage neutral to DRI;
--Balanced regulatory treatment at FERC and PUCO supports predictable cash flows at D-Gas;
--Strategic location in the Marcellus and Utica shale regions supports D-Gas growth;
--Sufficient consolidated liquidity at DRI.
DRI:
Affirmation and Stable Outlook: Fitch considers the creation of D-Gas as credit neutral to DRI. D-Gas is a first-tier holding company of DRI created to own the largely regulated gas assets of DRI consisting of: Dominion Transmission, Inc. (DTI); The East Ohio Gas Co. (DEO); and, a 24.7% ownership interest in the Iroquois Gas Transmission System, L.P. interstate natural gas pipeline (Dominion Iroquois). As the 100% owner of D-Gas, DRI's consolidated cash flows from the underlying D-Gas assets are unchanged. The creation of D-Gas enhances financial flexibility and long term issuance options independent of DRI's own financing plans. Over the near term; however, D-Gas will be dependent on DRI for short term financing and liquidity.
D-Gas's capitalization is leverage neutral to the company's consolidated capital structure, and Fitch's five-year consolidated forecast remains largely unchanged since its ratings affirmation on July 22, 2013. Pro forma capital funding needs related to DTI and DEO will be financed at D-Gas which in turn will proportionately reduce incremental new debt issuance at the holding company. Furthermore, DRI can expect to receive sustainable cash distributions from D-Gas to support holding company funding obligations.
Dominion's ratings and Stable Outlook continue to consider the company's large diverse asset base, including significant contribution from low-risk regulated businesses; and, an aggressive capital investment plan which includes construction of the Cove Point liquefaction export facility, funding of which limits near-term de-levering of holding company debt which is considered high relative to peers. As discussed, the formation of D-Gas will reduce incremental new debt issuance at the holding company.
D-Gas:
Rating Rationale: D-Gas's rating reflects both its standalone financial profile as well as its linkage to DRI. Initially, D-Gas will be dependent on DRI for liquidity and short-term working capital needs.
Stable Outlook: The company's Stable Outlook considers a strong financial profile, fair regulatory treatment and strategically located assets in the Marcellus and Utica shale regions.
Low-risk Company Profile: D-Gas has a solid credit profile, and delivers predictable cash flows. DTI, the largest contributor of D-Gas earnings, estimated by Fitch at 70% of EBITDA, is an integrated gas transmission business. Key services include gas transport, storage, and gathering and processing. From a credit perspective, the Federal Energy Regulatory Commission (FERC) regulates DTI rates and collateral requirements, DTI receives fee for service, and commodity price risk is limited. A large proportion of transport and storage capacity is under contracts extending beyond 2015. The FERC also regulates Iroquois Gas Transmission System, L.P.
DEO is a Public Utility Commission of Ohio (PUCO)-regulated gas utility with transmission, distribution and gathering lines located in eastern and western Ohio. The utility also operates underground storage assets. Fitch considers regulatory treatment in Ohio as fairly balanced. The straight-fixed variable (SFV) rate design applicable to most customers covers a majority of fixed costs in the customer charge, with other costs recovered through a volumetric charge for non-residential customers. Rate design features include riders to recover specific costs that fluctuate over time. DEO has no base rate filings pending, and in April 2013 an adjustment for the recovery of costs incurred and a return on rate base for 2012 and cumulative capital investments for pipeline infrastructure replacements was approved by PUCO.
While supplier choice is not required for natural gas customers in Ohio, DEO offers retail choice to its residential and commercial customers and is the provider of last resort (POLR) in the event of an alternate supplier default. The standard service offer pricing mechanism assumes a monthly market price which provides greater pricing transparency for retail choice customers.
Strong Financial Profile: D-Gas operates mature, free cash flow positive assets. Fitch expects financial metrics to be robust relative to guidelines for the rating category and risk profile, with leverage at or near 3 times (x) EBITDA through 2017. Management forecasts D-Gas EBITDA upwards of $1 billion over the forecast period. Fitch considers DTI assets favorably positioned in the Marcellus and Utica shale regions to support a solid growth platform. The company's modest capital plan is largely driven by maintenance spending and transmission-related growth projects.
Fitch's assessment assumes a sustainable dividend from D-Gas to DRI through 2017 to support holding company funding obligations. With limited funding obligations at D-Gas, and external debt financing expected to supplement cash available to fund capital investments, Fitch expects D-Gas can maintain a balanced capital structure absent equity infusions from DRI.
Liquidity: D-Gas is not a named borrower on DRI bank credit facilities, and short-term funding needs are met through an intercompany revolving credit facility with DRI. DRI has total bank credit capacity of $3.5 billion, which is viewed by Fitch as adequate to support company short-term funding needs. At June 30, 2013, Fitch calculated DRI consolidated liquidity at $1.57 billion, which includes bank credit totaling $1.38 billion, and $190 million of cash-on-hand. Fitch considers DRI and subsidiary access to the capital markets and bank credit as unrestricted.
Parent and Subsidiary Linkages: Fitch considers the formation of D-Gas as a first step in the corporate realignment to create a platform to highlight and possibly monetize DRI's gas and midstream assets. In a second step, DRI's remaining, directly-owned gas and midstream assets, mostly consisting of Cove Point, an import LNG facility and the Blue Racer joint venture, a midstream gatherer and processor in the Utica Shale region, are candidates for a Master Limited Partnership (MLP) which DRI plans to form in 2014. Asset drop downs into newly formed MLPs, especially very large individual assets such as Cove Point, are typically dropped down in stages over a multi-year time period. Fitch considers additional corporate transactions for DRI's portfolio of gas and midstream assets likely.
Given the evolving corporate and ownership structure of DRI's gas and midstream assets, ratings of DRI and rating alignments of DRI's primary subsidiaries may change over time. In the interim, the creation of D-Gas enhances financial flexibility in order to raise capital in a period of large capital investments that the DRI family will incur over the next few years.
RATING SENSITIVITIES
--DRI: Subordination of cash flows resulting in the event of corporate spin-offs along with higher parent level debt than that considered in Fitch's forecast could lead to a negative rating action.
--DRI: An aggressive multi-year capital investment plan exposes the company to execution risk, including construction delays and cost-overruns, which could pressure financial metrics if debt financed.
--D-Gas: Changes in tariffs for DRI's regulated assets could pressure ratings.
--D-Gas: Changes in financial management policies or acquisitions that could lead to higher leverage and result in a rating downgrade.
Fitch has affirmed the following ratings:
Dominion Resources
--Long-term IDR at 'BBB+';
--Senior unsecured debt and revenue bonds at 'BBB+';
--Preferred and junior subordinated debt at 'BBB-';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2'.
Consolidated Natural Gas Co. (debt assumed by Dominion Resources)
--Long-term IDR at 'BBB+';
--Senior unsecured debt and revenue bonds at 'BBB+'.
The Rating Outlook is Stable.
Fitch has assigned the following new ratings:
Dominion Gas Holdings, LLC
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+(exp)'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating North American Utilities, Gas and Water Companies', May 16, 2011;
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage', Aug. 5, 2013.
Applicable Criteria and Related Research:
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804810
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