NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Dominion Resources, Inc. (DRI) at 'BBB+' and upgraded the IDRs of regulated subsidiaries Virginia Electric and Power Company (VEPCo) and Dominion Gas Holdings (DomGas) to 'A-' from 'BBB+'. The Rating Outlook is Stable for all entities. Approximately $20 billion of long-term debt is affected by this rating action. A full list of ratings is provided at the end of this press release.
The upgrades of VEPCo and DomGas reflect changes in Fitch's analytical approach and rating assignments within the DRI family; the ratings are reflective of the standalone profiles of VEPCo and DomGas. DRI's evolving corporate structure with discrete debt issuing entities, permits ratings to be assigned to corporate entities in a manner consistent with Fitch's typical rating approach within utility families, rather than on a consolidated basis.
For DRI, the rating affirmation is based on the considerable size and scale of its operations, regulatory diversity, diversified asset portfolio, and favorable position in economically vibrant regions. Fitch has considered both DRI's consolidated and deconsolidated financial profile in the rating affirmation. In Fitch's consolidated or deconsolidated financial models, DRI exhibits high leverage in the early part of the five-year forecast period although significant deleveraging occurs in 2016 and through 2018 coinciding with the new equity raised upon the remarketing of the three year mandatorily convertible instruments originally issued in 2013 and 2014 and earnings from maturing capex projects and Cove Point. The contractual nature of the equity raise weighed heavily in Fitch's deleveraging expectation with the majority of the large future capex program funded by equity.
KEY RATING DRIVERS
--Large diversified asset portfolio anchored in VEPCo;
--Evolving corporate structure;
--Large parent level debt with resultant high consolidated leverage;
--Development of the Cove Point LNG export project;
--Consolidated leverage pressured by large growth capex and investment program.
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 VEPCo, a large integrated electric utility based in Virginia. VEPCo represents approximately two thirds of consolidated earnings and cash flows. Two regulated gas distribution companies, two FERC-regulated interstate gas pipelines, Cove Point, a liquefied natural gas (LNG) facility and a merchant generation fleet round out the portfolio. Fitch expects DRI's future capex and investment program will be largely centered within its existing business footprint including the development of the Cove Point LNG export facility. Fitch considers Dominion's business risk profile to be elevated for the next few years reflecting the various construction risks associated with a large scale project such as Cove Point. Cove Point development costs are estimated by DRI management to total $3.4 billion to $3.8 billion without financing costs, and a commercial operation in late 2017.
Evolving Corporate Structure
In 2013, DRI announced a corporate reorganization for its large diversified portfolio of energy investments. In October 2013, DRI formed DomGas to own most of the regulated gas assets of DRI including Dominion Transmission, Inc. (DTI), The East Ohio Gas Company (EOGC), and a 24.7% ownership interest in the Iroquois Gas Transmission System, L.P. 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 EOGC. Previously, DRI financed all of its operations except VEPCo.
In a second step, DRI created a Master Limited Partnership (MLP), Dominion Midstream Partners (DM). The Initial Public Offering (IPO) closed in October 2014 with DRI realizing net proceeds of approximately $400 million after the exercise of the underwriters' over-allotment. DRI's ownership interest in DM is approximately 73%% and it owns the General Partner interest. 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 2013). Through DM, DRI has another vehicle to raise capital, monetize existing assets and investments 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. 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 $11 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 a parent debt leverage representing 27% of consolidated debt. Fitch does not expect parent debt levels to increase over the forecast period.
Cove Point
The Cove Point LNG export facility has received all regulatory clearances to begin construction. DRI estimates that 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 affiliates of 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, with its three year timeframe to achieve commercial operation, 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.
DRI 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.
Improving Financial Profile
Fitch expects gradual improvement in DRI's consolidated financial metrics over the forecast period. On a consolidated basis, debt to EBITDAR, 4.9x at year-end 2013, shows gradual improvement to average 4.1x in 2017 and 2018. Similarly, funds from operations (FFO) adjusted leverage improves from 5.1x in 2013 to average 4.5x in 2017 and 2018. DRI's large scale and mostly regulated asset base provides the financial flexibility to support the higher leverage. Furthermore, the contractual equity raise and earnings from maturing capex projects provide confidence in achieving the expected deleveraging.
VEPCo Upgrade
The rating upgrade of VEPCo reflects its strong financial profile, a supportive regulatory environment, and favorable service area demographics. Leverage at year-end 2013, as measured by debt to EBITDAR and FFO adjusted leverage at 3.1x and 3.3x, respectively are comfortably within Fitch guideline ratios for 'A' category utilities. Fitch expects modestly higher leverage over the forecast period.
VEPCo's capital investment plan over the 2014 to 2019 time-period remains elevated and includes $3.7 billion of electric transmission projects and the 1,329MW Warren County and 1,358MW Brunswick County gas fired combined cycle power plants with total estimated project costs of $1.1 billion and $1.3 billion, respectively. Both projects received a 100 basis points (bps) incentive return on equity (ROE) in Virginia with the Warren County plant expected to come-on-line at year-end 2014 and the Brunswick plant expected to be completed in mid-2016.
Fitch views the regulatory environment in Virginia and North Carolina as constructive. Fitch considers the inclusion of riders that provide timely recovery of invested capital and incentive returns on approved generation projects as supportive of credit quality during an extended period of elevated capital investments. The next Biennial Review is expected to be submitted to the Virginia State Corporation Commission in early 2015.
VEPCo currently has an authorized ROE of 10% in Virginia with 100bps to 200bps incentive ROEs for generation. VEPCo operates with a 10.2% authorized ROE in North Carolina. FERC regulated transmission projects carry an authorized ROE of 11.4%.
DomGas Upgrade
The upgrade of DomGas reflects its strong financial profile and low risk regulated assets consisting of EOGC, a large gas distribution utility serving 1.2 million customers in Ohio, DTI, a large interstate pipeline system located in the prolific Marcellus Shale gas play and a small investment in Iroquois Gas Transmission.
DomGas exhibits a strong financial profile. As DomGas becomes more self-financing and achieves a more normal capital structure, Fitch expects leverage to increase from the low leverage as measured at year-end 2013 by debt to EBITDAR of 2.6x. The expected financings will also allow for intercompany advances from DRI to be paid down.
Over the forecast period, debt to EBITDAR averages 3.5x. Coverage measures for DomGas are strong as its debt structure has been financed in the current low interest rate environment. FFO coverage measures average 9x over the forecast period. Financial measures are strong and compare favorable to 'A' category guideline ratios as well as 'A' category peers.
The regulatory outlook is stable with EOGC operating under the same rate order since 2008. Favorably, EOGC recently received approval for an infrastructure rider recovery of planned older cast iron and bare steel pipe. DTI's pre-tax rate of return of 13.7% was established in 1998.
RATING SENSITIVITIES
Dominion Resources
Positive:
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:
Factors that could individually or collectively lead to a rating downgrade include:
--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 rating downgrade
--FFO adjusted leverage above 4.5xto 5.0x could lead to a negative rating action.
VEPCO
Positive:
--Given the recent rating upgrade, no further positive rating actions over the next two years are expected.
Negative:
--A downgrade of DRI of two notches would likely lead to a downgrade at VEPCo under Fitch's parent and subsidiary rating linkage criteria;
--A regulatory outcome that precluded VEPCo from earning an adequate and timely recovery on invested capital;
--Weakening of the financial profile with Debt to EBITDAR sustained above 3.5x to 3.75x (currently 3.1x) and FFO coverage measures sustained below 5.0x (currently 6.1x).
DomGas
Positive:
--Given the recent rating upgrade, no further positive rating actions over the next two years are expected.
Negative:
--A change in the existing business mix or investments in higher risk assets could lead to a lower rating;
--A downgrade of DRI of two or more notches would likely lead to a downgrade of DomGas under Fitch's parent and subsidiary rating linkage criteria;
--A change in the capital structure of DomGas that resulted in higher leverage with Debt to EBITDAR sustained above 3.5x to 3.75x and FFO coverage measures sustained below 5.0x
Fitch has affirmed the following ratings with a Stable Outlook:
Dominion Resources
--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)
--IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
Virginia Electric and Power Company
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Fitch has upgraded the following ratings with a Stable Outlook:
Dominion Gas Holdings, LLC
--IDR to 'A-' from 'BBB+';
--Senior unsecured debt to 'A-' from 'BBB+'.
-Virginia Electric and Power Company
--IDR to 'A-' from 'BBB+';
--Senior secured debt and revenue bonds to 'A+' from 'A';
--Senior unsecured debt and revenue bonds to 'A' from 'A-'.
Fitch has assigned the following ratings:
Dominion Gas Holdings
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Fitch has withdrawn the following ratings:
Virginia Electric and Power Company
--Preferred stock at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage, May 28, 2014;
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)', March 11, 2014;
--'Rating Investment Holding Companies', March 25, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Rating Investment Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741159
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=905694
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