Fitch Affirms Dominion Ratings Following Questar Acquisition

NEW YORK--()--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

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998849

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

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.

Contacts

Fitch Ratings
Primary Analyst
Robert Hornick, +1-212-908-0523
Senor Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Committee Chairperson
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Hornick, +1-212-908-0523
Senor Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Committee Chairperson
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com