NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating of Dominion Resources, Inc.'s (DRI) remarketable junior subordinated notes due July 1, 2019 to 'BBB' from 'BBB-'. The upgrade is prompted by the removal of the interest deferral feature in connection with the remarketing of the notes. Under Fitch's rating criteria, junior subordinated debt is typically rated one notch below the Issuer Default Rating (IDR) while those with an interest deferral feature are considered more equity like and rated two notches below the IDR.
The remarketable junior subordinated notes were originally issued as a component of DRI's 2013 Series B equity units consisting of the subordinated notes and a forward purchase contract obligating the holder to purchase DRI shares on July 1, 2016. The notes were pledged as security for the holder's obligation to purchase the DRI common stock. Proceeds from the remarketing will be used to settle the holders forward purchase obligation and ultimately used by DRI to repay debt issued to fund capital expenditures or for other corporate purposes.
The 'BBB-' rating on three issues of long-dated enhanced junior subordinated notes with maturities ranging between 38 and 40 years that retain the deferral provision are unaffected by this rating action. Similarly, the 'BBB-' rating on the remarketable junior subordinated notes that were originally issued as a component of the 2014 equity units and will be remarketed in 2017 is also unchanged.
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: Based on the expected financing plan and Questar Corp's strong financial position, 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 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).
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 $12.7 billion or approximately 50% of consolidated long-term debt (as of Dec. 31, 2015). 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.
--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.
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 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.
Additional information is available on www.fitchratings.com.
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