NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Dominion Resources, Inc.'s (DRI) multiple tranche offering of $500 million 2016 series B 1.60% senior notes due 2019, $400 million 2016 series C 2.00% senior notes due 2021 and $400 million 2016 series D 2.85% senior notes due 2026. The Rating Outlook is Stable.
Net proceeds of the senior note offerings will be used for general corporate purposes, including to fund a portion of DRI's pending acquisition of Questar Corp.
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 'A-'), a large integrated electric utility based in Virginia that represented nearly 60% of consolidated earnings and cash flows in 2015. 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 acquisition 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. 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 Dominion Gas Holdings, LLC, 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: 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 2020.
Disclosure: There were no financial statement adjustments made that were material to the rating rationale outlined above.
Date of Relevant Committee: May 18, 2016
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)