NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Dominion Resources, Inc.'s (DRI) $1.25 billion offering of 2016 Series A-1 and Series A-2 remarketable subordinated notes (RSNs or notes) maturing in August 2021 and August 2024, respectively. The Rating Outlook for DRI is Stable.
The RSN's are a component of DRI 2016 Series A equity units, which consist of the notes and a forward purchase contract obligating the holder to purchase on Aug. 15, 2019 (contract settlement date), $1.25 billion of DRI common stock. The RSNs will be pledged as security for the holders' obligation to purchase the common stock. The securities will be remarketed in 2019 as junior subordinated obligations of DRI and will remain outstanding until maturity in 2021 for the Series A-1 notes and 2024 for the Series A-2 notes. The notes will initially pay a quarterly fixed rate of interest payable through Aug. 15, 2019. Holders of the equity units will also receive quarterly contract payments on the forward purchase contract.
Prior to the remarketing date in 2019, DRI will have the right to defer the quarterly contract payments on either or both series of RSNs one or more times for one or more consecutive interest periods without giving rise to an event of default. No deferral period will extend beyond the contract settlement date. Following the remarketing the interest rate will be reset and DRI will no longer have the option to defer interest payments. Under Fitch's criteria, the RSNs will receive no equity credit. Net proceeds of the equity units will be used 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 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: 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 funds flow from operations (FFO) lease-adjusted leverage 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. 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 adjusted debt/EBITDAR to fall below 4.5x in 2018 and FFO lease-adjusted 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 June 30, 2016). 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.
KEY ASSUMPTIONS
--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.
RATING SENSITIVITIES
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/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 lease-adjusted leverage greater than 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 2020.
Date of Relevant Committee: May 18, 2016.
There were no financial statement adjustments made that were material to the rating rationale outlined above.
Additional information is available on 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
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010120
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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