NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Dominion Resources, Inc.'s (DRI) $1,650,000,000 issuance of senior notes. The issuance consists of the following series:
--$700,000,000 2014 series B, 2.50% senior notes due Dec. 1, 2019;
--$500,000,000 2014 series C, 3.625% senior notes due Dec. 1, 2024;
--$450,000,000 2014 series D, 4.70% senior notes due Dec. 1, 2044.
The Rating Outlook is Stable.
Debt proceeds together with commercial paper will largely be used to redeem higher coupon existing debt and cover make whole and other financing costs. The refinancing will lower interest costs and slightly improve DRI's coverage measures in Fitch's financial forecasts.
On Oct. 22, 2014, Fitch affirmed the ratings of DRI and upgraded the IDRs of regulated subsidiaries Virginia Electric Power Company (VEPCo, IDR 'A-') and Dominion Gas Holdings (DomGas, IDR 'A-').
DRI's ratings reflect the considerable size and scale of its operations, regulatory diversity, diversified asset portfolio, and favorable position in economically vibrant regions. Along with DRI's evolving corporate structure, Fitch has considered both DRI's consolidated and deconsolidated financial profile in its credit analysis and rating assignment.
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 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, largely its Cove Point LNG export project. The contractual nature of the equity raise weighed heavily in Fitch's deleveraging expectation with the majority of the large 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, Dominion Midstream Partners (DM). Following an Initial Public Offering (IPO) of MLP units, DRI realized net cash proceeds of approximately $400 million after the exercise of the underwriters' over-allotment. DRI's ownership interest in DM is approximately 70% 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 and 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 total 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.
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 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. Debt to EBITDAR, 4.9x at year-end 2013, shows gradual improvement to average 4.1x in 2017 and 2018. Similarly, 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.
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 the Rating Outlook remaining Stable.
Factors that 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 sustained above 4.5x to 5.0x could lead to a negative rating action.
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
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Rating Investment Holding Companies