OREANDA-NEWS. Fitch Ratings has revised the rating of Dominion Resources, Inc.'s (DRI) junior subordinated notes due April 1, 2021 to 'BBB' from 'BBB-' following a remarketing of the notes and removal of the interest deferral feature. The junior subordinated notes will be subordinated to all of DRI's current and future indebtedness for borrowed money. The remarketable subordinated notes were originally issued as a component of DRI's 2013 Series A equity units.

The equity units are comprised of the subordinated notes and a forward purchase contract obligating the holder to purchase DRI shares on April 1, 2016. Proceeds from the remarketing will be used to settle the forward purchase contract and ultimately used by DRI to repay debt issued to fund capital expenditures or for other corporate purposes.

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; 'A-' IDR), 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.

Financing Plan: The acquisition 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 utility 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 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, 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.

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 totals approximately $12.7 billion or approximately 44% 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 significant parent debt leverage.

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.