NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘A-‘ rating to Dominion Gas Holdings, LLC (DGH) new issue of 2015 series A senior notes due 2020. The Rating Outlook is Stable. Proceeds will be used for general corporate purposes, to repay short-term debt including commercial paper and to repay intercompany indebtedness owed to its parent company Dominion Resources, Inc.
KEY RATING DRIVERS
Strong Financial Profile: DGH exhibits a strong financial profile with conservative capitalization levels. The credit profile reflects strong interest coverage metrics as DGH’s debt has been issued in the current low interest rate environment. Fitch expects funds from operations (FFO) fixed charge coverage to average over 7x over the next three years. Debt to EBITDAR is expected by Fitch to average 3.5x over the same period compared to 3.0x for the latest 12 months (LTM) ended June 30, 2015, as DGH establishes a more balanced capital structure compared to its current position with nearly 54% common equity.
Low Risk Operations: DGH’s businesses are predominately regulated with only moderate commodity exposure. Dominion East Ohio (DEO), which is regulated by the Public Utility Commission of Ohio operates with a full commodity cost recovery mechanism and riders for pipeline infrastructure replacement, bad debt expense and demand side management. In addition, a straight fixed variable rate design limits volumetric exposure.
DGH’s natural gas transmission business, conducted through Dominion Transmission Inc. (DTI), is mostly regulated by the Federal Energy Regulatory Commission (FERC). The remainder of DGH’s businesses consist of underground storage that is complementary to its pipeline business, a 24.7% interest in Iroquois Gas Transmission System L.P. that is also FERC regulated and gathering and processing facilities that has a somewhat higher risk profile.
Well Situated Assets: DGH’s assets are well positioned in the Marcellus and Utica shale basins. The significant supply growth in the region is driving increased investment with firm contracts by DGH and higher transportation volumes from firm commitments. In addition, DGH has entered a number of farmout transactions that are expected by management to generate $270 million of pre-tax earnings through 2015 with potential for an additional $180 million-$230 million. The fee based leases are generally five to seven years in duration.
KEY ASSUMPTIONS
–Timely execution of capital plan;
–Maintenance of a balanced capital structure;
–No meaningful increase in commodity exposure.
RATING SENSITIVITIES
Positive Rating Action: Positive rating action is not expected at this time. However, ratings could be upgraded if adjusted debt/EBITDAR falls below 3.25x and FFO lease adjusted leverage below 3.5x on a sustainable basis.
Negative Rating Action: An increase in debt/EBITDAR above 3.75x and FFO adjusted leverage above 4.25x on a sustainable basis could lead to a downgrade.
A downgrade of two notches or more at Dominion Resources, Inc. (DRI, IDR ‘BBB+’, Stable Rating Outlook) would also likely trigger a downgrade of DGH under Fitch’s parent and subsidiary linkage criteria.
LIQUIDITY
Liquidity is supported by operating cash flow and a $500 million sub-borrowing limit in DRI’s $4 billion credit facility. The credit facility expires in April 2019. As of Sept. 30, 2015 there was $382 million of commercial paper outstanding and cash and equivalents of $18 million.
Date of Relevant Rating Committee: Oct. 21, 2015.
Additional information is available on www.fitchratings.com.
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993907
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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