Summary:
Dominion Gas Holdings LLC
Primary Credit Analyst:
Todd A Shipman, CFA, New York (1) 212-438-7676; [email protected]
Secondary Contact:
Dimitri Nikas, New York (1) 212-438-7807; [email protected]
Table Of Contents
Initial Analytical Outcome ("Anchor") And Rating Result Rationale
Outlook Business Risk Financial Risk Liquidity
Group Rating Methodology Ratings Score Snapshot Related Criteria And Research
Dominion Gas Holdings LLC
Corporate Credit Rating A-/Stable/--
Profile Assessments
BUSINESS RISK EXCELLENT
Vulnerable Excellent
FINANCIAL RISK SIGNIFICANT
Highly leveraged Minimal
Initial Analytical Outcome ("Anchor") And Rating Result
Our 'A-' rating on Dominion Gas Holdings LLC (DGH) is derived from:
• Our anchor of 'a-', based on our "excellent" business risk and "significant" financial risk profile assessments for the company.
• Modifiers have no effect on the rating outcome.
• The stand-alone credit profile (sacp) of 'a-' for DGH reflects its business risk and financial risk profiles that equate to the 'a-' group credit profile (GCP) of parent holding company Dominion Resources Inc. Under our group rating methodology, we consider DGH to be a "core" subsidiary of the Dominion group, and the issuer credit rating for DGH is equal to the Dominion GCP.
Rationale
Business Risk: Excellent Financial Risk: Significant
• DGH encompasses Dominion's regulated natural gas businesses in local distribution, transmission, storage, and gathering and processing.
• DGH manages regulatory risk better than its peers.
• Some operations are nominally regulated but are exposed to some degree of volume and market price risk. These risks are partially hedged through contractual and financial means.
• Stable credit protection measures that solidly support the financial risk profile.
• Adequate liquidity.
Outlook: Stable
The outlook is stable and reflects Dominion's utility-centric business strategy that combines favorable business-risk characteristics with an enhanced ability to produce more stable earnings and cash flow. The regulatory regime in Virginia is credit-supportive and trending upward, as regulatory reforms are being
implemented. The remaining business ventures have relatively low risk or are well-managed to contain risk, and many, such as the Cove Point liquefied natural gas facility, actually enhance Dominion's credit quality. Our base forecast shows adjusted consolidated measures as follows: funds from operations (FFO) to debt of about 15% to 17%% and debt to EBITDA averaging about 4.5x.
Downside scenario
We could lower ratings if Dominion expands the size and risk profile of its unregulated business activities to an extent that affects our assessment of its business risk profile or if financial performance deteriorates to a point that FFO to debt averages less than 13%.
Upside scenario
With elevated capital spending over the intermediate term and stable projected credit measures, higher ratings are unlikely.
Business Risk: Excellent
Dominion East Ohio (DEO) is a very low-risk natural gas local distribution utility that has mainly transportation-only customers, low regulatory risk due to its rate design, and a separate infrastructure replacement program and cost recovery. Gathering activities at DEO are performed under long-term, fee-based contracts. We expect DEO, which is about one-third of DGH, to invest more than its relative share of DGH's planned capital expenditures over the intermediate term.
Transportation and storage services are regulated by the Federal Energy Regulatory Commission, are highly
contracted with long terms, and have a high recontracting rate. The pipeline and storage network link major interstate pipeline systems to large natural gas markets in the northeastern and mid-Atlantic regions of the U.S. While subject to volume and recontracting risk, the growth and attractiveness of natural gas in both the originating and target markets considerably limit that risk. Gathering and processing activities are higher risk, especially on the processing side where keep-whole arrangements persist, but DGH consistently hedges the price exposure to reduce margin volatility.
Financial Risk: Significant
We use the medial volatility table, reflecting the company's predominantly regulated business model. We view DGH's stand-alone financial risk profile as "significant," reflecting our expectation under our base case scenario that the core credit measures will remain within the middle of the range for the financial risk profile category.
Summary: Dominion Gas Holdings LLC
Liquidity: Adequate
DGH's liquidity, measured on a consolidated basis with Dominion, as adequate under our corporate liquidity
methodology. Projected liquidity sources exceed uses by more than 1.1x. The company's ability to absorb high-impact, low-probability events with limited need for refinancing, its flexibility to lower capital spending or sell assets, sound bank relationships, solid standing in credit markets, and generally prudent risk management also support our assessment of its liquidity as adequate.
Principal Liquidity Sources Principal Liquidity Uses
• FFO of about $4.4 billion over the next 12 months
• Assumed cash and credit facility availability of about $1.9 billion for the next 12 months
• Debt maturities of about $1.5 billion over the next 12 months
• Capital spending of at least $2.5 billion over the next 12 months
• Cash dividends of about $1.4 billion
Group Rating Methodology
DGH is a wholly owned subsidiary of Dominion. Dominion's group credit profile (GCP) is 'a-'. DGH is a "core"
subsidiary: it is highly unlikely to be sold, is integral to the overall group strategy, possesses the strong long-term commitment from Dominion management, is successful, is a significant contributor to Dominion and operates as a profit center of the group, is closely linked to Dominion's name and reputation, and it has been operating for as long as 116 years through predecessor companies. Its issuer credit rating is the same as the Dominion GCP.
Ratings Score Snapshot
Issuer credit rating: A-/Stable/-- Business risk: Excellent
• Country risk: Very low
• Industry risk: Very low
• Competitive position: Strong Financial risk: Significant
• Cash flow/leverage: Significant Anchor: 'a-'
Modifiers
• Diversification/portfolio effect: Neutral (no effect)
• Capital structure: Neutral (no effect)
• Liquidity: Adequate (no effect)
• Financial policy: Neutral (no effect)
• Management and governance: Satisfactory (no effect)
• Comparable rating analysis: Neutral (no effect) Group credit profile: 'a-'
• Status with group: Core subsidiary
Related Criteria And Research
• Corporate Methodology, Nov. 19, 2013
• Key Credit Factors for The Regulated Utilities Industry, Nov. 19, 2013
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Methodology and Assumptions: Liquidity for Global Corporate Issuers, Nov. 19, 2013.
• Group Rating Methodology, Nov. 19, 2013
• Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Summary: Dominion Gas Holdings LLC
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.