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Rating Action:

Moody's Affirms Dominion Resources' ratings on Questar Acquisition Announcement

Global Credit Research - 01 Feb 2016

New York, February 01, 2016 -- Moody's Investors Service, ("Moody's") said today that it affirmed the Baa2 senior unsecured rating and the stable outlook at Dominion Resources Inc (Dominion) following its announcement on February 1, 2016 that it would acquire Questar Corp (Questar) in an all-cash deal for $4.4 billion plus the assumption of about $1.8 billion of debt.

RATINGS RATIONALE

"Dominion's size and capital structure can withstand the additional debt that comes with a Questar, including acquisition debt", said Swami Venkataraman, Moody's Vice-President -- Senior Credit Officer. "We also expect Dominion to finance the acquisition in a balanced manner with a 50/50 debt/equity mix which would only modestly dilute Dominion's key credit metrics until 2018, when Cove Point begins to materially contribute to cash flow."

On a consolidated basis, Dominion's ratio of cash from operations pre-working capital (CFO pre-WC) and retained cash flow (RCF) to debt should be in the range of 15-18% and 9-12%, respectively, over the next three years. As a simplifying assumption, we assume an incremental $2.2 billion of acquisition debt, which is used to finance the $4.4 billion cash purchase price for Questar. We expect that the remaining $2.2 billion in equity will come from a variety of sources, including common or hybrid equity issued at Dominion and at Dominion Mid-stream Partners L.P (DM, unrated).

Dominion has currently arranged for a committed term loans, a bridge facility and could tap into its existing credit facility to the tune of $500 million. The permanent financing will be put in place by the close of the transaction. We note the existence of some uncertainty and execution risk associated with any MLP equity issuance under current market conditions. "However, a heavily debt funded transaction in the potential absence of MLP equity would not be consistent with our expectations for Dominion's financial policy to manage its balance sheet during 2016-17, a period of heavy capital expenditures that is stressing its balance sheet before stronger cash flows kick-in with the commissioning of the Cove Point LNG terminal" Venkataraman added.

The MLP equity risk is partly mitigated by the fact that while DM's share price has declined 40% from its peak in summer 2015, they still trade about 28% higher than their IPO price and at a relatively attractive dividend yield of about 3%. Also Questar's primarily regulated operations have a strong credit profile, which further strengthens Dominion's business profile and also provides assets that can be dropped down into Dominion's MLP.

When the acquisition closes, Questar is expected to become a subsidiary of Dominion and it is possible that debt at Questar will be refinanced at Dominion over time. Dominion has indicated that Questar Pipeline Co. (A3 stable) would be converted into a partnership and dropped into the MLP. No other operational or financial changes are expected at any of Questar's three subsidiaries -- Questar Gas Co (A2 stable), Questar Pipeline and Wexpro (unrated). The current operational management at Questar is expected to remain in place. In effect, we expect little to no cost synergies from this transaction.

Questar Gas Co is a gas LDC with about a million customers in Utah, Wyoming and Idaho. The company enjoys a strong credit profile with decoupling, weather normalization and infrastructure trackers. On a Moody’s adjusted basis, Questar gas and Questar pipeline account for about 35% and 25%, respectively, of Questar’s consolidated cash flow. he remaining 40% comes from Wexpro, a quasi-regulated exploration and production (E&P) subsidiary. Wexpro's operations are designed to serve Questar Gas under a cost-of-service basis, with rates having been approved by the Utah Public Service Commission (UPSC) and Wyoming Public Service Commission since 1981. Wexpro's relationship with its utility affiliate is governed by the Wexpro Agreement and Wexpro II Agreement. The agreements reduce the business risk associated with Wexpro's more risky E&P operations, while still allowing Wexpro to earn nearly 20% return on equity.

The long track record of Wexpro's regulatory treatment gives us the comfort of seeing this more as a regulated operation rather than as a purely unregulated E&P company. Wexpro's integrated operations with Questar affiliates and regulated cost-of-service sales help to insulate its credit profile from the weak market conditions currently buffeting the E&P sector. In addition, we expect that Dominion will not invest in this business other than what is required to maintain wells that are currently in rate base.

Liquidity Analysis

Dominion's liquidity profile is adequate. Although the company's large capital expenditure program and dividend payout implies a reliance on external funding, the company's robust access to capital markets mitigates concerns on this front. Dominion currently has two shared credit facilities (with subsidiaries VEPCO and DomGas as co-borrowers) totaling $5.5 billion, maturing in April 2019. Dominion's sub-limit under these credit facilities is $2.75 billion. VEPCO has a sub-limit of $1.75 billion while DomGas has $1 billion. We expect the Questar subsidiaries to eventually be added as co-borrowers to these facilities as well. Questar currently has a $500 million facility that expiring in Nov 2020 and a $250 million facility maturing in Nov 2016.

For LTM 9/30/15, Dominion generated roughly $4.5 billion in cash from operations, incurred roughly $5.7 billion in capital expenditures (net of asset sales) and made dividend payments of approximately $1.5 billion, resulting in substantial negative free cash flow of about $2.7 billion. Given the size of the company's capital expenditure program, we expect Dominion will continue to have negative free cash flow over the next several years. On a consolidated basis, Dominion has approximately $1.9 billion of debt maturities in the next twelve months.

Rating Outlook

Dominion's stable outlook reflects Moody's expectation for strong and stable financial performance at its regulated utilities and a continued focus on new investments with regulated/contracted cash flows. We also expect Dominion to manage its balance sheet and liquidity resources appropriately throughout this period of heavy capital expenditures.

Factors that Could Lead to an Upgrade

Given the size of Dominion's investment program and the expected financial profile, an upgrade of its rating is unlikely at this time. A positive outlook could be considered when a significant improvement in the financial profile can be forecast within our 12-18 month outlook horizon. This includes cash from operations pre-working capital (CFO Pre-WC) and retained cash flow coverage of debt in the range of 20-22% and 15-17%, respectively, for a sustained period

Factors that Could Lead to a Downgrade

A negative rating action is possible if Dominion fails to finance its capex program with an appropriate mix of debt and equity, if there is a material delay or cost overrun at the Cove Point LNG export terminal, a material increase in structural subordination at Dominion or an unexpectedly more contentious regulatory environment at VEPCO. A negative rating action could also follow if CFO Pre-WC and retained cash flow coverage of debt falls to the low teens percentage and 8-10%, respectively, for an extended period.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in December 2013, and Natural Gas Pipelines published in November 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Outlook Actions:

..Issuer: Dominion Gas Holdings, LLC

....Outlook, Remains Stable

..Issuer: Dominion Resources Inc.

....Outlook, Remains Stable

..Issuer: Virginia Electric and Power Company

....Outlook, Remains Stable

Affirmations:

..Issuer: Chesapeake (City of) VA, Eco. Dev. Auth.

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Chesterfield Co. Economic Devel. Auth., VA

....Senior Unsecured Revenue Bonds, Affirmed A2

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Chesterfield County Industrial Dev. Auth., VA

....Senior Unsecured Revenue Bonds, Affirmed A2

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Dominion Gas Holdings, LLC

....Junior Subordinated Shelf, Affirmed (P)A3

....Senior Unsecured Shelf, Affirmed (P)A2

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: Dominion Resources Inc.

.... Commercial Paper, Affirmed P-2

....Junior Subordinated Conv./Exch. Bond/Debenture, Affirmed Baa3

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Preferred Shelf, Affirmed (P)Ba1

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Junior Subordinated Shelf, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Grant (County of) WV, County Commission

....Revenue Bonds, Affirmed A2/VMIG 1

....Senior Unsecured Revenue Bonds, Affirmed A2/VMIG 1

..Issuer: Halifax County Industrial Dev Auth, VA

....Revenue Bonds, Affirmed A2/VMIG 1

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Louisa (Town of) VA, I.D.A.

....Senior Unsecured Revenue Bonds, Affirmed A2/MIG 1

....Senior Unsecured Revenue Bonds, Affirmed A2/VMIG 1

..Issuer: Massachusetts Development Finance Agency

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: Peninsula Ports Authority of Virginia

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: Prince William County I.D.A., VA

....Revenue Bonds, Affirmed A2/VMIG 1

..Issuer: Virginia Electric and Power Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A2

....Senior Unsecured Shelf, Affirmed (P)A2

....Pref. Stock Preferred Stock, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: Wise (County of) VA, Industrial Dev. Auth.

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: York Co. Economic Development Auth., VA

....Senior Unsecured Revenue Bonds, Affirmed A2

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Swami Venkataraman, CFA
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Affirms Dominion Resources' ratings on Questar Acquisition Announcement

No Related Data.
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