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Rating Action:

Moody's affirms Dominion Energy Gas Holdings, LLC's Baa1 rating; stable outlook

02 Nov 2020

New York, November 02, 2020 -- Moody's Investors Service, ("Moody's") today affirmed the ratings of Dominion Energy Gas Holdings, LLC (DEGH, Baa1 senior unsecured) following the completion of its sale[1] to Berkshire Hathaway Energy Company (BHE, A3 stable). The outlook is stable. See a full list of affected debt toward the end of this press release.

RATINGS RATIONALE

"Dominion Energy Gas Holdings, LLC will continue to benefit from low business risk operations and contracted cash flow, while now under the ownership of Berkshire Hathaway Energy Company, an A3-rated parent company with conservative financial policies" said Ryan Wobbrock, Vice President -- Senior Credit Officer. "Over the next twelve months, BHE will reduce DEGH debt by $1.2 billion and relax dividend requirements. This will offset DEGH's loss of roughly $325 million of EBITDA related to its larger legacy ownership interest in the Cove Point LNG export terminal" added Wobbrock.

On 2 November 2020, the previously announced sale of DEGH by Dominion Energy, Inc. (Dominion, Baa2 stable) was completed when BHE paid approximately $2.7 billion in cash (subject to certain post-closing adjustments) and assumed around $5.3 billion in debt. The transaction did not include Dominion Energy Questar Pipeline, LLC (DEQP, A3 stable), which still requires Hart-Scott-Rodino Act clearance. Dominion has received a cash payment of approximately $1.3 billion in anticipation of the sale of DEQP interests and will transfer approximately $430 million of related debt to BHE upon close of the follow-on transaction. Completion of the DEQP deal is expected to occur in early 2021. In all, the sale will transfer roughly 21 million dekatherms per day of natural gas throughput and nearly 900 billion cubic feet of underground storage capacity to BHE.

The transaction also included BHE's acquisition of the general partner, controlling interest, and operational responsibilities of the Cove Point LNG export terminal; however, BHE will only receive a 25% economic interest in the asset while assuming all of the debt used to finance the export terminal. Going forward, we expect Cove Point to represent about 20% of DEGH's consolidated cash flow, with the remaining 80% coming from the gas transmission and storage business. As such, we will rate DEGH under our Natural Gas Pipelines methodology.

To offset the loss of Cove Point cash flow, BHE plans to retire about $1.2 billion (i.e., about 20% of total adjusted debt) of DEGH debt over the next twelve months. We estimate that this will result in a Funds from Operations (FFO) to debt metric of around 18% in 2021. By 2023, we expect the ratio will be above 20% through conservative debt financing and cash flow improvement.

As a holding company of natural gas related operating companies, DEGH is exposed to carbon transition risk since its primary business is the transportation of hydrocarbons. However, the cost recovery provisions provided by state and federal regulators, along with contractual arrangements with customers, help to offset some of this risk. Moreover, natural gas is currently seen as a "bridge fuel" by much of the utility industry, as a way to transition the US power sector away from a reliance on coal as a fuel for electric generation and toward a greater use of renewable generation. Natural gas is often the fuel for intermittent generation resources that help to provide reliable and adequate service.

Social risks are primarily related to health and safety, demographic and societal trends, as well as customer relations as the company works to provide reliable and affordable service to customers and safe working conditions to employees. In addition, various environmental and social groups can be a source of contention for the activities that DEGH engages in, which have the potential to cause reputational damage or increase the cost of doing business.

DEGH's governance practices will reflect those of BHE, which is owned by Berkshire Hathaway Inc. (BRK, Aa2 stable). BRK generally takes a decentralized approach to the management of its major business lines and has one of the more credit supportive financial policies of any owner in the energy sector. BRK itself pays no dividend, and neither has it ever required BHE to pay a dividend. This way, BHE has been able to accrete more equity value than its utility peers, which tend to be free cash flow negative and need regular infusions of capital. This has also allowed BHE to repay any past acquisition related debt on an accelerated basis, as is the intent for DEGH.

Outlook

The stable outlook reflects our expectation for DEGH to benefit from the financial policies of Berkshire, which will result in higher retained cash flow and lower leverage, offsetting the loss of cash flow from its reduced economic interest in Cove Point. For example, we expect the ratios of FFO to debt and retained cash flow to debt to be above 20% and 15%, respectively, by 2023.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

DEGH could be upgraded if FFO to debt were to reach 22% on a consistent basis or if the company were to significantly improve contractual terms, e.g., through enhanced credit quality of offtakers or elongated average contract life.

Factors that could lead to a downgrade

A downgrade of DEGH could occur if leverage remains at current levels, if there is a deterioration in the quality of the business' cash flow (e.g., higher-risk counterparties or shorter contracted life) or if - post debt reduction under BHE ownership -- the ratio of FFO to debt were to drop below 18% for a sustained period.

Affirmations:

..Issuer: Dominion Energy Gas Holdings, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: Dominion Energy Gas Holdings, LLC

....Outlook, Remains Stable

The principal methodology used in these ratings was Natural Gas Pipelines published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113727. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Berkshire Hathaway Energy Company Form 8-K (SEC) 02-Nov-2020

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.

Ryan Wobbrock
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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