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Rating Action:

Moody's places the ratings of Dominion Energy Gas Holdings on review for downgrade

11 Jun 2018

Approximately $4.2 billion of debt securities on review

New York, June 11, 2018 -- Moody's Investors Service ("Moody's") placed the ratings of Dominion Energy Gas Holdings, LLC (DEGH), including its A2 unsecured rating and its P-1 commercial paper rating, on review for downgrade. The review of DEGH's ratings is prompted by increasing debt levels and will incorporate DEGH's financial performance through 2Q18 and prospects for cash flow growth in the face of low commodity prices and US tax reform. The review could result in a two-notch downgrade of DEGH's long-term ratings.

On Review for Downgrade:

..Issuer: Dominion Energy Gas Holdings, LLC

....Senior Unsecured Commercial Paper, Placed on Review for Downgrade, currently P-1

....Senior Unsecured Regular Bond/Debentures, Placed on Review for Downgrade, currently A2

Outlook Actions:

..Issuer: Dominion Energy Gas Holdings, LLC

....Outlook, Changed To Rating Under Review From Negative

RATINGS RATIONALE

"Debt issuance continues to outpace cash flow growth, which could keep DEGH's ratio of cash flow to debt in the mid-to-high teen's percent range over the next two years" said Ryan Wobbrock, Vice President - Senior Analyst. "DEGH also faces cash flow headwinds from low commodity prices and returns in its gas gathering and processing business and lower deferred tax inflows from its utility subsidiaries" added Wobbrock.

The review for dowgrade will focus on DEGH's financial, liquidity and business risks. DEGH debt will cointinue to rise in order to maintain high capital spending on pipeline replacement, expansion projects and infrastructure modernization. The company has spent around $800 million of capital in each of the last three years, contributing to about $1.3 billion of negative free cash flow over that time, which was primarily funded with debt. We expect this trend to continue over the next few years.

The review will also consider challenges to cash flow growth, including the impacts of low commodity prices on DEGH's gas gathering and processing (G&P) operations and US tax reform on regulated assets. DEGH's G&P assets give the company a higher business risk profile than most LDCs and FERC-regulated pipelines. This commodity exposed business has become less profitable since 2014, following a decline in natural gas liquids (NGLs) prices. While the G&P segment is relatively small (around $400 million of assets compared to DEGH's $12 billion of total assets), its performance has contributed to the decline in cash flow ratios for DEGH over the past several years (e.g., funds from operation (FFO) to debt declining from nearly 27% in 2014 to just over 17% through LTM 1Q18).

The impact of US tax reform could also reduce cash flow from historical levels in DEGH's LDC operations, since the company will benefit less from the inflow of deferred taxes going forward. FERC regulated transmission assets could also be affected by tax reform, depending on the nature and magnitude of shipper contract rate structures and the timing of any FERC general rate case filings.

Moody's will assess whether DEGH will continue to generate consistent proceeds from "farmout" sales, where the company sells development rights underneath its natural gas storage fields in the Marcellus Shale. While we do not consider such asset sale proceeds as part of core, ongoing cash flow from operations, management is confident that this will be a continued source of cash to support DEGH operations. These arrangements also often include an ongoing royalty interest in gas produced, which provides additional cash flow. These proceeds are credit positive in that they improve liquidity and can be used to offset debt issuance that would otherwise be needed to fund negative free cash flow.

The review will also consider DEGH's liquidity profile, which we view as weak according to our strict liquidity analysis since it assumes no market access to finance cash needs. As of March 31, 2018, DEGH had about $136 million of available sub-limit borrowing capacity ($750 million) under its parent's master credit facility. This means that DEGH either depends upon intercompany loans from Dominion Energy, Inc. (Baa2, P-2, negative) or unfettered access to capital markets in order to fund ongoing free cash flow deficits (e.g., nearly $180 million through LTM 1Q18). DEGH is able to adjust its sub-limit borrowing capacity to as high as $1.5 billion upon providing five business days of notice to the administrative agent. The company has also reduced its dividend in the face of high capital spend and lower cash flow, a benefit to liquidity.

With roughly two-thirds of cash flow expected to come from its pipeline business, DEGH's consolidated business profile compares well to Columbia Pipeline Group, Inc. (Baa2 positive) which also operates an extensive interstate network of natural gas pipelines, the nation's largest natural gas storage system (300 million dekatherms) and a small G&P segment. Through LTM 1Q18, Columbia has produced FFO to debt of 16%, compared to DEGH's ratio of just over 17% over the same period.

From a regulated electric and gas utility perspective, DEGH compares well to NiSource Inc. (Baa2 stable) a holding company with a portfolio of regulated LDC subsidiaries, including Ohio, which account for roughly 60% of consolidated operating earnings. The balance of NiSource's earnings are generated from electric utilities. Through LTM 1Q18, NiSource's ratio of CFO pre-WC to debt was 12% compared to DEGH's ratio of 14%.

The standard adjustments Moody's makes to DEGH's GAAP financials are relatively minor, considering DEGH has an overfunded pension. The primary source of adjustment is derived from operating lease obligations, for which Moody's imputes $130 million of debt but also increases cash flow by $29 million, through LTM 1Q18, as a proxy for depreciation expense on the assets. Another key adjustment is the reduction of $25 million in cash flow (LTM 1Q18) related to DEGH's capitalized interest. Finally, Moody's imputes another $30 million of debt due to unamortized discount and debt issuance costs. Through LTM 1Q18, these adjustments result in FFO of $768 million, cash flow from operations before changes in working capital (CFO pre-WC) of $628 million and debt of $4.4 billion.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017, and Natural Gas Pipelines published in November 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

Ryan Wobbrock
Vice President - Senior Analyst
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

Jim Hempstead
MD - Utilities
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.
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