Credit Opinion: Dominion Gas Holdings, LLC Global Credit Research - 11 Dec 2015 Richmond, Virginia, United States Ratings Category Outlook Senior Unsecured Jr Subordinate Shelf Commercial Paper Moody's Rating Stable A2 (P)A3 P-1 Parent: Dominion Resources Inc. Outlook Senior Unsecured Jr Subordinate Pref. Shelf Commercial Paper Stable Baa2 Baa3 (P)Ba1 P-2 Contacts Analyst Phone Swami Venkataraman, CFA/New York 212.553.7950 City William L. Hess/New York City 212.553.3837 Key Indicators [1]Dominion Gas Holdings, LLC CFO pre-WC + Interest / Interest CFO pre-WC / Debt CFO pre-WC - Dividends / Debt Debt / Capitalization 12/31/2014 27.3x 26.7% 15.6% 35.3% 12/31/2013 18.1x 23.9% 11.9% 32.9% 12/31/2012 12.9x 29.7% 21.3% 33.1% 12/31/2011 11.9x 30.6% 20.3% 36.4% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers Low risk, diversified natural gas distribution and pipeline operations Supportive regulation Adequate financial profile Prospect of inclusion into Dominion's MLP is long-term Corporate Profile Dominion Gas Holdings, LLC (DomGas: A2 stable) is a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion: Baa2 stable) and is the holding company for Dominion's regulated natural gas operations, including East Ohio Gas Company (East Ohio), a natural gas local distribution company (LDC) in Ohio, the FERC-regulated interstate gas pipeline and storage company, Dominion Transmission Inc, (DTI, unrated) and an approximate 25% limited partnership interest in the Iroquois Gas Transmission System, L.P. (A3 positive). DomGas was formed in 2013 to serve as a holding company for the gas businesses and has over time replaced virtually all inter-company debt from Dominion with external debt. Moody's projects DomGas will represent approximately 15% - 20% of Dominion's consolidated cash flows over the next 3-5 years, split approximately one-third / two-thirds between East Ohio and DTI. DomGas does not own certain gas assets that are, or will be, dropped into Dominion Midstream Partners (DM, unrated), Dominion's MLP which went public in 2014. These include the Atlantic Coast Pipeline currently under development and Dominion Carolina Gas Transmission LLC, a FERC-regulated pipeline that serves South Carolina and which was acquired from SCANA in late 2014. SUMMARY RATING RATIONALE DomGas' A2 rating reflects its lower risk, rate regulated natural gas pipeline and LDC businesses, a wellpositioned, diversified asset base and a stable and predictable financial profile. DomGas enjoys a constructive and supportive regulatory environment at both the pipeline (via the Federal Energy Regulatory Commission, or FERC) and the LDC (via the Public Utility Commission of Ohio, or PUCO) businesses. There is significant ongoing capex at DomGas, especially in expanding DTI's transmission network in the fast growing Marcellus shale region. We expect that this will result in financial ratios weakening over the next few years. However, we expect DomGas' financial profile to remain adequate for the rating. This includes Moody's adjusted CFO pre-WC coverage of interest and debt at or above 10x and 22%, respectively for 2016-17. Moody's adjusted Leverage is expected to remain modest at under 40% debt to total capitalization. DETAILED RATING CONSIDERATIONS LOW RISK BUSINESS AND SUPPORTIVE REGULATION About two-thirds of DomGas' operations are associated with the low risk, FERC regulated interstate gas pipeline and storage businesses. These pipeline operations provide strategic transportation and storage services to the Mid-Atlantic and Northeast regions, and have a very strong market position in the fast growing Marcellus and Utica shale plays in eastern Ohio and western Pennsylvania. Surging gas production in the region has led to very high utilization rates for DomGas' pipelines. Firm transportation agreements generate about 95% of the transportation revenues, and roughly 98% of its capacity is contracted long term. Moody's also views the shipper credit quality as high. DomGas is investing significantly in pipelines and storage facilities in Marcellus. Most of these are "producer outlet projects" intended to serve the needs of producers who need to move gas out of Marcellus into the consuming regions. Such pipelines necessarily carry greater counterparty and market risks than traditional pipelines that are supported by long-term capacity contracts with regulated utilities. Although this is an increase in business risk, we view it as being acceptable at current rating levels given the strong economics of Marcellus shale gas, and DomGas' commanding market position. Dominion also seeks to manage its credit exposure by requiring more stringent credit support terms than the broader market. One-third of DomGas' business comes from the natural gas local distribution company operations at East Ohio Gas (East Ohio). East Ohio is regulated by the Public Utility Commission of Ohio, which provides a robust suite of timely recovery mechanisms for the LDCs operating in the state, which include a straight-fixed-variable rate design, an accelerated pipeline replacement program, and a bad debt tracker. ADEQUATE FINANCIAL PROFILE DomGas has strong capex spending plan, with $1.9 billion in growth capex (Marcellus producer outlet projects and East Ohio pipeline replacement) over and above maintenance capex. It will be able to finance this capex largely out of operating cash flow and the increase in debt during this period is expected to largely be equal to the dividend payments to Dominion. Despite DomGas' strong capex program, we expect financial ratios to be adequate for the rating, with Moody's adjusted CFO pre-WC coverage of interest and debt at or above 10x and 22%, respectively for 2016-17. Moody's adjusted leverage is expected to remain modest at under 40% debt to total capitalization, although this is largely a consequence of Moody's adjustments (we include deferred tax liabilities as part of book capitalization) and DomGas is expected to maintain a regulatory approved capital structure with debt around the mid-high 40s percent. There is no debt at the operating entities such as DTI and the East Ohio. Hence debt at DomGas does not suffer from structural subordination. PROSPECT OF INCLUSION INTO DOMINION'S MLP IS LONG-TERM The inclusion of DomGas into Dominion Midstream Partners (DM), the newly created MLP, would be consequential for the credit quality of DomGas as well as parent Dominion, especially if assets of DTI or the LDC are moved to DM rather than equity in DomGas. In addition, partial ownership by an MLP may also pose constraints on DomGas' financial policy. While DomGas' assets are eligible to be transferred to DM, Moody's rating assumes that any such transfer will take place only in the long term. The Cove Point LNG project, the Blue Racer subsidiary, the Atlantic Coast Pipeline and Dominion Carolina Gas Transmission LLC provide enough EBITDA to support growth at DM into the next decade. Any change to this position would cause Moody's to re-evaluate credit quality both at DomGas and at Dominion. Liquidity Profile DomGas' liquidity profile is adequate. Parent company Dominion currently has two shared credit facilities (with subsidiaries VEPCO and DomGas as co-borrowers) totaling $4.5 billion, maturing in April 2019. Dominion Gas has a $500 million sub-limit under the first of these credit facilities, which is $4 billion in size. The sub-limit can be increased or decreased multiple times per year, up to a maximum of $1.5 billion. At 9/30/15, Dominion reported cash on hand of $238 million and $1.9 billion available under the credit facilities. The joint facilities contain no material adverse change clause for borrowings but do contain a maximum 65% debt to capitalization covenant (as defined in the credit agreements), and all three borrowers have reported that they remain comfortably in compliance with this covenant restriction. DomGas has $400 million in notes maturing in Nov 2016. Rating Outlook The stable rating outlook assumes DomGas will maintain a stable financial profile, with Moody's adjusted CFO pre-WC coverage of interest and debt at or above 10x and 22%, respectively, and that DomGas or its assets will not be moved to the MLP for the foreseeable future. What Could Change the Rating - Up Upgrade potential at DomGas is limited in our view and would depend upon a significantly stronger financial profile with cash flow to debt ratios in the high 20s percent range. What Could Change the Rating - Down Ratings could be downgraded if DomGas pursues a more highly levered capital structure resulting in cash flow to debt ratios closer to the mid-teens percentage. A downgrade could also occur if DomGas creates structural subordination risk for its debt by issuing secured debt or financing directly out of its operating subsidiaries or by dropping assets of DTI or the LDC into the MLP. Rating Factors Dominion Gas Holdings, LLC Regulated Electric and Gas Utilities Industry Grid [1][2] Factor 1 : Regulatory Framework (25%) a) Legislative and Judicial Underpinnings of the Regulatory Framework b) Consistency and Predictability of Regulation Current FY 12/31/2014 Measure Score [3]Moody's 12-18 Month Forward ViewAs of 12/11/2015 Measure Score A A A A A A A A Factor 2 : Ability to Recover Costs and Earn Returns (25%) a) Timeliness of Recovery of Operating and Capital Costs b) Sufficiency of Rates and Returns A A A A A A A A Baa N/A Baa N/A Baa Baa 17.8x Aaa 10x - 13x Aaa 26.7% 16.2% A A 22% - 27% 12% - 17% A Baa 33.8% Aa 36% - 38% A Factor 3 : Diversification (10%) a) Market Position b) Generation and Fuel Diversity Factor 4 : Financial Strength (40%) a) CFO pre-WC + Interest / Interest (3 Year Avg) b) CFO pre-WC / Debt (3 Year Avg) c) CFO pre-WC - Dividends / Debt (3 Year Avg) d) Debt / Capitalization (3 Year Avg) Rating: Grid-Indicated Rating Before Notching Adjustment HoldCo Structural Subordination Notching a) Indicated Rating from Grid b) Actual Rating Assigned Natural Gas Pipelines Industry Grid [1][2] Factor 1 : Market Position (15%) a) Demand Growth b) Competition c) Volume Risk & Throughput Trend A2 A2 A2 Current 12/31/2014 Measure Score A A A A A A A A A A A A A A A A Baa Baa Baa Baa Baa Baa Baa Baa Baa Baa Baa Baa 19.4x 26.8% 16.3% Aaa A Baa 10x - 13x 22% - 27% 12% - 17% Aaa A Baa [3]Moody's 12-18 Month Forward ViewAs of 12/10/2015 Measure Score Factor 2 : Quality of Supply Source (10%) a) Supply Source Factor 3 : Contract Quality (30%) a) Firm Revenues b) Contract Life c) Shipper Quality / Recontracting Risk Factor 4 : Financial Strength (45%) a) (FFO + Interest) / Interest (3 Year Avg) b) FFO / Debt (3 Year Avg) c) (FFO - Dividends) / Debt (3 Year Avg) Rating: a) Indicated Rating from Grid b) Actual Rating Assigned A3 A2 A3 A2 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. 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