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. [2] As of 12/31/2014; Source: Moody's Financial Metrics [3] This represents Moody's
forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions
and divestitures.
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