Prior to the remarketing, DRI will have the right to defer interest on the securities without giving rise to an event of default. Under Fitch's criteria, the junior subordinated notes receive no equity credit; however, the underlying equity issuance is incorporated in Fitch's forward year financial modeling for DRI.
Net proceeds of the offering will be used for general corporate purposes including capital expenditures for the
KEY RATING DRIVERS
-- Evolving corporate structure;
-- Development of the Cove Point LNG export project;
-- Elevated utility capital investment program;
-- Consolidated leverage pressured by large three-year capex program.
Evolving Corporate Structure
In 2013, DRI announced a corporate reorganization for its large diversified base of energy investments. In
In a second step, DRI also announced its intention to form a
The creation of D-Gas and the expected formation of the MLP afford greater liquidity and financial flexibility to DRI as these entities can access capital independently and access a larger and different investor base. MLPs typically have a lower cost of capital than traditional corporate entities. Following completion of the restructuring, although consolidated cash flows will be largely unchanged, parent level cash flows from D-Gas and the MLP in the form of dividends and distributions to DRI become subordinated to other debt obligations of those entities.
DRI expects to begin construction of its Cove Point LNG Export Facility in the second half of 2014 after receipt of final regulatory clearances. DRI estimates that the overnight project development costs to be between
The development of the
DRI faces the normal risks associated with any large-scale development project including potential cost-overruns and construction delays that can occur.
Utility Capex Program
VEPCo's capital investment plan over the 2014 to 2018 time-period remains elevated and includes
Fitch views the regulatory environment in
Financial and Debt Profile
Fitch expects parent company debt which was
An MLP may permit a partial monetization of DRI's non-regulated energy investments with proceeds otherwise reducing DRI's financing needs. The creation of the MLP along with the self-financing of D-Gas will likely lead Fitch to view DRI more as a holding company with a portfolio of subsidiaries that support the parent through dividends and distributions rather than an operating company with direct control of consolidated cash flows.
Execution of a sizable capital investment plan limits positive rating actions at this time. Fitch considers timely execution of new projects as critical to maintaining a stable credit profile.
-- Given the evolving corporate and ownership structure of DRI's gas and midstream assets, ratings of Dominion and rating alignments of its primary subsidiaries may change over time.
-- Subordination of cash flows resulting in the event of corporate spin-offs without a concomitant reduction in parent level debt could lead to a negative rating action;
-- An aggressive multi-year capital investment plan exposes the company to execution risk, including construction delays and cost overruns which could pressure financial metrics if debt financed.
-- A material increase in parent level debt to finance higher-risk investments could lead to a negative rating action.
Additional information is available at 'www.fitchratings.com'.
'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage,
'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)',
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Source: Fitch Ratings
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