Dominion Resources criticized the decision last week by Standard & Poor's Ratings Services (S&P) to lower the company's long-term corporate credit rating to "BBB" from "BBB+." S&P said the downgrade was necessary given the impact of the hurricanes this year on Dominion's exploration and production (E&P) operations and because of the impact of high commodity prices on Virginia Power's fuel costs for power generation.
Fuel factor losses at Virginia Power and delayed production at Dominion's E&P have "caused a deterioration in financial performance to a level more commensurate with a 'BBB' rating," S&P said, noting that there will be "no material improvement in Dominion's credit profile before midyear 2007." Richmond, Va.-based Dominion had about $18.7 billion of outstanding debt as of Sept. 30, 2005.
S&P said ratings reflect the relative cash flow stability and supportive regulatory environment for its utility subsidiary, combined with riskier oil and gas exploration and production (E&P) operations and a growing portfolio of unregulated power generation. "In nearly all of its businesses, Dominion faces a high level of commodity price risk, which it actively manages by hedging its exposure," S&P said.
"As a result, despite very high oil and gas prices, the company has limited upside relative to many of its E&P peers," said credit analyst Aneesh Prabhu. She said the company's business risk profile is considered weak (a '7' on a 10-point scale, where '1' is low risk).
The stable outlook on Dominion reflects expectations that the company will maintain a financial profile. S&P also said a positive outlook could result in 2007 if expected cash flow increases from a fuel reset, roll off of legacy hedges, or from earnings growth from new projects. However, a negative outlook and lower ratings could result if the credit profile deteriorates further, particularly if unrecoverable fuel costs at Virginia Power and continuing production delays in the Gulf of Mexico result in a significant decline in 2006 cash flow expectation.
Dominion criticized the action as unnecessary given its recovery plan and the expected future regulatory actions that will ease the pain of higher fuel costs. The company estimates the impact of the credit rating downgrade on annual financing costs to be about 1 cent per share.
"Clearly we are disappointed in the action taken by S&P," said COO Tom Farrell. "While we have experienced temporary negative effects of hurricanes and rising commodity prices on our financial position, the successful execution of our business plan, including the 2007 reset of the Virginia fuel factor, is expected to deliver cash flow growth resulting in continued strengthening of our credit metrics. We remain committed to protecting the investments of our debt-holders while continuing to grow shareholder value."
He said Dominion would not respond by issuing additional equity to address concerns cited by S&P. "We feel that the business risk profile assigned by S&P to Dominion overstates the true underlying risks inherent in the company. We believe that recognition of the true risk profile, combined with the equity issuance already planned for May 2006 through the conversion of equity-linked debt securities, along with the improved results expected in 2007 and beyond, will reflect credit metrics consistent with a high BBB rating."
Standard & Poor's lowered its ratings on subsidiaries Virginia Electric & Power Co. and Consolidated Natural Gas Co. to "BBB" from "BBB+." The "A-" rating on Virginia Power's first mortgage bonds was affirmed based on the level of overcollateralization. The short-term ratings on Dominion were affirmed at "A-2." The outlook is stable.
Dominion has a portfolio of 28,100 MW of power generation, about 6 Tcfe of proved natural gas reserves and 7,900 miles of natural gas transmission pipeline. It also operates the nation's largest underground natural gas storage system with more than 965 Bcf of gas storage capacity and serves retail energy customers in nine states.
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