Moody’s Investors Service last week revised the outlooks for Dominion Resources Inc. (Baa1 senior unsecured.) and its gas pipeline subsidiary CNG (A3 senior unsecured) to negative from stable, citing concerns over financial risk from debt-financed growth, particularly at Dominion Energy and Consolidated Natural Gas (CNG). However, the credit rating agency said the outlook remains stable for securities issued by Virginia Electric and Power (A2 senior secured) based upon regulatory support afforded the utility in Virginia through 2007.
The revised outlook comes on the heels of Dominion’s release of its reduced earnings outlook for 2003 related to a pending equity sale designed to strengthen its balance sheet and debt coverage ratios. The company, which has largely avoided the collapse in energy stocks, saw its shares tumble following the announcement.
Moody’s noted that the management of Dominion Resources has taken steps to reduce leverage. Over the medium term, Moody’s said it will monitor the following issues:
The ratings agency said it will “contemplate a return to stable outlooks” pending successful execution of the financial plan over the next six to nine months. However, Moody’s warned that execution delay or deviation from the plan by such factors as unanticipated event risk from debt financed acquisitions will cause Moody’s to review securities for potential downgrade.
Analysts with CreditSights also expressed concern related to Dominion’s recent actions. The group said the “about face from last week’s claims does not inspire confidence.” Two weeks ago at the Lehman conference, CreditSights said Dominion Resources’ (Baa1/BBB+) presentation was “calm and confident,” affirming 2002 earnings estimates at $4.90-$4.95 per share, and projecting 7% earnings per share growth for 2003, with earnings at $5.25-$5.30 per share.
Last week, the company priced $520 million in debt with that forecast intact. “Yesterday, [Dominion] showed that its mastery of numbers leaves a lot to be desired, as it now says 2003 EPS will be flat to up 4%,” CreditSights said. The group added that the company “could be vulnerable to possible downgrades if it can’t tow the agency line fast enough.”
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