With adequate liquidity now an increasing focus of credit analysis in the energy industry, Dominion Resources Inc. (BBB+/Stable/A-2) is a “good example” of a company with improving liquidity, according to Standard & Poor’s (S&P) in a new report released Friday.

Such was not always the case, S&P said. At the end of a May 2002 review of about 1,000 U.S. and European investment-grade industrial companies, the credit rating agency placed Dominion on a list of 23 companies with the greatest potential for a “credit cliff.” The survey’s objective was to obtain information from issuers about provisions in financing or operating agreements, particularly ratings triggers, that could turn an otherwise modest decline in credit quality into a liquidity crisis — also referred to as a credit cliff.

S&P became concerned after it identified a rating trigger provision at an off-balance-sheet financing of Dominion, Dominion Fiber Ventures LLC, in the amount of $665 million. “The provision, triggered at ‘BBB-‘ (coupled with an equity price trigger provision at a $45.97 per share closing price for 10 consecutive trading days) could negatively affect the company’s liquidity position,” S&P said. “Dominion, or any of the companies cited, did not face an imminent threat of either a credit event or a liquidity problem.” The credit cliff possibility meant that if credit deterioration occurred, it could be compounded by the provisions of the company’s financial arrangements.

Since S&P came out with its credit cliff concerns, the agency noted that Dominion has been working to mitigate the potential liquidity risk associated with the rating trigger at Dominion Fiber Ventures by increasing its available sources of liquidity. Since May, the company has added more than $800 million of new liquidity lines, including a $100 million extendible commercial notes program placed in July 2002; a $500 million letter of credit facility to support trading operations syndicated in August; and a $250 million bridge facility to back commercial paper used to acquire the Cove Point liquid natural gas facility in September.

In October, Dominion’s liquidity position was further improved, S&P said, noting that the company issued $1 billion in common equity. A majority of the proceeds from the issuance was used to pay down commercial paper. As a result, the agency said that by the end of October, Dominion had about $1.3 billion of the $2 billion commercial paper program available, as opposed to $750 million at the end of May. In addition, the company had $300 million of cash and short-term investments available. “Dominion’s liquidity position has improved by about $1.4 billion since May,” S&P said.

Going forward, S&P said it believes “Dominion will continue to maintain adequate access to credit facilities and capital markets, so as to mitigate liquidity risk arising from ratings triggers and debt maturities. In the unlikely event of significant credit deterioration, Dominion can create additional liquidity by restructuring its capital expenditure program.” S&P noted that about $1.1 billion of capital expenditures in 2003 and $875 million in 2004 are discretionary.

Dominion has said it expects to refinance or partially pay down a $1 billion debt maturity coming due at the end of January 2003. In S&P’s view, this maturity should “pose no problem” for the company because commercial paper is sufficient to cover. Dominion also has another $1 billion in debt maturities spread out in 2003, with an additional $1 billion spread out in each of 2004 and 2005. The largest maturity in the medium term, after January 2003, is the $700 million senior notes due in July 2005.

“Although access to capital markets for many firms in the energy industry has been a challenge due to current market conditions, Dominion maintains good relationships with banks and has demonstrated continued access to capital markets, as evidenced by the swift arrangement of a $250 million bridge facility to facilitate the transaction for the Cove Point liquefied natural gas facility, and the recent $1 billion equity issue,” S&P said. to date this year, the company has raised more than $3.2 billion in debt and equity.

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