Today's announcement that Dominion Resources, Inc. (Dominion; Issuer
Default Rating [IDR] 'BBB+') will sell its Marcellus acreage and natural
gas and oil exploration and production business (E&P) to a subsidiary of
CONSOL Energy, for gross proceeds of $3.475 billion, subject to
adjustments, is not expected to affect Dominion's existing ratings or
Stable Rating Outlook.
The estimated after-tax sales proceeds of $2.2 to $2.4 billion,
depending on taxes, should enable Dominion to fund its equity needs in
2010 of $400 million and fund the refunds to Dominion Virginia Power
(VEPCO) customers resulting from rate case settlement agreement of March
13, 2010. A portion of the sales proceeds is also expected to be used to
repurchase common stock and may be used to fund a contribution to
employee benefit plans and/or reduce debt. The final allocation of the
sales proceeds has not yet been determined. Fitch's Stable Outlook
assumes that the final use of proceeds will balance the interests of
debt and equity holders.
Favorably, the E&P sale will reduce consolidated business risk and
liquidity needs associated with potential E&P business collateral
requirements and will increase the share of consolidated Dominion
operating earnings from regulated operations to approximately 70% in
2011. While liquidity needs will be reduced as a result of the E&P sale,
Fitch anticipates that Dominion will implement existing plans to obtain
$3-$3.5 billion of credit facilities when renewals of the bank
facilities are completed later this year. The exit from E&P continues
Dominion's shift away from commodity sensitive businesses and towards
regulated operations, particularly rate base growth in Virginia.
A portion of the cash inflow from the E&P sale is anticipated to be used
to approximately offset the negative cash impact of the VEPCO base rate
settlement reached March 13, 2010. The settlement provides for refunds
of interim rates, 2008 over-earning and other credits with total cash
outflows relating to the settlement of approximately $726 million on a
pre-tax basis. The interim base rate increase started in September 2009
will be refunded to customers and base rates will remain unchanged. The
settlement provides for an 11.9% allowed base return on equity
(inclusive of a 60 bps performance incentive) with a band of 50 bps;
11.3% will be the authorized base ROE used for new generation rider
projects, plus ROE adders depending on the technology (1% adder for the
Virginia City Hybrid Energy Center and Bear Garden combined cycle
units). Any earnings VEPCO realizes above 12.4% would be shared 60% with
customers. The rate settlement provides rate certainty through 2013 if
VEPCO's earnings remain within the 11.4%-13.4% ROE band.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com'
include:
'Credit Rating Guidelines for Regulated Utility Companies' (July 31,
2007).
'Issuer Default Ratings and Recovery Ratings in the Power and Gas
Sector' (Nov. 7, 2005).
'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and
Financial Guidelines' (Aug. 22, 2007).
'Corporate Rating Methodology' (Nov 24, 2009).
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings, New York
Sharon Bonelli, 212-908-0581
Karima
Omar, 212-908-0592
or
Media Relations:
Cindy Stoller,
212-908-0526
Email: cindy.stoller@fitchratings.com