NEW YORK–(BUSINESS WIRE)–Fitch Ratings considers Dominion Resources, Inc.’s (DRI) announcement that it is pursuing a sale of three coal-fired merchant generating plants to be supportive of credit quality, but not likely to affect current ratings (‘BBB+’ Issuer Default Rating).
If successful, the plan to sell the under-performing assets would reduce commodity price sensitivity and business risk and moderately lower capital requirements. A sale should also reduce liquidity and working capital needs. Previously, DRI announced it is seeking a sale of the Kewaunee nuclear plant.
For fixed income investors, the benefits are partly offset by a planned rise in the dividend payout ratio to 65% – 70% of operating earnings from 60% – 65%. Moreover, net proceeds from the asset sale will be used first to replace planned equity offerings with the balance to reduce future debt financings. However, the cash inflow provides additional financial flexibility.
DRI plans to sell the Brayton Point, Kincaid and Elwood coal-fired generating stations. The three merchant generating plants aggregate approximately 3,400 MW. After the sale, merchant generating capacity would be reduced to approximately 3,600 MW (excluding wind) and the management estimates the contribution of regulated businesses would increase to approximately 80% – 90% of consolidated earnings from 76%.
The remaining merchant assets are well positioned and produce positive cash flow. The assets include the low cost Millstone nuclear plant and the Fairless natural gas facility, which is located in a constrained zone in PJM. The Manchester plant provides support to the Millstone plant.
Current ratings reflect the strong cash flows from a large diverse asset base, including a significant contribution from regulated businesses, an aggressive capital investment plan and a high level of parent debt.