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CreditSights downgrades Dominion Energy to 'market perform'

CreditSights on March 19 downgraded Dominion Energy Inc. bonds to "market perform" from "outperform" with analysts pointing to the sharp fall in the stock price of Dominion Energy Midstream Partners LP and a "more difficult" dropdown schedule.

Dominion Energy Midstream stock closed at $18.40 per share on March 19, down nearly 15%. CreditSights attributed the recent drop to the Federal Energy Regulatory Commission's decision to no longer allow master limited partnerships to include federal income taxes in their cost-of-service rates. FERC launched a notice of inquiry on tax allowances and rate-of-return policies in December 2016 as it sought to avoid double recovery of tax costs in the rates charged by pipeline companies and MLPs.

"This stock price decline makes doing accretive dropdowns of assets, mainly the $4 billion [Dominion Energy Cove Point LNG LP] export terminal, more difficult for Dominion in terms of reaching both its 22% distribution growth target through 2022 and the [$6 billion to $7 billion] of proceeds for the parent company to de-lever with," CreditSights analysts wrote.

"We move to [market perform] rather than underperform because we don't view the FERC ruling as a game changer for the deleveraging story," analysts added. "Instead, it will just take longer, perhaps another year or two if management waits on the dropdowns for a higher [Dominion Energy Midstream] stock price."

Citing the FERC decision, Dominion Energy issued a news release March 19 reaffirming its operating earnings guidance of 95 cents to $1.15 per share for the first quarter of 2018 and full-year 2018 operating EPS in the range of $3.80 to $4.25. The company also reaffirmed its 6% to 8% compound earnings growth rate through 2020.

"The company believes that FERC's change in policy will take years to implement and, even then, will only impact revenues on a prospective basis from the conclusion of any ratemaking process," Dominion Energy said in the news release. "Regarding Dominion Energy Midstream Partners, the company does not anticipate any revenue reductions in the 2018 to 2020 time period due to FERC's actions and is still evaluating any long-term impacts and their timing."

CreditSights said the news release is a positive response and noted that Cove Point, which has received approval to begin commercial service, is "a real game changer" for the company. Dominion has stated previously that Cove Point will be the primary driver of its ability to grow earnings by at least 10% in 2018 compared to 2017.