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S&P Downgrades Dominion after Questar Announcement

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Market performance

Dominion Resources (D) reported 4Q15 earnings on February 1, 2016. The stock fell 2.8% on the day of the announcement. Dominion Resources showed dismal performance last year, correcting by more than 10% during the year. The graph below shows the stock price movement of Dominion Resources, Duke Energy (DUK), and the Utilities Select Sector SPDR ETF (XLU).

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Valuation

As of February 1, 2016, Dominion Resources is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 12.8x. Its five-year historical average EV-to-EBITDA multiple stands near 12.1x. The utility sector’s (IDU) average ratio stands at 10.2x.

Dominion’s forward EV-to-EBITDA, with an estimated EBITDA for 2016, stands at 10.9x. This indicates expectations of a higher EBITDA in 2016. Dominion Resources’ EV-to-EBITDA multiple is higher than Duke Energy’s (DUK) at 9.5x. American Electric Power’s (AEP) EV-to-EBITDA stands at 8x, while Exelon’s (EXC) multiple stands at 5.5x. EV-to-EBITDA is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of capital structure.

Dominion’s debt

Dominion Resources plans to spend $19.2 billion in the next five years. This spending may raise its current debt levels. Dominion has a total debt of $28.9 billion as of December 31, 2015. Of this amount, $23.5 billion is long-term debt, and $5.4 billion is short-term borrowing.

On February 1, 2016, S&P (Standard & Poor’s) downgraded Dominion Resources to a credit rating of BBB+ with a stable outlook. The move came after Dominion announced its merger with Questar. With its investment-grade credit rating, Dominion may raise funds from capital markets, if needed.

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