Fitch Rates Virginia Electric and Power Co.'s $585MM Issuance of Senior
Unsecured Notes 'A-'
NEW YORK -- August 13, 2013
Fitch Ratings has assigned an 'A-' rating to Virginia Electric and Power Co.'s
(VEPCo) $585 million issuance of Series D 4.65% senior unsecured notes due
Aug. 15, 2043. Proceeds will be used for the repayment of short-term
borrowings, and general corporate purposes. The notes will rank on parity in
right of payment with all the existing and senior unsecured debt and will be
senior in right of payment to all the existing and future subordinated debt.
The Rating Outlook for VEPCo is Stable.
Stable Outlook: The utility's rating and Stable Outlook reflect strong
financial metrics, balanced regulatory treatment, sufficient liquidity, and
manageable funding needs. VEPCo operates an electric distribution,
transmission, and generation system within two state regulatory jurisdictions,
Virginia and North Carolina.
KEY RATING DRIVERS
--Strong financial metrics;
--Large utility growth plan;
--Balanced regulatory treatment; and
Financial Profile: Financial metrics, as calculated by Fitch, are forecast to
remain robust relative to guidelines for the rating category and risk profile.
Fitch forecasts EBITDA-to-interest to range at or near 6.8x through 2015 and
FFO-to-debt to drop to around 23% in 2015 reflecting the absence of bonus
depreciation. Fitch considers VEPCo exposed to potentially lower sales volumes
due to the impact of sequestration and/or energy efficiency programs on its
service territory; however, does not expect either to have a material impact
on near-term financial metrics or the capital plan.
Utility Capital Plan: Capital expenditures will be elevated over the next
several years as VEPCo executes a growth plan focused largely on new
generation and electric transmission. The utility growth plan is supported by
positive service territory dynamics which established a need for new
generation to meet expected load growth this decade, even after any impact
from sequestration and efficiency programs. Current capital spending levels
are intended to not only meet load growth needs but to replace units either
retired or shut-down.
Fitch considers execution of the capital plan as material to maintaining
ratings stability, and the ratings assume a balanced mix of debt and internal
cash flow to fund capital investments over the next several years, as well as
continued regulatory support. The utility capital structure can sustain
Regulatory Treatment: Fitch views the regulatory environment in Virginia and
North Carolina as balanced, and continues to expect supportive treatment for
timely recovery of fuel and capital costs. Fitch considers the inclusion of
riders that provide timely recovery of invested capital and incentive returns
on equity (ROEs) on approved rider projects (up to and including Brunswick
County) as supportive of credit quality during this capital intensive period.
In March 2013 the utility submitted its 2013 Biennial Review with the Virginia
State Corporate Commission. The filing did not seek an increase in base rates.
The earned ROE was 10.11% on its electric generation and distribution
operations for the combined test period (2011 - 2012). The authorized ROE is
10.9% with a plus or minus 50 basis point earnings band. Effective Dec. 21,
2012 the North Carolina Utilities Commission authorized VEPCo a $36.4 million
rate increase, based on a 10.2% authorized ROE.
Sufficient Liquidity: VEPCo is a joint borrower with parent company Dominion
Resources, Inc. (IDR 'BBB+'; Stable Outlook by Fitch) on two separate
revolvers for total consolidated borrowing capacity of $3.5 billion, of which
$1.38 billion was available at June 30, 2013. The revolvers mature in
September 2017 and are sized at $3 billion and $500 million, respectively.
VEPCo sub-limits are currently set at $1 billion and $250 million,
respectively, and can be changed on an as-needed basis.
--Execution of a large utility capital plan limits positive rating action at
--Less supportive regulatory treatment in Virginia and North Carolina and/or
the FERC could limit the ability of VEPCo to earn an adequate and timely
return on investments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Utilities'(Nov. 13, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating North American Utilities, Power, Gas, and Water Companies
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Lindsay Minneman, +1-212-908-0592
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Rob Hornick, +1-212-908-0523
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, New York, +1 212-908-0549
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