NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Virginia Electric Power Co.'s (VEPCo) $250 million issuance of 2013 series A 1.20% senior unsecured notes due Jan. 15, 2018, and an 'A-' rating to VEPCo's $500 million of 2013 series B 4.0% senior unsecured notes due Jan. 15, 2043.
Proceeds will be used to repay outstanding commercial paper and intercompany short-term debt. The notes will rank on parity in right of payment with all the existing and future 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 rating of VEPCo and its Stable Outlook are supported by the low-risk nature of its regulated utility operations, which deliver predictable cash flow metrics due largely to balanced regulatory treatment. VEPCo operates an electric distribution, transmission and generation system within two state regulatory jurisdictions, Virginia and North Carolina, and is regulated federally by the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission.
Key Rating Drivers:
-Strong financial metrics;
-Balanced regulatory treatment;
-Sizeable capital investment plan;
-Manageable debt re-financings.
Strong Financial Metrics: financial metrics are forecast by Fitch to remain strong relative to guidelines for the rating category and risk profile. Fitch forecasts the ratio of EBITDA to interest to improve slightly from 6.47x for the latest 12-month (LTM) period ended Sept. 30, 2012 to the mid-to-high 6x range over the next few years. Fitch forecasts funds from operations (FFO) interest coverage and FFO-to-debt to range between 6.8x to 6.1x and 28% and 23%, respectively, over the next few years. Fitch attributes the reduced FFO to the absence of bonus depreciation and earnings lag from incremental new capex.
Balanced Regulatory Treatment: Fitch views the regulatory environment as balanced, and continues to expect supportive treatment for timely recovery of fuel and non-fuel costs and considers the inclusion of riders and incentive returns on equity (ROEs) in Virginia as supportive of credit quality, particularly in consideration of sizeable investments in new utility generation.
Sizeable Capital Investment Plan: Capital expenditures will be elevated over the next several years as VEPCo executes a capital plan focused on investments in new generation. The growth plan is supported by positive demographic trends within the utility service territory. Fitch considers successful execution of the capital plan as material to maintaining ratings stability, and the rating assessment assumes a balanced combination of debt and equity issuance to fund internal cash flow deficits during this capital intensive period, as well as continued regulatory support.
Sufficient Liquidity: VEPCo is a joint borrower with parent company Dominion Resources, Inc. (DRI; Fitch Issuer Default Rating [IDR] of 'BBB+', Stable Outlook) on two separate revolvers for total consolidated borrowing capacity of $3.5 billion, of which $2.095 billion was available at Sept. 30, 2012. Fitch views consolidated borrowing capacity as sufficient relative to funding needs, and the revolvers support the commercial paper program and working capital needs. In September 2012, DRI extended facility maturities by 12 months to September 2017, largely mitigating concern related to sufficient bank credit availability during a period of elevated capital funding needs. Single-bank concentration is also not a material concern as no one bank has extended greater than 7% of the total $3.5 billion consolidated borrowing capacity.
Manageable Debt Re-financings: VEPCo's debt maturities are manageable with $417.7 million due in 2013, $17.6 million due in 2014, $210.6 million due in 2015 and $476.4 million due in 2016. Fitch considers the re-financing risk as low and views VEPCo's access to the capital markets as unrestricted.
Positive Rating Trigger: Execution of a sizeable utility capital investment plan limits positive rating action at this time.
Negative Rating Trigger: Less supportive regulatory treatment in Virginia and North Carolina that would limit the ability to earn an adequate and timely return on investments could adversely affect the utility's credit profile.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
-'Corporate Rating Methodology', Aug. 8, 2012;
-'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
-'Rating North American Utilities, Power, Gas and Water Companies', May 16, 2011.
Applicable Criteria and Related Research:
Rating North American Utilities, Power, Gas, and Water Companies
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities