Fitch Rates Virginia Electric and Power Co.'s Senior Notes 'A'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to Virginia Electric and Power Co.'s (VEPCo) proposed dual tranche offering of 2015 series A senior notes due 2025 and 2045, respectively. Proceeds will be used for the repayment of short-term borrowings and general corporate purposes. The notes will rank equally with all other senior unsecured debt and will be senior in right of payment to all subordinated debt. The Rating Outlook is Stable.

KEY RATING DRIVERS

--Strong financial metrics;

--Credit supportive regulatory environment in Virginia and North Carolina

--Large utility growth capex plan;

--Favorable service territory demographics;

--Sufficient liquidity.

Strong Credit Profile: Financial metrics are consistent with Fitch's guidelines for the rating level and risk profile with both 2014 debt/EBITDAR and FFO (Funds from Operations) lease adjusted leverage at 3.4x and FFO fixed charge coverage at 6.4x. Fitch forecasts debt/EBITDAR to remain relatively flat over the next few years and FFO lease adjusted leverage and FFO fixed charge coverage to weaken moderately due to the expiration of bonus depreciation, but to remain supportive of the current ratings. FFO lease adjusted debt is expected to range between 3.8x - 4.0x and FFO fixed charge coverage to approximate 5.5x.

Constructive Regulatory Environment: Fitch views the regulatory environment in Virginia and North Carolina as constructive, due in large measure to rider mechanisms that provide timely cost recovery of invested capital including incentive returns on certain generation projects. In Virginia, VEPCo's primary regulatory jurisdiction, adjustment clauses are in place to recover costs for new generation projects, Federal Energy Regulatory Commission (FERC) approved transmission costs, environmental compliance and energy efficiency and renewable energy programs.

Large Capex Plan: Capex is expected to remain elevated over the next six years. The contemporaneous cost recovery mechanisms available to VEPCo soften the financial strain of funding the capex plan. Growth capex over the 2015 to 2020 period includes $4.4 billion in electric transmission, $4.0 billion in new generation and $2.8 billion in electric distribution. Fitch's rating forecast assumes timely execution of the capital plan and assumes funding requirements will be managed to maintain a capital structure with approximately 50% equity.

Suspension of Biennial Review Process: Legislation enacted in Virginia in February 2015 suspends biennial reviews after 2015 until 2022 and freezes VEPCo's base rates through 2019. Fitch considers the impact to be neutral for credit quality. During the rate freeze period rider mechanisms remain in place and VEPCo can retain any earnings in excess of its authorized return on equity (ROE) of 10.0%. Conversely, VEPCo is at risk for unexpected storm costs and increased operating and capital costs not recovered through rider mechanisms. The 2022 biennial review will address rates in 2020 and 2021.

The legislation also limits the scope of the biennial review currently underway for 2013 and 2014 to whether VEPCo over or under earned its authorized ROE during the 2013 and 2014 test years (typically the biennial review is a comprehensive examination of base rates). The legislation also requires ROE proceedings in 2017 and 2019 for riders only and required VEPCo to forego recovery of approximately $85 million of deferred fuel costs.

Favorable Service Territory Demographics: A large government and military presence tends to limit economic and sales volatility. In addition, VEPCo's service territory has experienced strong growth of data centers due in large measure to its proximity to Washington DC and high capacity fiber networks. Data center sales are expected to grow 9% annually. The service area also benefits from an attractive climate that drives residential customer growth. Management expects sales to increase 1% and 1.5% in 2015 and 2016, respectively, and 2% thereafter.

Sufficient Liquidity: VEPCo is a joint borrower with its corporate parent Dominion Resources, Inc. (DRI, IDR 'BBB+'; Stable Rating Outlook) in two separate revolving credit facilities aggregating $4.5 billion. VEPCo's borrowing sub-limits are currently set at $1.5 billion and $250 million, respectively, but can be changed on an as-needed basis. VEPCo also has access to inter-company borrowing from DRI, which can borrow up to the total facility size.

KEY ASSUMPTIONS

--Base rate freeze through 2019;

--Annual sales growth of 1.0% and 1.5% in 2015 and 2016 and 2% thereafter;

--Continuation of existing rider mechanism;

--Timely execution of capex plan.

RATING SENSITIVITIES

Positive Rating Action: No positive rating action is expected at this time. However, ratings could be upgraded if adjusted debt/EBITDAR fell below 3.25x and FFO lease adjusted leverage below 3.5x on a sustainable basis.

Negative: An increase in debt/EBITDAR above 3.5x and FFO lease adjusted leverage above 4.25x on a sustainable basis could lead to a downgrade.

A downgrade of two notches or more at DRI would also likely trigger a downgrade of VEPCo under Fitch's parent and subsidiary rating linkage criteria.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (March 5, 2015);

--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors) (March 11, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984420

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Fitch Ratings
Primary Analyst
Robert Hornick
Senor Director
+1-212-908-0523
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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