NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Virginia Electric Power Co.'s (VEPCo) $500 million issuance of 2013 series C 2.75% senior unsecured notes due March 15, 2023. 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 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 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.
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 remain near the 6.67 times (x) (Fitch calculated) for the fiscal year-ended Dec. 31, 2012. 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) on approved rider projects in the utility's current pipeline of projects (up to and including Brunswick County) as supportive of credit quality, particularly in consideration of these 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; IDR 'BBB+', Stable Outlook) on two separate revolvers for total consolidated borrowing capacity of $3.5 billion, of which $1.062 billion was available at Dec. 31, 2012. The two separate revolvers each mature in September 2017 and are sized at $5 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. Single-bank concentration is 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 as of March 12, 2013 are manageable with $17.7 million due in 2013, $17.6 million due in 2014, $210.6 million due in 2015, $476.4 million due in 2016 and $678.7 million due in 2017. Fitch considers the re-financing risk as low and views VEPCo's access to the capital markets as unrestricted.
--Execution of a sizeable utility capital investment plan limits positive rating action at this time.
--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
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating North American Utilities, Power, Gas, and Water Companies