NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Virginia Electric and Power Company's (VEPCo) dual tranche offering of senior notes due 2026 and 2046. Proceeds will be used for the repayment of short-term borrowings ($965 million at VEPCo as of Sept. 30, 2016) 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 on VEPCo's 'A-' Long-Term Issuer Default Rating (IDR) is Stable.
KEY RATING DRIVERS
Strong Credit Profile
VEPCo's current and projected credit metrics are supportive of the ratings. Fitch forecasts adjusted debt/EBITDAR to approximate 3.4x over the next few years, funds flow from operations (FFO) lease-adjusted leverage 3.5x and FFO fixed-charge coverage to remain above 6.0x. By comparison, these figures were 3.5x, 3.5x and 6.5x, respectively, for the latest 12 months (LTM) ended June 30, 2016.
Constructive Regulatory Environment
Fitch considers the regulatory environment in Virginia and North Carolina to be constructive, due largely 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, FERC-approved transmission costs, environmental compliance, energy efficiency and renewable energy programs.
Large Capex Plan
Capex is expected to remain elevated over the next five years. The timely cost recovery mechanisms available to VEPCo soften the financial strain of funding the capex plan. Capex aggregates $8.7 billion over 2016-2018, including a peak of $3.4 billion in 2016, compared with $8.3 billion over the prior three years. About two-thirds of the capex is growth-related and the remainder maintenance. Fitch's forecast assumes timely execution of the capital plan and that funding will be managed to maintain a balanced capital structure.
Biennial Review Suspension
Legislation enacted in Virginia in February 2015 suspends biennial reviews after 2015 until 2022 and freezes base rates through 2019. Fitch considers the impact to be credit neutral. During the rate freeze period rider mechanisms remain in place and VEPCo can retain any earnings in excess of its authorized return on equity of 10%. VEPCo is at risk for unexpected storm costs and increased operating and capital costs not subject to rider mechanisms. The 2022 biennial review will address rates in 2020 and 2021.
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, D.C. and high-capacity fiber networks. Data center sales are expected to grow 11% annually. The service area also benefits from an attractive climate and sound economy that drives residential customer growth. Management expects sales to increase 1% in 2016 and 2017, and 1.5% thereafter.
Fitch's key assumptions within the rating case for VEPCo include:
--Base rate freeze through 2019;
--Annual sales growth of 1% in 2016 and 2017, and 1.5% thereafter;
--Continuation of existing rider mechanism;
--Timely execution of capex plan.
Positive Rating Action: A positive rating action is not expected in the near future given the large capex plan and rate freeze. However, ratings could be upgraded if Fitch were to expect adjusted debt/EBITDAR to fall below 3.3x and FFO lease-adjusted leverage below 3.5x on a sustainable basis.
Negative Rating Action: An increase in adjusted debt/EBITDAR above 3.5x and FFO-adjusted leverage above 4.3x on a sustainable basis could lead to a downgrade. A downgrade of two notches or more at Dominion Resources, Inc. (DRI, Long-Term IDR 'BBB+'/Stable Outlook) would also likely trigger a downgrade of VEPCo under Fitch's parent and subsidiary linkage criteria.
Fitch considers liquidity to be sufficient. To supplement internal cash generation VEPCo is a joint borrower with its corporate parent DRI and affiliate Dominion Gas Holdings, LLC in two separate revolving credit facilities aggregating $5.5 billion. In March 2016, VEPCo's sub-borrowing limit was increased to $2.0 billion from $1.75 billion. VEPCo's sub-borrowing limits can be changed on an as-needed basis up to the full amount of the credit facilities. The two credit facilities support the issuance of commercial paper. VEPCo also has access to intercompany borrowing from DRI. The credit facilities mature in April 2020.
Disclosure: There were no financial statement adjustments made that were material to the rating rationale outlined above.
Date of Relevant Rating Committee: Feb. 1, 2016.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
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