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Global Credit Research - 08 Dec 2010
Approximately $18 billion of debt affected
New York, December 08, 2010 -- Moody's Investors Service affirmed Dominion Resources' (Dominion)
Baa2 senior unsecured rating and upgraded Virginia Electric and Power
Company's (VEPCO) senior unsecured rating to A3 from Baa1.
Moody's also affirmed the Prime-2 commercial paper ratings
at both Dominion and VEPCO. The rating outlooks for both Dominion
and VEPCO are stable.
Dominion's Baa2 senior unsecured rating is supported by the diversity
of its operations, approximately two-thirds of which are
related to rate-regulated business activities. These regulated
activities are primarily related to the corporate crown jewel, VEPCO,
a vertically integrated electric utility as well as a sizeable natural
gas transmission business and local gas distribution (primarily East Ohio
Gas Company). Dominion is considered to be well positioned within
the Baa2 rating category, given its overall business and operating
risk profile, but also based on our expectation that the company
will produce consolidated financial credit metrics that are still appropriate
for the rating category. These metrics include the ratio of cash
flow before working capital adjustments to debt in the 16% -
18% range and retained cash flow to debt in the low-teen's.
Dominion's rating is only modestly constrained by its more risky non-regulated
merchant generation operations.
The A3 senior unsecured rating for VEPCO primarily reflects the Virginia
and North Carolina regulatory and political environments, which
we believe provide a reasonably supportive and transparent suite of recovery
mechanisms. The rating also reflects our expectations that VEPCO
will produce key financial credit metrics more in the range of the A-rating
category over the near, intermediate and longer-term horizon,
including ratio's of cash flow to debt in the low 20% range
and RCF to debt in the high-teen's.
Moody's acknowledges that, historically, we maintained
a 1-notch ratings differential between VEPCO and Dominion;
however, the two-notch differential between VEPCO's
A3 senior unsecured and Dominion's Baa2 senior unsecured is now
considered to be more appropriate for the following reasons: 1)
the significant amount of parent holding company debt as a percentage
of total consolidated debt, despite the organization structure which
also includes numerous subsidiaries that have no direct debt, but
instead are allocated debt internally via the parent; 2) our expectations
for increasingly stringent environmental mandates, which are likely
to add to the costs and investment requirements for the merchant generation
fleet at Dominion without the benefits of seeking regulatory recovery;
and, 3) the significant challenges facing the approximately 9GW
merchant generation fleet, which includes our expectations for continuing
relatively low natural gas and power prices. As a result of these
merchant generation pressures, Dominion's consolidated financial
profile may decline, albeit modestly over the next few years.
Dominion's stable rating outlook primarily reflects our expectation that
the company will not materially alter its overall business and operating
risk profile but will continue to focus primarily on regulated investment
opportunities. The stable outlook also reflects our expectation
that Dominion will produce key financial credit metrics that are commensurate
with the Baa2 ratings category with a ratio of cash flow from operations
before working capital adjustments to debt in the high teen's range.
VEPCO's stable rating outlook primarily reflects the supportive suite
of recovery mechanisms provided by the Virginia and North Carolina regulatory
commissions as well as the generally supportive political and regulatory
environments that currently exists in those states. The stable
outlook also reflects a continued strong financial credit profile,
where cash flow to debt metrics are expected to remain above 20%
while leverage ratios stay around the 45% range over the next several
VEPCO's rating could be upgraded into the mid-to high-A
ratings category if VEPCO is able to produce a ratio of CFO pre-w/c
to debt above 25% for a sustained period of time. Moody's
already ascribes a material benefit to the VA and NC regulatory environments
which maintain jurisdiction over the majority of VEPCO's rate base.
Nevertheless, should these supportive environments and suite of
recovery mechanisms improve even further, ratings could be upgraded
without a sustained improvement in the financial profile. For Dominion.
a rating upgrade appears unlikely over the near to intermediate-term
horizon, primarily due to our view that Dominion is most likely
going to produce key cash flow to debt metrics in the mid to high teen's
range. Nevertheless, should Dominion produce materially higher
financial credit metrics, for example, where the ratio of
cash flow to debt approximates the low 20% range for a sustained
period of time, then the ratings could be upgraded. Separately,
ratings could also be upgraded without a material increase in the financial
profile should Dominion divest itself of its more risky non-regulated
generation businesses, or embark on similar, corporate risk
VEPCO's ratings could be downgraded back to the Baa-category
if VEPCO's financial profile began to exhibit an unexpected deterioration,
perhaps triggered by an unexpectedly negative regulatory outcome or significant
political intervention in the rate making process. The most likely
scenario to trigger such an event could be the next bi-annual rate
review, where the initial filings are expected in mid-2011,
unless delayed. Nevertheless, we view a more contentious
regulatory environment as highly unlikely at this time. The ratings
could be also downgraded if VEPCO's CFO pre-w/c to debt ratio declined
to the high-teen's range or if its CFO pre-w/c interest
coverage ratio fell below the 4x range for a sustainable period of time
and without any clear path to recovery. A Dominion rating downgrade
also appears unlikely at this time, given Dominion's solid position
within its existing rating category. Nevertheless, a material
weakening of its consolidated financial or liquidity profile (where the
ratio of cash flow to debt fell to the mid to low teen's range for
a sustained period of time), unexpectedly large swings in its collateral
and hedging program that negatively impacts liquidity availability or
an unexpectedly more contentious regulatory environment at VEPCO could
weaken Dominion's credit profile. Absent any mitigating actions
that would address such deterioration, could ultimately result in
a rating downgrade.
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in August 2009.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Dominion's Baa2 senior unsecured; upgrades VEPCO's A3 senior unsecured; outlooks stable
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