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Rating Action:

Moody's affirms Dominion's Baa2 senior unsecured; upgrades VEPCO's A3 senior unsecured; outlooks stable

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 years.

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 reduction strategies.

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.

RATINGS RATIONALE

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009.

REGULATORY DISCLOSURES

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 Analytics information.

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 for further information.

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.

New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Dominion's Baa2 senior unsecured; upgrades VEPCO's A3 senior unsecured; outlooks stable
No Related Data.
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