Fitch Affirms Dominion Energy's and Subsidiaries' IDRs

Published: 2025-05-23 05:19:08 ET D

Published on 05/23/2025 at 05:19

Fitch Ratings has affirmed Dominion Energy, Inc.'s (DEI) Long-Term Issuer Default Rating (IDR) at 'BBB+' and the IDRs of Virginia Electric and Power Co. (VEPCo) and Dominion Energy South Carolina, Inc. (DESC) at 'A-'.

The Rating Outlooks for DEI, VEPCo and DESC are Stable. Additionally, Fitch has affirmed DEI's, VEPCo's and DESC's Short-Term IDRs at 'F2'.

DEI's affirmation reflects the completion of the company's comprehensive business review, simplification of its corporate structure and expectations for greater predictability in its financial performance. Additionally, DEI's and VEPCo's ratings reflect Fitch's expectation that the Costal Virginia Offshore Wind (CVOW) project will be constructed on time and within the revised budget, and the continuation of existing regulatory constructs for the project.

However, Fitch believes DEI has limited headroom to the post CVOW in-service downgrade threshold of 5.0x FFO leverage. The affirmations of VEPCo's and DESC's ratings also reflect the subsidiaries supportive regulatory jurisdictions.

Key Rating Drivers

Dominion Energy, Inc.

Comprehensive Business Review Completed: In 2024, DEI completed a comprehensive business review that resulted in multiple asset sales, including the remaining 50% non-controlling partnership interest in Cove Point LNG, three local gas distribution companies (LDCs) and 50% non-controlling interest in the Coastal Virginia Offshore Wind (CVOW) project.

Fitch expects approximately 90% of DEI's EBITDA will be derived from VEPCo and DESC. While regulated operations continue to account for the majority of DEI's EBITDA, the company has less geographic and regulatory diversity, with VEPCo accounting for over 70% of DEI's consolidated EBITDA. The asset sale program allowed for a reduction in DEI parent-level debt to mid-30% of total debt from approximately 40% prior to the review, excluding a 50% credit equity for hybrids.

Large Subsidiary Capital Project: VEPCO is constructing CVOW, which is a 176-turbine offshore wind installation 27 miles off the coast of Virginia. The 2.6GW rate-based project is 55% complete, with expected completion in late 2026. CVOW's $10.8 billion cost was recently increased from the original $9.8 billion, primarily due to a revised estimate of interconnection costs and transmission system upgrades. DEI's and VEPCo's ratings incorporate the completion of the CVOW project on time and within budget.

Minority CVOW Partner: The last step in DEI's business review was an agreement to sell a 50% non-controlling interest in the CVOW project to private equity firm Stonepeak Partners, LLC, which closed on Oct. 22, 2024. Stonepeak will fund 50% of CVOW's expected construction costs, with $2.6 billion contributed upon closing. Fitch views the partnership as beneficial in reducing VEPCo 's CVOW risk and provides an additional source of funding.

Well Positioned Utility Subsidiaries: DEI's credit quality is underpinned by its ownership of VEPCo and DESC. Both subsidiaries benefit from supportive regulation and strong service territory growth. VEPCo's northern Virginia service territory is home to the largest data center market in the world and continues to see robust growth. DEI forecasts long-term weather normalized electric sales growth of 3.5%-4.5% for VEPCo and 2.5%-3.5% for DESC.

Limited Headroom in Credit Metrics: Fitch believes DEI has no headroom regarding the post-CVOW in-service downgrade threshold for 5.0x FFO leverage. The company will retain limited cash due to a high dividend payout, relying more on non-utility cash flows, especially in the early years of the new plan. Any significant variation from expectations for financial metrics or the CVOW project could result in negative rating actions.

Parent-Subsidiary Rating Linkage: There is a parent-subsidiary relationship between DEI and its regulated subsidiaries VEPCO and DESC. Fitch assesses DEI's Standalone Credit Profile (SCP) using consolidated metrics and views VEPCO and DESC as stronger, thus following the stronger subsidiary path. Legal ring-fencing is seen as porous due to economic regulation protections. Access and control are also considered porous. Due to linkage considerations, the rating difference between DEI and VEPCo or DESC is limited to two notches.

Virginia Electric and Power Company

Estimated Tariff Impacts Manageable: In its 1Q25 earnings call, the company disclosed that if the Trump administration's recently enacted tariffs were put in place for the remainder of the project's construction, the total CVOW project cost would be estimated at $11.2 billion. Under a cost sharing settlement approved by the Virginia State Corporation Commission (VSCC), VEPCo customers absorb 50% of the costs between $10.3 billion and $11.3 billion, and VEPCO and Stonepeak equally absorb the other 50%. Fitch views the company's outlined potential tariff impact as manageable due to regulatory and partner cost-sharing provisions.

CVOW Cost Competitive: On the 1Q25 earnings call, DEI estimated that CVOW's levelized cost of energy (LCOE) will be $62/MWh, which Fitch considers competitive with recent combined-cycle gas power plants. The company estimates that the full impact of tariffs as outlined, would only increase LCOE by $2. The legislatively mandated LCOE prudency cap is $125/MWh. Fitch believes the expected favorable cost profile and VEPCo's need for additional generation resources are beneficial in supporting the project against potential opposition.

Wind Energy Executive Order: The Bureau of Ocean Energy Management (BOEM) issued a favorable decision on CVOW in October 2023. So far, CVOW has not been impacted by the Trump administration's executive order requiring a pause in current leasing activity and a comprehensive assessment and review of federal wind leases and permitting practices. However, any federally ordered pause would likely result in a negative rating action.

Favorable Rider Recovery for CVOW: VEPCo is recovering its revenue requirements for CVOW through a rate adjustment clause (Rider OSW). On July 25, 2024, the Virginia State Corporation Commission (VSCC) approved VEPCo's $486 million Rider OSW request for the current rate year beginning September 2024. The company has made its rider filing for the next rate year, representing $154 million of annual incremental revenue.

VEPCO Biennial Review Filing: VEPCo recently made its 2025 legislatively mandated biennial review filing, which will review base rate returns for 2023-2024 and set base rates for 2026 and 2027. The company has requested a two-step rate increase totaling $1.167 billion, based upon 10.40% return on equity (ROE) and 52.10% equity capitalization. VEPCo's current authorized ROE is 9.70%. Fitch estimates that approximately 35%-40% of VEPCo's revenues are covered under the biennial filing. However, the authorized ROE is used in calculating future riders. A final order is expected in November 2025. Fitch assumes a constructive outcome in the rate proceedings.

Elevated Capex: As a result of the CVOW project, VEPCo's near-term capex forecast remains elevated, with 2025 spending of $10.2 billion and 2026 spending of $8.6 billion, of which $3.1 billion and $1.1 billion, respectively, are due the CVOW project. The timely cost-recovery mechanisms available to VEPCo will help soften the financial strain of funding the capex plan. Favorably, the Stonepeak partnership contribution will reduce the aforementioned amounts by approximately $1.6 billion in 2025 and $0.6 billion in 2026.

Stable Credit Metrics: Fitch expects VEPCo's FFO leverage to average around 4.0x over the forecast period. Ongoing recovery of deferred fuel costs and service territory growth have benefitted VEPCo's cash flow. Fitch expects VEPCo to maintain headroom within its 4.5x downgrade threshold over the forecast period.

Dominion Energy South Carolina, Inc.

Favorable South Carolina Legislation: On May 12, 2025, the governor signed South Carolina Energy Security Act (House Bill 3309) into law. Fitch views this bill positively from a credit perspective. The new legislation allows DESC to increase rates through a rate stabilization adjustment rider outside of multi-year rate case proceedings, thereby reducing regulatory lag. The legislation also authorizes DESC and state-owned South Carolina Public Service Authority to jointly pursue development of up to 2 GW natural gas generation at a previously shuttered coal power plant.

2024 Electric Rate Proceeding: DESC resolved its March 1, 2024 electric base rate case via settlement, which was adopted by the Public Service Commission of South Carolina (PSCSC) on Aug. 8, 2024. The comprehensive agreement resulted in a $219.5 million increase based upon a return on equity (ROE) of 9.94% and 52.51% equity capitalization. New rates were effective Sept. 1, 2024. DESC had proposed a $291 million increase based upon 10.6% ROE and 52.51% equity capitalization.

This was DESC's first electric rate case since a 2021 base rate settlement, which included a stay-out provision. In that proceeding, DESC received a net revenue increase of $35.6 million ($61.6 million before accelerated return of deferred income taxes), a regulatory capital structure of 51.62% equity, and authorized ROE of 9.5%. The resolution of DESC's 2024 electric rate case aligns with Fitch's expectations.

Natural Gas Rates: DESC's most recent gas base rate case was resolved in 2023 when the PSCSC approved a settlement on Sept. 20, 2023. The settlement resulted in a $8.9 million net rate increase based upon a below-average 9.49% ROE but robust 54.78% equity capitalization. In October 2024, the PSCSC approved a $13 million base rate increase under the terms of the Natural Gas Rate Stabilization Act. New rates were effective as of the first billing cycle in November 2024.

Supportive Regulatory Environment: DESC's ratings reflect the resolution of SCANA's 2017 abandonment of the V. C. Summer Nuclear Station expansion project and evidence of an improved regulatory relationship. The proceeding resulted in a PSCSC final order addressing the ratemaking treatment for $2.8 billion of the $4.7 billion in abandoned nuclear costs, as well as approving $2.0 billion in rate relief. DESC is allowed to earn a 9.9% ROE on $2.8 billion of a new nuclear development (NND) rate base with 52.81% equity capitalization.

Expectation for Improved Credit Metrics: DESC's credit metrics are elevated due to increased capex and the 2021 agreement that resulted in a base rate freeze. As a result, DESC's FFO leverage was 5.4x as of YE 2024. Fitch expects DESC's leverage to improve with the constructive outcome in the electric base rate case and the ability to reduce regulatory lag given the recently passed legislation.

Peer Analysis

Fitch continues to view DEI as weakly positioned within the 'BBB+' rating category, despite the positive implications of the now completed strategic review. This is due to the large CVOW construction project and limited headroom to the post-CVOW in-service downgrade threshold of 5.0x FFO leverage. Fitch expects approximately 90% of DEI's EBITDA to come from state-regulated utility businesses over the forecast period. This aligns with The Southern Company's (BBB+/Stable) utility EBITDA of 86% but compares more favorably with Sempra's (BBB+/Stable) 80%.

DEI's expected post-CVOW leverage is higher than Sempra's (average 4.5x) but similar to Southern's expected FFO leverage of 5.0x by 2026. DEI-level debt will be significantly reduced with the completion of asset sales, bringing it to approximately 30% from 40%, albeit still at the high end of the 20%-30% range of most of its peers. DEI and Sempra have significant construction risk; DEI is constructing CVOW and Sempra is a part owner in Port Arthur LNG project.

Key Assumptions

Capex of approximately $31.8 billion for 2025-2027, including nuclear fuel and before consideration of Stonepeak CVOW contribution;

CVOW completion in 2026 at an estimated cost of $10.8 billion;

Stonepeak partnership operates consistent with the terms of the agreement;

Continuation of existing rider mechanisms;

Annual equity issuance of $700 million;

Current common dividend rate of $2.67 per share;

Maintenance of utility subsidiaries' capital structures in line with regulatory capital structures;

No adverse regulatory changes.

VEPCO and DEI fully consolidate CVOW partnership.

RATING SENSITIVITIES

Dominion Energy, Inc.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

FFO leverage expected to exceed 5.4x during the offshore wind project permitting and construction phases, followed by 5.0x after beginning service;

A downgrade of VEPCo's IDR to 'BBB+';

Material escalation of CVOW costs above the current estimate of $10.8 billion or delays beyond the scheduled YE 2026 completion;

Significant project costs not deemed recoverable by the VSCC and/or denial of rider recovery for CVOW;

Breach of a major CVOW Engineering, Procurement, and Construction (EPC) or supplier contracts;

Unfavorable regulatory or legislative developments.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action is not likely at present given the large capital investment plan and high consolidated leverage. However, the ratings could be upgraded if FFO leverage drops below 4.3x on a sustainable basis.

Virginia Electric and Power Company

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

An increase in FFO leverage above 4.5x;

Material escalation of CVOW costs above current estimate of $10.8 billion and/or delays beyond scheduled YE 2026 completion;

Significant project costs not deemed recoverable by the SCC and/or denial of rider recovery for CVOW;

Breach of a major CVOW EPC or supplier contract;

Unfavorable regulatory or legislative developments;

A downgrade of two notches or more at DEI under Fitch's parent and subsidiary linkage criteria.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action is not likely in the near future given the capex plan and CVOW construction.

Dominion Energy South Carolina, Inc.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Unfavorable state regulatory or legislative developments;

FFO leverage consistently and materially exceeding 4.5x;

A downgrade of two notches or more at DEI under Fitch's parent-subsidiary linkage criteria.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Sustained FFO leverage at or below 3.5x.

Liquidity and Debt Structure

In April 2025, DEI amended its joint revolving credit agreement to $7.0 billion and extended the maturity April 2030. The new sublimits on the amended facility are as follows: DEI $3.0 billion, VEPCo $3.0 billion and DESC $1 billion. If any of the above DEI subsidiaries have liquidity needs exceeding their respective current sub-limit, the sub-limit can be adjusted, or the needs could be satisfied through short-term intercompany borrowings from DEI. According to the credit agreement, DEI's calculated total debt-to-total capital ratio is not to exceed 67.5%. As of Dec. 31, 2024, the actual ratio was 54.9%.

At March 31, 2025, DEI had $4.355 billion of capacity available under the original $6 billion facility and $355 million of cash. Additionally, in April 2025, DEI also entered into a new $1.0 billion 364-day RCF, and amended its Sustainability Revolving Credit Agreement to $1 billion from $900 million and extended the maturity date to April 2028 from June 2025. DEI's parent long-term corporate debt maturities are as follows: 2025-$750 million; 2026- $970 million; and 2027-$433 million.

Issuer Profile

DEI's business portfolio consists of two state-regulated utilities, nuclear power generation, contracted renewables, and renewable natural gas facilities. VEPCo is the largest contributor, comprising about 70% of DEI's consolidated EBITDA.

Summary of Financial Adjustments

Fitch adjusts DEI's debt by assigning 50% equity credit to its enhanced junior subordinated debentures, trust preferred and perpetual preferred stock.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.