Virginia Power, which sells electricity to customers in Virginia and North Carolina, is preparing to issue $1.2 million in asset-backed securities through the Virginia Power Fuel Securitization, in the first utility cost recovery charge deal for the Commonwealth of Virginia.
A mechanism called the deferred fuel cost property, known as the securitization property will secure the notes, issued through a transaction called the VPFS 2024 Senior Secured Deferred Fuel Cost Bonds. The securitization property will empower the trust, VPFS 2024, to impose and collect the deferred fuel cost charge on all existing and future Virginia Power electric retail customers, according to ratings analysts at Moody's Investors Service.
Virginia Electric and Power will service the notes, while U.S. Bank Trust is on the transaction as trustee, according to Moody's.
Driven by a legislative financing order, the securitization property features an uncapped true-up adjustment mechanism that ensures revenue from utility service collections are enough to service the outstanding debt, according to Moody's.
S&P Global Ratings says Morgan Stanley is the arranger on the deal. While VPFS will issue two tranches of A class notes, the structure will still issue notes through a senior-subordinate structure, both rating agencies said. S&P noted that the deal benefits from a fully funded capital subaccount, which is equal to 0.50% of the bonds' issuance amount. Funds from the subaccount will be available to cover any collections shortfalls.
Weather forecasting variance remains a potential credit weakness, particularly if they result from inaccurate forecasting assumptions and events like natural disasters, according to S&P. Speaking of natural disasters, federal and state government measures to limit carbon emissions pose ongoing compliance costs to the energy sector, the rating agency said. Further, extreme weather, climate events like wildfires, hurricanes and droughts have become more frequent and severe. And as technology continues to advance, cyber attacks could also become more frequent, according to the rating agency.
Moody's expects to assign Aaa ratings to both the A1 and A2 notes, which have legal final maturity dates of May 1, 2029 and May 1, 2033, respectively. For its part, S&P also assigns AAA ratings to the A1 and A2 notes.
