OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to Virginia Electric and Power Co.'s (VEPCo) new issue of 2016 series A senior notes due Jan. 15, 2026. Proceeds will be used for the repayment of short-term borrowings ($1.656 billion as of Dec. 31, 2015) 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 is Stable.

KEY RATING DRIVERS

Strong Credit Profile: Current and projected credit metrics are strong and supportive of the current rating. Fitch forecasts debt/EBITDAR to approximate 3.1x over the next few years, funds from operations (FFO) lease adjusted leverage 3.4x and FFO fixed charge coverage to remain above 6.0x.

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 six years. The cost recovery mechanisms available to VEPCo soften the financial strain of funding the capex plan. Growth capex over the 2015 to 2020 period includes $4.4 billion in electric transmission, $4.0 billion in new utility generation and $2.8 billion in electric distribution. Fitch's rating forecast assumes timely execution of the capital plan and assumes funding requirements will be managed to maintain a capital structure with approximately 50% equity.

Suspension of Biennial Review Process: 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 neutral for credit quality. During the rate freeze period rider mechanisms remain in place and VEPCo can retain any earnings in excess of its authorized return on equity (ROE) of 10%. Conversely, 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 and high capacity fiber networks. Data center sales are expected to grow 9% annually. The service area also benefits from an attractive climate that drives residential customer growth. Management expects sales to increase 1% and 1.5% in 2015 and 2016, respectively, and 2% thereafter.

KEY ASSUMPTIONS:

--Base rate freeze through 2019;
--Annual sales growth of 1.5% in 2016 and 2% thereafter;
--Continuation of existing rider mechanism;
--Timely execution of capex plan.

RATING SENSITIVITIES

[Positive Rating Action: Positive rating action is not expected at this time. However, ratings could be upgraded if adjusted debt/EBITDAR falls below 3.25x and FFO lease adjusted leverage below 3.5x on a sustainable basis.
Negative Rating Action: An increase in debt/EBITDAR above 3.5x and FFO adjusted leverage above 4.25x on a sustainable basis could lead to a downgrade.

A downgrade of two notches or more at Dominion Resources, Inc. (DRI; IDR 'BBB+'/ Stable Outlook) would also likely trigger a downgrade of VEPCo under Fitch's parent and subsidiary linkage criteria.]

LIQUIDITY

Liquidity is considered sufficient supported by operating cash flow and access to revolving credit facilities. VEPCo is a joint borrower with parent Dominion Resources, Inc. and affiliate Dominion Gas Holdings, LLC in two revolving credit facilities aggregating $4.5 billion. VEPCo's borrowing sublimits are currently set at $1.5 billion and $250 million, respectively, but can be changed on an as needed basis. The credit facilities expire in April 2019. VEPCo also has access to inter-company borrowing from DRI, which can borrow up to the total facility size.

Date of Relevant Rating Committee: October 21, 2015