Fitch Rates Progress Energy Florida's FMBs 'A'
NEW YORK -- November 16, 2012
Fitch Ratings has assigned an 'A' rating to Progress Energy Florida's (PEF)
new $650 million dual tranche debt offering comprised of $250 million, 0.65%
first mortgage bonds due 2015 and $400 million, 3.85% first mortgage bonds due
2042. The Rating Outlook is Negative. Net proceeds will be used to repay at
maturity $425 million, 4.8% first mortgage bonds due March 1, 2013, to repay
money pool borrowings and for general corporate purposes.
The Negative Outlook reflects ongoing uncertainty related to the operation of
the Crystal River 3 nuclear station (CR3) and a downtrend in credit metrics
that is likely to persist through 2012. Fitch believes it is unlikely
management will elect to repair CR3 given the rising cost estimates,
construction risks and low gas price environment, and instead will pursue the
retirement option and recovery of invested capital (see settlement agreement
below). The unit has been out of service since September 2009.
Key Rating Drivers
Credit Metrics: As expected, PEF's credit metrics continued to weaken in 2012,
and will remain under pressure until higher rates are implemented in 2013.
Fitch estimates consolidated EBITDA/interest and debt/EBITDA will approximate
4.5x and 4.0x, respectively, in 2012. Credit metrics should remain fairly
stable in 2013, reflecting the approved tariff increase in Florida partly
offset by a CR3 related rate refund.
Rate Settlement: A rate settlement agreement approved by the Florida Public
Service Commission's (FPSC) establishes a framework approval treatment of CR3
costs. Favorably, the settlement provides for recovery of on-going replacement
power costs, a $150 million rate increase effective Jan.1, 2013, and recovery
of $350 million of Levy County Nuclear (LCN) project costs and recovery of
costs to complete the LCN license application. In addition, if PEF decides to
retire CR3, the parties to the settlement agreement agreed not to challenge
the full recovery of all plant investment.
Partly, offsetting the positive elements are provisions for rate refunds of
$388 million of CR3 replacement power costs primarily in 2013 and 2014, a
lower than expected rate increase in 2013, a rate freeze through 2016 and the
removal of CR3 from rate base. The rate refunds include $40 million in 2015
and $60 million in 2016 due to the company's announcement that it is unlikely
to begin CR# repairs before 2012 year-end.
Constructive Regulatory Environment: Fitch considers regulation in Florida to
be constructive. The FPSC employs several tariff adjustment mechanisms that
benefit cash flow. In addition to a fuel adjustment clause, energy
conservation expenses, specified environmental compliance costs and qualified
nuclear costs are recoverable outside of base rate cases.
Liquidity: PEF has sufficient liquidity to meet its operational needs and debt
refinancing requirements, but will require continued capital market access.
PEF has a borrowing limit of $750 million under parent Duke Energy Corp.'s $6
billion, five-year master credit facility. As of Sept 30, 2012, available
borrowing capacity under the company's credit facilities was $5,042 million
and available cash was $732 million.
What would lead to consideration of a negative rating action?
--A decision to repair CR3 without assured regulatory recovery could adversely
--Any change in the ability to recover fuel and purchased power costs.
What would lead to consideration of a positive rating action?
--Not likely given the CR3 uncertainty and present rating level
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011)
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Robert Hornick, +1-212-908-0523
One State Street Plaza
New York, NY 10004
Philip Smyth, +1-212-908-0331
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549
Media Relations, New York
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