Fitch Rates Carolina P&L First Mortgage Bonds 'A+'
NEW YORK -- March 7, 2013
Fitch Ratings has assigned an 'A+' rating to Carolina Power and Light Co.'s,
DBA Progress Energy Carolinas, Inc. (PEC), $500 million, 4.1% first mortgage
bonds due March 15, 2043. The Rating Outlook is Stable.
Proceeds of the offering will be used to repay borrowings from the Duke Energy
Corp. money pool and for general corporate purposes. As of Feb. 28, 2013,
money pool borrowings were $489 million.
KEY RATING DRIVERS
Rate Support: PEC reached a settlement agreement with the North Carolina
Public Staff in its pending rate case that should enhance earnings and cash
flow and reverse a downtrend in credit metrics in recent years. If approved by
the North Carolina Utilities Commission (NCUC) the settlement agreement would
provide a $151 million annual rate increase in 2013 and an additional $31
million increase in 2014. The 2014 increase reflects a delay in the collection
of a cash return on construction work in progress for the Sutton combined
cycle generating plant for one year. The plant is scheduled to enter
commercial operation by 2013 year-end. Hearings are scheduled to begin in
March and a final decision is expected in May.
PEC is also considering a rate filing in South Carolina later this year. PEC
has not raised base rates since 1988 due in large part to above-average sales
and customer growth, which has since abated.
Constructive Regulatory Environment: Fitch considers regulation in North
Carolina, PEC's primary regulatory jurisdiction, to be constructive. NC state
regulation permits annual tariff adjustments to recover fuel, demand-side
management, energy efficiency and certain renewable costs. The settlement
agreement also supports PEC's proposed nuclear levelization accounting
Financial Metrics: Credit metrics weakened far more than expected in 2012, due
in large part to one-time merger integration costs and the additional expenses
of having three nuclear fuel outages during the year. Higher rates and lower
operating and maintenance expenses are expected by Fitch to drive improvements
in 2013 and beyond. Fitch expects interest and funds from operations (FFO)
coverage measures to approximate 4.75x-5.0x and 6.0x, respectively in 2013
with FFO/debt in excess of 20%. The ratio of Debt/EBITDA is expected to be
about 3.8x, which is aggressive for the rating.
Capital Expenditure Program: PEC is nearing completion of a large capex
program. The Lee plant was completed earlier this year and the Sutton plant is
expected to be completed by year-end. While capex remains significant, it
should be manageable at about 1.5x depreciation and amortization.
Parent leverage: PEC's ratings also consider the upstream dividend payments to
Progress Energy, Inc. (PGN, Fitch IDR 'BBB' Stable Outlook), needed to help
support the substantial holding company debt and the common dividend to
PEC has adequate liquidity. The company has a $750 million committed revolving
credit agreement that extends in 2016.
What could lead to consideration of a negative rating action:
--Lack of NCUC support for, or meaningful reductions to, the pending rate
settlement in North Carolina;
--Inability to control post-merger expenses.
What could lead to consideration of a positive rating action:
--Not likely at the current 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.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011)
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
Applicable Criteria and Related Research
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
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Robert Hornick, +1-212-908-0523
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Philip Smyth, +1-212-908-0531
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549
New York, Media Relations
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