Fitch Rates Gulf Power Senior Notes 'A'; Outlook Stable
NEW YORK -- June 11, 2013
Fitch Ratings has assigned an 'A' rating to Gulf Power Company's (Gulf Power)
issuance of $90 million series 2013A 5.00% senior notes due June 15, 2043. The
notes are senior, unsecured obligations of Gulf Power. The Rating Outlook is
Gulf Power plans to use the net proceeds from the offering for the redemption
at maturity of the $60 million series G 4.35% senior notes due July 15, 2013,
and/or a portion of the $125 million bank loan that was entered into in June
2013 and matures in September 2013, and/or for the proposed redemption of a
portion of $60 million of series H 5.25% senior notes due July 15, 2033, out
of which $30 million is outstanding.
KEY RATING DRIVERS
The ratings and Stable Outlook for Gulf Power reflect predictable cash flows
from regulated electric operations, a slow but steady improvement in retail
sales after a deep economic downturn, return to a more orderly and
constructive regulatory environment, and steadily improving credit metrics
from 2009 cyclical lows. Gulf Power's service territory continues to see slow
but steady improvement in the local economy with economic indicators such as
housing starts, unemployment and income growth, all showing positive trends.
Gulf Power achieved a constructive outcome in its last rate case that provided
for a $64.1 million rate increase in April 2012 and an additional $4 million
step up increase in 2013. The rate increases were based on a midpoint return
on equity (ROE) of 10.25% and an authorized retail ROE range of 9.25% -
11.25%. As a result, Gulf Power's credit metrics have shown a marked
improvement from what these have been historically. Funds from operations
(FFO) metrics have been further aided by the benefits of bonus depreciation.
For the last 12 months ending March 31, 2013, Gulf Power's total debt to
EBITDA was 3.6x and FFO to total debt was 29%. Coverage ratios were strong
relative to its rating category.
Gulf Power recently filed a test year letter with the Florida Public Service
Commission notifying them of its intent to file for a base rate increase
between July 8, 2013 and July 22, 2013. The utility expects to file for a $70
million-$80 million base rate based on a projected test year of 2014. High
capital expenditures, primarily related to transmission, and slower than
expected sales growth are the main drivers for the rate increase request. The
proposed rate case filing coming so soon on the heels of the last rate case
does induce regulatory uncertainty for Gulf Power. Fitch will review its
financial forecasts once the details of the proposed rate case filing are
The utility enjoys several rate riders that provide timely recovery of all
prudent costs related to fuel, purchased costs and environmental expenditures.
While Gulf Power is heavily dependent on coal fired generation capacity that
must comply with stringent emissions standards, the fuel and environmental
recovery clauses promote timely recovery of associated costs.
Gulf Power benefits from ownership by the Southern Company (IDR rated 'A',
Outlook Stable by Fitch), a multi-utility holding company in the Southeast.
Positive rating actions for Gulf Power are not anticipated at this time.
Negative rating actions could be triggered by unexpected negative regulatory
developments in Florida such as an adverse outcome in the proposed rate case
or extended weakness in Florida economy.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Shalini Mahajan, CFA, +1 212-908-0351
Fitch Ratings, Inc.
One State Street Plaza
New York, NY, 10004
Lindsay Minneman, +1 212-908-0592
Glen Grabelsky, +1 212-908-0577
Brian Bertsch, +1 212-908-0549
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