Fitch Ratings has assigned an A+ rating to Carolina Power and Light Co.’s, d/b/a Progress Energy Carolinas Inc. (PEC), $1 billion dual tranche debt offering comprised of a $500 million, 2.8% first mortgage bonds due May 15, 2022 and $500 million, 4.1% first mortgage bonds due May 15, 2042.
The Rating Outlook is Stable.
Proceeds of the offering will be used to retire $500 million 6.5% notes due July 15, 2012 and to repay a portion of short-term debt, which totaled approximately $575 million at April 30, 2012.
Key Rating Drivers
Solid Financial Metrics: Credit metrics are strong, despite some weakening in recent periods. Fitch expects interest and funds from operations (FFO) coverage measures to be well in excess of 6 times (x) over the next several years and debt to EBITDA to range between 3.0x-3.25x. Over the past 15 months these measures have been adversely affected by unfavorable weather, higher nuclear expenses, merger related integration costs and higher debt balances.
Rate Support: The ratings and forecasted credit metrics assume a base rate increase in 2013 to recover investments in PEC’s fleet modernization plan and other cost of service items. Management indicated it plans to file a rate case in North Carolina later this year with new rates to be effective mid-2013. The company has not raised base rates since 1988. The above average sales and customer growth which allowed PEC to avoid base rate filings over the past 24-years has subsided due to the economic downturn.
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.
Large Capital Expenditure Program: PEC is engaged in a multi-year capex program that will require debt financing in each of the next several years and rate support to maintain its current financial position. The spending program is designed to replace coal-fired generating facilities that do not have sufficient pollution controls to meet existing and pending environmental regulations with new natural gas-fired generating facilities. Current projects include replacing the coal fired Lee and Sutton plants with natural gas-fueled combined cycle units. The new natural gas facilities, expected to enter service in January and December 2013, respectively, have an aggregate generating capacity of 1,545MW compared to 957MW for the retiring coal units.
Parent Leverage: PEC’s ratings also consider the upstream dividend payments to Progress Energy, Inc. (PGN; IDR ‘BBB’, Outlook Stable), needed to help support the substantial holding company debt and its common dividend to shareholders.
Duke Merger: The pending merger between PEC’s parent, Progress Energy Corp. (PGN) and Duke Energy Corp. (DUK) is not expected by Fitch to impact PEC’s credit ratings. PGN and its subsidiaries will be structured as subsidiaries of DUK. There is no incremental debt associated with the planned stock for stock merger. However, economies of scale of the merged entity and the geographic proximity of the service territories should create synergy opportunities.
Liquidity: PEC has adequate liquidity. PEC has a $750 million committed revolving credit agreement (RCA) that matures Oct. 15, 2013. The RCA provide liquidity support for issuances of commercial paper. Post merger, PEC will have a $750 million sub-borrowing limit in DUK’s $6 billion credit facility maturing in 2016.