RPT-Fitch affirms Duke Energy florida's ratings; outlook revised to stable
Dec 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the 'BBB+' Issuer Default Ratings (IDR) and all instrument ratings of Duke Energy Florida, Inc. (DEF). Fitch has also revised the Rating Outlook to Stable from Negative. A full list of the rating actions is provided at the end of this release.
The Stable Outlook reflects the constructive resolution of all remaining regulatory issues related to the outage and closure of the Crystal River 3 (CR3) nuclear plant. The unit has been out of service since September 2009 and in February 2013 DEF announced plans to retire the unit rather than attempt a costly and complex, first of a kind repair.
KEY RATING DRIVERS
CR3 Settlement Agreement: A revised settlement agreement approved by the Florida Public Service Commission (FPSC) in October 2013 provides certainty as to the amount and timing of CR3 cost recovery lowering business and financial risk. The agreement accelerates recovery of $135 million of CR3 costs to the 2014-2016 periods with the balance, up to a cap of $1.47 billion, to be recovered beginning 2017 (as of Sept. 30, 2013 the CR3 regulatory asset was $1.2 billion). Importantly, the agreement terminates any further investigation into the decision to retire CR3 or challenges to the sufficiency of the mediated insurance settlement. The agreement also keeps in place the provisions of the 2012 agreement allowing continued recovery of replacement power costs and the investment in the Levy County Nuclear (LCN) project.
Sound Credit Profile: As expected, credit metrics strengthened considerably in 2013 due to a Jan. 1, 2013 rate increase ($150 million), lower CR3 related O&M expense and the retirement of $435 million of debt. Over the next three years, Fitch estimates EBITDA/interest will average 5.9x, funds from operations (FFO)/interest 4.5x, FFO/debt 18% and debt/EBITDA 3.3x. The improvement in the credit profile beyond 2014 reflects a decline in CR3 related fuel cost refunds provided for in the previous settlement.
Rate Refunds: The 2012 settlement required rate refunds of $129 million of CR3 replacement power costs in both 2013 and 2014, and $10 million annually in 2014 - 2016, As per the agreement additional rate refunds of up to $40 million in 2015 and $60 million in 2016 are required due to the decision to retire the unit.
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.
Base Rate Increase: A $150 million rate increase implemented in January 2013 has strengthened earnings and cash flow measures.
Base Rate Freeze: As part of the 2013 settlement agreement, DEF agreed to extend a previously agreed upon rate freeze two years through 2018, but importantly, is permitted to file a rate case if it's earned return on equity (ROE) falls below 9.5%. DEF is also permitted to accrue, for future rate setting purposes, a carrying charge on the CR3 investment until cost recovery begins.
Manageable Capital Program: Capital expenditures are moderate through 2015, easing external financing needs and pressure on financial metrics. Expenditures pick up beginning in 2016 for new capacity needed in the 2017-2018 period.
A positive rating action is not likely during the rate freeze period. A negative rating action could occur if:
Management is unable to control costs during the rate freeze period. Unexpected costs arise related to the CR3 decommissioning that are not recoverable from rate payers or through the nuclear decommissioning fund.
Fitch has affirmed the following ratings with a Stable Outlook:
Duke Energy Florida, Inc.
--Long-term IDR at 'BBB+';
--First mortgage bonds at 'A';
--Senior unsecured debt at 'A-';
--Short-term IDR at 'F2'.
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