Fitch Upgrades Progress Energy and Utility Subsidiaries; Outlook Stable.
The rating upgrade of PGN reflects the reduced consolidated business risk as a result of non-utility asset sales and the leverage reduction resulting from the $1.3 billion holding company debt reduction effort. In addition, the favorable resolution of the IRS Earthco syn-fuel audit in February 2006 eliminated uncertainty regarding PGN's ability to use syn-fuel related tax credit carry forwards that totaled approximately $900 million as of June 30, 2006. The parent debt pay-down is being funded with proceeds from diversified asset sales, including $1.13 billion from the sale of Winchester Energy in October 2006. PGN announced the early redemption of two series of notes with a combined principal amount of $750 million on October 27, 2006 and management announced its intention to pay down an additional $550 million of parent company debt. The ratings upgrades of PEC and PEF reflect the stronger consolidated financial and business profile of the PGN group.
The ratings of PGN are supported by consistent dividends from two strong utilities, consolidated credit ratios that are appropriate for the 'BBB' IDR pro forma for the $1.3 billion of debt reduction and a currently robust cash position of approximately $1.7 billion. While the $1.3 billion of parent debt reduction is substantial, there would still be approximately $2.5 billion of holding company debt following the repayment, which results in an on-going need for dividend support from PEC and PEF.
The utilities' ratings are supported by cash flow credit metrics consistent with the rating category, healthy economies in the service territories and historically favorable state regulatory environments. The FFO interest coverage ratios of PEC and PEF were 6 times (x) and 4.8x, respectively for the twelve months ended June 30, 2006. The utilities benefit from a number of efficient rate adjustment mechanisms that limit reduce business risk and cost recovery lags.
Fitch's rating concerns for PEC and PEF include upward pressures on capital spending for environmental controls and system investments to serve growing load, as well as the risks associated with base rate freezes that extend through mid-2010 in Florida and December 2007 in North Carolina. The estimated costs of compliance with North Carolina's Clean Smokestack law, and Federal Clean Air Interstate and Clean Air Mercury rules have been rising due to higher costs for concrete, steel, and revisions in the scope of work. In addition, volatile fuel costs and the location of the service territories along hurricane prone coasts will require continuing regulatory support for recovery of associated costs.
The Stable Rating Outlook incorporates Fitch's expectations that the debt reduction plan will be completed with existing cash on hand, credit ratios will remain within ranges for the current ratings, and capital investments, fuel and operating costs will be recovered from customers on a timely basis.
The following ratings have been upgraded with a Stable Outlook:
Progress Energy, Inc
--Long Term Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Senior Unsecured Debt to 'BBB' from 'BBB-'.
Progress Energy, Inc.
-- Initial Short Term IDR 'F2';
Florida Power Corp
--Long term IDR to 'BBB+' from 'BBB";
--First Mortgage Bonds to 'A' from A-';
--Senior Unsecured Debt to 'A-' from 'BBB+';
--Preferred Securities to 'BBB+' from 'BBB'.
-- Commercial paper to 'F1' from 'F2'
Carolina Power & Light Co
--Long term IDR to 'BBB+' from 'BBB'
--First Mortgage Bonds to 'A' from 'A-'
--Senior Unsecured Debt to 'A-' from 'BBB+;
--Preferred Securities to 'BBB+' from 'BBB';
-- Commercial Paper to 'F1' from 'F2'.