NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to Florida Power & Light Company's (FPL) issue of $400 million 3.80% series first mortgage bonds due Dec. 15, 2042. The Rating Outlook is Stable. FPL plans to use the net proceeds from this offering to repay a portion of its outstanding commercial paper borrowings, which stood at approximately $575.8 million as of Dec. 14, 2012, and for other general corporate purposes.
FPL's ratings 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 strong balance sheet and liquidity profile. The ratings take into account a period of high utility capex over 2013 - 2016 as FPL modernizes its power generation fleet and uprates its nuclear capacity.
FPL was able to achieve a constructive outcome in its recently concluded rate case. The utility was allowed a $350 million rate increase effective January 2013 based on a mid-point Return on Equity (ROE) of 10.50% with a band of +/- 100 basis points and a 59.6% equity ratio. Importantly, the order provided for a four-year generation base rate adjustment (GBRA) mechanism, which allows FPL to raise rates when its three modernization projects, Cape Canaveral, Riviera Beach and Port Everglades achieve commercial operations in 2013, 2014 and 2016, respectively, without having to file a rate case proceeding. This not only provides timely recovery on major capital expenditures but significantly reduces regulatory risk of frequent rate filings.
FPL's south Florida service territory still has above average unemployment and a weak housing market. However, employment statistics are modestly and consistently improving. FPL's inactive accounts and low usage accounts are gradually waning. Fitch has assumed a modest customer and usage growth in its financial forecasts. FPL recovers more than half of the typical residential bill through clauses such as for fuel and power purchased costs, environmental expenditures, nuclear uprates, conservation and storm recovery.
FPL plans to spend approximately $8.3 billion in capex over 2013 - 2016. A significant proportion of that will be spent on modernizing its aging gas fleet. Recovery of these expenditures are now assured via the GBRA mechanism and is expected to result in only modest price increases for consumers due to anticipated fuel cost savings. FPL is also spending a significant amount of capex on nuclear uprates that have been approved by the Florida Public Service Commission (FPSC) and are being recovered through the nuclear clause.
Fitch expects FPL to finance its capex needs using a mix of equity and debt so as to maintain its regulatory capital structure. FPL's long-term debt financing vehicles are primarily taxable secured first mortgage bonds and tax-exempt revenue bonds. FPL has its own credit facilities separate from the NEE group to provide liquidity back-up for commercial paper funding and variable-rate tax-exempt revenue notes, as well as for issuance of letters of credit. FPL has demonstrated excellent access to the debt capital markets and commercial paper market, even during periods of capital markets stress.
Fitch anticipates FPL's EBITDA based credit measures to improve 2013 onwards led by the base rate increase effective January 2013 and forecasted stepped up revenue increases for the investments made in modernization of the gas fleet. Fitch expects EBITDA coverage ratio to be 8.0 - 8.5x and Debt to EBITDA ratio to be in the 2.4 - 2.5x range towards the end of the three-year forecast period. The Funds Flow from Operations (FFO) based credit measures remain robust over 2012-13 due to bonus depreciation benefits and decline to more normalized levels thereafter. Fitch forecasts FFO to Debt ratio to be in the 25 - 27% range and FFO to interest coverage to approximate 6.5x toward the end of the forecast period.
Triggers for Future Rating Actions: Positive or negative rating actions for FPL look unlikely at this time. However, downward rating pressure could result from:
Change in Florida Regulation: Unfavorable changes in current Florida regulatory policies for timely recovery of utility capital investments, fuel and purchased power costs, and storm-related costs would adversely affect FPL's ratings.
Increasing Parent Risk Profile: If parent NEE increases its debt leverage or changes its corporate strategy such that NEE's risk profile materially worsens, it could adversely affect FPL's ratings in line with Fitch's Parent and Subsidiary Rating Linkage Criteria.
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:
-- 'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
-- 'Corporate Rating Methodology', Aug. 8, 2012;
-- 'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
-- 'Rating North American Utilities, Power, Gas and Water Companies', May 16, 2011.
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating North American Utilities, Power, Gas, and Water Companies