NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Gulf Power Company's (Gulf Power) issuance of $200 million series 2014A 4.55% senior notes due Oct. 1, 2044. The Rating Outlook is Stable.
The notes are senior, unsecured obligations of Gulf Power and will rank equally with all other unsecured and unsubordinated obligations of the company. The net proceeds from the offering will be used by Gulf Power to redeem $75 million series K 4.90% senior notes due Oct. 1, 2014, to repay a portion of its outstanding short-term debt, which stood at approximately $110 million as of Sept. 15, 2014, and for general corporate purposes including the company's continuous construction program.
KEY RATING DRIVERS
Favorable Outcome in Rate Case: In its last rate filing, the Florida PSC approved base rate increase of $35 million annually effective January 2014 and an additional $20 million in annual revenues effective January 2015 based on authorized return on equity (ROE) of 10.25%. Gulf Power has the ability to record credits to depreciation expense with an offset to a regulatory asset in amounts up to $62.5 million between January 2014 and June 2017; in any given month the credit may not exceed the amount necessary for the jurisdictional ROE to reach the authorized midpoint. Also, Gulf Power may not request a base rate increase to be effective until after June 2017 unless the retail ROE falls below the authorized ROE range and the $62.5 million credit is exhausted.
Constructive Regulation: The utility enjoys several rate riders that provide timely recovery of all prudent costs related to fuel, purchased power costs and environmental expenditures. While Gulf Power is 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.
Improvement in Retail Sales: 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. The number of customers served continues to grow; however, customer usage trends have been unpredictable. In the first half of 2014, weather adjusted residential and commercial MWH sales fell by 0.8% and 1.1%, respectively, over the corresponding period in 2013 primarily due to drop in customer usage. Industrial sales increased 14% primarily due to decreased customer co-generation.
Credit Metrics: Fitch forecasts Gulf Power's adjusted debt to EBITDAR and funds from operations (FFO) adjusted leverage to be approximately 3.4x and 3.6x, respectively, in 2016, which is in line with its rating category.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained FFO adjusted leverage lower than 3.0x.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Unexpected negative regulatory developments in Florida.
--Continued weakness in customer usage and a reversal of customer growth trends that results in significantly lower than expected sales.
--Sustained FFO adjusted leverage weaker than 4.0x.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876994
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