OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to Duke Energy Florida, LLC's (DEF) $600 million issue of First Mortgage Bonds due 2046. The Rating Outlook is Stable. Net proceeds will be used to fund capital expenditures, pay down inter-company money pool borrowings and for general corporate purposes.

KEY RATING DRIVERS

Sound Credit Profile: Credit metrics are well positioned within the rating level and expected to remain relatively stable. Over the next three years, Fitch expects adjusted debt/EBITDAR, lease-adjusted FFO leverage and FFO fixed-charge coverage to average approximately 3.5x, 4.0x and 4.2x, respectively. Both leverage measures are strong compared with Fitch's target ratios for the current rating level, while FFO fixed-charge coverage is moderately weak.

Constructive Regulatory Environment: Fitch considers regulation in Florida to be constructive. The Florida Public Service Commission (FPSC) employs several adjustment mechanisms that benefit cash flow. In addition to a fuel adjustment clause, energy conservation expenses, specified environmental compliance costs, qualified nuclear costs and certain new generation additions are recoverable outside of base rate cases. Also, the settlement agreement addressing the rate treatment of the Crystal River 3 (CR3) nuclear plant was considered credit-supportive by Fitch.

Substantial Capex Plan: Capex is growing primarily due to the need for new generating capacity in 2017-2018. Total planned capex over the next five years is $6.9 billion, including approximately $1.7 billion for new generation primarily consisting of a combined-cycle natural gas plant, an uprate to the Hines Energy Complex and the acquisition of the Osprey natural gas plant (599 MW) from Calpine. By comparison, capex over the prior five-year period was $4.3 billion, including a low of $699 million in 2014. Approximately $1.5 billion in the capex plan attributable to the new generation is recoverable upon their in-service dates through rider mechanisms without the need to file a general rate case.

The company is to recover all prudently incurred costs for this new generation upon its in service date without a GRC. In addition, DEF is authorized to increase base rates without a general rate case through a Generation Base Rate Adjustment, or GBRA, to recover the costs of up to 1,800 MW of additional new generation in 2018. Adjustments under the GBRA are to reflect a 10.5% ROE and the most recent capital structure from the company's periodic surveillance reports that are filed with the PSC.

Base Rate Freeze: As part of the 2013 revised CR3 settlement agreement, DEF agreed to extend a previously agreed upon rate freeze two years through 2018 but is permitted to file a rate case if its earned return on equity (ROE) falls below 9.5%. Rider mechanisms remain in effect during the rate-freeze period.

CR3 Securitization: In June 2016 DEF issued $1.3 billion of securitization debt that provides recovery of its CR3 investment. Securitization proceeds accelerate cash recovery of the regulatory asset, but reduce future earnings and cash flow, as the company will no longer earn an equity return on its investment. A portion of the proceeds were used to reduce short-term debt at DEF and the remainder upstreamed to parent Duke Energy Corp. where short-term debt was also reduced. Legislation permitting securitization was enacted in June 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DEF include:

--Retail sales growth of 0.5-1% annually;

--Base rates remain frozen through 2018;

--Riders mechanisms remain in effect;

--Timely execution of $6.9 billion capex plan.

RATING SENSITIVITIES

Positive Rating Action: Ratings could be upgraded if adjusted debt/EBITDAR and FFO lease-adjusted leverage fall below 3.4x and 4.0x, respectively.

Negative Rating Action: Ratings could be lowered if debt/EBITDAR and FFO lease-adjusted leverage increased above 3.7x and 4.7x, respectively, on a sustained basis.

LIQUIDITY

Liquidity to supplement internal cash flow is provided primarily through a committed bank credit facility and participation in a corporate money pool. DEF has a $1.2 billion sub-borrowing limit as of June 30, 2016, in a $7.5 billion master credit facility shared with its corporate parent, Duke Energy Corp. (DUK) and its utility affiliates. DUK has the unilateral ability to increase DEF's sub-borrowing limit up to a maximum of $1.2 billion. DEF also participates in a corporate money pool. DUK's CP borrowings and excess utility affiliate cash are the primary source of funds for the money pool. The credit facility extends to January 2020.