MOODY'S PLACES SECURITIES RATINGS OF FLORIDA PROGRESS CORPORATION ON REVIEW FOR POSSIBLE DOWNGRADE. CAROLINA POWER & LIGHT COMPANY RATINGS CONFIRMED WITH A NEGATIVE OUTLOOK
Moody's has placed the securities ratings of Florida Progress Corporation (FPC) and its electric utility, Florida Power Corporation, on review for possible downgrade. Ratings placed under review include the Aa3 secured rating assigned to debt issued by Florida Power Corporation and the A2 senior unsecured rating assigned to debt issued by Progress Capital Holdings (PCH). The review is in response to the announcement by management today that Carolina Power and Light Company (CPL) will acquire FPC in a cash and stock transaction valued at $8 billion including the assumption of $2.7 Bn of FPC net debt and preferred stock. At the same time, Moody's confirmed the A2 senior secured and other ratings of Carolina Power and Light Company, but changed the outlook to negative from stable.
A CP&L holding company will be formed to complete the transaction. FPC shareholders will elect compensation in the form of cash and stock in the new CP&L holding company totaling $54 per share. As debt will finance the cash portion of the exchange, the holding company will house acquisition financing estimated to total $3.5 billion. A combination of bank debt, commerical paper and possibly hybrid securities will comprise initial financing. New holdco has not yet been rated by Moody's.
Moody's assumes that the dividend stream from Florida Power Corporation will contribute to new holdco's ability to service acquisition leverage. In addition, management estimates cost savings ranging from $100 million to $175 million per annum related to headcount reductions in shared services, energy supply, energy delivery, revenue synergies (including combining power marketing operations) and retail operations. A large portion of the savings will likely be identifed and extracted from FPC. However, at this early stage in the merger process many of these synergies have not been definitively identified. Moody's will evaluate the likelihood that they will be realized.
Concern for ratings pressure from acquisition financing drives the review for downgrade of FPC securities and the negative outlook for CPL's ratings. While the two entities are roughly equal in size, Moody's is concerned that FPC, the higher-rated and therefore more liquid entity, may come under relatively greater pressure to service acquisition leverage. In addition, FPC guarantees the debt issued by PCH which funds its non-regulated businesses and management has yet to decide which entity will support PCH debt going forward.
A negative outlook assigned to the A2 senior secured ratings of CPL captures uncertainty surrounding the extent to which acquisition leverage at holdco will pressure this entity's rating. Moody's will take further ratings on the CPL ratings if necessary upon receipt of acquisition details from CPL management. Final ratings determinations for both companies will be made with consideration of progress toward receipt of merger approvals from various regulatory agencies.
On a combined basis, the new entity will form the 9th largest electric utility in terms of megawatts and the 14th largest utility in terms of total assets. The merger therefore gives critical mass to two previously mid-size utilities, and is premised upon the identification of economies of scale and efficiency which are increasingly important in a deregulating environment. Goodwill totalling $3.3 bn originates in the use of purchase accounting for the transaction. Goodwill amortization at new holdco will total an estimated $85 Bn per year.
Carolina Power and Light is headquartered in Raleigh, NC. FPC is headquartered in St. Petersburg, Florida. The new company will be domiciled in North Carolina.
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