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Announcement:

Moody's says Progress Florida Settlement Provides Some Regulatory Certainty, But Questions Remain

23 Jan 2012

New York, January 23, 2012 -- Moody's Investors Service said that the comprehensive rate settlement announced by Progress Energy Florida on January 20th provides some regulatory clarity as the company approaches the end of its current two year rate settlement on December 31, 2012. However, significant questions remain, the most important of which is the ultimate amount of insurance proceeds the company will receive from the mutual nuclear insurer Nuclear Electric Insurance Limited (NEIL) to cover repair and replacement power costs at its long shuttered Crystal River 3 (CR3) nuclear plant. Moody's does not expect the settlement in itself to affect Progress Energy Florida's credit rating or stable rating outlook.

RATINGS RATIONALE

The settlement addresses several regulatory overhangs facing the company, including recovery mechanisms for the repair or retirement of CR3, regulatory treatment of costs incurred at its Levy nuclear construction project (for which construction activities and spending are postponed), and the level of base rates and return on equity over the 2013-2016 time period. Positively, the settlement provides for higher base rates through a $150 million increase in annual retail revenue requirements, an authorized return on equity of 10.5% (increasing to 10.7% if CR3 is restarted), and recovery of $350 million of incurred costs associated with the Levy project, including costs to terminate its EPC contract, although the Levy recovery is on a partially deferred basis. The parties to the settlement also agree not to challenge the prudence of the company's actions with respect to the CR3 repairs to date or any future decision to retire the unit and recover the investment balance. The settlement will result in an increase in the average residential bill of 4%, at roughly the midpoint of the 3% to 5% range that Moody's anticipates for annual utility rate increases nationwide, and one that is sensitive to the lingering effects of the economic recession in Florida.

However, like all settlements, this one includes tradeoffs, some of which will pressure credit metrics over the next few years. The company will refund $288 million of replacement fuel and purchased power costs incurred as a result of the CR3 outage, the bulk of which will occur in 2013 and 2014. CR3 will also be removed from its rate base until the plant resumes commercial operation. The company will be able to recognize an AFUDC accrual for the carrying cost (reduced to 70% if the project is cancelled), but cash flow will be impacted. The company has agreed to share any costs exceeding the initial Board approved CR3 repair cost estimate on a 50%/50% basis between shareholders and customers up to the first $400 million, with recovery of amounts above that to be settled or decided by the Florida Public Service Commission. The parties agree to address recovery of any gap between repair costs and NEIL insurance proceeds after the insurance proceeds are known. The settlement does not address recovery of any replacement plants that may be required if CR3 is not repaired.

In short, Progress Energy Florida has been able to manage the lengthy 30 month outage at its only nuclear plant largely due to a combination of low natural gas prices, which reached a 10 year low last week, and the sluggish Florida economy. Economic conditions in the state have not only mitigated the impact of the CR3 outage, but have also tempered the need for additional nuclear capacity. Had natural gas prices or economic conditions been similar to the levels experienced by the company several years ago, the impact of the CR3 outage would have been far greater.

Progress Energy Florida exhibits credit metrics that are strong for its Baa1 rating, including cash from operations pre-working capital to debt of 22% to 23% over the last two years. The company also benefits from a stabilized and potentially improving Florida regulatory environment with several relatively new commissioners in place. The rate settlement includes some constructive elements and addresses several regulatory issues that would have complicated any rate filing the company made in 2012 in anticipation of the expiration of its current two year rate settlement. While metrics could be negatively pressured as a result of the settlement, Moody's does not expect them to fall to levels that would affect its rating, which would include cash from operations pre-working capital in the mid-teens range.

The company's rating could be adversely affected, however, if NEIL insurance proceeds cover substantially less than the costs to repair and return CR3 to service (unless they can be recovered in rates), if there is a material dispute between the company and the insurer; if repairs on CR3 do not begin prior to the end of 2012, allowing challenges to the recovery of post-settlement CR3 costs; or if cost overruns on the CR3 repair project exceeding the $400 million level addressed in the rate settlement cannot be recovered.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says Progress Florida Settlement Provides Some Regulatory Certainty, But Questions Remain
No Related Data.
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