Fitch Places Duke Energy Ratings on Rating Watch Negative Following Acquisition Announcement
Fitch Ratings has placed the 'BBB+' long-term Issuer Default Rating
(IDR) of Duke Energy Corp. (DUK) on Rating Watch Negative. The action
follows today's announcement of a definitive agreement to acquire
Piedmont Natural Gas Co., Inc. (not rated by Fitch) for $4.9 billion in
cash. Including assumed debt the transaction is valued at approximately
$6.8 billion. Fitch expects to resolve the Negative Watch once a more
definitive financing plan is in place and any regulatory requirements
are known. A full list of ratings is provided at the end of this release.
The cash offer will be financed with a combination of DUK corporate debt
and equity and cash. Management indicated the equity portion of the
funding will range between $500 million and $750 million. Potential
sources of cash include $300 million from its international businesses
and approximately $650 million in the form of dividends from subsidiary
Duke Energy Florida, Inc. following a planned securitization of the
Crystal River 3 (CR3) regulatory asset. The purchase price equates to a
40% premium over Piedmont's Oct. 23, 2015 closing stock price and
approximately 12.2x EBITDA for the 12 months ended July 31, 2015.
The ratings of DUK's subsidiaries are unaffected by this transaction.
Post-closing, Piedmont will become a direct subsidiary of DUK.
KEY RATING DRIVERS
Financing plan: The preliminary financing plan includes a large debt
component that increases consolidated debt leverage compared to Fitch's
previous base case, which assumed debt/EBITDAR would fall below 4.5x and
accounts for the Negative Watch. It also increases parent level debt
from approximately 30% of adjusted consolidated debt to about 35%
post-acquisition. The rise in leverage is driven by the combination of
the acquisition debt to be issued by DUK and the assumption of existing
Piedmont consolidated debt.
Business risk: Fitch did not consider the acquisition of Piedmont to
meaningfully alter DUK's business risk. The pro forma earnings
contribution from regulated businesses increases to approximately 90%
from 85%. However, the acquisition does increase the diversity of DUK's
revenue and provides a platform for potential growth. Management did not
identify merger synergies. Piedmont will retain its current headquarters
in Charlotte, NC and operate as a separate business unit and subsidiary
of DUK. Workforce reductions typically associated with an acquisition
are likely to be limited given the differences in electric and natural
gas operations.
Regulatory Approvals: Regulatory approval is required by the North
Carolina Utilities Commission (NCUC), but no other state public utility
commission. In addition, Piedmont shareholder approval is required as
well as the expiration or termination of any applicable waiting period
under the Hart-Scott-Rodino Antitrust Act. DUK expects to close this
deal in the fourth quarter of 2016.
In approving utility mergers the NCUC must determine whether a proposed
merger is justified by 'the public convenience and necessity.' The NCUC
has interpreted the statute to require a determination that rates and
service will not be adversely affected by the transaction. In addition,
the NCUC has concluded that for the public convenience and necessity
standard to be met, expected benefits must be at least equal to known
and expected costs so that customers are not negatively affected. Other
factors to be considered by the NCUC include, but are not limited to,
maintenance of, or improvement in, service quality, the extent to which
costs can be lowered and rates can be maintained or reduced, and the
continuation of effective state regulation. In approving DUK's
acquisition of Progress Energy, Inc. the NCUC required $687 million of
fuel savings over five years. Fitch anticipates that some form of
customer benefits that either maintain or lower customer rates will be
required, but these are not expected to affect our ratings.
KEY ASSUMPTIONS
--Acquisition financing to include up to $4.3 billion of DUK parent debt
--Cash component of financing plan may include approximately $950
million of cash, exclusive of equity issuances
--No change in existing capex or financing plan
--Acquisition closes in late 2016
--Limited customer credits or other regulatory concessions
RATING SENSITIVITIES
[Positive: Positive rating action is not likely given the expected rise
in leverage. However, current ratings can be maintained if debt/EBITDAR
is maintained below 4.75x.
Negative: Ratings could be downgraded if adjusted debt/EBITDAR exceeds
4.75x on a sustained basis. Downgrades of one or more of its utility
subsidiaries could also lead to lower ratings.]
LIQUIDITY
DUK has ample liquidity primarily through a $7.5 billion committed
revolving credit facility that supports its commercial paper (CP)
program and has borrowing sub-limits for each of its six utility
subsidiaries. The credit facility extends to January 2020. The CP
program allows for issuances of up to $4 billion, but issuances are
limited to the amount of available credit facility borrowings (including
subsidiaries). As of June 30, 2015, borrowing capacity under the master
credit facility was $5.2 billion net of $1.6 billion of outstanding CP,
letters of credit and other uses, and cash and short-term investments
$960 million.
Fitch has placed the following ratings on Negative Watch:
Duke Energy Corp.
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Junior subordinated notes at 'BBB-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992917
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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