Fitch Ratings has assigned a 'BBB+' rating to Duke Energy Corp.'s (DUK)
dual tranche offering of nine and 30-year senior notes. The new ratings
are on Rating Watch Negative. Fitch placed DUK's ratings on Rating Watch
Negative Oct. 29, 2015 following the announcement by DUK of a definitive
agreement to acquire Piedmont Natural Gas Co., Inc.
A portion of the proceeds will be used to repay outstanding commercial
paper (CP), including amounts issued to fund a portion of subsidiary
Duke Energy Progress, LLC's (DEP) $1.2 billion purchase on July 31, 2015
of North Carolina Electric Municipal Power Agency's (NCEMPA) ownership
interest in certain generating assets jointly owned with DEP. At Nov. 2,
2015, CP outstanding was $1.9 billion. The remainder will be used to
repay at maturity $300 million of Progress Energy Inc.'s senior notes
due Jan. 15, 2016 and for general corporate purposes.
KEY RATING DRIVERS
Rating Watch Negative: The Rating Watch Negative reflects the rise in
leverage from DUK's pending $4.9 billion acquisition of Piedmont Natural
Gas Co., Inc. The higher leverage is driven by the acquisition financing
plan, which includes a large debt component of up to $4.3 billion that
increases consolidated debt leverage compared with Fitch's previous base
case, which assumed debt to EBITDAR would fall below 4.5x.
Conservative Business Model: DUK's six regulated utilities provide a
predictable and diversified source of earnings and cash flow. The
utilities are expected to provide about 85%-90% of consolidated earnings
over the next several years. Each of the utilities has a solid credit
profile and is well positioned within its respective rating level.
Contracted renewables, Federal Energy Regulatory Commission
(FERC)-regulated electric and gas transmission projects, and
international power generation account for the remaining earnings and
cash flow contributions.
Constructive Regulation: Each of the six state jurisdictions in which
DUK's subsidiaries operate is constructive. Fitch considers the three
largest jurisdictions -- North Carolina, Florida and Indiana --
supportive of credit quality.
Sound Financial Profile: Consolidated credit metrics are projected to
remain largely consistent with or slightly better than historical
levels, which include elevated debt/EBITDAR, which is not atypical for
utility holding companies. Fitch forecasts debt/EBITDAR will average
approximately 4.4x over the next three years. Funds from operations
(FFO) lease-adjusted leverage is projected to average 4.5x, which is
consistent with the current rating and FFO fixed-charge coverage 4.3x.
High Parent Leverage: The percentage of holding company debt, including
intermediate holding company Progress Energy, Inc., is relatively high.
Holding company debt accounted for approximately 30% of adjusted debt as
of Sept. 30, 2015, consistent with management's target of less than or
equal to 30%. About 30% of the holding company debt is housed at
Progress Energy, Inc., which was acquired in 2012.
Aggressive Growth Plan: Consolidated capex is forecast to increase
substantially, averaging $8.4 billion annually over the next five years,
well in excess of the $5.6 billion average spending over the prior two
years. Regulated investments account for approximately 85% of the capex
plan. The plan also includes investments in the Atlantic Coast Pipeline,
renewable generation and $2.9 billion (about 7% of total capex) of
discretionary growth. About 38% of growth capex is recoverable through
rider mechanisms, including FERC rates (27%) or power purchase
agreements (PPAs; 11%).
Repatriation of Off-Shore Cash: DUK intends to access $2.7 billion of
cash from its international energy business over the next eight years,
including the $1.2 billion received in 2015, with the remainder by 2022.
Proceeds will be used to support investments in domestic businesses and
the common stock dividend in lieu of debt financing. DUK recorded a $370
million tax liability to reflect the cash repatriation, but does not
expect to be a significant taxpayer until 2018. DUK previously
repatriated $750 million of cash in 2013 through a one-time tax free
return of capital.
--2015-2017 consolidated capex of $25.6 billion;
--Kwh sales growth of 0.5%-1.0% annually;
--No significant base rate increases through 2017;
--Dividend payout ratio of approximately 65%-70%.
Positive Rating Action: Ratings could be upgraded if adjusted
debt/EBITDAR falls below 3.5x and FFO fixed-charge coverage remains
above 4.7x on a sustainable basis.
Negative Rating Action: Ratings could be downgraded if parent leverage
exceeds 30% of consolidated debt or adjusted debt/EBITDAR exceeds 4.75x
on a sustained basis. Downgrades of one or more of DUK's utility
subsidiaries could also lead to lower ratings.
DUK has ample liquidity, primarily through a $7.5 billion committed
revolving credit facility that supports its CP program, and has
borrowing sublimits 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 CP issuances are limited to the amount of
available credit facility borrowings, including subsidiaries. Borrowing
capacity under the master credit facility as of June 30, 2015 was $5
billion, net of $1.8 billion of outstanding CP and $688 million of
letters of credit and other uses. Cash and short-term investments were
Date of Relevant Rating Committee: Oct. 26, 2015.
Additional information is available at 'www.fitchratings.com'.
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