November 14, 2016 - 11:33 AM EST
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Fitch Rates Duke Energy Carolinas FMBs 'AA-'

Fitch Ratings assigns an 'AA-' rating to Duke Energy Carolinas, LLC's (DEC) first and refunding mortgage bonds due 2026. The Rating Outlook is Stable. Net proceeds will be used to repay at maturity $350 million of first and refunding mortgage bonds due Dec. 15, 2016 and to fund capital expenditures and for general corporate purposes.

KEY RATING DRIVERS

Strong Credit Profile: DEC's credit metrics are strong for the rating level. Over the next two years, Fitch expects adjusted debt/EBITDAR, lease-adjusted debt/funds flow from operations (FFO) and FFO fixed-charge coverage to average approximately 3.0x, 3.3x and 6.5x, respectively. In each case the metrics are in excess of Fitch's target ratios for the current rating level.

Constructive Regulation: Regulation in North Carolina (NC), DEC's primary regulatory jurisdiction, and South Carolina (SC) is considered to be constructive by Fitch. Regulations in both states permit annual adjustments to recover fuel, demand side management, energy efficiency and certain renewable costs on a timely basis. Authorized returns are generally at or above the industry average.

Coal Ash Legislation: Coal ash remediation will require substantial capital investment over the next 15 years. Although the amount and timing of the expenditures remain uncertain, recently enacted legislation for dealing with coal ash ponds provides the North Carolina Department of Environmental Quality (NCDEQ) more flexibility to establish the timing and closure options, which ultimately determines the cost. Although Fitch expects the costs to be recoverable from rate payers, an accelerated time frame and higher cost could weaken credit metrics.

Sizeable Capex: Capex is expected to remain elevated through 2020 due in large measure to planned generation additions, new customer connections and environmental expenditures. Management forecasts capex will approximate $11.4 billion over the next five years, including DEC's share of the $1.3 billion estimate for coal ash remediation at five high-risk sites and $600 million for its 87% share of a 750 MW combined cycle natural gas plant slated for commercial operation in 2017.

Parent/Subsidiary Linkage: Due to its strong stand-alone credit profile, DEC's Issuer Default Rating (IDR) is two notches above its parent Duke Energy Corp. (DUK, IDR 'BBB+'/Rating Watch Negative). Consequently, under Fitch's parent and subsidiary rating linkage criteria, a downgrade of DUK could lead to a downgrade of DEC. The linkage originates from common management, centralized treasury function and shared money pool moderated by regulatory oversight, absence of cross default provisions or guarantees and DEC's capital market access.

KEY ASSUMPTIONS

--Retail sales growth of 0.5% -1.0% annually;

--Timely execution and cost recovery of $11.4 billion capex plan;

--Coal ash remediation costs are recoverable from rate payers;

--Existing rate rider recovery mechanisms remain in place.

RATING SENSITIVITIES

Positive Rating Action: Positive rating action is not likely given the two notch rating differential that already exists between the Issuer Default Ratings (IDR) of DEC and its parent Duke Energy Corp. (DUK).

Negative Rating Action: Given the current headroom in credit quality measures a downgrade is not expected, but could occur if there is a material adverse change in the constructive regulatory environment in NC or a significant increase in the cost of closing DEC's coal ash ponds. A downgrade of parent DUK could also trigger a downgrade under Fitch's parent and subsidiary rating linkage criteria.

Date of Relevant Rating Committee: June 14, 2016.

Disclosure: There was no financial statement adjustments made that were material to the rating rationale outlined above.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Recovery Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)

https://www.fitchratings.com/site/re/878227

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014730

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Business Wire (November 14, 2016 - 11:33 AM EST)

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