Fitch Ratings assigns an 'AA-' rating to Duke Energy Carolinas, LLC
(DEC) dual-tranche offering of First and Refunding Mortgage Bonds (FMBs)
due 2023 and 2046, respectively. The Rating Outlook is Stable. Net
proceeds will be used to fund capital expenditures and for general
corporate purposes.
KEY RATING DRIVERS
Strong Credit Profile: Actual and projected
credit metrics are strong for the rating level. Over the next two years,
Fitch expects adjusted debt/EBITDAR, lease adjusted debt/FFO, and FFO
fixed charge coverage to average approximately 3.0x, 3.3x and 6.0x,
respectively. In each case the metrics are in excess of Fitch's target
ratios for the current rating level. The strong financial performance is
largely due to the recovery of investments in plant modernization,
environmental compliance, and energy efficiency through base rate
increases and rate riders.
Constructive Regulation: Regulation in North Carolina (NC), DEC's
primary regulatory jurisdiction, and South Carolina (SC) is considered
by Fitch to be constructive. 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. NC regulators may also
pre-approve the prudence and projected cost of new base-load generating
projects, reducing cost recovery risk.
Coal Ash Remediation: The major issues surrounding the 2014 spill of ash
water into the Dan River are resolved, but will require substantial
capital outlays over the next 15 years. Fitch expects the investments to
be recoverable in rates similar to the treatment of other mandated
expenditures.
Substantial Capex Plan: Planned capex over the next five years of $11.4
billion is substantial and will require on-going capital market access
and supportive rate treatment. The lion's share of the capex is
maintenance, nuclear fuel, new generation and customer additions. The
capex plan includes DEC's share of coal ash remediation and a roughly
87% share of a 750 MW combined cycle natural gas plant at its existing
William States Lee Generating Station scheduled for Commercial operation
in late 2017.
Expiring Rate Credits: Approximately $30 million of customer rate
credits expired in September 2015 providing DEC with a modest cash flow
boost. The rate credits were required as part of the 2013 NC rate
settlement agreement. The agreement required DEC to amortize a like
amount of regulatory liabilities over two years.
KEY ASSUMPTIONS
--Retail sales growth of about 1% 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
DUK.
Negative Rating Action: Given the current headroom in credit quality
measures, a downgrade is not expected, but could occur if Debt/EBITDAR
and/or FFO lease adjusted leverage increased above 3.3x and 3.75x,
respectively, on a sustained basis. 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 15, 2015.
Additional information is available at '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
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000626
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL
FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160308006762/en/
Copyright Business Wire 2016
