NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Duke Energy Corp.'s (DUK) new $400 million issue of 3.95% senior notes due Oct. 15, 2023. The Rating Outlook is Stable. The notes will be unsecured and will rank equal to all existing and future unsecured debt obligations of DUK. Proceeds will be used for general corporate purposes including the repayment of outstanding commercial paper.
Key Rating Drivers
Conservative Business Model: The consolidated ratings are supported by the credit strength and cash flow diversity of DUK's six regulated utility subsidiaries. Utility operations are expected to provide approximately 85% of consolidated earnings and cash flow. Each of the utilities has a solid credit profile and is well positioned within their respective rating categories.
Solid Credit Metrics: Consolidated credit metrics are expected to remain strong over the forecast period. Fitch estimates consolidated EBITDA/interest and FFO/interest will both average over 5.0 times (x), and FFO/debt approximately 19%, which is consistent with Fitch's target ratios for 'BBB+' issuers and DUK's peer group of utility parent companies. Debt/EBITDA, however, will be somewhat weak for the rating category with 2013 Debt/EBITDA projected by Fitch to be about 4.4x, trending down to about 4.0x over the next two years.
High Parent Leverage: The high percentage of parent level debt is a rating concern. The acquisition of the more levered PGN in 2012 increased the proportion of debt at the parent level (DUK plus PGN). Fitch expects parent debt (DUK plus PGN) to be approximately 30% of consolidated debt over the next several years.
Capital and Operating Cost Recovery: Six Tariff increases have been implemented in 2013 which will strengthen consolidated earnings and cash flow measures. Base rate increases were implemented in each of DUK's two North Carolina territories, as well as in South Carolina, Florida, and Ohio following regulatory approval of settlement agreements. Duke Energy Indiana, LLC (DEI) also increased rates in January 2013 through a rider mechanism to reflect the full amount of approved construction work in progress (CWIP) related to its Edwardsport Integrated Gasification Combined Cycle (IGCC) plant.
Moderating Capital Requirements: Consolidated capital expenditures are expected to decline through 2014, reflecting the completion of several electric generation modernization projects in 2012 and into 2013. Expenditures then begin to ramp up beginning in 2015 due, in part, to rising environmental expenditures and plans to add new natural gas plants in the Carolinas, Florida and Kentucky later this decade to replace plant retirements and meet load growth. The capex forecast also includes discretionary expenditures for uncommitted renewable and commercial transmission projects.
Achieving Synergies: DUK is at risk for achieving system fuel savings included as part of the PGN merger settlement agreement with the North and South Carolina regulators. The companies guaranteed $687 million in system fuel savings for Carolina retail customers over the next five years (plus an additional 18 months if coal consumption at certain plants is less than originally forecast due to low gas prices). The company claims to be on track to achieve its targeted savings.
IGCC Operational Issues: Unexpected operational issues at DEI's Edwardsport IGCC that increase operating or capital costs would also pressure credit metrics.
Increased Parent leverage: Higher than expected parent leverage could adversely affect ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies