NEW YORK--(BUSINESS WIRE)--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.
KEY ASSUMPTIONS
--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%.
RATING SENSITIVITIES
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.
LIQUIDITY
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 $1.4 billion.
Date of Relevant Rating Committee: Oct. 26, 2015.
Additional information is available at 'www.fitchratings.com'.
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