NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of Duke Energy Corp. (DUK) following its announcement of an agreement to sell its Latin American generation businesses. Fitch has also removed the ratings from Rating Watch Negative and assigned a Negative Rating Outlook.
The Negative Rating Outlook reflects the high consolidated and parent leverage and the uncertainty in DUK's ability to lower leverage to levels acceptable for the current rating and reduced business risk. Fitch will monitor the following actions: application of sale proceeds to debt reduction; the level of future parent level debt issuances; the timely recovery of significant capital investments and operating costs related to coal ash and other investments and expense control.
Cash proceeds from the asset sale are expected to be roughly $1.7 billion to $1.9 billion. Management has indicated that proceeds will be used to retire a portion of the debt incurred to fund the $4.9 billion (excluding fees) acquisition of Piedmont Natural Gas Co., which closed on Oct. 6, 2016 and the remainder to fund parent debt maturities or in lieu of other debt requirements. DUK initially announced plans to sell the Latin American business and to use proceeds for debt reduction in February 2016.
Key Rating Drivers
Asset Sale: Fitch views the sale of the Latin American Generation business and the associated reduction in earnings and cash flow volatility to be credit supportive. However, sale proceeds alone are not sufficient to achieve the debt reduction needed to bring leverage in line with the current ratings and business risk without further adjustments to the company's aggressive growth plan and timely capital recovery.
High Consolidated and Parent Leverage: Despite the anticipated debt reduction consolidated and parent leverage remains high. In the first full year of the Piedmont earnings contribution (2017), Fitch estimates Debt/EBITDAR will approximate 5.0x. Fitch will consider maintaining the rating if the company can demonstrate the ability to reduce leverage below 4.8x by 2019. Prior to the Piedmont acquisition Fitch expected consolidated leverage to be in the 4.5x range. The percentage of holding company debt (including intermediate holdco Progress Energy, Inc.) is also high. With the acquisition and proposed asset sale Fitch expects holdco debt to peak at about 35% in 2017 and not fall below 31% - 32% any time soon.
High Quality Core Businesses: The acquisition of Piedmont Natural Gas Co. and the announced sale of its Latin American business will complete DUK's transition to a primarily regulated business model. However, the transition was accompanied by a meaningful rise in leverage. The businesses provide regulatory and geographic diversity and relatively predictable earnings and cash flow. Each of the utilities have solid credit profiles and are well positioned within their respective rating levels.
Investments in relatively low-risk contracted renewables and FERC-regulated electric and gas transmission projects round out the portfolio. The last vestiges of DUK's U.S. merchant generation portfolio were disposed of in April 2015.
Constructive Regulation: Each of the seven state regulatory jurisdictions in which the DUK subsidiaries operate is considered constructive by Fitch.
Aggressive Growth Plan: Consolidated capex is forecast to average approximately $8.4 billion (excluding Piedmont) annually over the next five years, well in excess of the $6.3 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 discretionary growth. About 35% of growth capex is recoverable through rider mechanisms or power purchase agreements.
Pending Rate Case: DUK subsidiary Duke Energy Progress, LLC (DEP) filed with the South Carolina Public Service Commission for a $79 million rate request in July 2016 based on a 10.75% return on equity (ROE). The rate request increase was based on a 2015 test year adjusted for known and measureable changes through Sept. 30, 2016. This is DEP's first rate filing in South Carolina since 1988. The majority of the rate request is driven by investments in major generation plant additions. A final decision is expected by January 2017. Given the level of investment by DEP and Duke Energy Carolinas, LLC, Fitch expects additional rate filings in North Carolina as early as 2017. In addition, rider mechanisms in effect in Florida and Indiana are expected to provide additional revenue increases.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating cases are as follows:
--Sale of Latin American Generation business closes in 2017 and a minimum $1.5 billion is used for debt reduction;
--$42 billion five-year capex plan;
--Ash pond remediation costs are recoverable from ratepayers;
--Current rider mechanisms remain in effect;
--Rate filings as necessary to recover capital investments and operating costs not recovered through rider mechanisms.
RATING SENSITIVITIES
Positive Rating Action: A positive rating action is not likely given the high level of parent debt and expected rise in consolidated leverage, but ratings could be maintained if leverage falls to 4.8x or below by 2019.
Negative Rating Action: Ratings could be downgraded if parent leverage rises above current expectations or adjusted debt/EBITDAR exceeds 4.8x on a sustained basis.
LIQUIDITY
To meet short-term cash needs DUK has substantial and relatively stable cash flows from its seven regulated utilities. Nonetheless, like most of the utility sector, consolidated capex exceeds internal cash flow after dividends. Accordingly, to provide for its working capital needs DUK maintains a $7.5 billion committed revolving credit facility (RCF) to support its $4 billion commercial paper (CP) program, letters of credit (LOCs) and variable-rate tax-exempt bonds. The facility includes borrowing sub-limits for DUK and its subsidiaries, each of which are party to the credit facility. DUK has the unilateral ability to at any time increase or decrease the borrowing sub-limits for each borrower, within specified limits. The master credit facility matures in January 2020.
DUK and its subsidiaries also participate in a corporate money pool that supports short-term borrowing needs. DUK may lend funds to the pool, but may not borrow from the pool. DUK's CP program and excess utility cash are the primary source of funds for the money pool.
Fitch has affirmed the following ratings with a Negative Outlook:
Duke Energy Corp.
--Long-Term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Junior subordinated notes at'BBB-';
--Short-Term IDR at 'F2';
--Commercial Paper at 'F2'.
Disclosure: There was no financial statement adjustments made that were material to the rating rationale outlined above.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013097
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013097
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.