Fitch: Duke Energy Exit from Midwest Unlikely to Affect Rating
NEW YORK--(BUSINESS WIRE)--The credit ratings of Duke Energy Corp. (DUK; issuer default rating [IDR] of 'BBB+') or its wholly owned subsidiary Duke Energy Ohio, Inc. (DEO; IDR of 'BBB+') will not likely be affected by the company's plan to exit its Midwest commercial generation business, according to Fitch Ratings. On February 17, Duke announced it has initiated a strategic process to exit the business and expects the process to be completed in 12 to 18 months.
Selling the underperforming assets reduces earnings and cash flow volatility and lowers business risk at both entities. At the regulated utility, the combination of lower business risk, very strong credit quality measures, and management's plan to refinance $400 million of DEO debt with DUK debt should allow DEO to withstand the lost earnings associated with the potential sale without sacrificing credit quality. ($500 million of DEO debt was similarly refinanced in 2012 following the deregulation of the Midwest generation portfolio.)
In 2013, the commercial generation business earnings contribution declined to approximately $15 million from an estimated $93 million the prior year and is estimated by management to contribute $130 million in 2014.
The plan to exit its Midwest commercial generation business follows a ruling by the Public Utilities Commission of OHIO (PUCO) denying DEO's request to establish a cost based capacity price mechanism. The proposed mechanism was expected to provide approximately $725 million of incremental revenue over three years. Ohio regulators previously approved a similar mechanism for Ohio Power Co. In August 2012, DEO requested the cost based capacity charge to replace the PJM market based charge in current rates.
The Midwest commercial generation business consists of 13 power plants with total capacity of approximately 6,600 megawatts. The capacity mix is roughly 50% coal and 50% natural gas. The book value is approximately $3.0-$3.5 billion and DUK expects the proposed sale to result in an estimated pre-tax impairment charge of $1 billion-$2 billion, which suggests a market value of roughly $225-$375 per kilowatt.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013