NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Duke Energy Progress, Inc.'s (DEP) proposed new $700 million dual tranche offering of first mortgage bonds. The debt offerings consist of a three-year floating rate issue maturing in 2017 and a 30-year fixed rate bond maturing in 2044. The Ratings Outlook is Stable. A portion of the proceeds will be used to repurchase eight series of tax exempt debt with an aggregate principal amount of $453 million and the remainder for the repayment of inter-company short-term borrowings under the corporate money pool and general corporate purposes.
KEY RATING DRIVERS
Sound Financial Profile: Following meaningful improvement over the past 15-months, credit metrics are well positioned within the current rating level and expected by Fitch to continue to remain sound over the next two years. The financial improvement reflects higher rates, cost control measures and moderating capital requirements. Fitch expects funds from operations (FFO) fixed charge coverage to exceed 5.0x, over the next two years with FFO leverage and debt/EBITDAR of approximately 3.75x.
Rate Support: In May 2013, DEP was authorized a two-step tariff increase that will bolster earnings and cash flow through 2014. A $147.4 million base rate increase became effective June 1, 2013 and an additional $31.3 million June 1, 2014. Prior to the 2013 increase, DEP had not raised base rates since 1988. The base rate increase was premised on a 10.2% return on equity (ROE) and a 53% equity ratio.
Constructive Regulatory Environment: Fitch considers regulation in North Carolina, DEP's primary regulatory jurisdiction, to be constructive. State regulation permits annual tariff adjustments to recover fuel, demand side management, energy efficiency and certain renewable costs. North Carolina (NC) regulators may also pre-approve the prudence and projected cost of new base load generating projects, reducing cost recovery risk, and have adopted policies that permit timely recovery of a significant portion of mandated emission reductions.
Moderating Capex: Capex is expected to moderate through 2015 alleviating external financing requirements and pressure on credit metrics. Over the 2014-2015 period estimated capex is approximately $2.7 billion, about 14% less than the prior two year period. The lower capex follows the completion of a fleet modernization program designed to retire all of DEP's coal fired generating facilities in North Carolina that do not have scrubbers and to add new gas fired generation. Capex trends upward after 2015 for new gas fired generation needed later in this decade and the purchase of North Carolina Eastern Municipal Power Agency's (NCEMPA) interest in several generating units jointly owned with and operated by DEP.
Asset Acquisition: DEP agreed to purchase NCEMPA's interest in four units aggregating 700 MW for $1.2 billion. The asset acquisition includes approximately 490 MW of nuclear capacity. Under the agreement DEP will enter into a 30-year wholesale power supply contract with NCEMPA that allows DEP to recover its operating costs including the cost of capital. The agreement requires the transaction to be complete by 2016 year-end.
Positive: Achieving adjusted debt/EBITDAR and FFO/lease adjusted leverage on a sustained basis below 3.25x and 3.5x, respectively, could lead to higher rating, but is not likely given capex is expected to trend upward beginning in 2015 to address a capacity need in the 2016-2017 period.
Negative: ratings could be lowered if debt/EBITDAR and FFO/lease adjusted leverage increased above 3.75x and 4.0x, respectively on a sustained basis. Significant unrecoverable costs related to recently enacted ash pond legislation in North Carolina (NC), an increase in parent Duke Energy Corp.'s (DUK) leverage or risk profile or a material adverse change in the constructive regulatory policies for timely recovery of capital investments and fuel costs in NC could also adversely affect ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Rating Linkage' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)' (March 11, 2014).
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 U.S. Utilities, Power and Gas Companies (Sector Credit Factors)