Fitch Rates Duke Energy's Junior Subordinated Notes 'BBB-'
NEW YORK -- January 9, 2013
Fitch Ratings has assigned a 'BBB-' rating to Duke Energy Corp.'s (DUK) new
$500 million issue of 5.125% junior subordinated debentures due Jan. 15, 2073.
The Rating Outlook is Stable. The debentures will be unsecured and will rank
junior and be subordinated in right of payment and upon liquidation to all
senior indebtedness of DUK.
A portion of the proceeds will be used to fund the redemption of the $300
million of 7.1% Cumulative Quarterly Income Preferred Securities due 2039,
Series A, issued by DUK's indirect subsidiary FPC Capital I. The remaining net
proceeds will be used to repay commercial paper, fund capital expenditures of
DUK's unregulated businesses and for general corporate purposes.
So long as there is no event of default under the subordinated indenture, DUK
has the right to defer interest payments on the debentures for up to 10
consecutive years on more than one occasion. Deferred interest payments will
accumulate interest at a rate equal to the interest on the junior subordinated
debentures. DUK may redeem the debentures at any time at the applicable
The securities are eligible for 50% equity credit under Fitch's applicable
criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis', dated Dec. 12. 2012. Key features supporting the equity
credit are the junior subordinated ranking, the option to defer interest
payments on a cumulative basis for up to 10-years on each occasion, and
Key Rating Drivers
Utility Operations: The ratings are supported by the credit strength and cash
flow diversity of DUK's six regulated utility subsidiaries operating in six
states. Utility operations are expected to provide approximately 85% of
consolidated earnings and cash flow. DUK's two largest and financially sound
utility subsidiaries, Duke Energy Carolinas and Progress Energy Carolinas
(Fitch IDR of 'A-' for both companies), will account for approximately 55% -
60% of utility earnings.
Financial Flexibility: The ratings incorporate DUK's increased scale and
enhanced financial flexibility following the 2012 merger with Progress Energy
Corp. (PGN). Longer term, economies of scale and the geographic proximity of
the service territories should create synergy opportunities that strengthen
credit quality measures.
Credit Metrics: In 2013, the first full year of operation for the combined
entity, Fitch estimates consolidated EBITDA/interest, FFO/interest and
FFO/debt of approximately 4.75x, 5.0x, and 20%, respectively, 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
4.25x, trending down to about 4.0x over the next two years.
Construction Expenditures: Consolidated capital expenditures should decline in
2013, as several electric generation modernization projects enter service.
Expenditures then begin to increase in 2014 due, in part, to rising
environmental expenditures and potential electric generation additions.
Capital and Operating Cost Recovery: Tariff increases are expected in several
jurisdictions in 2013 that should enhance consolidated earnings and cash flow
measures. Fitch expects tariff adjustments for Duke Energy Carolinas (DEC) and
Progress Energy Carolinas (PEC) in both their North Carolina and South
Carolina jurisdictions, primarily to recover capital investments. Electric and
gas rate increases are also expected for Duke Energy Ohio in 2013, while
Progress Energy Florida (PEF) raised electric rates effective Jan. 1, 2013.
Liquidity: DUK has ample liquidity to meet its operational needs and debt
refinancing requirements, but will require continued capital market access. A
$6 billion, five-year master credit facility expires in November 2016. The
credit facility supports DUK's $2.2 billion commercial paper program.
Crystal River 3 Outage: Fitch believes it is unlikely management will elect to
repair Crystal River 3 (CR3) given the rising cost estimates, construction
risks and low gas-price environment, and instead will pursue the retirement
option and recovery of invested capital (see settlement agreement below). The
unit has been out of service since September 2009.
Florida Rate Settlement Agreement: A rate settlement agreement approved by the
Florida Public Service Commission (FPSC) establishes a framework for the
treatment of CR3 costs. Importantly, the agreement allows the recovery of
on-going replacement power costs. In addition, if PEF decides to retire CR3,
the parties to the settlement agreed not to challenge the full recovery of all
plant investment. Partly, offsetting the positive elements of the settlement
agreement are provisions for rate refunds of $388 million of CR3 replacement
power costs (primarily in 2013 and 2014), a lower than expected rate increase
in 2013, a rate freeze through 2016 and the removal of CR3 from rate base. The
rate refunds include $40 million in 2015 and $60 million in 2016 due to its
inability to start repairs in 2012.
High Parent Leverage: The acquisition of the more levered PGN increases the
proportion of debt at the parent level (DUK plus PGN). Pre-merger, Duke had
approximately 20% of its $23 billion consolidated debt at the parent level,
compared to about 33% for PGN. Post-merger parent debt (DUK plus PGN) is
expected to approximate 25% - 27% of consolidated debt.
Achieving synergies: DUK is at risk for achieving system fuel savings included
as part of the PGN merger settlement agreement with the North Carolina Public
Service Commission. The companies agreed to guarantee $650 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).
What Could Trigger a Rating Action
Adverse Regulatory Outcomes: Lack of rate support for DEC's fleet
modernization program poses the greatest downside risk to ratings. The company
has invested heavily to replace aging power plants and to comply with
environmental regulations and is dependent on continued rate support to
Crystal River 3 Repair: A decision to repair CR3 without assured regulatory
recovery would strain credit protection measures and could adversely affect
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011)
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
-- 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (Dec. 13, 2012)
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
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