Fitch Rates Duke Energy's Senior Notes 'BBB+'
NEW YORK -- October 9, 2013
Fitch Ratings has assigned a 'BBB+' rating to Duke Energy Corp.'s (DUK) new
$400 million issue of 3.95% senior notes due Oct. 15, 2023. The Rating Outlook
is Stable. The notes will be unsecured and will rank equal to all existing and
future unsecured debt obligations of DUK. Proceeds will be used for general
corporate purposes including the repayment of outstanding commercial paper.
Key Rating Drivers
Conservative Business Model: The consolidated ratings are supported by the
credit strength and cash flow diversity of DUK's six regulated utility
subsidiaries. Utility operations are expected to provide approximately 85% of
consolidated earnings and cash flow. Each of the utilities has a solid credit
profile and is well positioned within their respective rating categories.
Solid Credit Metrics: Consolidated credit metrics are expected to remain
strong over the forecast period. Fitch estimates consolidated EBITDA/interest
and FFO/interest will both average over 5.0 times (x), and FFO/debt
approximately 19%, 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 4.4x, trending down to about 4.0x over the next
High Parent Leverage: The high percentage of parent level debt is a rating
concern. The acquisition of the more levered PGN in 2012 increased the
proportion of debt at the parent level (DUK plus PGN). Fitch expects parent
debt (DUK plus PGN) to be approximately 30% of consolidated debt over the next
Capital and Operating Cost Recovery: Six Tariff increases have been
implemented in 2013 which will strengthen consolidated earnings and cash flow
measures. Base rate increases were implemented in each of DUK's two North
Carolina territories, as well as in South Carolina, Florida, and Ohio
following regulatory approval of settlement agreements. Duke Energy Indiana,
LLC (DEI) also increased rates in January 2013 through a rider mechanism to
reflect the full amount of approved construction work in progress (CWIP)
related to its Edwardsport Integrated Gasification Combined Cycle (IGCC)
Moderating Capital Requirements: Consolidated capital expenditures are
expected to decline through 2014, reflecting the completion of several
electric generation modernization projects in 2012 and into 2013. Expenditures
then begin to ramp up beginning in 2015 due, in part, to rising environmental
expenditures and plans to add new natural gas plants in the Carolinas, Florida
and Kentucky later this decade to replace plant retirements and meet load
growth. The capex forecast also includes discretionary expenditures for
uncommitted renewable and commercial transmission projects.
Achieving Synergies: DUK is at risk for achieving system fuel savings included
as part of the PGN merger settlement agreement with the North and South
Carolina regulators. The companies guaranteed $687 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). The company claims to be on track
to achieve its targeted savings.
IGCC Operational Issues: Unexpected operational issues at DEI's Edwardsport
IGCC that increase operating or capital costs would also pressure credit
Increased Parent leverage: Higher than expected parent leverage could
adversely affect ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Robert Hornick, +1-212-908-0523
Fitch Ratings, Inc.
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New York, NY 10004
Philip Smyth, +1-212-908-0331
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, New York, +1-212-908-0549
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