NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned its ‘A+’ rating to Duke Energy Carolinas, LLC’s (DEC) new $650 million, 4% first and refunding mortgage bonds due Sept. 30, 2042.
The Rating Outlook is Stable. The bonds rank equally with all existing secured debt obligations. Net proceeds will be used to repay at maturity DEC’s $400 million, 5.625% senior notes due Nov. 30, 2012 and $20 million 1999 series pollution bonds due Oct. 1, 2012 and the remainder for general corporate purposes.
Key Rating Drivers
Solid Credit Profile: Credit metrics are solidly positioned within the rating category and are improving due to rate increases implemented in North and South Carolina effective January 2012. Fitch expects EBITDA/interest and FFO/interest coverage measures to each range between 5.5x and 6.0x in 2012 and 2013 and FFO/debt between 23%-25%.
Manageable Capital Requirements: DEC is nearing the end of a major construction cycle, which should result in moderately lower capital expenditures and ease financing pressures in 2013. Both the 825 MW Cliffside coal-fired generating station and the 620 MW, natural gas fired Dan River combined cycle unit are expected to enter commercial operation by 2012 year-end. Capex is expected to trend moderately upward after 2013, primarily due to environmental compliance spending.
Regulatory Risk: The traditionally constructive regulatory environment in North Carolina is less certain due to the CEO transition controversy, which prompted regulators to initiate investigative hearings that may lead to financial penalties or other corporate commitments. The full impact will not be known until planned rate cases for DEC and its North Carolina affiliate are completed in 2013. Ratings assume timely recovery of DEC’s capital and operating costs.
Planned Rate Filings: Rate cases are planned before year-end in both North and South Carolina to recover capital investments in the new electric generation facilities and other cost of service items. The ratings assume higher rates are implemented mid-2013. The planned 2012 rate cases are the last of three rate filings to recover capital invested to modernize the generation fleet and power delivery system.
Guaranteed Fuel Savings: DEC is at risk for achieving its share of system fuel savings guaranteed as part of the merger settlement agreement between parent Duke Energy Corp. and the North Carolina Public Service Commission. Management guaranteed a combined $650 million in joint dispatch and fuel savings for DEC and its affiliate Progress Energy Carolinas over the first five years after the merger close (plus an 18 additional months if coal consumption is less than originally forecast due to low gas prices).
What would lead to consideration of a negative 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 maintain ratings.
What would lead to consideration of a positive rating action?
–Not likely at the present rating level.