On the heels of the Duke Energy (NYSE:DUK) announcement that it has agreed to acquire Piedmont Natural Gas (NYSE:PNY) for $4.9bn in cash, Moody’s Investors Service has placed the ratings of certain Duke companies on review for downgrade.
While Moody’s describes Piedmont as a low-risk company, the ratings service noted that the deal increases the already significant debt level of the Duke parent company.
It’s worth noting that Moody’s expressed similar concerns after another utility holding company, Southern (NYSE:SO), announced plans in August to acquire the AGL Resources (NYSE:GAS) gas company.
Moody’s said Oct. 27 that it has placed the long-term ratings of Duke Energy Corp. (Duke, A3 senior unsecured), Progress Energy, (Progress, Baa1 senior unsecured), and Duke Energy Progress, (A1 senior unsecured) on review for downgrade. Duke’s Prime-2 short-term rating for commercial paper is not on review.
Moody’s affirmed the ratings of Duke Energy Carolinas, LLC (A1 senior unsecured), Duke Energy Florida (A3 senior unsecured), Duke Energy Indiana (A2 senior unsecured), Duke Energy Ohio (Baa1 senior unsecured), and Duke Energy Kentucky (Baa1 senior unsecured) with stable outlooks.
“The review of Duke’s long-term ratings is prompted by yesterday’s announcement that Duke had agreed to acquire Piedmont Natural Gas (A2 stable), a Charlotte based gas distribution company, for $4.9 billion in cash and the assumption of nearly $2 billion of debt,” said Moody’s Associate Managing Director Michael G. Haggarty. Piedmont is a relatively low risk gas utility with a strong credit profile that will increase and diversify Duke’s mostly electric utility business in the Carolinas and modestly increase the proportion of Duke’s overall regulated utility business mix.
“Despite Piedmont’s attractive risk profile, the mostly debt financed acquisition at a particularly high multiple will result in a significant increase in Duke’s already high parent company debt, which we expect will rise from 30% of consolidated debt to around 35% at closing, pressuring cash flow coverage metrics” added Haggarty.
The review of the ratings of Duke utility subsidiary Duke Energy Progress reflects financial coverage metrics that Moody’s expect to decline materially from historical levels due to increased operations and maintenance (O&M) expenses and higher debt incurred for coal basin remediation and other capital expenditures.
It also considers the debt financed acquisition of generating assets from the North Carolina Eastern Municipal Power Agency (NCEMPA) for $1.2bn, which closed on July 31.
The review of intermediate holding company Progress Energy’s ratings reflects the review for downgrade of Duke Energy Progress, the largest of its two utility subsidiaries, as well as the high level of legacy debt that remains at the Progress Energy level. The review of both Duke Energy Progress and Progress Energy also considers the weaker financial profile of the Duke parent company as a result of the Piedmont acquisition, which has a negative impact on the entire Duke corporate family.