Fitch Rates Duke Energy Carolinas FMBs 'AA-'
Fitch Ratings assigns an 'AA-' rating to Duke Energy Carolinas, LLC (DEC) dual-tranche offering of First and Refunding Mortgage Bonds (FMBs) due 2023 and 2046, respectively. The Rating Outlook is Stable. Net proceeds will be used to fund capital expenditures and for general corporate purposes.
KEY RATING DRIVERS
Strong Credit Profile: Actual and projected credit metrics are strong for the rating level. Over the next two years, Fitch expects adjusted debt/EBITDAR, lease adjusted debt/FFO, and FFO fixed charge coverage to average approximately 3.0x, 3.3x and 6.0x, respectively. In each case the metrics are in excess of Fitch's target ratios for the current rating level. The strong financial performance is largely due to the recovery of investments in plant modernization, environmental compliance, and energy efficiency through base rate increases and rate riders.
Constructive Regulation: Regulation in North Carolina (NC), DEC's primary regulatory jurisdiction, and South Carolina (SC) is considered by Fitch to be constructive. Regulations in both states permit annual adjustments to recover fuel, demand-side management, energy efficiency and certain renewable costs on a timely basis. Authorized returns are generally at or above the industry average. NC regulators may also pre-approve the prudence and projected cost of new base-load generating projects, reducing cost recovery risk.
Coal Ash Remediation: The major issues surrounding the 2014 spill of ash water into the Dan River are resolved, but will require substantial capital outlays over the next 15 years. Fitch expects the investments to be recoverable in rates similar to the treatment of other mandated expenditures.
Substantial Capex Plan: Planned capex over the next five years of $11.4 billion is substantial and will require on-going capital market access and supportive rate treatment. The lion's share of the capex is maintenance, nuclear fuel, new generation and customer additions. The capex plan includes DEC's share of coal ash remediation and a roughly 87% share of a 750 MW combined cycle natural gas plant at its existing William States Lee Generating Station scheduled for Commercial operation in late 2017.
Expiring Rate Credits: Approximately $30 million of customer rate credits expired in September 2015 providing DEC with a modest cash flow boost. The rate credits were required as part of the 2013 NC rate settlement agreement. The agreement required DEC to amortize a like amount of regulatory liabilities over two years.
--Retail sales growth of about 1% annually;
--Timely execution and cost recovery of $11.4 billion capex plan;
--Coal ash remediation costs are recoverable from rate payers;
--Existing rate rider recovery mechanisms remain in place.
Positive Rating Action: Positive rating action is not likely given the two-notch rating differential that already exists between the Issuer Default Ratings (IDR) of DEC and its parent DUK.
Negative Rating Action: Given the current headroom in credit quality measures, a downgrade is not expected, but could occur if Debt/EBITDAR and/or FFO lease adjusted leverage increased above 3.3x and 3.75x, respectively, on a sustained basis. A downgrade of parent DUK could also trigger a downgrade under Fitch's parent and subsidiary rating linkage criteria.
Date of Relevant Rating Committee: June 15, 2015.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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