Fitch: Duke Energy's Plan to Sell International Businesses is Credit Positive
OREANDA-NEWS. Fitch Ratings considers Duke Energy Corp.'s (DUK) plan to sell all or a portion of its international operations and to activate its dividend reinvestment plan (DRIP) to be positive for its risk profile and credit ratings. The ratings impact, however, will be greatly dependent on the amount and deployment of sale proceeds and the extent the incremental cash is used to lessen the amount of holding company debt that would otherwise have been issued to fund growth in its core utility and contracted renewable businesses. Given the highly leveraged funding plan for the pending Piedmont Natural Gas Co. (Piedmont) acquisition and its adverse effect on consolidated leverage, reducing future parent debt issuances is critical to maintaining DUK's existing ratings ('BBB+' IDR, Rating Watch Negative).
Even with a revised financing strategy, DUK is not likely to attain the improvement in credit quality measures or the reduction in the percentage of parent level debt that Fitch anticipated prior to the pending Piedmont acquisition. The ratio of debt/EBITDAR in particular is likely to remain elevated relative to the rating category. However, Fitch would consider maintaining existing ratings if funds from operations (FFO) lease adjusted leverage is maintained below 4.8x, which is consistent with the current ratings, and adjusted debt/EBITDAR is no greater than 4.75x.
Other credit attributes supporting the rating are the company's significant size and scale, the diversified and predictable earnings and cash flow streams of its six existing utility subsidiaries (growing to seven post-acquisition) and the substantial contribution of regulated earnings (virtually 100% regulated or contracted post-merger). Conversely, using sale proceeds to fund incremental growth opportunities not previously anticipated or using proceeds from the planned securitization of the Crystal River 3 regulatory asset and/or cash extracted from the international operations prior to its disposal for equity friendly initiatives including stock buy-backs in lieu of reducing future debt issuances would be unfavourable for current ratings.
Under DUK's initial Piedmont financing plan, only about 10% - 15% of the $4.9 billion acquisition was to be funded with equity, which Fitch estimates would increase adjusted debt/EBITDAR to nearly 5.0x in 2017 compared to the previous expectation that EBITDAR would fall below 4.5x. Given the improved business risk, Fitch would be satisfied with adjusted debt/EBITDAR of 4.75x if FFO adjusted leverage is below 4.8x. Fitch expects to resolve the Rating Watch Negative once there is more clarity around the amount and use of sale proceeds and future debt financing plans.