OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Duke Energy Corp.'s (DUK) multi-tranche offering of senior notes. DUK's ratings are on Rating Watch Negative. Fitch placed them on Rating Watch on Oct. 29, 2015 following the announcement by DUK of a definitive agreement to acquire Piedmont Natural Gas Co., Inc. in an all-cash transaction. Net proceeds will be used to partially fund the pending Piedmont acquisition.

Key Rating Drivers

Pending Acquisition: The pending acquisition and related financing of Piedmont Natural Gas Co. (Piedmont) together with the amount and use of proceeds from the proposed sale of its Latin American generation business will be important determinants of DUK's credit quality and ratings. The initial acquisition financing plan is highly leveraged with up to $4.2 billion of debt for the $4.9 billion acquisition, which accounts for the Negative Watch. On a pro forma basis the incremental acquisition debt plus assumed debt increases debt/EBITDA about 50 bps from 4.7x as of March 31, 2016 to 5.2x.

Asset Sale: The decision to sell its Latin American generation business, if successful, may offset a portion of the Piedmont acquisition debt if sale proceeds are applied to debt reduction as indicated by management. With the asset sale, Fitch expects leverage to be approximately 4.8x over the next few years compared to our previous expectation for leverage to trend down to about 4.5x in 2016 on a stand-alone basis with no asset sale.

Conservative Business Model: DUK's ratings also consider the relatively stable and diversified earnings and cash flow generated by its six regulated utilities. On a stand-alone basis, Fitch expects the regulated utilities to provide approximately 85%-90% of DUK's consolidated earnings and cash flow in 2016. Each of the utilities has a solid credit profile and is well positioned within their respective rating levels. Investments in relatively low-risk contracted renewables, FERC-regulated electric and gas transmission projects, and international power generation (before the proposed sale) account for the remaining earnings and cash flow contributions. Completing the Piedmont acquisition and disposing of the international business would further increase the contribution of regulated businesses and further diversify cash flows. The last vestiges of DUK's U. S. merchant generation portfolio were disposed of in April 2015.

Constructive Regulation: Each of the six state regulatory jurisdictions in which the DUK subsidiaries operate is considered constructive by Fitch.

High Parent Leverage: The percentage of holding company debt (including intermediate holdco Progress Energy, Inc.) is relatively high and will increase post-acquisition. Holdco debt (including short-term debt) accounted for about 31.6 % of adjusted consolidated debt as of March 31, 2016, above management's target of 30%. With the pending acquisition and proposed asset sale Fitch expects holdco debt to remain well above target through 2019.

Aggressive Growth Plan: Consolidated capex is forecast to average approximately $8.4 billion (stand-alone) annually over the next five years, well in excess of the $6.3 billion average spending over the prior two years. Regulated investments account for approximately 85% of the capex plan. The plan also includes investments in the Atlantic Coast Pipeline, renewable generation and discretionary growth. About 35% of growth capex is recoverable through rider mechanisms or power purchase agreements.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating cases are as follows:

--Piedmont merger closes by 2016 year-end;

--Sale of Latin American generation business closes in 2017 and proceeds are used for debt reduction or in lieu of other planned debt offerings;

--$42.2 billion five-year capex plan;

--Ash pond remediation costs are recoverable from ratepayers;

--No adverse finding in Edwardsport IGCC review.

RATING SENSITIVITIES

Positive Rating Action: Positive rating action is not likely given the current Negative Watch, high level of parent debt and expected rise in consolidated leverage. However, ratings could be maintained if adjusted debt/EBITDAR is below 4.8x on a sustainable basis.

Negative Rating Action: Ratings could be downgraded if parent leverage exceeds 30% of consolidated debt or adjusted debt/EBITDAR exceeds 4.8x on a sustained basis.

LIQUIDITY

To meet short-term cash needs DUK has substantial and relatively stable cash flows from its six regulated utilities. Nonetheless, like most of the utility sector, consolidated capex exceeds internal cash flow after dividends. Accordingly, to provide for its working capital needs DUK maintains a $7.5 billion committed revolving credit facility to support its $4 billion commercial paper (CP) program, letters of credit (LOCs) and variable-rate tax-exempt bonds. The facility includes borrowing sub-limits for DUK and its subsidiaries, each of whom is party to the credit facility. DUK has the unilateral ability to increase or decrease the borrowing sub-limits for each borrower at any time, within specified limits. The master credit facility matures in January 2020.

The obligation of each borrower is several and not joint. The only restrictive covenant is a debt/capital ratio of 65% for each borrower, and each borrower is well within the limit. As of March 31, 2016, borrowing capacity under the master credit facility was $3.825 billion (net of CP borrowings, LOCs and variable-rate debt) and cash and short-term investments were $778 million.

DUK and its subsidiaries also participate in a corporate money pool that supports short-term borrowing needs. DUK may lend funds to the pool, but may not borrow from the pool. DUK's CP program and excess utility cash are the primary source of funds for the money pool.