Fitch Rates Duke Energy Carolinas' FMBs 'A+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A+' rating to Duke Energy Carolinas (DEC) new issue of first and refunding mortgage bonds due 2045. The Rating Outlook is Positive. The net proceeds will be used to repay at maturity $500 million aggregate principal amount of the company's 5.3% first and refunding mortgage bonds due Oct. 1, 2015.

KEY RATING DRIVERS

Strong Credit Profile: Credit metrics continued to improve in 2014 and are expected by Fitch to remain strong relative to DEC's peer group. Over the next two years, Fitch expects FFO fixed charge coverage, adjusted FFO leverage and Adjusted Debt/EBITDAR to average approximately 6.0x, 3.0x and 2.75X, respectively. In each case the metrics are in excess of Fitch's target ratios for the current rating level.

Coal Ash Exposure: The substantial cost to remediate DEC's coal ash basins is a concern but appears manageable given the required time frame. Legislation in North Carolina requires all ash basins in the state to be closed over a 15-year period, including certain high priority sites by 2019. The ratings assume the remediation costs will be recoverable in rates.

Constructive Regulation: Regulation in North Carolina (NC) and South Carolina (SC) is considered constructive by Fitch. NC and SC regulation permits annual adjustments to recover fuel, demand side management, energy efficiency and certain renewable costs. Authorized returns are generally at or above the industry average. In NC, DEC's primary jurisdiction, regulators may pre-approve the prudence and projected cost of new base load generating projects, reducing cost recovery risk, and has adopted non-traditional policies to accelerate recovery of a portion of mandated emission reductions.

Increasing Capex: Capex is projected to rise to about $11 billion over the next five-years. The increase is driven by investments in new generation projects and environmental compliance (including coal ash). The higher capex will require on-going rate support. The ratings assume the rising capex will be funded in a manner to preserve DEC's strong balance sheet

RATING SENSITIVITIES

Positive Rating Action: DEC's currently sound credit profile could support higher ratings once the regulatory treatment of the coal ash remediation costs becomes more certain.

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 3.5x and 4.25x, respectively, on a sustained basis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 18, 2014);

--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors) (March 11, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980983

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Fitch Ratings
Primary Analyst
Robert Hornick
Senor Director
+1-212-908-0523
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Philip Smyth
Senior Director
+1-212-908-0531
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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