Fitch Rates Duke Energy Indiana's FMBs 'A'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to Duke Energy Indiana, LLC's (DEI) First Mortgage Bonds, Series XXX due May 15, 2046. The Rating Outlook is Positive. Net proceeds will be used to repay $475 million of maturing debt, including the $325 million 6.05% debentures due June 15, 2016 and the $150 million floating rate first mortgage bonds Series VVV, due July 11, 2016, and for general corporate purposes.

KEY RATING DRIVERS

Strong Credit Metrics: Current and forecasted credit metrics are strong within the rating level, which accounts for the Positive Rating Outlook. Fitch Ratings attributes the healthy credit profile to relatively strong cash flow, moderate debt financing and regulatory recovery mechanisms that provide timely cost recovery, including the Edwardsport Integrated Gasification Combined Cycle (IGCC) rider. Over the next three years, Fitch expects adjusted debt/EBITDAR, lease adjusted FFO leverage and FFO fixed-charge coverage to average approximately 3.0x, 3.5x and 5.5x, respectively.

Balanced Regulatory Environment: Fitch considers regulation in Indiana to be constructive. Indiana statutes permit the timely recovery of fuel and purchased power costs, environmental expenditures, energy efficiency programs, pipeline safety and bad debts. In addition, the Indiana Regulatory Commission (IURC) permitted recovery of construction work in progress (CWIP) for the Edwardsport IGCC plant.

Rising Capex Program: Capex is expected to rise moderately beginning in 2017; however, due to the extension of bonus depreciation and the capital cost recovery mechanisms in place in Indiana Fitch expects the capex to be largely funded with internally generated cash easing the financial burden. The five-year spending plan of $3.7 billion equates to about 1.5x depreciation and amortization. About 35% of the capex ($1.3 billion) is infrastructure improvements related to Senate Bill 560 (SB 560), which allows certain costs to be recovered through a semi-annual rider.

IGCC Settlement: DEI entered into a settlement agreement that if approved by the IURC will resolve all outstanding issues regarding the Edwardsport IGCC. Importantly, the agreement confirms June 13, 2013 as the in-service date for accounting and ratemaking purposes eliminating the threat of refunds. The agreement also places a cap on recoverable operating and maintenance expenses and on-going capex for 2016 and 2017 adding an element of financial risk and increasing the importance of controlling Edwardsport costs. As a result of the settlement DEI recognized impairment and related costs of $93 million impairment. A final IURC decision is expected in the third quarter of 2016.

Positive Rating Outlook: DEI's Positive Rating Outlook reflects credit metrics that are stronger than Fitch's target ratios for its current rating level. In addition, the Indiana regulatory jurisdiction is considered by Fitch to be among the most constructive in the U.S.

KEY ASSUMPTIONS

--No rate increase other than IGCC and other rider mechanisms;

--Retail sales growth of about 0.5% - 1.0% annually;

--Timely execution of $3.7 billion capex plan.

RATING SENSITIVITIES

Positive Rating Action: DEI's currently sound credit profile could support higher ratings once there is a final approval of the pending Edwardsport IGCC settlement agreement.

Negative Rating Action: While not likely given the headroom in existing credit metrics, ratings could be lowered if Debt/EBITDAR and FFO lease adjusted leverage increased above 3.7x and 4.8x, respectively, on a sustained basis.

Date of Relevant Rating Committee: September 29, 2015.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004199

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160509006338/en/

Fitch Ratings
Primary Analyst
Robert Hornick
Senor Director
+1-212-908-0523
Fitch Ratings, Inc.
33 Whitehall Street
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, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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