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TEXT-S&P cuts Duke Energy Corp rating
July 25, 2012 / 9:40 PM / 5 years ago

TEXT-S&P cuts Duke Energy Corp rating

 (The following statement was released by the rating agency)

Overview
  -- Although the Duke Energy Corp. board of directors claimed a good
faith exercise of its fiduciary duty in appointing a new CEO following the close
of the merger with Progress Energy Inc., we view the lack of transparency 
associated with this process and with some board members--and which resulted 
in regulatory hearings and investigations in North Carolina--as significantly 
heightening regulatory risk for Duke Energy and weakening its consolidated 
business risk profile.
  -- We are lowering our corporate credit ratings on Duke Energy and its 
subsidiaries to 'BBB+' from 'A-' and are affirming our 'A-2' short-term rating 
on Duke Energy. We are removing the ratings from CreditWatch with negative 
implications.
  -- We are affirming our corporate credit rating on Progress Energy and 
its subsidiaries at 'BBB+' and are affirming our 'A-2' short-term rating. We 
are removing the ratings from CreditWatch with developing implications.
  -- The negative outlook on Duke Energy and its subsidiaries reflects the 
potential for lower ratings over the next 12 to 18 months if the company fails 
to deal with increased regulatory risk in North Carolina and Florida and to 
effectively manage the integration of the two companies.

Rating Action
On July 25, 2012, Standard & Poor's Ratings Services lowered its corporate 
credit ratings on Duke Energy Corp. and its subsidiaries, Duke Energy 
Carolinas LLC, Duke Energy Ohio Inc., Duke Energy Indiana Inc., and Duke 
Energy Kentucky Inc., to 'BBB+' from 'A-'. We lowered the rating on Duke 
Energy's senior unsecured debt to 'BBB' from 'BBB+' and lowered the rating on 
Duke Energy Kentucky's senior unsecured debt to 'BBB+' from 'A-'. We affirmed 
the ratings on first-mortgage bonds of Duke Energy Carolinas, Duke Energy 
Ohio, and Duke Energy Indiana at 'A' and we affirmed the 'A-2' short-term 
ratings on Duke Energy. We removed the ratings from CreditWatch, where we 
placed them with negative implications on July 3, 2012.

At the same time, we affirmed the 'BBB+' corporate credit ratings on Progress 
Energy Inc. and its subsidiaries, Progress Energy Carolinas Inc. and Progress 
Energy Florida Inc. We also affirmed the 'BBB' rating on Progress Energy's 
senior unsecured debt and the 'A' ratings on first mortgage bonds of Progress 
Energy Carolinas and Progress Energy Florida. In addition, we affirmed the 
'A-2' short-term ratings on Progress Energy and its subsidiaries. We removed 
the ratings from CreditWatch, where we placed them with developing 
implications on July 3, 2012.

Following the close of the merger with Duke Energy, Progress Energy is now a 
wholly owned subsidiary of Duke Energy.

The outlook on the ratings on Duke Energy and all its subsidiaries is negative.

Rationale
The ratings downgrade on Duke Energy and its subsidiaries stems from our view 
that abrupt leadership changes at the company have heightened regulatory risk 
in North Carolina and likely in Florida, significantly weakening the company's 
consolidated "excellent" business risk profile under our criteria. Our 
assessment of business risk incorporates the impact of the unexpected change 
in management on the company's regulatory relations (but not the actual change 
itself) and our view that the company may not be able to realize timely and 
constructive regulatory outcomes in North Carolina and Florida, two of its 
largest jurisdictions. In North Carolina, Duke Energy is preparing to file for 
two major rate-case increases and in Florida it needs to address the status of 
the Crystal River 3 nuclear plant, which has been out of service since August 
2009. These concerns are compounded by the manifestly poor risk management 
that "legacy" Duke Energy demonstrated with its Edwardsport project in Indiana.

Following the unexpected change in CEO upon the close of Duke Energy's merger 
with Progress Energy, the North Carolina Utilities Commission (NCUC) initiated 
hearings and an investigation into the change in management. We believe the 
decision to change the CEO immediately after his appointment was a foregone 
conclusion. While an inability to act decisively is often an attribute of poor 
governance, in our opinion circumstances such as these are not a manifestation 
of good governance. What we believe to be deficient governance processes are 
combined with the lack of transparency on key information--which has become 
evident in the steps leading up to the merger of Progress and Duke. As a 
result, we think that management and the board have a journey ahead to restore 
their credibility with regulators and in the marketplace.

We will continue to monitor how the company's board and executive management 
navigate these issues, including CEO succession planning, the impact of any 
further executive or board departures, combining the two corporate cultures in 
a cohesive fashion to realize expected synergies, and assess the impact of 
changes in the regulatory environment.

Duke Energy's "excellent" business risk profile accounts for the benefits of 
its large and diverse U.S. regulated utility operations that serve more than 7 
million customers across six states. These benefits are offset by several 
challenges the company faces as well as the risk introduced by its 
nonregulated operations, which include a largely uncontracted merchant 
generation fleet in the U.S. Midwest and merchant generation operations in 
Central and South America.

The regulated utility subsidiaries operate under generally credit-supportive 
regulatory environments that provide for slightly below-average returns but 
have timely recovery of fuel and other variable costs. The utility operations 
benefit from operating, regulatory, and economic diversity in service 
territories that range from average to attractive and span six states. Duke 
Energy's regulated generation operations have high availability and capacity 
utilization factors and rates that are competitive for the regions of 
operations. At the same time, Duke Energy's capital spending program is large, 
totaling between $6 billion and $6.5 billion per year through 2015. The 
capital spending program could increase somewhat to address operational issues 
at some of Progress Energy's nuclear power plants. Since about 90% of that 
planned capital spending is for the regulated operations, Duke Energy's 
regulated utilities will need regular rate relief to recover the invested 
capital in a timely manner while still preserving the overall "significant" 
financial risk profile. As a result, ineffective management of regulatory risk 
that leads to detrimental rate-case outcomes will further weaken the 
consolidated business risk profile and move it to the "strong" category. Even 
though recent rate-case outcomes in North Carolina and South Carolina were 
supportive and established a constructive beginning to Duke's multiyear effort 
to place several large generating stations in rate base, this pattern could 
erode as a result of the recent change in management and subsequent NCUC 
investigation which could delay important future rate-case filings and the 
associated rate increases, leading to a weaker financial risk profile in the 
near to intermediate term.

Progress Energy Florida's biggest challenge during 2012 will be to reach a 
conclusion regarding the repair or retirement of the Crystal River 3 nuclear 
plant that encountered significant structural problems and has been off-line 
since 2009. The company reached a settlement agreement with various 
intervenors, that the Florida Public Service Commission subsequently approved, 
which provides it with an effective framework to make prudent decisions 
regarding the plant. However, the change in mana

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