(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