Wall Street is reacting favorably to Duke Energy Corp.'s decision to off-load a nearly 20% interest in its Duke Energy Indiana LLC subsidiary to a Singaporean sovereign wealth fund in a move designed to strengthen the company's balance sheet and boost earnings.

After market hours Jan. 28, Duke Energy announced it will sell a 19.9% indirect minority interest in Duke Energy Indiana, or DEI, to GIC Pte. Ltd. affiliate EPSOM Investment Pte. Ltd. in a $2.05 billion all-cash deal.

Duke Energy stock was trading up nearly 3% midday Jan. 29.

"Overall, the transaction is very positive and, to the extent that [Duke Energy] requires additional capital to fund growth capex in renewables, grid [modernization], etc., we believe there is opportunity to execute similar transactions with the partner — at a minimum, it's a capital allocation option at their disposal," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a Jan. 29 flash note.

The transaction is expected to close in two phases and will allow Duke Energy to forgo previous plans to raise $1 billion in common equity, the company said. The first closing, expected in the second quarter of 2021, will see GIC acquire an approximately 11% interest in DEI, and the second closing, to occur by January 2023, will transfer the remaining approximately 8.9% interest. Payments will be split evenly.

The deal is subject to approval by the Federal Energy Regulatory Commission and the completion of a review by the Committee on Foreign Investments in the United States.

"With this agreement, Duke Energy is well-positioned to effectively finance our robust investment plan in a clean energy future and continue delivering sustainable value to our investors," Duke Energy Chair, President and CEO Lynn Good said in a Jan. 28 news release.

In conjunction with the transaction announcement, Duke Energy announced an adjusted EPS guidance range for 2021 of $5.00 to $5.30, based on a midpoint of $5.15, and the company increased its long-term adjusted EPS growth rate to 5% to 7% through 2025 from 4% to 6%.

Duke Energy said proceeds from the transaction will fund an increased $58 billion to $60 billion five-year capital plan.

"DEI transacted at what we view as a very attractive multiple and is accretive to earnings and credit — the sale removes all equity from the five-year capital plan and proceeds will be used to redeploy into higher-growth opportunities," Pourreza wrote.

A winning formula?

Pourreza noted that more monetization of DEI is possible to satisfy Duke Energy's future capital needs.

"While it wasn't explicitly stated per our conversation with management, we believe there is opportunity for [Duke Energy] to offer more of DEI to GIC for highly accretive capital to be redeployed into growth opportunities down the line — we believe [Duke Energy] sized the $2.05B deal for the amount they needed at this time and could potentially come back to GIC for more if, for example, [North Carolina] renewables deployment or grid [modernization] across [Duke Energy's] footprint was accelerated," Pourreza wrote. "[Duke Energy] has shown its ability to work constructively with partners, and we believe [Duke Energy] would be interested in entering into more of these agreements if the capex opportunities are there."

The analyst said the deal also displays private infrastructure appetite for U.S. utilities and assets, with CenterPoint Energy Inc., NiSource Inc., American Electric Power Co. Inc. and Sempra Energy seen as companies that could benefit from similar transactions.

"We have stated multiple times in the past that infrastructure and private capital would be willing to pay a healthy premium for assets including gas LDCs given they are less price sensitive and are more agnostic on ESG," Pourreza wrote.

A clearer picture

The Guggenheim analyst added that "clarity" on coal ash costs in North Carolina and a rate case settlement in Florida provide Duke Energy "strong rate base growth with bias toward the top-half of the new [long-term] EPS guidance range and incremental opportunities still in play."

Earlier in the week, Duke Energy announced that its North Carolina utilities will forgo recovery of about $1.1 billion in coal ash management costs as part of a settlement agreement reached in their electric rate cases.

The agreement with the public staff of the North Carolina Utilities Commission, North Carolina Attorney General Joshua Stein and the Sierra Club resolves "all coal ash prudence and cost recovery issues" in rate cases filed in 2019 for Duke Energy Carolinas LLC, or DEC, (NCUC docket E-7, Sub 1214) and Duke Energy Progress LLC, or DEP, (NCUC docket E-2, Sub 1219). The agreement also resolves the public staff's equitable sharing proposal in the utilities' 2017 rate cases, Duke Energy wrote in a Form 8-K filing.

Duke Energy said the settlement is expected to reduce coal ash cost recovery in the pending rate cases by 60%. As a result, DEC and DEP are each expected to incur a pretax charge to earnings of about $500 million in the fourth quarter of 2020.

S&P Global Ratings on Jan. 26 downgraded the credit ratings of Duke Energy and its rated subsidiaries following the coal ash settlement.

Ratings noted that the North Carolina settlement not only results in a lack of a full recovery of its costs but also reduces DEC and DEP's return on equity for major portions of current and future coal ash remediation spending. The rating agency said this demonstrates a modest increase in business risk and erodes the company's forward-looking financial measures to some extent.

Ratings said it expects Duke Energy's consolidated funds from operations-to-debt ratio to consistently be about 14% beginning in 2021, when incorporating a $58 billion capital spending plan.

Still, CreditSights viewed the coal ash settlement as a "net positive" for Duke Energy bondholders.

"We remained optimistic that the coal ash recovery dispute would get resolved in a settlement between Duke and regulators as previous ones have, especially because all of these plants were always owned by ratepayers/never resulted in windfall profits, unlike coal plants in deregulated states," CreditSights analyst Andrew DeVries wrote in a Jan. 25 research report.

In Florida, Duke Energy subsidiary Duke Energy Florida LLC filed a settlement with state regulators Jan. 14 that would allow for an overall rate increase of $195.4 million between 2022 and 2024. The agreement also accelerates the closure of the last two units at the 1,442-MW Crystal River coal plant to 2034 from 2042.

If approved by the Florida Public Service Commission, Duke Energy Florida said its base rates would increase by $67.2 million in 2022, $48.9 million in 2023 and $79.2 million in 2024.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.