S&P Global Ratings on Jan. 26 downgraded the credit ratings of Duke Energy Corp. and its rated subsidiaries after North Carolina utilities Duke Energy Carolinas LLC and Duke Energy Progress LLC reached a rate settlement agreement under which they would forgo roughly $1.1 billion in coal ash management costs.
S&P Global Ratings downgraded to BBB+ from A-: Duke Energy, Piedmont Natural Gas Co. Inc., Duke Energy Ohio Inc., Duke Energy Kentucky Inc., Duke Energy Indiana LLC, Duke Energy Florida LLC, Florida Progress Corp., Progress Energy Inc., Cinergy Corp., Duke Energy Carolinas, or DEC, and Duke Energy Progress, or DEP.
The agency also lowered the issue-level rating on the senior unsecured debt of Duke Energy and Progress Energy to BBB from BBB+ and the issue-level rating on senior unsecured debt at Duke Energy's rated subsidiaries to BBB+ from A-. Additionally, Duke Energy's hybrid instruments, including its junior subordinated notes and preferred stock, were lowered to BBB- from BBB.
The outlook for Duke Energy and subsidiaries is stable.
S&P Global Ratings noted the North Carolina settlement, announced Jan. 25, not only results in a lack of a full recovery of its costs but also reduces DEC's and DEP's return on equity for major portions of current and future coal ash remediation spending. This demonstrates a modest increase in business risk and erodes the company's forward-looking financial measures to some extent, in the view of S&P Global Ratings.
Separately, Duke Energy has increased its five-year capital spending budget to $58 billion, from $50 billion announced in 2019.
As a result, S&P Global Ratings expects Duke Energy's consolidated funds from operations-to-debt ratio to consistently be about 14% beginning in 2021. The stable outlook reflects that the company will maintain a consistent FFC-to-debt ratio at roughly this 14% level.
"The stable outlook on Duke Energy and its subsidiaries reflects our expectation that the company will effectively manage its regulatory risks despite its ongoing energy transition and high capital spending, which could weaken its management of regulatory risk and financial measures," the rating agency said in a research note.
The agency said it has revised its treatment of Duke Energy's coal ash asset retirement obligations, after previously assuming the company would fully recover these costs. Because of the material coal ash-related charge, S&P Global Ratings now sees the company as more in line with its industry peers. Fully incorporating the coal ash debt obligations adds about $3 billion to Duke Energy's consolidated debt, according to S&P Global Ratings.
S&P Global Ratings affirmed an A issue-level rating on the first mortgage bonds at DEC, DEP, Duke Energy Ohio, Duke Energy Indiana and Duke Energy Florida and A-2 short-term and commercial paper ratings.
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.