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North Carolina Capital Facilities Fin. Agy. -- Moody's downgrades Duke Energy to Baa2, Duke Carolinas to A2, and confirms Duke Progress at A2, outlooks stable

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Rating Action: Moody's downgrades Duke Energy to Baa2, Duke Carolinas to A2, and confirms Duke Progress at A2, outlooks stableGlobal Credit Research - 26 Mar 2021Approximately $26 billion of debt securities downgradedNew York, March 26, 2021 -- Moody's Investors Service, ("Moody's") downgraded the long-term ratings of Duke Energy Corporation (Duke) including its senior unsecured rating to Baa2 from Baa1, and the ratings of its largest subsidiary Duke Energy Carolinas, LLC (Duke Carolinas) including its senior unsecured rating to A2 from A1. Concurrently, Moody's confirmed the ratings of Duke's other Carolina subsidiary Duke Energy Progress, LLC (Duke Progress) including its senior unsecured rating at A2, and affirmed Duke's short-term Prime-2 rating for commercial paper. This action concludes the review of the companies' long-term ratings that began on February 16, 2021. The outlooks of all the entities are stable. This action has no impact on the ratings or outlooks of Duke Energy's other subsidiaries.RATINGS RATIONALE"The downgrade of Duke reflects the company's weaker balance sheet strength objectives, which include targeting a ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt of 14%, lower than its previous target of 15%" said Laura Schumacher, Vice President -- Senior Credit Officer. The downgrade also considers the adverse financial impact of recent settlement agreements the company has reached for both of its Carolina utilities in their North Carolina regulatory jurisdictions[1]. While these agreements are indicative of a regulatory environment that remains broadly supportive of utility credit quality, their financial terms resulted in current impairment charges and lowered the amount of future cash flow the utilities will be receiving in conjunction with their coal ash remediation spending.Although Duke has historically taken action to respond to unfavorable events in a way that supported credit metrics, the company has for several years not been able to sustain a ratio of CFO pre-WC to debt above the 15% threshold we had established for it to maintain its prior Baa1 rating. For 2020, the metric was 14.8% and it has not been above 15% since 2015. Going forward, while the company has successfully eliminated the potential for adverse coal ash related regulatory outcomes in North Carolina, its utility operations are in storm prone territories that are recovering from the coronavirus pandemic, and are investing heavily to achieve the company's clean energy transition plan, all of which puts negative pressure on credit metrics. While Duke continues to benefit from scale and diversity, which provides some resiliency, given its updated capital plans and reduced financial flexibility, we now expect the company to generate a level of CFO pre-WC to debt that is close to, or at, its new 14% target, which is more consistent with a Baa2 credit rating.At Duke Carolinas, the terms of the utility's recent North Carolina settlement agreements were qualitatively supportive and resolved what had become fairly contentious issues surrounding the prudence and recovery of its coal ash remediation spending. However, the associated financial terms, which included an agreement to not seek recovery for a portion of previously deferred spending and to accept a modestly (150 basis points) lower equity return on future spending, were less supportive. These terms, along with the utility's ongoing capital program and continued regulatory lag, will maintain pressure on its balance sheet and financial credit metrics. As such, we now anticipate that Duke Carolinas' ratio of CFO pre-WC to debt, which for 2020 was 21%, will remain in the low 20% range rather than improving above the 25% threshold we had established for the utility to maintain its prior A1 rating.The confirmation of Duke Progress' ratings recognizes the similarly supportive qualitative terms of its recent settlement agreements along with a financial profile that has historically been well positioned for its A2 rating. Although the utility's 2020 ratio of CFO pre-WC to debt of about 18% was below the 20% threshold we have established for it to maintain its A2 rating, this was primarily due to one-time deferred tax adjustments, mostly relating to its recent North Carolina settlement agreements. Going forward, we expect the credit metric will move back to the low 20% range and support the current rating.OutlookThe stable outlooks for Duke, Duke Carolinas and Duke Progress recognize the companies' historically supportive regulatory relationships, as recently evidenced by the settlement agreements reached in North Carolina. The stable outlooks assume the companies will continue to recover their prudently incurred costs on a relatively timely manner, and that they will fund their significant capital programs in a manner that supports their balance sheet strength.The stable outlooks assume Duke will demonstrate a consolidated ratio of CFO pre-WC to debt that is around 14%, and that parent level debt will remain under 35% of consolidated total debt. We expect Duke Carolinas and Duke Progress to both demonstrate ratios of CFO pre-WC to debt in the low 20% range.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgradeUpward pressure in the ratings of Duke Carolinas, Duke Progress or Duke could develop if there were to be credit positive changes in the regulatory frameworks of the Carolina utilities, including more riders and trackers to reduce regulatory lag and improve cash flow. Upward pressure could develop if increased cash flow, or a reduction in leverage, were to lead to improved financial profiles. For example, if Duke were to demonstrate a consolidated ratio of CFO pre-WC above 15% on a sustainable basis, or if Duke Carolinas or Duke Progress were to generate ratios of CFO pre-WC to debt of around 25%, there could be upward movement in the ratings.Factors that could lead to a downgradeDownward rating action could be considered if there were to be a deterioration in the credit supportiveness of the regulatory environments of Duke's two Carolina subsidiaries, or its other significant subsidiaries. A material increase in operating or capital expenditures that are not able to be recovered on a timely basis, or an expectation that credit metrics will be sustained below the threshold levels we have established could put downward pressure on the ratings. For example, at Duke a consolidated ratio of CFO pre-WC to debt below 13%, at Duke Carolinas and at Duke Progress below 20%, could result in a downgrade.Downgrades:..Issuer: Duke Energy Carolinas, LLC.... Issuer Rating, Downgraded to A2 from A1....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1....Senior Secured Shelf, Downgraded to (P)Aa3 from (P)Aa2....Senior Secured First Mortgage Bonds, Downgraded to Aa3 from Aa2....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1..Issuer: Duke Energy Corporation.... Issuer Rating, Downgraded to Baa2 from Baa1....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa3 from Baa2....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa3 from Baa2 (Hyb)....Preferred Shelf, Downgraded to (P)Ba1 from (P)Baa3....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1....Pref. Stock Preferred Stock, Downgraded to Ba1 from Baa3....Senior Unsecured Bank Credit Facility, Downgraded to Baa2 from Baa1....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1..Issuer: North Carolina Capital Facilities Fin. Agy.....Senior Secured Revenue Bonds, Downgraded to Aa3 from Aa2....Senior Unsecured Revenue Bonds, Downgraded to A2 from A1....Underlying Senior Unsecured Revenue Bonds, Downgraded to A2 from A1Confirmations:..Issuer: Duke Energy Progress, LLC.... Issuer Rating, Confirmed at A2....Senior Unsecured Shelf, Confirmed at (P)A2....Senior Secured Shelf, Confirmed at (P)Aa3....Senior Secured First Mortgage Bonds, Confirmed at Aa3....Senior Unsecured Regular Bond/Debenture, Confirmed at A2..Issuer: Person County Industrial Facilities & P....Senior Secured Revenue Bonds, Confirmed at Aa3....Underlying Senior Secured Revenue Bonds, Confirmed at Aa3..Issuer: Wake County I.F. & P.C.F.A., NC (The)....Senior Secured Revenue Bonds, Confirmed at Aa3....Underlying Senior Secured Revenue Bonds, Confirmed at Aa3Affirmations:..Issuer: Duke Energy Corporation....Senior Unsecured Commercial Paper, Affirmed P-2Outlook Actions:..Issuer: Duke Energy Carolinas, LLC....Outlook, Changed To Stable From Rating Under Review..Issuer: Duke Energy Corporation....Outlook, Changed To Stable From Rating Under Review..Issuer: Duke Energy Progress, LLC....Outlook, Changed To Stable From Rating Under ReviewDuke Energy Corporation is a holding company for intermediate holding company Progress Energy, Inc., and regulated utilities Duke Energy Carolinas, LLC, Duke Energy Progress, LLC, Duke Energy Florida, LLC, Duke Energy Indiana, LLC, Duke Energy Ohio, Inc., Duke Energy Kentucky, Inc., and Piedmont Natural Gas Company, Inc. as well as commercial renewables and natural gas infrastructure businesses in the US. Duke is headquartered in Charlotte, North Carolina.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] North Carolina Utilities Commission: Dockets E-7 Sub 1214, E-2 Sub 1219, E-7 Sub 1146, E-2 Sub 1142 22-Jan-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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