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Rating Action:

Moody's revises outlooks for Duke Energy, Duke Carolinas, and Duke Progress to negative

28 Oct 2020

New York, October 28, 2020 -- Moody's Investors Service, ("Moody's") revised the outlook for Duke Energy Carolinas, LLC (Duke Carolinas, A1), Duke Energy Progress, LLC (Duke Progress, A2) and their parent company Duke Energy Corporation (Duke Energy, Baa1) to negative from stable and affirmed their existing ratings. This action has no impact on the ratings or outlooks of Duke Energy's other subsidiaries.

RATINGS RATIONALE

"The negative outlook for Duke Energy's largest subsidiary Duke Carolinas reflects a weakened financial profile that is not likely to return to prior levels," said Laura Schumacher -- Vice President Senior Credit Officer. Although the company is in the midst of a general rate case in North Carolina, its largest jurisdiction, we expect its significant capital program will likely cause its ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt to remain below the 25% financial metric threshold we have established to maintain the utility's current A1 rating. The negative outlook further recognizes the potential for additional downward pressure on the company's credit profile in the event the North Carolina Utilities Commission (NCUC) denies Duke Carolinas request to continue timely recovery of its coal ash remediation spending and its ability to earn a return on these expenditures.

While affiliate utility Duke Progress' financial profile is currently well positioned for its A2 rating, the negative outlook recognizes the potential that an adverse regulatory decision on coal ash remediation recovery, severe storms, or an accelerated capital program could cause its ratio of CFO pre-WC to debt to fall below the 20% financial metric threshold for a possible downgrade. However, unlike affiliate Duke Energy Carolinas, Duke Energy Progress has more cushion in its financial metrics to maintain its current A2 rating.

These financial and regulatory pressures come at a time when all utilities are facing higher uncertainty associated with the coronavirus outbreak and the time frame for economic recovery. We expect regulators will provide utilities an ability to recover incremental costs incurred as a result of the coronavirus; however, Duke's electric utility subsidiaries in North and South Carolina do not benefit from decoupling mechanisms, which could insulate against reduced demand, or tracking mechanisms, which could speed the recovery of increased costs.

The negative outlooks also acknowledge the ongoing uncertainty surrounding coal ash remediation recovery in their smaller South Carolina regulatory jurisdictions, where the companies have appealed the regulator's denial of a portion of the spending.

The negative outlook for parent company Duke Energy reflects the regulatory uncertainty at its two largest subsidiaries along with its weak financial profile. For several years, Duke Energy's ratio of CFO pre-WC to debt has been at or below the 15% financial metric threshold for a possible downgrade that we have established for its Baa1 rating. As such, the company has little financial cushion to absorb the impact of adverse regulatory developments, severe storms, or credit pressure from a growing capital expenditure program.

Duke Energy has historically demonstrated a desire and capability to respond to unfavorable events in a way that supported improving credit metrics. The negative outlook reflects uncertainty regarding the company's ongoing willingness and ability to take the actions necessary to maintain credit quality, which will likely depend on the outcome of pending regulatory proceedings. The negative outlook also recognizes that there will likely be additional downward pressure on credit metrics due to the company's expanding capital expenditure program as it pursues its clean energy goals.

The rating affirmations recognize the historically supportive relationships the companies have had with their regulators and that, depending primarily on the outcome of pending rate cases in North Carolina, there is a potential for credit metrics to remain at or above current levels. The affirmations also recognize that, although Duke's consolidated financial profile is relatively weak, its size, scale and diversity provide some protection from adverse developments in any one jurisdiction. For example, the company has previously been able to mitigate the impact of unforeseen or adverse events by adjusting operational or capital spending, or by strengthening its balance sheet.

Outlook

The outlooks for Duke Energy, Duke Carolinas and Duke Progress are negative.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

Given the negative outlooks, upgrades in the next 12-18 months are not likely. The outlooks could be returned to stable if, through either supportive regulatory outcomes or mitigating company actions, we expect the companies' cash flow credit metrics will remain above their financial metric thresholds we have indicated could cause a downgrade.

Factors that could lead to a downgrade

Downward rating action could be considered if there were to be a deterioration in the credit supportiveness of the regulatory environments at Duke's two utility subsidiaries in the Carolinas, particularly with regard to coal ash remediation recovery. A material increase in operating or capital expenditures that is not able to be recovered on a timely basis, or our expectation of continued weak credit metrics could put downward pressure on the ratings.

For example: at Duke a consolidated ratio of CFO pre-WC to debt that remains below 15%; at Duke Carolinas a ratio below 25%; and at Duke Progress below 20%.

..Issuer: Duke Energy Corporation

....Issuer Rating, Affirmed Baa1

....Pref. Shelf, Affirmed (P)Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Pref. Stock Preferred Stock, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

....Senior Unsecured Bank Credit Facility, Affirmed Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa2

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa2 (hyb)

..Issuer: Duke Energy Carolinas, LLC

....Issuer Rating, Affirmed A1

....Senior Unsecured Shelf, Affirmed (P)A1

....Senior Secured Shelf, Affirmed (P)Aa2

....Senior Secured First Mortgage Bonds, Affirmed Aa2

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

..Issuer: North Carolina Capital Facilities Fin. Agy.

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed A1

....Underlying Senior Unsecured Revenue Bonds, Affirmed A1

..Issuer: Duke Energy Progress, LLC

....Issuer Rating, Affirmed A2

....Senior Unsecured Shelf, Affirmed (P)A2

....Senior Secured Shelf, Affirmed (P)Aa3

....Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: Person County Industrial Facilities & P

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: Wake County I.F. & P.C.F.A., NC (The)

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

Outlook Actions:

..Issuer: Duke Energy Carolinas, LLC

....Outlook, Changed To Negative From Stable

..Issuer: Duke Energy Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Duke Energy Progress, LLC

....Outlook, Changed To Negative From Stable

Duke 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 DISCLOSURES

For 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_1133569.

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.

Please 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.

Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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