Approximately $30 billion of debt securities affected
New York, January 10, 2011 -- Moody's Investors Service affirmed the ratings and stable outlooks of
Duke Energy Corporation (Duke: Baa2 senior unsecured) and its subsidiaries
(listed below) as well as the ratings and stable outlooks of Progress
Energy Corporation (Progress: Baa2 senior unsecured) and its subsidiaries
(listed below) following today's announcement that the boards of Duke
and Progress have agreed to combine in a stock-for-stock
transaction. Duke will be the surviving parent company upon consummation
of the transaction. In addition, Moody's changed the
rating outlook for Duke Energy Ohio to stable from positive.
Ratings affirmed include:
Duke Energy's Baa2 senior unsecured and Issuer Rating and Prime-2
short-term rating for commercial paper;
Progress Energy's Baa2 senior unsecured and Issuer Rating and Prime-2
short-term rating for commercial paper;
Duke Energy Carolinas A1 senior secured, A3 senior unsecured;
Carolina Power & Light Company d/b/a Progress Energy Carolinas A1
senior secured, A3 senior unsecured and Issuer Rating, and
Prime-2 short-term rating for commercial paper;
Florida Power Corporation d/b/a Progress Energy Florida's A2 senior
secured, Baa1 senior unsecured and Issuer Rating; Baa3 preferred
stock, and Prime-2 short-term rating for commercial
paper;
Cinergy Corporation's Baa2 Long Term Issuer Rating;
Duke Energy Ohio's A2 senior secured and Baa1 senior unsecured,
Duke Energy Indiana's A2 senior secured, Baa1 senior unsecured
and Baa3 preferred stock;
Duke Energy Kentucky's (p)A3 senior secured and Baa1 senior unsecured;
Florida Progress Funding Corporation's Baa2 junior subordinated
debt;
FPC Capital 1's Baa2 preferred stock.
RATINGS RATIONALE
"The rating affirmations of Duke and Progress reflect their strong
financial positions, sizeable regulated utility business operations
and diversity among regulatory jurisdictions. The merger announcement
is viewed as a credit neutral event for both companies, although
our qualitative view regarding their relative positions within the Baa2
rating category has changed" said Mike Haggarty, Senior Vice
President.
Pro-forma consolidated credit metrics for the combined Duke-Progress
entity are expected to result in cash flow (CFO-pre WC) to debt
of around 15% - 16%. These pro-forma
credit metrics and business risk factors position the merged Duke more
appropriately within its Baa2 rating category. Previously,
we viewed Duke to be strongly positioned, and Progress to be weakly
positioned within the Baa2 ratings category.
"We believe the merger transaction has several positive attributes"
said Jim Hempstead, Senior Vice President. "The inherent
logic behind the merger is the consolidation of two homogenous,
capital intensive companies, to spread fixed costs across a larger
asset platform. We also see good incremental diversification benefits
with the proposed merger, including the addition of a Florida service
territory, generation dispatch efficiencies in the Carolinas,
and the ability to wring out other operating cost efficiencies across
both organizations" Hempstead added. The merger creates one
of the largest utility systems in the country, including the largest
regulated nuclear generating fleet, operating in generally supportive
regulatory environments. A larger Duke/Progress organization will
also be better positioned to undertake the construction of new nuclear
generation in either the Carolinas or Florida in the event the new company
decides to move forward in this direction.
In addition to shareholder approval, we believe the merger will
likely require the approval of two state regulatory commissions (North
Carolina and South Carolina), the Federal Energy Regulatory Commission
(FERC) and the Nuclear Regulatory Commission (NRC). While it is
premature to predict the outcome of any of these proceedings, it
remains possible that additional merger conditions could be imposed by
one or more of the state regulators in order for merger approval to occur.
It is also possible that today's merger announcement could have implications
for other regulatory proceedings currently underway or planned over the
near-term by both companies in various states, particularly
given the current economic challenges that exist in their respective service
territories.
Notwithstanding the clear fit that exists by merging the two companies,
these regulatory issues make the consummation of the merger under the
current terms less certain at this juncture. As there is greater
clarity concerning the regulatory and shareholder approvals, including
the impact, if any, on pending regulatory filings, Moody's
will comment accordingly. Also, as the companies provide
more transparency around legal structure, integration plans and
synergy benefits, rating refinements, if needed, may
follow. Today, we incorporate a view that the merger will
close by year-end 2011.
Moody's affirmed the ratings for several Duke subsidiaries,
including: Duke Energy Carolinas (Duke Carolinas: A3 senior
unsecured); Duke Energy Ohio (Duke Ohio: Baa1 senior unsecured);
Duke Energy Indiana (Duke Indiana: Baa1 senior unsecured) and Duke
Energy Kentucky (Duke Kentucky: Baa1 senior unsecured).
Moody's also affirmed the ratings for all of Progress' subsidiaries,
including: Progress Energy Carolinas, Inc. (A3 senior
unsecured, Prime-2 commercial paper rating) and Progress
Energy Florida, Inc. (Baa1 senior unsecured, Prime-2
commercial paper rating).
The prime-2 commercial paper ratings for both Duke and Progress
are also affirmed.
For Duke Ohio, the change in the rating outlook to stable from positive
reflects our modest concerns regarding the regulatory restructuring process
in Ohio, lingering uncertainties associated with potential generation
divestiture plans and the longer-term implications associated with
the utility's ultimate capital structure and cash flow generation
possibilities. Although we continue to view Ohio as a supportive
regulatory and political jurisdiction, the chronic overhang of intermediate-term
regulatory restructuring plans present increased uncertainties for Duke
Ohio over the near-term. In addition, while we continue
to view the Duke Ohio utility as strongly positioned within its Baa1 senior
unsecured rating category, a rating upgrade is no longer likely
over the near to intermediate term horizon. We are only modestly
concerned with the implications associated with customer choice,
and prefer to focus on the longer-term fundamentals of the Duke
Ohio transmission and distribution utility activities.
The rating affirmations of Duke Indiana and Duke Kentucky reflect the
good regulatory and political relationships that those entities have in
their respective jurisdictions; the supportive suite of cost and
investment recovery mechanisms, including numerous trackers;
the diversity of load, customers and generation fuel supplies;
and adequate sources of liquidity through the Duke Master Credit Facility.
We continue to monitor the regulatory situation at Duke Indiana related
to its Edwardsport Coal Gasification project, but incorporate a
view that the matter will be resolved without adversely impacting credit
quality.
The ratings affirmation of Duke Carolinas and Progress Energy Carolinas
reflects the above average regulatory environments in both North and South
Carolina, the credit supportive cost recovery provisions in place,
strong financial metrics, and service territories that should experience
limited growth over the near term. The merger is not expected to
immediately alter the utilities' respective capital expenditure
programs or planned generation retirements.
However, joint dispatch arrangements should benefit both utilities
over the longer-term and could eventually slow the timing of some
new generation. Because of the relatively early enactment of North
Carolina's 2002 Clean Smokestacks Act, both Duke Carolinas
and Progress Energy Carolinas are fairly well positioned in meeting currently
mandated environmental requirements.
The ratings affirmation of Progress Energy Florida reflects the stabilization
of the political and regulatory environment in Florida, including
the utility's recent rate settlement with the Florida Public Service
Commission that should preclude the need for additional base rate proceedings
through 2012. The utility continues to be negatively affected by
the long-term outage of its Crystal River 3 nuclear plant,
which has been undergoing repairs since September 2009, although
the company expects to recover replacement power costs, which have
been relatively manageable due to low gas prices, through its fuel
cost recovery clause. The plant is currently expected to be back
in service in March 2011. Although the merger will result in no
direct benefits to Progress Energy Florida, such as the expected
joint dispatch benefits in the Carolinas, the utility will be part
of a much larger and more diverse organization in the event it decides
to accelerate its currently postponed new Levy County nuclear construction
project.
The rating outlooks of Duke, Progress and their respective subsidiaries
are all stable and, barring unexpected new developments, Moody's
does not anticipate any change in ratings or rating outlooks while the
merger integration is underway and regulatory approvals are being obtained
over the next year.
Rating upgrades are unlikely given last year's adverse regulatory
development in Florida, lingering regulatory uncertainties in Indiana
and Ohio, our expectations regarding pro-forma combined key
financial credit metrics and high levels of debt at the parent holding
companies.
Rating downgrades appear equally unlikely at this time, but could
occur if there is a sustained decline in parent company cash flow coverage
metrics below current levels, including a ratio of CFO before working
capital plus interest to interest below 3.5x, a ratio of
CFO before working capital to debt below 15%, a sustained
decline in the supportiveness of the regulatory environments in North
Carolina, South Carolina, Florida, Indiana or Ohio or
a substantial increase in leverage at the parent or utilities.
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in August 2009.
Duke Energy Corporation is a holding company for regulated utilities Duke
Energy Carolinas, Duke Energy Ohio, Duke Energy Indiana and
Duke Energy Kentucky, as well as international business activities
in Central and South America. Duke Energy is headquartered in Charlotte,
North Carolina.
Progress Energy, Inc. is a holding company for regulated
utilities Carolina Power & Light Company d/b/a Progress Energy Carolinas,
Inc. and Florida Power Corporation d/b/a Progress Energy Florida,
Inc., and is headquartered in Raleigh, North Carolina.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms Duke Energy and Progress Energy's Baa2 senior unsecured ratings following merger announcement; rating outlooks stable
