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Rating Action:

Moody's affirms Duke, Progress and subsidiary ratings following merger; outlooks stable

03 Jul 2012

Approximately $33 billion of debt securities affected

New York, July 03, 2012 -- Moody's Investors Service affirmed the ratings and stable outlooks of Duke Energy Corporation (Duke: Baa2 senior unsecured, Prime-2 short-term rating for commercial paper) and its subsidiaries (listed below) as well as the ratings and stable outlooks of Progress Energy Corporation (Progress: Baa2 senior unsecured, Prime-2 short-term rating for commercial paper) and its subsidiaries (listed below) following the closing of the merger between the two companies. Duke is now the parent holding company of the combined Duke/Progress organization, although Progress will continue to exist as an intermediate holding company for utility subsidiaries Progress Energy Carolinas and Progress Energy Florida.

Moody's assigned a Baa2 senior unsecured rating to Duke Energy's unsecured bank revolving credit facility, which is in place and has been increased to $6 billion from $4 billion through a previously agreed upon arrangement with the banks to accommodate the merger with Progress.

Moody's affirmed the ratings and stable outlooks of Duke's utility 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 of Progress Energy's utility subsidiaries including Progress Energy Carolinas, Inc. (Progress Carolinas, A3 senior unsecured, Prime-2 short term rating for commercial paper) and Progress Energy Florida, Inc. (Progress Florida, Baa1 senior unsecured, Prime-2 short term rating for commercial paper). Moody's expects to withdraw the Prime-2 commercial paper ratings of Progress, Progress Carolinas, and Progress Florida on or about August 15, 2012 when all commercial paper outstanding at these entities has been redeemed.

RATING RATIONALE

"The rating affirmations of Duke and Progress reflect their strong and stable financial profiles, a higher proportion of regulated utility operations in Duke's overall business following the merger, and increased diversity among regulatory jurisdictions" said Michael G. Haggarty, Senior Vice President. "Although Moody's views the merger between the two companies as broadly credit neutral, it does improve the long-term strategic position of the Duke organization through the addition of a Florida service territory, generation dispatch efficiencies in the Carolinas, and the ability to spread fixed assets over a larger asset platform" added Haggarty. The combination increases the percentage of Duke's lower risk regulated business activities to roughly 85% of its total business from about 75% before the merger.

In affirming the ratings and stable outlooks, we note the change in CEO role that was announced at merger close and do not expect any material change in the strategic direction or financial policies of the company as a result of this development. The change does create some uncertainty over the longer-term leadership of the company, as the current Duke CEO had indicated a willingness to relinquish this role after many years to facilitate the merger with Progress. The CEO change could also lead to some additional turnover in the newly constituted company's senior management team, but we don't expect such developments by themselves to affect the company's ratings or rating outlooks.

We now view both Duke and Progress as more appropriately positioned at the Baa2 rating level. Whereas Duke had been more strongly positioned prior to the merger, the addition of a more highly leveraged Progress holding company to the Duke organization has slightly weakened its position within the Baa2 rating level. Conversely, Progress Energy's rating has long been constrained by $4 billion of debt at the holding company level. This debt will not be guaranteed by Duke and will continue to be supported and serviced by upstreamed dividends from both Progress Carolinas and Progress Florida. The combined Duke and Progress holding company debt as a percentage of total company debt will now be in the range of 25% and could rise further if additional debt is issued at the Duke parent company, up from approximately 20% pre-merger. Partly as a result of this additional leverage, we expect Duke's consolidated cash flow (CFO-pre WC) to debt metrics to fall to the mid to high teens range from above 20% historically, still adequate for a Baa2 rating but with less cushion.

The merger will create the largest utility system in the Carolinas, where the companies expect to generate $650 million of savings from fuel purchasing power and joint generation dispatch, although this will occur over a longer time frame than originally anticipated. The ratings affirmations and maintenance of stable outlooks for Duke Carolinas (A3 senior unsecured) and Progress Energy Carolinas (A3 senior unsecured) reflect the above average regulatory environments in both North and South Carolina, credit supportive cost recovery provisions in place, strong cash flow coverage metrics, and service territories that should experience modest growth over the intermediate term. Although the merger is not expected to significantly alter the utilities' respective capital expenditure programs or planned generation retirements, joint dispatch arrangements should benefit both utilities and could eventually slow the timing of some new generation. In addition, 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 to meet currently mandated environmental requirements.

The rating affirmation and stable outlook of Duke Indiana (Baa1 senior unsecured) reflects strong and stable financial metrics for its rating, good cost recovery mechanisms in place, and a regulatory framework that continues to be relatively supportive despite the substantial cost overruns and associated controversy surrounding the utility's Edwardsport IGCC Project. These credit strengths have largely offset the negative impact that the April 30 project cost recovery settlement agreement, if approved, will have on the utility. The settlement capped recovery of Edwardsport costs at $2.6 billion, well below the $3.3 billion of currently estimated costs, and not significantly above the $2.35 billion of cost recovery that had been previously approved by the Indiana Utility Regulatory Commission. The settlement also requires that the utility not increase base rates until April 2014, although financial metrics should be supported by riders and cost recovery provisions related to Edwardsport, which should become effective this year if the settlement is approved. The settlement caused the company to recognize a pretax charge of $420 million in the first quarter of 2012, in addition to the $220 million charge previously taken in the third quarter of 2011. Although these charges are credit negative, the settlement does allow Duke Indiana to begin to move beyond the controversy associated with the construction of the plant while preserving a reasonably supportive regulatory framework in Indiana.

The rating affirmation and stable rating outlook of Duke Ohio (Baa1 senior unsecured) considers financial metrics that are currently adequate for its Baa1 rating, although they could be pressured by provisions included in its current three year Electric Security Plan (ESP) approved in November 2011. The ESP requires Duke Ohio's generation requirements to be procured through a competitive bid process and requires the utility to transfer its non-regulated generating assets to an affiliate or subsidiary by the end of 2014. While the ESP provides for a $330 million non-bypassable electric service stability charge which will offset some of the negative pressure on financial metrics, we expect the ESP to result in lower revenues, earnings, and cash flow from the utility's coal fired generation assets. We will closely monitor the company's progress on transferring its non-regulated generation assets to an affiliate and ultimately separating them from its transmission and distribution business, as well as its financial performance in an increasingly competitive Ohio generation environment. We anticipate any restructuring of Duke Ohio to conform with the provisions of the ESP will be done in a manner that is supportive of its current rating.

The ratings affirmation and stable outlook of Duke Kentucky (Baa1 senior unsecured) reflects its comparatively low business risk profile and the credit supportive regulatory environment in Kentucky, despite a two year rate freeze currently in place. The company exhibits strong financial metrics which, although likely to decline somewhat because of the rate freeze and higher spending for environmental compliance, should remain adequate for its current Baa1 rating.

The ratings affirmation and stable outlook of Progress Energy Florida (Baa1 senior unsecured) is prompted by its recently executed comprehensive Florida rate settlement that provides some regulatory clarity as the utility approaches the end of its current rate agreement on December 31, 2012, as well as a stabilized political and regulatory environment for utilities in Florida. Positively, the settlement provides for higher base rates, recovery on a deferred basis of its Levy new nuclear construction project costs, and an authorized return on equity of 10.5%. However, it also requires the utility to refund of $288 million of replacement fuel and purchased power repair costs incurred from its lengthy Crystal River 3 nuclear plant outage. Crystal River 3 will also be removed from rate base until it resumes commercial operation. Among the key uncertainties the settlement did not address are the cost and schedule to repair the plant and the ultimate amount of insurance proceeds the company will receive from the mutual nuclear insurer Nuclear Electric Insurance Limited (NEIL), which we should receive greater clarity on later this year. Although the merger will not result in any direct benefits to Progress Florida similar to 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 returns Crystal River to service or moves forward with currently postponed plans for new nuclear generation in Florida.

Ratings assigned include:

Duke Energy senior unsecured bank credit facility at Baa2.

Ratings affirmed include:

Duke 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 and Issuer Rating;

Duke Energy Indiana's A2 senior secured, Baa1 senior unsecured and Issuer Rating;

Duke Energy Kentucky's Baa1 senior unsecured;

Duke Energy Ohio's A2 senior secured and Baa1 senior unsecured and Issuer Rating;

Progress Energy's Baa2 senior unsecured and Prime-2 short-term rating for commercial paper;

Carolina Power & Light Company d/b/a Progress Energy Carolinas A1 senior secured, A3 senior unsecured and Issuer Rating, Baa2 preferred stock, 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;

Florida Progress Funding Corporation's Baa2 junior subordinated debt;

FPC Capital 1's Baa2 preferred stock.

The principal methodology used in rating these issuers was the Regulated Electric and Gas Utilities rating methodology published in August 2009. Other methodologies and factors that may have been considered in rating these issuers can be found on Moody's website.

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. Progress Energy, Inc. is an intermediate holding company of Duke Energy and a holding company for Progress Energy Carolinas, Inc., and Florida Power Corporation d/b/a Progress Energy Florida, Inc. Duke Energy is headquartered in Charlotte, North Carolina.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the 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 considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

A.J. Sabatelle
Senior Vice President
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Duke, Progress and subsidiary ratings following merger; outlooks stable
No Related Data.
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