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Rating Action:

Moody's assigns Prime-2 rating to Duke Energy Corporation's CP program

27 Jun 2007
Moody's assigns Prime-2 rating to Duke Energy Corporation's CP program

New York, June 27, 2007 -- Moody's Investors Service assigned a short term rating of Prime-2 for Duke Energy Corporation (Duke Energy) in connection with the company's new $1.5 billion Section 4(2) exempt commercial paper program and a Baa2 senior unsecured rating to the company's new $2.65 billion bank credit facility expiring in 2012. Duke Energy's existing Baa2 Long Term Issuer rating and positive rating outlook remain unchanged. This is the first time Moody's has assigned a short-term rating to Duke Energy Corporation.

Moody's has also affirmed the Prime-2 short term rating for Duke Energy Carolinas in connection with its $700 million Section 3(a)3 commercial paper program, which will be upsized from $600 million upon closing of the $2.65 billion bank credit facility described below. Duke Energy Carolinas' existing A3 senior unsecured long term rating and positive outlook remain unchanged.

Duke Energy plans to implement a Commercial Paper (CP) program whereby it can issue up to $2.20 billion of CP, provided that up to $700 million of this authorized CP capacity can be utilized directly by Duke Energy Carolinas through its own separate CP program. At the same time, Duke Energy plans to establish a new $2.65 billion credit agreement that consolidates the existing credit agreements at various Duke Energy subsidiaries into a single multi-borrower credit facility. The proceeds from borrowings under the facility can be used for general corporate purposes, including CP back up and acquisitions.

As a result, Cinergy's CP program will be cancelled and all CP requirements or short term working capital needs of the Cinergy subsidiaries, including Duke Energy Ohio (Baa1 senior unsecured / positive outlook), Duke Energy Indiana (Baa1 senior unsecured / stable outlook) and Duke Energy Kentucky (Baa1 senior unsecured / positive outlook) will be met out of the new $2.65 billion Duke Energy bank credit facility. As a result, the Prime-2 commercial paper ratings for Cinergy, Duke Energy Ohio and Duke Energy Indiana will be withdrawn at closing of the new credit facility.

Duke Energy's Prime-2 rating recognizes the stability and predictability of cash flows associated with its primarily rate-regulated utility subsidiary operations. As of March 2007, Duke Energy had approximately $1.8 billion of cash and short-term investments and approximately $1.9 billion of short-term debt outstanding, including approximately $425 million of CP. Duke Energy is expected to produce significant negative free cash flow over the next few years as its approximately $3.1 billion of expected annual cash flow from operations falls short of meeting the anticipated average annual capital expenditures of $3.5 billion and shareholder dividends of $1.1 billion. These average free cash flow deficits of $1.5 billion are expected to be funded through available cash balances and the issuance of incremental debt.

The Prime-2 rating acknowledges that Duke Energy's CP documentation does not contain any specific requirements to maintain dollar-for-dollar committed credit facility availability with its CP issuances, but it is our understanding that the company will manage the amount of commercial paper and other near-term obligations outstanding within the limits of its readily available sources of cash, including its $2.65 billion committed bank credit facility and expected upstream of dividends from its subsidiaries. Duke Energy will have a borrowing sub-limit of approximately $850 million under the $2.65 billion facility. Each subsidiary, in turn, has also been assigned a sub-limit for borrowing purposes.

The sole financial covenant under the $2.65 billion committed bank credit facility is the maintenance of a maximum 65% consolidated debt-to-capital ratio and Duke Energy is comfortably within compliance of this test as of its latest financial statement date, March 31, 2007. New borrowings require a representation that there has been no default under the facility with respect to that specific borrower. While Duke Energy will be required to represent that there were no material adverse effects upon closing, there are no on-going material adverse change clauses or ratings triggers that would prevent on-going access to funds under the facility.

Duke Energy's rating outlook continues to be positive, reflecting the substantial portion of rate-regulated operations as a percentage of the consolidated enterprise, the constructive regulatory and legislative environments where the utility subsidiaries operate and the strong key financial metrics that have been produced over the past few years. Ratings could be upgraded if Duke Energy maintains both cash flow to adjusted total debt credit metrics of over 20% and cash flow to interest coverage ratios of over 4x on a sustainable basis. Rating could be downgraded if Duke Energy's consolidated cash flow credit ratios deteriorated from their current levels, for example, if its cash flow to adjusted total debt metrics fell closer to the mid-teen's range, if the relationship with one or more regulatory authorities became more adversarial or uncertain, or if the company were to substantially alter its mix of regulated / non-regulated business activities.

Duke Energy Corporation is headquartered in Charlotte, North Carolina.

New York
William Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Hempstead
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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