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Rating Action:

Moody's downgrades Duke, Progress, and Duke Energy Progress; Duke outlook negative

13 Jan 2016

Approximately $15 Billion of debt securities downgraded

New York, January 13, 2016 -- Moody's Investors Service downgraded the long-term ratings of Duke Energy Corporation (Duke) to Baa1 senior unsecured from A3, Progress Energy, Inc. (Progress) to Baa2 senior unsecured from Baa1, and Duke Energy Progress, LLC to A2 Issuer Rating from A1. The rating outlook of Duke is negative. The rating outlooks of Progress and Duke Energy Progress are stable. Moody's affirmed Duke's Prime-2 short-term rating for commercial paper and affirmed the ratings of subsidiaries Duke Energy Carolinas, LLC (A1 senior unsecured), Duke Energy Florida, Inc. (A3 senior unsecured), Duke Energy Indiana, Inc. (A2 senior unsecured), Duke Energy Ohio, Inc. (Baa1 senior unsecured), and Duke Energy Kentucky, Inc. (Baa1 senior unsecured) with stable outlooks.

RATING RATIONALE

"The downgrade of Duke is prompted by weak consolidated financial metrics, a high level of debt at the Duke holding company, and the pending acquisition of Piedmont Natural Gas Company, Inc. (A2 stable), which will worsen these credit factors" said Michael G. Haggarty, Associate Managing Director. Duke's CFO pre-working capital to debt could fall below 15% from the high teens and parent company leverage increase to approximately 35% of total consolidated debt from 30% following the acquisition, increasing credit risk. Although Piedmont is a relatively low risk natural gas utility that will modestly increase the proportion of regulated activities in Duke's overall business mix, the $7 billion acquisition will be primarily debt financed, increasing the level of risk to Duke bondholders. The negative rating action is also driven by the downgrade of one of its two largest utility subsidiaries, Duke Energy Progress; high planned capital spending at the Duke parent company for pipeline, renewable and potentially additional gas infrastructure investments that will lead to additional leverage; and the company's higher risk, more volatile international business, which has underperformed in recent years.

The negative outlook on Duke's rating reflects our view that cash flow coverage of debt could stay in the low to mid-teens while parent company debt levels remain elevated for an extended period, eventually positioning the company more appropriately at the Baa2 rating level. The negative outlook considers the primarily debt financed nature of the Piedmont acquisition, uncertainty over how and when this debt will be reduced, the lack of a definitive plan to improve financial metrics to offset the incremental leverage, the limited amount of equity ($500 to $750 million) being issued, and Duke's plans to use Piedmont as a platform for further expansion into gas infrastructure, potentially adding additional debt.

Duke's rating could be downgraded if we expect parent company debt levels will remain around 35% of total consolidated debt for an extended period, CFO pre-working capital to debt does not improve from the 15% range, the Piedmont acquisition closes with debt financing as currently envisioned, or there are additional debt financed acquisitions.

The downgrade of Carolina utility Duke Energy Progress to A2 reflects cash flow coverage metrics that we expect to decline from previous levels due to increased O&M expenses and higher debt incurred for coal ash basin remediation and other capital expenditures. Of Duke's two Carolina utilities, Duke Energy Progress has proportionally more coal ash basin remediation to address. It also recently completed the debt financed acquisition of generating assets from the North Carolina Eastern Municipal Power Agency (NCEMPA) for $1.2 billion, which closed on 31 July 2015. We expect the utility's pre-working capital to debt ratio to fall to the 20% range from the around 25% historically, which would be below the parameters outlined for an A rating under our Regulated Electric and Gas Utilities Rating Methodology.

The stable outlook reflects the utility's relatively low business risk profile, credit supportive regulatory frameworks in both North and South Carolina, and metrics that should remain in the 20% or above range. It reflects our expectation that its growing capital expenditure program will remain manageable and that debt to capitalization will remain at the current levels. The stable outlook also considers our expectation that the utility will be able to recover all of its coal ash basin closure and remediation costs in rates, although regulatory lag in the recovery of these costs will likely pressure the metrics to a modest degree.

The downgrade of intermediate holding company Progress to Baa2 reflects the downgrade of Duke Energy Progress, its largest utility subsidiary; the downgrade of parent company Duke, which provides Progress with liquidity support through a $2.5 billion revolving credit agreement; and the high level of debt at the Progress level, which is being gradually refinanced at the Duke parent company.

The stable outlook on Progress reflects the stable outlook on its two regulated utility subsidiaries; consolidated financial metrics that are expected to remain in the mid to high teens that are adequate for the Baa2 rating; and our expectation that debt at the Progress level will gradually be reduced.

The affirmation of the ratings and stable outlook of Duke's largest utility subsidiary, Duke Energy Carolinas, reflects the utility's credit supportive regulatory environments in North and South Carolina despite scrutiny over the coal ash spill at its Dan River coal ash basin in 2014. It also reflects improving financial metrics that are expected to remain robust for the rating going forward, including CFO pre-working capital to debt of nearly 30% in 2014. Although operating under largely the same regulatory framework as affiliate utility Duke Energy Progress, Duke Energy Carolinas exhibits better cash flow coverage metrics, more resilient retail sales volumes, proportionally lower coal ash remediation costs, and is not undertaking any significant generating asset purchases.

The affirmation of the ratings and stable outlook of Duke Energy Florida considers the credit supportive Florida regulatory framework and improving financial coverage metrics over the last three years (26.7% CFO pre-working capital to debt in 2014) despite some regulatory lag and a base rate freeze in place related to its retired Crystal River 3 (CR3) nuclear plant. The company has received approval to securitize some of its CR3 costs, which will weaken cash flow to debt metrics but also reduce the pressure from CR3 on customer rates, which are among the highest among the state's investor owned utilities.

The affirmation of the ratings and stable outlook of Duke Energy Indiana reflects the completion and operation of the Edwardsport IGCC plant, a regulatory settlement reached in 2015 that would provide clarity on the recovery of Edwardsport plant costs if approved, a credit supportive regulatory framework in Indiana, and improving financial metrics (CFO pre-working capital to debt of 26.2% in 2014) as a result of declining capital expenditures and the implementation of IGCC rider recovery mechanisms.

The affirmation of the ratings and stable outlook of Duke Energy Ohio considers its lower business and operating risk profile following the sale of its generating assets, which has transformed the utility into a fully regulated transmission and distribution utility. Although business risk has diminished, we expect financial metrics (23.2% CFO pre-working capital to debt in 2014) to decline to levels appropriate for high Baa-rated transmission and distribution utilities considering the key financial metrics in our Regulated Electric and Gas Utilities rating methodology, including CFO pre-working capital to debt in the 17% to 18% range over the next several years.

The affirmation of the ratings and stable outlook of Duke Energy Kentucky considers its historically credit supportive regulation and declining cash flow generation and financial coverage metrics that remain adequate for its Baa1 rating (20.7% CFO pre-working capital to debt in 2014). The utility's rating is constrained by its small size and position as a wholly-owned subsidiary of Duke Energy Ohio, as well as the base rate freeze that has been in place.

The principal methodology used in rating these issuers was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Downgrades:

..Issuer: Duke Energy Corporation

.... Issuer Rating, Downgraded to Baa1 from A3

....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3

....Subordinate Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Bank Credit Facility, Downgraded to Baa1 from A3

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: Duke Energy Progress, LLC

.... Issuer Rating, Downgraded to A2 from A1

....Subordinate Shelf, Downgraded to (P)A3 from (P)A2

....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

..Issuer: Progress Energy Capital Trust II

....Pref. Stock Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: Progress Energy, Inc.

....Preferred Shelf, Downgraded to (P)Ba1 from (P)Baa3

....Junior Subordinate Shelf, Downgraded to (P)Baa3 from (P)Baa2

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

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

....Senior Secured Revenue Bonds, Downgraded to Aa3 from Aa2

Outlook Actions:

..Issuer: Duke Energy Carolinas, LLC

....Outlook, Remains Stable

..Issuer: Duke Energy Corporation

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Duke Energy Florida, Inc.

....Outlook, Remains Stable

..Issuer: Duke Energy Indiana, Inc.

....Outlook, Remains Stable

..Issuer: Duke Energy Kentucky, Inc.

....Outlook, Remains Stable

..Issuer: Duke Energy Ohio, Inc.

....Outlook, Remains Stable

..Issuer: Duke Energy Progress, LLC

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Progress Energy Capital Trust II

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Progress Energy, Inc.

....Outlook, Changed To Stable From Rating Under Review

Affirmations:

..Issuer: Boone (County of) KY

....Senior Unsecured Revenue Bonds, Affirmed Baa1

..Issuer: Citrus (County of) FL

....Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Duke Energy Carolinas, LLC

.... Issuer Rating, Affirmed A1

....Subordinate Shelf, Affirmed (P)A2

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

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

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

....Senior Secured Medium-Term Note Program, Affirmed (P)Aa2

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

..Issuer: Duke Energy Corporation

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

..Issuer: Duke Energy Florida, Inc.

.... Issuer Rating, Affirmed A3

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

....Senior Unsecured Shelf, Affirmed (P)A3

....Subordinate Shelf, Affirmed (P)Baa1

....Senior Secured First Mortgage Bonds, Affirmed A1

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: Duke Energy Indiana, Inc.

.... Issuer Rating, Affirmed A2

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

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

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

....Senior Secured Regular Bond/Debenture, Affirmed Aa3

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

..Issuer: Duke Energy Kentucky, Inc.

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

..Issuer: Duke Energy Ohio, Inc.

.... Issuer Rating, Affirmed Baa1

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

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

....Senior Secured First Mortgage Bonds, Affirmed A2

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

..Issuer: Indiana Finance Authority

....Senior Secured Revenue Bonds, Affirmed Aa3

....Senior Unsecured Revenue Bonds, Affirmed A2

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

....Senior Unsecured Revenue Bonds, Affirmed A2

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

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed A1

..Issuer: Oconee (County of) SC

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed P-1

..Issuer: Ohio Air Quality Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Baa1

..Issuer: Person County Industrial Facilities & P

....Senior Secured Revenue Bonds, Affirmed Aa2

..Issuer: Princeton (City of) IN

....Senior Unsecured Revenue Bonds, Affirmed A2

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

....Senior Secured Revenue Bonds, Affirmed Aa2

Duke Energy Corporation is a holding company for intermediate holding company Progress Energy, Inc., and regulated utilities Duke Energy Carolinas, LLC, Duke Energy Progress, Inc., Duke Energy Florida, Inc., Duke Energy Indiana, Inc., Duke Energy Ohio, Inc. and Duke Energy Kentucky, Inc. as well as a renewable power business in the US and international business activities in Central and South America. Duke Energy is headquartered in Charlotte, North Carolina.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Michael G. Haggarty
Associate Managing Director
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

William L. Hess
MD - Utilities
Infrastructure 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 downgrades Duke, Progress, and Duke Energy Progress; Duke outlook negative
No Related Data.
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