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Rating Action:

Moody's places Duke Energy and three utility subsidiaries on review for possible upgrade

09 Jul 2013

Approximately $22 billion of debt securities on review

New York, July 09, 2013 -- Moody's Investors Service placed the long-term ratings of Duke Energy Corporation (Duke Energy, Baa2 senior unsecured) and utility subsidiaries Duke Energy Carolinas, LLC (A3 senior unsecured), Duke Energy Progress, Inc., (A3 issuer rating), and Duke Energy Indiana, Inc. (Baa1 senior unsecured) on review for possible upgrade. The ratings of Duke Energy Florida, Inc. (Baa1 senior unsecured, stable outlook); Duke Energy Ohio, Inc. (Baa1 senior unsecured, stable outlook); Duke Energy Kentucky, Inc. (Baa1 senior unsecured, stable outlook); and intermediate holding company Progress Energy, Inc. (Progress, Baa2 senior unsecured, stable outlook) are not on review and are affirmed with a stable outlook. Duke's Prime-2 short-term rating for commercial paper is also not on review and is affirmed.

Rating Rationale

"The review of the ratings of Duke Energy and three of its subsidiaries is prompted by the resolution of several key uncertainties that had faced the company over the past year and the commensurate reduction in its risk profile" said Michael G. Haggarty, Senior Vice President. These positive developments include commercial operation of the Edwardsport Integrated Gasification Combined Cycle (IGCC) plant in Indiana; rate settlements at both of its North Carolina utilities; a regulatory agreement in North Carolina on outstanding issues associated with the management changes made following its merger with Progress Energy; and the clarification of succession plans with the appointment of the company's Chief Financial Officer to be its CEO.

The review of the ratings of Duke Energy Carolinas and Duke Energy Progress will evaluate the impact that the recent rate settlements will have on the future financial performance of each utility; the progress being made on joint dispatch, fuel, and other integration plans since the merger; a pending rate case in South Carolina; the impact of coal unit retirements at both utilities, and the credit supportiveness of the overall regulatory environment in both North and South Carolina. The review of Duke Energy Progress will also consider that utility's ongoing obligation, along with Duke Energy Florida, to service approximately $4 billion of debt at the intermediate Progress Energy holding company.

The review of the ratings of Duke Energy Indiana considers the start-up of the long delayed Edwardsport IGCC plant and will evaluate the progress of additional testing that is required over the next several months to bring the plant up to full operation; the implementation of riders and other cost recovery mechanisms associated with the plant; the prospects for any base rate filings following the expiration of the company's rate freeze; prospective financial coverage metrics now that the Edwardsport construction has been completed; and the regulatory framework in Indiana, which appears to have remained credit supportive despite the higher costs and delays associated with completing Edwardsport.

The rating of parent company Duke Energy will in large part be dependent on the outcome of the review of the ratings of its three largest utility subsidiaries. The Duke Energy review will also focus on the amount of holding company debt at both the parent and the intermediate Progress holding company, which has approached 30% of consolidated Duke Energy debt following the merger; future trends with regard to these debt levels; the prospect that consolidated financial coverage metrics will improve to levels closer to historical results; expectations for the growth of Duke Energy's non-US utility commercial, international, and renewable businesses; and the ability and inclination for Duke Energy to access over $1 billion of offshore cash to pay down debt at the parent. The review will also consider the higher diversity of cash flow sources supporting Duke Energy's debt obligations since the merger.

The affirmation of Duke Energy Florida's Baa1 rating with a stable outlook reflects the ongoing impact that the Crystal River nuclear plant will have on the utility's financial performance despite the regulatory and operational clarity resulting from the decision to permanently retire the plant. Cash flow coverage metrics have been negatively affected by under-recovery of replacement power costs and we expect them to remain at levels that are adequate for its current Baa1 rating, including CFO pre-working capital to debt close to the 20% range. Although the Florida regulatory environment has improved over the last few years, with a base rate freeze in place until 2016 and the Crystal River nuclear plant removed from rate base, prospects for improved financial coverage metrics at Duke Energy Florida are limited.

The affirmation of Duke Energy Ohio's Baa1 rating with a stable outlook reflects the hybrid nature of its operations, with a stable, lower risk regulated transmission and distribution business offset by a more volatile and higher risk unregulated generation business selling power into the wholesale power markets. Although Duke Ohio is in the midst of an Electric Security Plan (ESP) that includes a non-bypassable electric security stability charge of $110 million per year to bolster cash flow, the overall provisions of the ESP have resulted in a lower revenues, earnings, and cash flow from the utility's generating assets. Although the parent has reduced debt at the utility to maintain an investment grade capital structure and Duke Ohio has requested approval for a cost-based capacity charge that would improve cash flow, its higher risk commercial business and the overall uncertainty regarding the future structure and role of this business within the Duke organization constrains Duke Ohio's rating to a large degree.

The affirmation of the Baa1 rating of Duke Energy Kentucky with a stable outlook reflects its relatively low business risk profile and credit supportive regulatory environment, despite a two year rate freeze in place through the middle of this year. The utility's historically strong financial metrics are expected to decline modestly going forward with significantly higher capital expenditures and increased debt levels over the next few years. In addition, the utility's relatively small size and position as a wholly owned subsidiary of Baa1 rated Duke Energy Ohio are rating constraints.

The affirmation of the Baa2 rating of Progress Energy with a stable outlook considers the high $4 billion of debt at the intermediate holding company, the less diverse sources of cash flow supporting this debt compared to the debt at ultimate parent Duke Energy; the Baa1 rating and stable outlook of subsidiary Duke Energy Florida; and cash flow coverage metrics that continue to be weak for its current Baa2 rating. Although the merger with Duke improved Progress Energy's long-term strategic position, it was overall credit neutral as it did little to reduce the high level of intermediate holding company debt. The Progress Energy debt is not guaranteed by Duke Energy, but relies solely on the upstreamed dividends from its two utility subsidiaries Duke Energy Progress and Duke Energy Florida.

Ratings under review for possible upgrade include:

Duke Energy's Baa2 senior unsecured and Issuer Rating, and Baa3 junior subordinated;

Duke Energy Carolinas A1 senior secured, A3 senior unsecured and Issuer Rating;

Duke Energy Progress A1 senior secured,A3 Issuer Rating;

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

Ratings affirmed include:

Duke Energy's Prime-2 short-term rating for commercial paper;

Duke Energy Florida's A2 senior secured, Baa1 senior unsecured and Issuer Rating; Baa3 preferred stock;

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

Duke Energy Kentucky's Baa1 senior unsecured

Progress Energy's Baa2 senior unsecured.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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 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 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 rating action, and whose ratings may change as a result of this 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
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

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 places Duke Energy and three utility subsidiaries on review for possible upgrade
No Related Data.
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