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Rating Action:

Moody's puts Duke Energy, Progress Energy and Duke Energy Progress on review for downgrade

27 Oct 2015

Approximately $15 Billion of debt securities on review

New York, October 27, 2015 -- Moody's Investors Service placed the long-term ratings of Duke Energy Corporation (Duke, A3 senior unsecured), Progress Energy, Inc. (Progress, Baa1 senior unsecured), and Duke Energy Progress, Inc. (A1 senior unsecured) on review for downgrade. Duke's Prime-2 short-term rating for commercial paper is not on review. Moody's affirmed the ratings of 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 review of Duke's long-term ratings is prompted by yesterday's announcement that Duke had agreed to acquire Piedmont Natural Gas (A2 stable), a Charlotte based gas distribution company, for $4.9 billion in cash and the assumption of nearly $2 billion of debt" said Michael G. Haggarty, Associate Managing Director. Piedmont is a relatively low risk gas utility with a strong credit profile that will increase and diversify Duke's mostly electric utility business in the Carolinas and modestly increase the proportion of Duke's overall regulated utility business mix. "Despite Piedmont's attractive risk profile, the mostly debt financed acquisition at a particularly high multiple will result in a significant increase in Duke's already high parent company debt, which we expect will rise from 30% of consolidated debt to around 35% at closing, pressuring cash flow coverage metrics" added Haggarty.

The review of the ratings of Duke utility subsidiary Duke Energy Progress reflects financial coverage metrics that we expect to decline materially from historical levels due to increased O&M expenses and higher debt incurred for coal basin remediation and other capital expenditures. It also considers 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.

The review of intermediate holding company Progress Energy's ratings reflects the review for downgrade of Duke Energy Progress, the largest of its two utility subsidiaries, as well as the high level of legacy debt that remains at the Progress Energy level. The review of both Duke Energy Progress and Progress Energy also considers the weaker financial profile of the Duke parent company as a result of the Piedmont acquisition, which has a negative impact on the entire Duke corporate family.

We do not expect the review to lead to more than a one notch downgrade of the ratings of Duke Energy, Progress Energy, or Duke Energy Progress.

The review will focus on the amount of parent company debt to be issued by Duke to finance the Piedmont transaction, Duke's plans for reducing this debt going forward, the timing and structure of the limited amount of equity the company expects to issue, and the other cash flow sources Duke intends to use to reduce transaction financing requirements. The review will also consider the impact that the Piedmont acquisition will have on Duke's consolidated cash flow coverage metrics, which are already weak for its current rating and will likely fall further once the acquisition closes.

The review will consider Duke's strategic plans to use Piedmont as a platform for additional acquisitions in the natural gas infrastructure space, and the potential that Duke could become increasingly levered as it pursues such opportunities. Finally, the review will incorporate the continued challenges facing Duke in its higher risk international business segment, which it decided to retain after a year-long strategic review was concluded in 2014.

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 is seeking 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 2012 that provides clarity on the recovery of Edwardsport plant costs, 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 remain at 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 in place for the remainder of this year.

The principal methodology used in rating these issuers was Regulated Electric and Gas Utilities published in December 2013. 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 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.

On Review for Downgrade:

..Issuer: Duke Energy Corporation

.... Issuer Rating, Placed on Review for Downgrade, currently A3

....Junior Subordinated Regular Bond/Debenture, Placed on Review for Downgrade, currently Baa1

....Senior Unsecured Shelf, Placed on Review for Downgrade, currently (P)A3

....Subordinate Shelf, Placed on Review for Downgrade, currently (P)Baa1

....Senior Unsecured Bank Credit Facility, Placed on Review for Downgrade, currently A3

....Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)A3

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently A3

..Issuer: Duke Energy Progress, Inc.

.... Issuer Rating, Placed on Review for Downgrade, currently A1

....Subordinate Shelf, Placed on Review for Downgrade, currently (P)A2

....Senior Unsecured Shelf, Placed on Review for Downgrade, currently (P)A1

....Senior Secured Shelf, Placed on Review for Downgrade, currently (P)Aa2

....Senior Secured First Mortgage Bonds, Placed on Review for Downgrade, currently Aa2

..Issuer: Progress Energy Capital Trust II

....Pref. Stock Shelf, Placed on Review for Downgrade, currently (P)Baa2

..Issuer: Progress Energy, Inc.

....Senior Unsecured Shelf, Placed on Review for Downgrade, currently (P)Baa1

....Junior Subordinate Shelf, Placed on Review for Downgrade, currently (P)Baa2

....Preferred Shelf, Placed on Review for Downgrade, currently (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Baa1

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

....Senior Secured Revenue Bonds, Placed on Review for Downgrade, currently Aa2

Outlook Actions:

..Issuer: Duke Energy Carolinas, LLC

....Outlook, Remains Stable

..Issuer: Duke Energy Corporation

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

..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, Inc.

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

..Issuer: Progress Energy Capital Trust II

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

..Issuer: Progress Energy, Inc.

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

Affirmations:

..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

....Pref. Stock Preferred Stock (Local Currency), Affirmed Baa2

....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

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
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 puts Duke Energy, Progress Energy and Duke Energy Progress on review for downgrade
No Related Data.
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