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Rating Action:

Moody's revises Duke Ohio outlook to positive, ratings affirmed

Global Credit Research - 10 Aug 2017

Approximately $2 billion of debt affected

New York, August 10, 2017 -- Moody's Investors Service ("Moody's") revised the outlook for Duke Energy Ohio, Inc. (Duke Ohio, Baa1) to positive from stable and affirmed its existing ratings. The ratings of Duke Ohio's utility subsidiary, Duke Energy Kentucky, Inc. (Duke Kentucky, Baa1 stable) were also affirmed. The outlook for Duke Kentucky remains stable. Duke Ohio is a subsidiary of Duke Energy Corporation (Duke Energy, Baa1 stable).

RATINGS RATIONALE

The positive outlook for Duke Ohio recognizes financial credit metrics that are expected to remain strong for a high Baa rated transmission and distribution utility operating in a supportive regulatory environment. The outlook considers the lower risk nature of the company's business and operating profile as a company that no longer owns merchant generation assets and recognizes the supportive regulatory framework that has been demonstrated in recent years in Ohio. The positive outlook reflects our expectation of continued strong cash flow metrics, for example a ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt in the range of 20%. Our view also considers Duke Ohio's ownership of the smaller, vertically integrated, and neighboring, electric and gas operations of Duke Kentucky.

Duke Energy's 2015 transfer of its ownership interest in Ohio generating assets eliminated a more risky, volatile business from the company's predominantly regulated utility operations and completed the transition of Duke Ohio into a transmission and distribution company. Duke Ohio's generation ownership is currently limited to its 9% (approximately 200 MW) interest in Ohio Valley Electric Corp (OVEC, Ba1 negative) a generation cooperative that owns two coal-fired generating plants in Ohio and Indiana; and its ownership of Duke Kentucky, an electric and gas utility with about $600 million of electric earnings base (approximately 20% of Duke Ohio) including around 1,062 MW of generating capacity. We view electric and gas transmission and distribution utilities as having a lower operating risk profile than vertically integrated electric utilities.

We see the Ohio regulatory environment under the Public Utilities Commission of Ohio (PUCO) as supportive to credit quality of transmission and distribution utilities. For the past several years, as the state has been restructuring its electric industry, utilities have been operating under individually tailored electric security plans (ESPs) for their standard service offers. Duke Ohio is currently operating under its third ESP, ESP III, which covers the three years beginning June 2015 and ending May 2018. Under its current ESP, the company utilizes a competitive procurement process to supply all of its customers' energy and capacity needs, and plans to continue to do so in the future. Duke Ohio also benefits from numerous riders and trackers including a distribution capital investment rider, riders for retail energy and capacity, energy efficiency and distribution decoupling. In its most recent filings, which include a request for ESP IV as well as an electric distribution rate case, Duke Ohio has requested continuation of existing riders, the implementation of additional riders, and authorization to adjust its price stabilization rider to pass through the net cost of its contractual commitments to OVEC. We view the use of numerous riders and trackers as supportive of credit quality as they result in more stable and predictable cash flow for the utility.

We expect Duke Ohio's financial metrics to remain at levels that are strong for a high Baa-rated transmission and distribution utility. Going forward, we anticipate the ratio of CFO Pre-WC to debt will remain in the high teens to 20% range. These metrics include the results of subsidiary Duke Kentucky, which are consolidated into the financial statements of Duke Ohio. When evaluated in light of the standard business risk grid factors (used for vertically integrated electric utilities such as Duke Kentucky), Duke Ohio's overall credit metrics are still strong for the rating.

Duke Kentucky - Utilities in Kentucky benefit from timely cost adjustment mechanisms for the recovery of fuel, purchased power and environmental compliance costs, and the company has historically been able generate strong cash flow credit metrics. However, Duke Kentucky has not filed for a general rate increase in many years. The company's last case was decided 11 years ago based on a settlement agreement, and its last ROE decision was in 1992 when an 11.5% return was established. Duke Kentucky recently announced that it intends to submit an electric base rate application around September 1st where it will seek to recover costs incurred for ash basin repurposing and for the installation of automated metering equipment. To the extent Duke Kentucky's upcoming rate case is decided in a reasonably timely and supportive fashion, such that credit metrics could be expected to remain near their current levels; for example CFO pre-WC to debt above 22%, there could be upward pressure on Duke Kentucky's rating or outlook.

Rating Outlook

The positive outlook for Duke Ohio's ratings reflects our view of a credit supportive regulatory environment and our expectation that the utility will continue to demonstrate strong financial metrics.

Factors that Could Lead to an Upgrade

Duke Ohio's rating could be upgraded if the company receives reasonably supportive treatment in its current rate proceedings, including the continuation of riders and other recovery mechanisms to maintain cash flow stability. If financial credit metrics are maintained at or above their current levels, for example, if the ratio of cash from operations excluding changes in working capital (CFO pre-WC) to debt remains near 20%, there could be upward pressure on the rating.

Factors that Could Lead to a Downgrade

The rating could be downgraded if the company's regulatory environments become less supportive or less consistent, or If there were to be a significant increase in leverage, or reduction in cash flow leading for example to a ratio of CFO pre-working to debt falling below the high teens on a sustained basis.

Outlook Actions:

..Issuer: Duke Energy Ohio, Inc.

....Outlook, Changed To Positive From Stable

..Issuer: Duke Energy Kentucky, Inc.

....Outlook, Remains Stable

Affirmations:

..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: 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: Duke Energy Kentucky, Inc.

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

..Issuer: Boone (County of) KY

....Senior Unsecured Revenue Bonds, Affirmed Baa1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Duke Ohio is an electric and gas utility providing electric service to approximately 850,000 customers and transmission and distribution of natural gas to about 529,000 customers covering a 3,000 square mile area in southwestern Ohio and part of Kentucky.

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.

Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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