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Rating Action:

Moody's revises outlook for Duke Energy to stable; affirms Duke and key subsidiaries

Global Credit Research - 12 May 2017

Approximately $44 billion of debt and credit facilities affected

New York, May 12, 2017 -- Moody's Investors Service, ("Moody's") today changed the rating outlook for Duke Energy Corporation (Duke, Baa1) to stable from negative. At the same time, Moody's affirmed Duke's ratings along with the ratings of its key electric utility subsidiaries Duke Energy Carolinas, LLC (Duke Energy Carolinas, A1), Duke Energy Progress, LLC (Duke Energy Progress, A2) and Duke Energy Florida, LLC (Duke Energy Florida, A3). Moody's also affirmed the ratings of Duke's intermediate subsidiary holding company, Progress Energy, Inc. (Progress Energy, Baa2) as well as Duke's Prime-2 short term rating for commercial paper. The rating outlook for Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida and Progress Energy is stable.

RATINGS RATIONALE

Duke's ratings and stable outlook are driven by its low business risk profile in which over 95% of earnings and cash flow are derived from rate regulated businesses operating in supportive regulatory environments. The rating affirmation recognizes Duke's consolidated cash flow credit metrics are currently weak for the rating, but incorporates a view that improvement will occur gradually as the company files general rate cases in its largest North Carolina jurisdictions and completes its generation projects in Florida. The rating affirmation also considers Duke's plans for increased capital expenditures across its utility businesses, which will maintain pressure on financial credit metrics in the near term, but recognizes the lower risk nature of investments that are being made across the distribution systems, including investments for state mandated environmental compliance, and to improve system integrity and reliability.

Following Duke's 2016 acquisition of Piedmont Natural Gas Company, Inc. (Piedmont, A2 stable) and the divestiture of its Latin American businesses, the company's unregulated operations now represent less than 5% of consolidated operations and are essentially limited to its highly contracted renewables business. The portfolio transformation reduced the risk profile of the organization, a credit positive; however, even after the repayment of a portion of the Piedmont acquisition debt with proceeds of the Latin American sale, cash flow metrics remain weak. For example, as of December 2016 Duke's ratio of cash available from operations excluding working capital changes, (CFO pre-WC) to debt was 13.5%. The metric has been negatively impacted by the timing of the Piedmont and Latin American transactions and the accounting treatment of expenditures for coal ash remediation. Adjusting for these items, the ratio would have been slightly above 15%.

Although Duke's credit metrics will likely remain near their current adjusted levels in 2017, which is generally more in line with Baa2 rated holding company peers such as Southern Company (Baa2 stable) and Dominion Energy, Inc. (Baa2 stable), Duke's Baa1 rating considers its lower business risk profile, and the scalability of its current investment plan. The rating and stable outlook also reflect our expectation that credit metrics will begin to slowly rebound in 2018 following the conclusion of rate cases in North Carolina and inclusion of Duke Energy Florida's Citrus County 1,640 MW combined cycle plant in rates.

Duke's parent level leverage is also expected to remain near current levels. At over 30% on a reported basis, it is a driving factor of the multi-notch differential between Duke's Baa1 rating and the approximate A2 weighted average rating of the debt at its utility subsidiaries.

The affirmation of the ratings of Duke's largest utilities, Duke Energy Carolinas and Duke Energy Progress, reflect their supportive regulatory environments in North Carolina and South Carolina, and our expectation that expenditures relating to coal ash remediation and other systems improvements will be recovered, albeit with some lag and over multiple years. In their smaller South Carolina jurisdiction, both utilities received regulatory approval to defer coal ash remediation expenditures for future recovery. Duke Energy Progress also received approval to begin recovering costs incurred through June 2016 over fifteen years. Duke plans to file base rate cases for both companies in North Carolina later this year. While we anticipate the cases will be concluded in a reasonable and timely manner, the lag in recovery of these, as well as other planned infrastructure investments, will continue to pressure financial credit metrics.

Through December 2016, Duke's coal ash remediation expenditures in the Carolinas totaled about $775 million, with about $500 million incurred during 2016. We expect annual coal ash expenditures will remain near these levels for the foreseeable future while investment in the utilities' distribution systems also ramps up. As a result, going forward we expect Duke Energy Carolinas' ratio of CFO pre-WC to debt will remain in the mid-to-high twenty percent range versus around 30% over the 2013-2015 period. At Duke Energy Progress, we expect the metric will rebound from the high teens to the low twenty percent range. The affirmation of the A1 rating for Duke Energy Carolinas and A2 rating for Duke Energy Progress recognizes the differential in credit statistics between the two organizations, and incorporates our assumption of continued regulatory support for both utilities. The ratings consider the lower risk nature of Duke's current investment program, which is intended to upgrade and strengthen its energy grid, and we anticipate the company will retain its ability adjust expenditures accordingly to reflect variations in weather, economic or regulatory conditions. The ratings also recognize the potential for credit metrics to be somewhat stronger if Duke is successful in its efforts to achieve lag reducing regulatory modifications such as multi-year rate cases or rider mechanisms.

The affirmation of the ratings of Duke Energy Florida reflects the supportive Florida regulatory environment and the predictability of cash flow that stems from existing cost recovery mechanisms. In particular, the generation base rate adjustment (GBRA) provides recovery for new generation the utility completes or purchases in 2016 -- 2018; this covers the over 2,000 MW of natural gas-fired resources the utility has been adding during this period. The recovery parameters for approved projects have been pre-determined, providing certainty of cash flow; however, recovery does not begin until projects are placed in service. In February and April 2017, Duke Energy Florida began recovery of costs incurred to purchase the approximately 600 MW Osprey plant, and to complete an approximate 220 MW uprate project at its Hines energy center. However, recovery of the utility's largest project, the completion of a $1.5 billion combined cycle plant in Citrus County, which began in 2015, will not begin until 2018. As such, in 2018 we expect credit metrics will strengthen from current levels, for example, we anticipate the ratio of CFO pre-WC to debt will move to about 20% versus approximately 16% as of December 2016.

The affirmation of intermediate holding company Progress Energy's Baa2 rating reflects its structurally subordinate position vis-à-vis the debt at its two utility subsidiaries, Duke Energy Progress and Duke Energy Florida, and the high level of parent company debt (currently over 25%) at Progress Energy.

Rating Outlook

The stable outlook for Duke, Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida and Progress Energy assumes a continuation of their supportive regulatory relationships, that the companies will continue their focus on cost control and strategic optimization, and that credit metrics will begin to improve in 2018.

Factors that Could Lead to an Upgrade

The ratings could be upgraded if there were to be a significant increase in cash flow, or reduction in leverage resulting in a material improvement in credit metrics. For example, a ratio of CFO pre-WC to debt closer to 20% at Duke; above 30% at Duke Energy Carolinas; above 25% at Duke Energy Progress; and above 22% at Duke Energy Florida could put upward pressure on the respective ratings. An upgrade of Duke Energy Progress or Duke Energy Florida could lead to an upgrade of Progress Energy. A reduction of Progress Energy parent level debt could also lead to an upgrade of Progress Energy.

Factors that Could Lead to a Downgrade

Downward rating action could be considered if there were to be a deterioration in the regulatory relationship at Duke Energy Carolinas, Duke Energy Progress, or Duke Energy Florida. To the extent regulatory lag is more pronounced than anticipated, or if there were to be an increase in costs or leverage such that the gradual improvement we expect in credit metrics beginning 2018 does not materialize, there could be downward pressure on the rating. For example, a ratio of CFO pre-WC to debt remaining below 15% at Duke; below 25% at Duke Energy Carolinas; below 20% at Duke Energy Progress; or below the high teens at Duke Energy Florida, could put downward pressure on the respective ratings. At Duke, parent company debt levels above 35% of total Moody's adjusted consolidated debt for an extended period could also put downward pressure on its ratings. A downgrade of one or more of Duke's largest subsidiaries could lead to a downgrade of Duke or Progress Energy.

Outlook Actions:

..Issuer: Duke Energy Carolinas, LLC

....Outlook, Remains Stable

..Issuer: Duke Energy Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Duke Energy Florida, LLC.

....Outlook, Remains Stable

..Issuer: Duke Energy Progress, LLC

....Outlook, Remains Stable

..Issuer: Progress Energy, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Duke Energy Carolinas, LLC

.... Issuer Rating, Affirmed A1

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

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

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

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

..Issuer: Duke Energy Corporation

.... Issuer Rating, Affirmed Baa1

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa2

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

....Senior Unsecured Bank Credit Facility, Affirmed Baa1

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

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

..Issuer: Duke Energy Florida, LLC.

.... Issuer Rating, Affirmed A3

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

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

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

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

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

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

..Issuer: Duke Energy Progress, LLC

.... Issuer Rating, Affirmed A2

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

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

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

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

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed A1

..Issuer: Person County Industrial Facilities & P

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underyling Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: Progress Energy, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

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

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: CITRUS (COUNTY OF) FL

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

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

Duke Energy Corporation is a holding company for intermediate holding company Progress Energy, Inc., and regulated utilities Duke Energy Carolinas, LLC, Duke Energy Progress, LLC, Duke Energy Florida, LLC, Duke Energy Indiana, LLC, Duke Energy Ohio, Inc., Duke Energy Kentucky, Inc., and Piedmont Natural Gas Company, Inc. as well as commercial renewables and natural gas infrastructure businesses in the US. 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.

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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