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Rating Action:

Moody's revises outlook of Duke Energy and Duke Ohio to stable; upgrades Progress Energy; and downgrades Piedmont

01 Aug 2018

Approximately $60 billion of debt and credit facilities affected

New York, August 01, 2018 -- Moody's Investors Service, (Moody's) revised 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 electric utility subsidiaries: Duke Energy Carolinas, LLC (Duke Energy Carolinas, A1), Duke Energy Progress, LLC (Duke Energy Progress, A2), Duke Energy Florida, LLC. (Duke Energy Florida, A3), Duke Energy Indiana, LLC. (Duke Energy Indiana, A2), Duke Energy Ohio, Inc. (Duke Energy Ohio, Baa1), and Duke Energy Kentucky, Inc. (Duke Energy Kentucky, Baa1). The rating outlook for Duke Energy Ohio was revised to stable from positive.

Concurrent with today's action, Moody's upgraded the ratings of Duke's intermediate subsidiary holding company, Progress Energy, Inc. (Progress Energy, senior unsecured to Baa1 from Baa2), and downgraded the ratings of its natural gas distribution subsidiary, Piedmont Natural Gas Company, Inc. (Piedmont, senior unsecured to A3 from A2 and short-term rating for commercial paper to P-2 from P-1). The rating outlook for Duke and all of its subsidiaries is stable.

RATINGS RATIONALE

"While we expect Duke's financial credit metrics will remain weak for its current Baa1 rating, this is balanced by the scale, diversity, and predictability of its utility operations in strong economies with credit supportive regulators" said Laura Schumacher, Senior Credit Officer. The stabilization of Duke's rating outlook recognizes the actions taken by the company in 2018 to support credit quality and mitigate the negative cash flow impacts of federal tax reform, including balance sheet strengthening as well as pro-active engagement with regulators. The stable outlook acknowledges recent rate case outcomes in Duke's largest jurisdictions, which when combined with ongoing management focus on cost control, regulatory relationships and prudent financial policies should enable a modest improvement in cash flow based financial metrics beginning in 2019.

Duke's near term revenues and cash flow are being negatively impacted by the 2017 Tax Cuts and Jobs Act (TCJA) which reduced the corporate tax rate and eliminated bonus depreciation for utilities. As a result, cash flow based credit metrics, which had already declined in 2016 following Duke's acquisition of Piedmont, will remain depressed through 2018. For example, for the twelve months ending March 2018, we calculate Duke's ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt to be about 14%, which is at the lower end of the "Baa" scoring range for this metric in our rating methodology for regulated electric and gas utilities.

To support its balance sheet in view of these lower cash flows, Duke is issuing approximately $2 billion of equity in 2018 and plans to issue an additional approximately $350 million annually through at least 2022. The company has also lowered its five year capital expenditure plans by about $1 billion and, due to the scalable nature of its capital programs, has the flexibility for additional modifications. While these adjustments are sizeable, the impact on credit metrics is muted by the scale of Duke's consolidated operations, which currently generate about $8 billion of CFO pre-WC, and support about $55 billion of debt. At the same time, this significant size provides an ability to more easily withstand the negative impacts of unforeseen events such as storms, unplanned outages, adverse regulatory outcomes, or other operational challenges. Following Duke's actions and recent rate case outcomes, beginning in 2019, Moody's calculates a ratio of CFO pre-WC to debt above 15%.

The rating affirmation for Duke's largest utility subsidiaries, Duke Energy Carolinas and Duke Energy Progress, both of which operate in North and South Carolina, reflect recent credit supportive rate case outcomes in their primary North Carolina jurisdiction. In June, the North Carolina Utilities Commission (NCUC) issued an order for Duke Energy Carolinas that established revenues based on 9.9% return on equity, and a 52% equity base. These parameters mirror an earlier order for Duke Energy Progress.

Importantly, the North Carolina orders also resolved issues relating the recovery of costs for coal ash remediation. Spending for coal ash remediation has been deemed reasonable and prudent and, with the exception of a specific manageable penalty assessed in each case, the companies have been authorized to recover their prior expenditures over five years with a full debt and equity return. Ongoing expenditures will continue to be deferred for future recovery. In South Carolina, Duke Energy Progress previously received authorization to recover coal ash remediation costs over fifteen years with a full return. We view the ability to earn a full return on these expenditures, and to recover them over reasonable time frames, as credit positive. As a result of this rate base like treatment, we currently view the spending for coal ash remediation to be akin to a capital expenditure.

Duke Energy Carolinas' North Carolina order also addressed the impact of federal tax reform. The company's revenue requirement was reduced by the full amount of the change in tax rate to 21% from 35%. However, the company has been allowed to retain all excess federal deferred taxes for three years, or until its next rate case whichever is sooner. At that time, the NCUC will evaluate how to best return this value to customers. We believe the form of return could include accelerated recovery of certain expenses, or the avoidance of rate increases. We would view these outcomes as credit positive, and we believe the decision will likely set a precedent for similar treatment at Duke Energy Progress.

The NCUC did however deny Duke's requests for rider recovery for grid modernization investments and ongoing coal ash remediation. As a result, there will continue to be regulatory lag associated with these expenditures and we expect the utilities will file frequent rate cases to minimize this exposure. Our stable outlook assumes a continuation of supportive regulatory outcomes that will allow the companies to maintain cash flow based credit metrics at levels that are appropriate for their ratings. For example, at Duke Energy Carolinas, a ratio of CFO pre-WC to debt around 25%, and at Duke Energy Progress a ratio around 22%.

The affirmation of Duke Energy Florida's ratings recognizes regulatory orders on the forefront of federal tax reform that are supportive of credit quality. Duke Energy Florida's 2017 rate order included provisions that authorized the utility to use a portion of the future benefits of lower tax rates to accelerate the depreciation of existing coal plants rather than decreasing revenue. In January 2018, the Florida Public Service Commission authorized Duke Energy Florida to utilize the remainder of the benefits of lower tax rates to avoid a rate increase for power restoration costs associated with the company's 2017 response to Hurricane Irma. We view these tax reform related developments as supportive of credit quality, and as a result, we expect the utility will be able to maintain a ratio of CFO pre-WC to debt in the high-teens range.

The Baa1 rating upgrade for intermediate parent company Progress Energy is driven by the structurally subordinate position of its debt vis-à-vis the debt at its utility subsidiaries. The upgrade to Baa1 from Baa2 reflects a decrease in the notching from A3 rated Duke Energy Florida and A2 rated Duke Energy Progress. The upgrade recognizes a reduction in the percentage of intermediate parent level debt as compared to total consolidated Progress Energy total debt. As of December 2017, including Moody's standard adjustments, intermediate parent level debt was approximately 20% of the consolidated total.

The affirmation of Duke Energy Indiana's A2 rating recognizes a credit supportive regulatory environment that should allow the utility to maintain its financial performance, including a ratio of CFO pre-WC to debt of around 22%. The utility is able to recover the majority of its grid modernization investment and coal ash related expenditures via riders, and to defer unrecovered balances for future recovery. In June 2018, Duke Energy Indiana reached a settlement with key intervenors on tax reform. The settlement calls for a flow through of the reduction in tax rate to 21% from 35% beginning in September. However, the protected portion of excess deferred taxes will be retained until January 2020, after which it will be returned over approximately 26 years. The unprotected portion will be returned over 10 years, but to mitigate the impact on cash flow based credit metrics, the amount is lower in the first five years.

Duke Energy Ohio's Baa1 rating reflects a credit supportive regulatory environment that includes a large number of riders and trackers for investment in the company's transmission and distribution systems. A settlement agreement reached in April 2018 with major intervenors will allow the continuation of fourteen existing riders and the addition of two new riders. Credit metrics have historically been strong for the rating, and a factor supporting our previous positive outlook. However, we now expect the combination of lower cash flow due to tax reform, and increased debt funding for capital expenditures in light of predictable rider recovery, to cause credit metrics to weaken. For example, we now expect Duke Energy Ohio will maintain a ratio of CFO pre-WC to debt in the mid-teens, versus the current level of about 20%.

Duke Energy Kentucky's Baa1 rating reflects a credit supportive regulatory environment that allows rider recovery for coal ash remediation costs and a flow back of unprotected excess deferred taxes over ten years. Cash flow based credit metrics have historically been strong for the rating, for example a ratio of CFO pre-WC to debt around 20%. Going forward, we expect this metric to be maintained in the high-teens, which is supportive of this small vertically integrated utility's current rating.

The downgrade of Piedmont's long-term ratings is driven primarily by an increase in debt funded capital expenditures as the company undertakes integrity management programs as well as expansions to supply additional gas fired generating facilities. The utility benefits from supportive regulatory environments in North Carolina, South Carolina and Tennessee, including rider recovery for much of it spending. However, the long-lived nature of its assets increases time to recovery and puts downward pressure on credit metrics. As a result, going forward, we expect Piedmont's ratio of CFO pre-WC to debt to fall to the low-to-mid teens, as compared to current levels that are in the high-teens. The downgrade of Piedmont's short-term rating to P-2 from P-1 follows the downgrade Piedmont's long-term rating to A3 and reflects our standard mapping practice.

Rating Outlook

The stable outlook for Duke and all of its subsidiaries reflects our expectation that the companies will maintain supportive regulatory relationships in all of their jurisdictions. The outlook also assumes management will manage its operating, capital and financing plans in a manner that supports credit quality and enables the maintenance of credit metrics that are consistent with our expectations.

Factors that could lead to an upgrade

Although not likely in the near term, upward pressure on ratings could develop if regulatory environments were to become more supportive, that could result in increased cash flow, or if there were to be reductions in leverage leading to materially stronger credit metrics.

For example: at Duke, a consolidated ratio of CFO pre-WC to debt above 18% on a sustainable basis; at Duke Energy Carolinas a ratio above 30%; at Duke Energy Progress and Duke Energy Indiana a ratio above 25%; at Duke Energy Florida a ratio above 22%; and, at Duke Energy Ohio and Duke Energy Kentucky a ratio at or above 20% respectively. An upgrade of Duke Energy Progress or Duke Energy Florida could put upward pressure on the rating of Progress Energy. At Piedmont, a ratio of CFO pre-WC to debt above 18% could put upward pressure on the rating.

Factors that could lead to a downgrade

Downward rating action could be considered if there were to be a deterioration in the credit supportiveness of the regulatory relationships at Duke's subsidiaries, that could result in a reduction in cash flow. A material increase in operating or capital expenditures that is not able to be recovered on a timely basis, or an increase in leverage leading to weaker credit metrics could put downward pressure on the ratings.

For example: at Duke a consolidated ratio of CFO pre-WC to debt sustained below 15% beyond 2018; at Duke Energy Carolinas a ratio below 25%; at Duke Energy Progress and Duke Energy Indiana a ratio below 22%; at Duke Energy Florida a ratio below 19%; and, at Duke Energy Ohio and Duke Energy Kentucky a ratio below 15%. A downgrade of Duke Energy Progress or Duke Energy Florida could put downward pressure on the rating of Progress Energy. At Piedmont, a ratio of CFO pre-WC to debt below 14% could put downward pressure on the rating.

Outlook Actions:

..Issuer: Duke Energy Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Duke Energy Carolinas, LLC

....Outlook, Remains Stable

..Issuer: Duke Energy Florida, LLC.

....Outlook, Remains Stable

..Issuer: Duke Energy Indiana, LLC.

....Outlook, Remains Stable

..Issuer: Duke Energy Kentucky, Inc.

....Outlook, Remains Stable

..Issuer: Duke Energy Ohio, Inc.

....Outlook, Changed To Stable From Positive

..Issuer: Duke Energy Progress, LLC

....Outlook, Remains Stable

..Issuer: Piedmont Natural Gas Company, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Progress Energy, Inc.

....Outlook, Remains Stable

Affirmations:

..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 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: North Carolina Capital Facilities Fin. Agy.

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed A1

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

..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: Citrus (County of) FL

....Senior Secured Revenue Bonds, Affirmed A1

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

..Issuer: Duke Energy Indiana, LLC.

.... Issuer Rating, Affirmed A2

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

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

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

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

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

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

..Issuer: Indiana Finance Authority

....Senior Secured Revenue Bonds, Affirmed Aa3

....Senior Unsecured Revenue Bonds, Affirmed A2

....Underlying Senior Unsecured Revenue Bonds, Affirmed A2

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

..Issuer: Princeton (City of) IN

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Duke Energy Kentucky, Inc.

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

..Issuer: Boone (County of) KY

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Underlying Senior Unsecured Revenue Bonds, 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: Ohio Air Quality Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa1

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

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa1

..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: Person County Industrial Facilities & P

....Senior Secured Revenue Bonds, Affirmed Aa3

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

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

....Senior Secured Revenue Bonds, Affirmed Aa3

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

Downgrades:

..Issuer: Piedmont Natural Gas Company, Inc.

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Upgrades:

..Issuer: Progress Energy, Inc.

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

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 is headquartered in Charlotte, North Carolina.

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.

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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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