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Rating Action:

Moody's upgrades Duke Energy and five subsidiaries; outlooks stable

31 Jan 2014

Approximately $30 Billion of Debt Securities Upgraded

New York, January 31, 2014 -- Moody's Investors Service upgraded the long-term ratings of Duke Energy Corporation (senior unsecured and Issuer Rating to A3 from Baa1; junior subordinate to Baa1 from Baa2); Progress Energy, Inc. (senior unsecured to Baa1 from Baa2); Duke Energy Carolinas, LLC (senior secured to Aa2 from Aa3; senior unsecured and Issuer Rating to A1 from A2); Duke Energy Progress, Inc. (senior secured to Aa2 from Aa3, Issuer Rating to A1 from A2); Duke Energy Indiana, Inc. (senior secured to Aa3 from A1; senior unsecured to A2 from A3); and Duke Energy Florida Inc. (senior secured to A1 from A2, senior unsecured to A3 from Baa1, preferred stock to Baa2 from Baa3). Moody's also upgraded the short-term ratings on Duke Energy Carolinas' industrial development bonds (to P-1 from P-2; VMIG-1 from VMIG-2) and Duke Energy Indiana's industrial development bonds (to VMIG-1 from VMIG-2). Moody's confirmed the rating of Duke Energy Kentucky, Inc. (senior unsecured at Baa1). This rating action concludes our review of these companies' ratings initiated on November 8, 2013. The rating outlooks of Duke Energy and all of its subsidiaries are stable.

"The upgrades of Duke Energy and several of its utility subsidiaries reflect regulatory provisions in North Carolina, South Carolina, Indiana, and Florida that are consistent with our view of a generally improving regulatory environment for US electric and gas utilities", said Michael G. Haggarty, Senior Vice President.

RATINGS RATIONALE

The primary driver of today's rating action is Moody's more favorable view of the relative credit supportiveness of the US regulatory framework, as detailed in our September 23, 2013 Request for Comment: "Proposed Refinements to the Regulated Utilities Rating Methodology and our Evolving View of US Utility Regulation." Factors supporting this view include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators. The US utility sector's low number of defaults, high recovery rates, and generally strong financial metrics from a global perspective provide additional corroboration for these upgrades.

In June 2013, Duke Carolinas and the North Carolina Utilities Commission (NCUC) Public Staff reached a settlement agreement related to a general rate case filed by the company in February 2013, which was approved by the NCUC on September 24, 2013. The settlement agreement authorized a $235 million electric base rate increase over three years based on a 10.2% ROE (with a 53% equity ratio) and a total return of 7.88% based on a year-end rate base valued at $11.5 billion. Duke Carolinas agreed to file no new general base rate case before September 2015 except for new generation or new government regulations.

In July 2013, Duke Carolinas announced that it had reached a settlement agreement with the South Carolina Office of Regulatory Staff and other interveners related to the general electric rate case filed in March 2013. The settlement agreement authorized a total rate increase of $118.6 million, which would be implemented over two years. The rate increase is based on a 10.2% ROE (with a 53% equity ratio) and a total return of 7.89% on a rate base valued at $4.229 billion. The settlement agreement was approved by the Public Service Commission of South Carolina.

In May 2013, the NCUC approved a settlement in the Duke Progress' 2012 North Carolina rate case allowing the utility a 10.2% ROE (with a 53% equity ratio), and a two-step rate increase of $147 million or 4.5% in the first year and an additional $31.4 million or 1% in the second year.

We view these rate settlements in North and South Carolina as credit supportive and an indication that the regulatory framework in these two states was not adversely affected by the management changes and other developments that occurred in 2012 upon closing of the merger with Progress Energy.

Duke Energy Indiana operates in a fully regulated environment with strong cost recovery provisions in place, and a history of settling rather than litigating rate cases. These cost recovery mechanisms permit timely recovery of costs, including purchased power, bad debt expense, and energy efficiency costs. We view Duke Indiana's overall regulatory framework and suite of cost recovery mechanisms as credit positive. The Indiana Utility Regulatory Commission (IURC) authorizes an allowed return on equity of approximately 10.5% on a roughly 45% equity ratio. In addition, Duke Indiana is permitted to retain a portion of its margins associated with off-system sales, adjust its fuel costs on a quarterly basis, and was able to recover CWIP during the company's Edwardsport IGCC plant construction project, all of which have contributed to reasonably stable and predictable returns.

In early June 2013, Duke Energy Indiana announced the start-up and commercial operation of the Edwardsport plant, a key milestone representing a major step toward resolving a significant uncertainty that had faced the company over the last several years. Some execution risk remains, as the plant is in the midst of up to a 15 month testing and optimization period. A 2012 settlement agreement with the IURC capped total cost recovery at $2.595 billon, resulting in a disallowance of project costs of $835 million. As part of the settlement, Duke Indiana agreed not to file a retail electric base rate prior to March 2013 but can recover the capped cost of the project and earn a return on those costs.

For Duke Energy Florida, the political and regulatory environment for investor-owned utilities in Florida has improved since highly political rate proceedings several years ago resulted in some adverse rate case outcomes. Since that time, there has been an almost complete turnover of commissioners on the Florida Public Service Commission, with the commission now viewed as credit positive, with the utility's 2012 and 2013 rate settlements providing a degree of regulatory clarity for the utility.

In the most recent 2013 settlement agreement, reached on October 17, 2013, the FPSC approved a comprehensive settlement resolving all open issues associated with the company's decision to retire its Crystal River 3 nuclear plant, its proposed new Levy nuclear project, two Crystal River coal units, its new generation needs, and future base rate increases. Although the utility agreed to a base rate freeze through 2018, it can file for a rate increase if its earned ROE falls below 9.5%

The confirmation of the ratings of Duke Energy Kentucky reflects adequate but declining financial metrics, increasing capital expenditures, and anticipated higher debt levels that offset the generally credit supportive regulatory environment in Kentucky. The utility's cash flow pre-working capital to debt ratio has fallen from the 25% range in 2011 and prior years to the 20% range more recently, and is likely to fall into the low teens as debt levels rise. The utility has not filed for a rate increase in several years and has no immediate plans to file a base rate case. Duke Energy Kentucky's small size and status as a subsidiary of Baa1 rated Duke Energy Ohio, which was not placed on review for upgrade in November, are also rating constraints.

The upgrade of parent company Duke Energy reflects the upgrades of its four largest utility subsidiaries, the high proportion of lower risk, regulated businesses in the corporate family, and resolution of several key regulatory uncertainties over the last year. The upgrade of intermediate utility holding company Progress Energy reflects the upgrades of both of its regulated utility subsidiaries, Duke Energy Progress and Duke Energy Florida, generally credit supportive regulatory environments in its jurisdictions, and its completely regulated business mix.

Rating Outlook

The rating outlook of Duke Energy is stable, reflecting the low business risk profile of its predominantly regulated utility business, credit supportive regulatory environments, and the resolution of several long-term uncertainties, including conclusion of rate cases at its Carolina utilities, recovery of costs related to the Crystal River 3 nuclear plant, commercial operation of the Edwardsport IGCC plant, and the appointment of a new CEO and CFO in 2013. Although there is some continued uncertainty at Duke Energy Ohio, this utility represents a relatively small part of Duke's overall business.

The rating outlook of Progress Energy is stable, reflecting the relatively low business risk of its two regulated utility subsidiaries, the credit supportive Duke Energy Progress rate settlement in North Carolina, an improved utility regulatory framework in Florida, strong cost recovery provisions in both of its jurisdictions, offset by consolidated financial metrics that are expected to remain weak for its Baa2 rating range going forward. The stable outlook also reflects its position as part of the Duke Energy family, which has improved its overall strategic position.

The stable rating outlooks of Duke Energy Carolinas and Duke Energy Progress reflect both utility's relatively low business risk profiles, credit supportive regulatory frameworks in North and South Carolina, and financial metrics that are for the most part adequate for their ratings. It reflects our expectation that their capital expenditure programs will remain manageable and financed with a balanced mix of debt and equity. The stable outlook also reflects the potential benefits of joint dispatch and other operating efficiencies that should be generated from their affiliation, and their position as part of the larger, more diversified Duke Energy organization.

The stable rating outlook of Duke Energy Indiana reflects the utility's low business risk profile, the relatively credit supportive regulatory environment, and financial metrics that should continue to improve to levels appropriate for its current rating. It also reflects the completion and commercial operation of the Edwardsport plant and the recent implementation of plant related cost recovery mechanisms.

The stable rating outlook of Duke Energy Florida reflects the reduced uncertainty resulting from the Crystal River 3 retirement decision, the regulatory clarity provided by its 2013 rate settlement, and our view that the political and regulatory environment for investor owned utilities in Florida has improved. These factors largely offset the likelihood that financial metrics will remain weak for the rating category over its current rate settlement period

The stable rating outlook of Duke Energy Kentucky considers the utility's relatively supportive regulatory framework, which helps to offset our expectation that the company's credit metrics will decline from previously high levels and may temporarily fall below our ratio guidelines for its rating as it enters a period of high capital spending and associated debt issuance. It also recognizes the ability of the utility to seek emergency rate relief in the event its financial condition deteriorates to a material degree.

What Could Change the Rating - Up

Duke's Energy's rating could be raised if there is a material reduction of parent company debt, if one or more of its larger utility subsidiaries is upgraded, or if the company exhibits improved consolidated coverage metrics, including CFO pre-working capital to debt above 25% on a sustained basis.

An upgrade of Progress Energy is unlikely while there is a high level of debt at the Progress Energy intermediate holding company and consolidated coverage metrics are at the low end of the Baa rating range. An upgrade could be considered, however, if there is a material reduction in Progress Energy debt, a further upgrade of one or both of its utility subsidiaries, or a sustained improvement in consolidated cash flow coverage metrics, including a ratio of CFO pre-working capital to debt of 22% or higher.

An upgrade of Duke Energy Carolinas or Duke Energy Progress could be considered if there is further improvement in each utility's regulatory environment, if economic conditions in their service territory improve, or if cash flow coverage metrics increase to levels that are strong for its current rating, including CFO pre-working capital to debt above 30% on a sustained basis.

An upgrade of Duke Energy Indiana could be considered if there is material improvement in the utility's regulatory environment, or if there is an improvement in cash flow coverage metrics, including CFO pre-working capital to debt above 27% on a sustainable basis.

An upgrade of Duke Energy Florida is unlikely given financial metrics that are weak for the rating and a base rate freeze in place through 2018 but could be considered if there is a material improvement in cash flow coverage measures such that cash flow pre-working capital to debt is above 25% on a sustained basis.

An upgrade of Duke Energy Kentucky is unlikely while the utility's metrics are expected to decline and it has no immediate plans to file for base rate relief. However, an upgrade could be considered if financial metrics were to return to levels closer to historical results, including CFO pre-working capital to debt comfortably over 22% on a sustained basis. However, the utility's small size and position as a wholly-owned subsidiary of Duke Energy Ohio remain rating constraints.

What Could Change the Rating - Down

Duke Energy's rating could be downgraded if additional debt is issued at the parent company level, if there are adverse rate case outcomes or other negative regulatory developments at any of its major utilities, if one or more of its significant utility subsidiaries is downgraded, if the amount or risk of its unregulated business activities increases materially, or if consolidated financial metrics were to deteriorate, including CFO pre-working capital to debt below 20% on a sustained basis.

Progress Energy's rating could be downgraded if metrics remain at the low end of the Baa rating range for an extended period, including a ratio of CFO pre-working capital to debt below 17%; a decline in the credit supportiveness of the regulatory environments in Florida, North Carolina, or South Carolina; or an increase in leverage at the Progress Energy intermediate holding company.

The ratings of Duke Energy Carolinas or Duke Energy Progress could be downgraded if there is a decline in the credit supportiveness of the regulatory environments in North or South Carolina, if additional capital expenditures or other capital needs result in a material increase in debt levels; or if financial metrics fall to levels that would be considered weak for its rating, including CFO pre-working capital to debt below 27% on a sustained basis.

Duke Energy Indiana's rating could be downgraded if material additional costs are incurred during the testing and optimization of the Edwardsport plant or if there is a decline in the credit supportiveness of the utility's regulatory framework. The rating could also be pressured if financial metrics fall to levels considered weak for its rating, including with CFO pre-working capital to debt falling below 25% on a sustained basis.

Duke Energy Florida's rating could be downgraded if there is a decline in the supportiveness of the utility's regulatory framework in Florida or if cash flow coverage ratios do not recover from the unusually low levels experienced recently such that CFO pre-working capital to debt remains below 22% for an extended period.

Duke Energy Kentucky's rating could be downgraded if high capital expenditures result in a material increase in debt levels, if there is a decline in the credit supportiveness of the regulatory framework in Kentucky; or if there is a sustained decline in the company's CFO pre-working capital to debt to the mid-teens level or below.

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

Ratings upgraded and confirmed

Duke Energy Corporation

Issuer Rating to A3 from Baa1

Senior Unsecured to A3 from Baa1

Junior Subordinate to Baa1 from Baa2

Senior Unsecured Shelf to (P)A3 from (P)Baa1

Subordinate Shelf to (P)Baa1 from (P)Baa2

Duke Energy Carolinas, LLC

Issuer Rating to A1 from A2

Senior Secured to Aa2 from Aa3

Senior Unsecured to A1 from A2

Senior Secured Shelf (P)Aa2 from (P)Aa3

Senior Unsecured Shelf (P)A1 from (P)A2

Subordinate Shelf (P)A2 from (P)A3

Short-term Rating to Prime 1 from Prime 2; VMIG 1 from VMIG 2

Duke Energy Progress, Inc.

Issuer Rating to A1 from A2

Senior Secured to Aa2 from Aa3

Senior Secured Shelf (P)Aa2 from (P)Aa3

Senior Unsecured Shelf (P)A1 from (P)A2

Subordinate Shelf (P)A2 from (P)A3

Duke Energy Florida, Inc.

Issuer Rating to A3 from Baa1

Senior Secured to A1 from A2

Senior Unsecured to A3 from Baa1

Preferred Stock to Baa2 from Baa3

Senior Secured Shelf (P)A1 from (P)A2

Senior Unsecured Shelf (P)A3 from (P)Baa1

Subordinate Shelf (P)Baa1 from (P)Baa2

Duke Energy Indiana, Inc

Issuer Rating to A2 from A3

Senior Secured to Aa3 from A1

Senior Unsecured to A2 from A3

Senior Secured Shelf (P)Aa3 from (P)A1

Senior Unsecured Shelf (P)A2 from (P)A3

Short-term Rating to VMIG 1 from VMIG 2

Progress Energy, Inc

Senior Unsecured to Baa1 from Baa2

Senior Unsecured Shelf to (P)Baa1 from (P)Baa2

Subordinated Shelf (P)Baa2 from (P)Baa3

Preferred Shelf to (P)Baa3 from (P)Ba1

Duke Energy Kentucky, Inc

Senior Unsecured confirmed at 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
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 upgrades Duke Energy and five subsidiaries; outlooks stable
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