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Rating Action:

Moody's upgrades Duke Energy and three utility subsidiaries

25 Sep 2013

Approximately $22 billion of debt securities upgraded

NOTE: On October 30, 2013 , the press release was revised as follows: In the list of upgraded ratings, added “shelf” after “subordinate” and a (P) in front of the ratings for subordinate shelf. Revised release follows.

New York, September 25, 2013 -- Moody's Investors Service upgraded the long-term ratings of Duke Energy Corporation (Duke Energy) to Baa1 senior unsecured from Baa2 and utility subsidiaries Duke Energy Carolinas, LLC to A2 senior unsecured from A3, Duke Energy Progress, Inc. to A2 senior unsecured from A3, and Duke Energy Indiana, Inc. to A3 senior unsecured from Baa1. The rating outlook of Duke Energy and all of its utility subsidiaries is stable. This rating action concludes the review of possible upgrade of Duke Energy, Duke Energy Carolinas, Duke Energy Progress, and Duke Energy Indiana initiated on July 9, 2013.

RATINGS RATIONALE

"The upgrade of Duke Energy and three of its utility subsidiaries reflects the improvement in their credit profiles following the resolution of several key issues and uncertainties since its merger with Progress Energy nearly 15 months ago." said Michael G. Haggarty, Senior Vice President. During this period, the company successfully settled rate cases at its two Carolinas utilities, achieved commercial operation of the Edwardsport Integrated Gasification Combined Cycle (IGCC) plant in Indiana, resolved cost recovery issues associated with the retirement of its Crystal River 3 nuclear plant in Florida; and clarified management succession questions with the appointment of the company's long time CFO, Lynn J. Good, as Chief Executive Officer.

The merger of Duke Energy and Progress Energy (Baa2 senior unsecured, stable) in July 2012 created the largest utility holding company in the US. Duke Energy's Baa1 rating and improved credit profile reflect the company's diverse, mostly rate regulated business activities, which increased to roughly 85% of its overall business from 75% before the merger. The company's utilities are in mostly credit supportive regulatory jurisdictions and operate under regulatory settlements in most cases. The company's non-utility operations have become a less significant driver of credit quality since the merger, including a domestic commercial power segment that has been negatively affected by low power prices, and a highly contracted South American hydroelectric and natural gas generating portfolio. Although Duke Energy parent and Progress Energy intermediate holding company debts are together a relatively high 30% of total debt, we do not expect that percentage to increase going forward. Duke Energy faces some uncertainty at subsidiary Duke Energy Ohio (Baa1 senior unsecured, stable) related to a pending request for a cost-based capacity charge for its unregulated generating assets in the state, which will be an important determinant of the future profitability and viability of that business.

The upgrade of Duke Energy Carolinas and Duke Energy Progress considers the credit supportive regulatory environments in both North and South Carolina, the regulatory clarity provided by rate settlements reached earlier this year at both utilities, and financial metrics that are adequate for their current ratings. The rate settlements in North Carolina provided for two to three year incremental base rate increases based on a 10.2% return on equity and a 53% equity ratio, while a similar settlement agreement reached for Duke Energy Carolinas in South Carolina called for a two-year incremental base rate increase with the same 10.2% return on equity and 53% equity ratio. We viewed these rate settlements as supportive and an indication that the regulatory framework in these two states had not been adversely affected by the management changes and other developments that occurred following the closing of the Progress Energy merger.

The upgrade of Duke Energy Indiana reflects the commercial operation of the long delayed Edwardsport IGCC plant in June, clarity on plant cost recovery provided by a settlement agreement with the Indiana Utility Regulatory Commission, a continued supportive utility regulatory framework in Indiana, improving financial coverage metrics, and declining capital expenditures. Although commercial operation of Edwardsport was an important milestone, some execution risk remains as the plant must undergo up to 15 months of testing and optimization, much of it related to the gasifier, a highly complex technology to convert coal into gas, remove pollutants and burn the cleaner gas to produce electricity.

The stable rating outlook of Duke Energy reflects the relatively low business risk profile of its predominantly regulated utility business and generally credit supportive regulatory environments. Although there is some continued uncertainty at Duke Ohio, this utility represents a relatively small part of Duke's overall business.

Duke 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 20% on a sustained basis.

The company'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 15% on a sustained basis.

Ratings upgraded include:

Duke Energy's senior unsecured and Issuer Rating, to Baa1 from Baa2; subordinate shelf, to (P)Baa2 from (P)Baa3; junior subordinate, to Baa2 from Baa3;

Duke Energy Carolinas' senior secured, to Aa3 from A1; senior unsecured and Issuer Rating, to A2 from A3; subordinate shelf, to (P) A3 from (P) Baa1

Duke Energy Progress' senior secured, to Aa3 from A1; senior unsecured and Issuer Rating, to A2 from A3; subordinate shelf, to (P) A3 from (P) Baa1; pref. shelf to (P)Baa1 from (P)Baa2

Duke Energy Indiana's senior secured, to A1 from A2; and senior unsecured and Issuer Rating, to A3 from Baa1.

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 commercial power business in the US and international business activities in Central and South America. Duke Energy is headquartered in Charlotte, North Carolina.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy 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 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 three utility subsidiaries
No Related Data.
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