OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to Duke Energy Progress, LLC's (DEP) new dual-tranche offering of 10-year and 30-year first mortgage bonds. The Rating Outlook is Stable.

A portion of the proceeds will be used to repay short-term money pool borrowings including amounts used to fund a portion of the \\$1.2 billion purchase on July 31, 2015 of North Carolina Electric Municipal Power Agency's (NCEMPA) ownership interest in certain generating assets jointly owned with DEP. At Aug. 5, 2015, money pool borrowings and commercial paper outstanding was \\$794 million. The remainder will be used to repay at maturity \\$400 million of first mortgage bonds due Dec. 15, 2015 and for general corporate purposes.

KEY RATING DRIVERS

Weak Credit Profile: Credit metrics are somewhat weak relative to DEP's peer group of similarly rated utilities and Fitch targets for the rating level are likely to trend downward moderately through 2017 due to rising capex and the expiration of bonus depreciation. Fitch expects credit metrics to recover once substantial new capital investments planned over the next several years are reflected in rates. Over the next two years, Fitch expects funds from opertions (FFO) fixed charge coverage and adjusted debt/EBITDAR to average approximately 4x and 3.8X, respectively, which is weak for the current rating level, and FFO lease-adjusted leverage 4x over the same period, which is in line with the current rating.

Constructive Regulatory Environment: Regulation in North Carolina, DEP's primary regulatory jurisdiction, and South Carolina are considered to be constructive by Fitch. Regulations in both states permit annual tariff adjustments to recover fuel, demand-side management, energy efficiency, and certain renewable costs. Authorized returns are generally at or above the industry average. North Carolina regulators may also pre-approve the prudence and projected cost of new base-load generating projects, reducing cost risk.

Substantial Capex Plan: Planned capex over the next five years is \\$11 billion, roughly 60% greater than the \\$6.8 billion invested over the prior five years. The large capex plan includes the \\$1.2 billion NCEMPA purchase of nuclear and coal plants it co-owns with DEP, new generation planned for later in this decade and coal ash remediation.

NCEMPA Acquisition: The NCEMPA acquisition, completed on July 31, 2015, includes about 700MW of nuclear and coal generation that NCEMPA co-owned with DEP. In addition, DEP and NCEMPA entered into a 30-year wholesale power supply contract that DEP management expects to provide \\$50 million of after-tax earnings.

Coal Ash Remediation: Legislation enacted in September 2014 requires all coal ash basins in North Carolina to be closed by 2029. Closure will require substantial capital outlays over the next 15 years. Fitch expects the investments to be recoverable in rates, similar to other mandated expenditures. Over the next five years DEP and its affiliate Duke Energy North Carolina, LLC plan to spend \\$1.3 billion to close the five sites initially designated as high priority. Yet to be resolved is the ultimate cost and timing of closing the remaining ash basins in North and South Carolina.

KEY ASSUMPTIONS
--Retail sales growth of approximately 1% annually;
--\\$11.1 billion capex;
--Ash pond remediation costs are recoverable from ratepayers.

RATING SENSITIVITIES

Positive Rating Action: Ratings could be raised if adjusted debt/EBITDAR falls below 3.4x and/or FFO fixed charge coverage reaches 5x on a sustainable basis.

Negative Rating Action: Ratings could be lowered if FFO lease-adjusted leverage exceeds 4x and/or FFO fixed charge coverage remains below 4.5x on a sustained basis. Significant unrecoverable costs related to ash pond remediation, an increase in parent company Duke Energy Corp.'s leverage or risk profile, or a material adverse change in the constructive regulatory policies for timely recovery of capital investments and fuel costs in North Carolina could also adversely affect ratings.

LIQUIDITY
To provide for its working capital needs DEP is party to parent Duke Energy Corp.'s \\$7.5 billion committed revolving credit facility. DEP's borrowing sub-limit is \\$1 billion as of June 30, 2015. The credit facility matures in January 2020. The obligation of each borrower is several and not joint. The only restrictive covenant is a debt-to-capital ratio of 65%. DEP is well within the restrictive covenant limit. As of June 30, 2015, borrowing capacity under the master credit facility was \\$682 million and cash and short-term investments \\$13 million. DEP also participates in a corporate money pool that supports short-term borrowing needs.