Fitch Rates Duke Energy Ohio's First Mortgage Bonds 'A'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to Duke Energy Ohio. Inc.'s (DEO) first mortgage bonds due June 15, 2046. The Rating Outlook is Stable. Net proceeds will be used to fund capital expenditures and for general corporate purposes.

KEY RATING DRIVERS

Strong Credit Profile: Credit quality measures are well positioned within the current rating level. Over the next three years, Fitch expects FFO fixed charge coverage, lease adjusted FFO leverage, and adjusted debt/EBITDAR (normalized for the impact of asset sales) to average approximately 5.0x, 4.0x and 3.6x, respectively, each of which is in line with the current ratings.

Electric Security Plan: A new three-year electric security plan (ESP) was approved by the Public Utility Commission of Ohio (PUCO) in April 2015 that continues the current electricity procurement and commodity cost recovery policies and certain distribution riders. The new ESP also establishes new riders to recover reliability investments and storm costs. A request to pass through gains or losses on its entitlement to Ohio Valley Electric Corp. (OVEC) capacity was denied. DEO will continue to sell its share of the OVEC output into day-ahead and forward markets and will retain all gains and losses on those sales. The ESP also continued a distribution decoupling rider (DDR). The DDR will remain in place until DEO files its next distribution base rate case, at which time the company plans to propose a straight fixed/variable rate design.

Decoupling Rider: The ESP also continued a distribution decoupling rider (DDR) that essentially removes volumetric risk. The DDR will remain in place until DEO files its next distribution base rate case at which time the company plans to propose a straight fixed variable rate design. Management has indicated it plans to file a base rate increase in 2016 with new rates to be effective in 2017.

Asset Dispositions/Recapitalization Plan: In 2015, DEO completed the sale of its non-regulated Midwest generation business (5,900 MW) to Dynegy for $2.8 billion. In anticipation of the asset divestiture management recapitalized DEO to maintain leverage and coverage ratios that are appropriate for the revised earnings power, lower business risk and current ratings.

KEY ASSUMPTIONS

--Retail sales growth of 0.5%-1% annually;

--$2.7 billion capex;

--Rate increases effective 2017.

RATING SENSITIVITIES

[Positive: Future Developments that may, individually or collectively lead to a positive rating action include:

Ratings could be upgraded if adjusted debt/EBITDAR and FFO lease adjusted leverage fall below 3.4x and 4x, respectively, on a sustained basis.

Negative: Future Developments that may, individually or collectively lead to a negative rating action include:

Ratings could be lowered if Debt/EBITDAR and FFO lease adjusted leverage increased above 3.7x and 4.7x, respectively, on a sustained basis.]

LIQUIDITY

Liquidity is provided primarily through a committed bank credit facility and participation in a corporate money pool. DEO has a $425 million sub-borrowing limit (as of March 31, 2016) in a $7.5 billion master credit facility shared with its corporate parent, Duke Energy Corp. (DUK) and its utility affiliates. DEO also participates in a corporate money pool. DUK's CP borrowings and excess utility cash are the primary source of funds for the money pool.

The credit facility extends through January 2020. The obligation of each borrower is several and not joint. The only restrictive financial covenant is a debt to capital ratio of 65% for each borrower. DEO's current debt to capital ratio is well below the 65% limit in the credit agreement.

Date of Relative Rating Committee: June 14, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878227

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007738

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160620006064/en/

Fitch Ratings
Primary Analyst
Robert Hornick
Senior Director
+1-212-908-0523
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Philip Smyth, CFA
Senior Director
+1-212-908-0531
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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