DBRS Confirms Duke Energy Corporation and Related Entities

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Duke Energy Corporation (“Duke Energy” or the “Company”) and several related entities as noted above.

This rating action removes the ratings from “Under Review with Developing Implications” where they were placed on May 9, 2005, following the announcement that Duke Energy will acquire Cinergy Corporation (“Cinergy”) for approximately US$9 billion in common stock. Duke Energy expects to close the transaction in mid-2006 pending various regulatory and other approvals, although this may be aggressive given the lengthy approval process of previous electricity industry transactions.

Based on its review, DBRS expects the proposed acquisition to have a moderately positive impact on Duke Energy’s business risk and financial profiles as a result of: (1) the increased scope and scale of: (a) its ongoing merchant power operations (in the U.S. Midwest), and (b) its regulated operations; and (2) the all-stock nature of the transaction. However, the improved profiles remain within the context of the current ratings. DBRS’s review of the merger resulted in the following conclusions:

(1) The impact on business risk profile of combining Duke Energy’s U.S. merchant power exposure [currently 9,890 megawatts (MW) of gas-fired capacity at Duke Energy North America (“DENA”)] with Cinergy’s largely coal-fired merchant portfolio of approximately 6,200 MW is positive when combined with the following: On September 14, 2005, Duke Energy announced its decision to dispose of substantially all of DENA’s physical (6,200 MW) and commercial (forward gas and power, gas transportation, storage, structured power, and other contracts) assets outside the U.S. Midwest (where DENA currently has approximately 3,700 MW of merchant power capacity) within the next 12 months. Duke Energy is taking a net initial pre-tax charge of approximately US$1.3 billion in Q3 2005 earnings and a US$1.6 billion reduction in common equity. While Duke Energy’s ability to execute the proposed DENA transaction without incurring higher-than-expected charges will be a challenge, DBRS expects that successful execution, combined with the increased fuel diversity in the U.S. Midwest following the Cinergy transaction, would have a positive impact on the combined entity’s business risk and financial risk profiles, notwithstanding the anticipated impairment charges.

(2) The combined entity’s debt-to-capital ratio will benefit from the all-stock nature of the transaction, resulting in a lower debt-to-capital ratio (45%, compared to the low-50% range for Duke Energy at present), although largely due to a near doubling of Goodwill (up by approximately US$4 billion) and de-consolidation of Duke Energy Field Services, LLC (“DEFS”). Pro forma impacts on key credit measures such as cash flow-to-debt and interest coverage ratios are expected to be relatively neutral, remaining within acceptable limits for the current ratings.

(3) Impact of the transaction on Duke Energy’s corporate structure going forward has been taken into consideration for confirmation of the above ratings. A new holding company (“new” Duke Energy) will be created to own Duke Energy (to be renamed “Duke Power”) and Duke Capital LLC (“Duke Capital”, currently a wholly-owned subsidiary of Duke Energy). Duke Power will retain all the debt associated with the regulated electricity operations (approximately US$6.1 billion at June 30, 2005). Ownership of Duke Capital, which currently owns virtually all the consolidated operations of Duke Energy except for the regulated electricity operations, will be transferred to “new” Duke Energy. Finally, “new” Duke Energy will own the Cinergy operations, with the operating entities remaining wholly owned by Cinergy.

(4) On September 9, 2005, DBRS assigned ratings to Cinergy and related subsidiaries. Cinergy’s Senior Unsecured Notes/Debentures were assigned a rating of BBB (high)p with a Stable trend. (See DBRS press release for ratings of related Cinergy entities.) Cinergy’s ratings are largely supported by its wholly owned, regulated utility operations in Ohio, Indiana, and Kentucky, which provide approximately 74% of Cinergy’s consolidated EBIT. Additionally, Cinergy’s non-regulated operations are largely composed of a 6,200 MW (mainly coal-fired) generation portfolio in Ohio that is currently contracted on a primarily fixed price basis to its affiliate, Cincinnati Gas and Electric Company. Consequently, DBRS considers the all-stock combination of two similarly rated entities as an important factor in the confirmation of the Duke Energy related entities.

Note:
p – This rating is based on public information.