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M&A, rate cases fuel Q1 credit ratings actions in power sector

Large-scaleutility deals were a primary driver of credit ratings actions on SNLEnergy-covered power companies in the first quarter of 2016, as ofelectric utilities' willingness to take on substantial debt in their pursuit ofmergers and acquisitions.

InJanuary, Moody's lowered Duke Energy Corp.'s unsecured rating to Baa1 from A3 witha negative outlook. The rating agency cited weak consolidated financial metricsand its debt-financed acquisition of Piedmont Natural Gas Co. Inc. in the downgrade. WhileMoody's acknowledged Piedmont as a relatively low-risk natural gas utility, therating agency said the $6.7 billion acquisition will be primarilydebt-financed, which could put bondholders at higher risk due to a higherproportion of debt held at the parent company.

Dukesaid it has demonstrated its commitment to the balance sheet over time andremains committed to strong credit quality.

Higherleverage and the addition of Pepco Holdings LLC's debt to its consolidated balancesheet prompted Fitch Ratings on March 25 to downgrade 's issuer default rating.But Standard & Poor's Ratings Services, acknowledging an incrementalincrease in leverage, affirmed Exelon's BBB corporate credit rating, noting anew source of stable cash flow. Moody's affirmed Exelon's senior unsecuredrating — citing a higher proportion of regulated earnings with the acquisition— and upgraded Pepco's issuer and unsecured rating.

and itssubsidiaries were downgraded by S&P in February, after announcing a planned acquisition of

S&Psaid the downgrade reflects expectations that Dominion will continue to growthrough acquisitions at a faster pace than peers. "This is based on ourassessment of the company's master limited partnership, , whichadds a degree of complexity to the company's organizational structure, providesincremental opportunities and incentive for the company to complete acquisitions,"the rating agency added.

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Other drivers

In March, Fitch 's long-termIDR to BBB from BBB- on expectations of improving consolidated credit metrics.

 subsidiary andDTE Energy Co.subsidiary DTE ElectricCo. also won upgrades from Fitch because of their credit metrics,backed in part by strong cash flows and constructive rate case outcomes.  

EntergyArkansas Inc. earned an upgrade from Moody's after the Arkansas Public ServiceCommission approved aroughly $225 million rate increase. Moody's upgraded the subsidiary's long-termcredit ratings to Baa1 from Baa2, saying the rate hike enhanced thepredictability and stability of the company's financial profile over the nextfive years.

S&P cited debt reduction behind its decision toupgrade the corporatecredit ratings of Atlantic PowerCorp. and affiliate Atlantic Power LP to B+ from B. "Deleveragingcontinues to remain the priority for management and we expect management tofollow through on this during the next few years," S&P said. "Webelieve a faster deleveraging supports credit because it will allow the companya quicker path to accessing capital markets, which is necessary for growth."

Moreover, S&P placed emphasis on the ultimate parentcompany relationship in upgrading Berkshire Hathaway Energy and its subsidiaries. Therating agency said the upgrade reflects a reassessment of Berkshire HathawayEnergy's importance and contribution to parent Berkshire Hathaway Inc.

SNL Energy is an offering ofS&P Global Market Intelligence, which together with S&P Ratings isowned by McGraw Hill Financial Inc.