Investors turned off by Duke Energy's downward revision of 2003 forecast

By Ronda Fears

Nashville, Jan. 13 - Lots of convertible players had already abandoned Duke Energy Corp. - but more joined the exodus Monday on the company's downward revision to 2002 and 2003 earnings.

Duke's 8% mandatory convertible dropped 1.7 points to 15.3 while the 8.25% mandatory lost 2 points to 15. The stock closed down $3.13 to $17.87.

All three Duke securities were among the leading percentage losers on the New York Stock Exchange for the day.

Merrill Lynch & Co. stock analyst Steven Fleishman issued a sell recommendation on Duke shares, saying its earnings are going to be worse than he had feared, plus noting concern about the company's common dividend and credit ratings.

"Given the significantly reduced outlook we see DUK trading down from here and are downgrading our investment rating from Neutral to Sell," Fleishman said in a report Monday.

"Based on our new 2003E and an integrated electric group average multiple of 11.5x, we would not be surprised to see the stock in the sub-$17 area."

Duke said its 2002 earnings per share estimate will be about 10c below the $1.95 to $2.05 range provided in October.

The company is scheduled to report 2002 earnings on Jan. 28.

For 2003, the company expects EPS of $1.35 to $1.60, down from its previous forecast of flat with 2002.

"We're obviously taking a pessimistic view on 2003," said Richard Priory, Duke's chief executive, on a conference call Monday.

"In our view, clearly, conditions have not improved. All of the industry signals that we watch - supply and demand, spark spreads, volatility, credit conditions and liquidity - point to make again a challenging year for 2003.

The U.S. economic recovery is sluggish and consumer confidence remains low, he added.

"Our primary concern is the pace of economic recovery, the substantial imbalance between supply and demand for electricity and the regulatory/legal uncertainties that face our company and industry," Priory said.

"In addition, there are a number of wildcards."

The possibility of war in the Middle East, tensions in the Korean peninsula and the threat of terrorism in the U.S. all create a level of uncertainty that hampers economic activity and recovery, he said.

"Access to capital is going to be difficult for many companies this year, curtailing growth and expansion plans," Priory said.

"Our particular industry has experienced a dramatic reduction in liquidity and available sources of capital."

Robert Brace, CFO of Duke, said on the call that for 2003 the company expects to be cash positive with income of $1.4 billion, excluding charges.

Total cash for the year, he said, is estimated at $4.6 billion. Of that, he said $600 million from divestitures.

Capital expenditures are projected at $3.2 billion and the company expects to keep its common dividend intact, which would cost another $1 billion.

The company was challenged about the common dividend, but the executives said it is expected to survive.

There also were some questions regarding Duke's credit ratings. Investors were particularly interested as to whether the company planned any equity offering to improve its debt-to-capital ratios.

There are no major plans to issue equity, the executives said.

Brace noted that the negative outlook for Duke by Moody's is really more about the industry outlook than the company's.

In 2003, he said Duke has $1.3 billion of debt that matures. The company plans to pay off some of that and refinance the balance, he said, but he did not break out those estimates.

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