Credit analyst: more bad news from Duke Energy adds weight to pessimistic outlook

By Ronda Fears

Nashville, Jan. 14 - Duke Energy Corp.'s latest disappointment reinforces a view that little upside is waiting in the credit, said Carol Levenson, director of research at Gimme Credit, said in a report Tuesday.

"Although we had previously believed Duke's strong regulated businesses would protect it to some extent from the woes besetting its merchant energy peers, we changed our mind as we saw its struggling wholesale power and trading businesses impairing the company's financial flexibility," Levenson said in a report Tuesday.

"We continue to see little upside in this name."

The analyst also noted that Moody's has downgraded Duke by two notches and, even more important, lowered its commercial paper rating.

Duke (A3/A) on Monday delivered more bad news on the earnings front, arising from an increasingly grim view of the prospects for recovery in the merchant energy business. Now, 2002 earnings per share is expected to be 10 cents below the low end of its earnings guidance range and the 2003 outlook was also lowered.

Bondholders would welcome the possibility the company might issue more equity or cut its dividend, the analyst said, although management said neither action is being contemplated.

Duke has attempted to conserve cash by cutting its capital spending plan, she said, noting that its most recent cash flow projections showed another $300 million reduction in 2002's capital spending budget, as well as $1.1 billion in asset sales.

She expects, however, that free cash flow before asset sales or financing will show a shortfall of more than $1 billion this year.

"This means at best Duke's elevated debt load will remain unchanged, and at worst it will increase," Levenson said.

"Asset sales are chancy things, but eliminating the dividend would provide a surefire $1 billion in cash."

The company used proceeds from its October stock issuance to pay down acquisition-related commercial paper, but the CP backstop facilities also were reduced at that time.

At year-end, companywide bank facilities totaled $5.6 billion, while CP, letters of credit and other short-term borrowings totaled $2.7 billion. Thus, including cash on hand, Duke ended the year with net available liquidity of $3.5 billion, up $300 million from the third quarter.

"Duke's bank lines are sufficient to take up [the] slack and more, but obviously relying on the banks is less desirable than having unfettered access to the CP markets," she said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.