Credit analyst says Duke seems unwilling to take action to avoid downgrades

By Ronda Fears

Nashville, March 13 - Duke Energy Corp. doesn't appear to be willing to take measures to avoid more downgrades, specifically by cutting its common dividend, so Gimme Credit director of research Carol Levenson continues to say avoid the paper.

"Arrogant or confident? You make the call," Levenson said in a report Thursday, citing the company's remarks Wednesday that it would not cut its common dividend.

"While the stock market has learned to applaud dividend cuts and/or eliminations by distressed utilities, it rejoiced at Duke's decision not to change the dividend, with the stock rising almost 10%, implying stock investors do not yet perceive Duke (A3/A-) as troubled."

But the credit analyst noted that S&P recently downgraded Duke's long- and short-term ratings without placing them under review.

"This [downgrade] is an outcome we've long worried about, as it represents some impairment of financial flexibility," Levenson said.

"We don't feel a sense of urgency on the part of management to do what it takes to avert further downgrades, and we would continue to avoid this name."

Although Duke hasn't disclosed how much commercial paper is outstanding, or affected by the downgrade, management did present a liquidity update on Wednesday.

Duke ended February with $900 million in cash and $2.9 billion available under its credit lines.

Levenson said the markets still do not know what precisely happened with cash flow in the fourth quarter, as Duke only included a condensed cash flow statement with its fourth quarter earnings release.

"It appears free cash flow before asset sales was negative by over $500 million," Levenson said, also noting that management still contends it will generate sufficient cash flow this year to cover capital spending and pay out $1 billion in dividends, with several hundred million dollars left over to reduce debt.

Duke did reduce its capital budget Wednesday, by $200 million, which she said should help achieve this goal.

"Every little bit helps," Levenson said.

"Nevertheless, it seems obvious that a dividend cut would guarantee cash savings and couldn't possibly affect the company's other sources of cash, while capital spending cuts must eventually have negative consequences."

Duke implied capital sending could be cut even further in 2004 and 2005, with $1.8 billion being the bare minimum amount of spending needed to maintain its utility plant.

"Of course we'd be much more comfortable with Duke's projections of stable cash flow, increased free cash flow and gradual debt reduction if the wild card of the merchant energy business weren't still a part of the equation," Levenson said.

"In fact, Duke is one of the last holdouts, hanging on to a 'modest' proprietary trading business and continuing its merchant energy efforts, albeit at a subdued level.

"It sounds good to say Duke's regulated businesses accounted for 80% of 2002 EBITDA, but let's not forget the unregulated businesses can be negative factors, not just neutral ones.

"Leverage in the low 60s and coverage of 3x might be adequate for a weak single-A 'pure' utility, but these measures are far too weak for Duke's current business risk profile."

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