Credit analysts say if Duke is forced to issue stock, bonds would benefit

By Ronda Fears

Nashville, Jan. 31 - Credit analysts, noting outrage among Duke Energy Corp. equity analysts, said that if the company is forced to issue stock to maintain its credit ratings, it will be good for its bondholders.

Duke Energy (A3/A) held its quarterly analysts' review of earnings Thursday.

"The audience was hostile, with questioners skeptical about Duke's business plan and merchant energy business," said CreditSights analysts Dot Matthews and Andy DeVries in a report Friday, noting there was no news as Duke reported earnings earlier this week.

"As soon as CFO Robert Brace opened the floor for questions, though, a flood of skeptical, hostile queries ensued. It seems equity analysts now care, really care, about credit quality, at least until the earnings go up.

"While we don't currently expect any downgrades, if Duke is forced to issue equity to keep its ratings as some equity analysts apparently expect, this could actually be good news for bondholders."

The utility and pipeline assets are performing well and will contribute about 80% of EBIT this year. Duke expects 2003 cash flow to be around $4.4 billion, with $500 million coming from ordinary course of business sales and $600 million from unspecified asset sales.

With the mark-to-market book shrinking, to around $400 million at year-end, EBIT and cash flow should more closely correlate than they have in past years, the analysts said.

Capex for the year should be about $3.2 billion, with $1.8 billion earmarked for maintenance, $500 million for Crescent Realty and the remaining $900 million for growth capex at DENA and Duke Energy Gas Transmission. DENA capex will go to finishing two nearly completed plants, with three others mothballed.

With cash on hand of $857 million and a $1 billion dividend payout, Duke estimates it will be able to pay down "several hundred million" of Duke Capital debt coming due this year - $500 million in the first quarter and $150 million in the fourth quarter.

"The main area of concern with this company is the U.S. merchant power fleet, which Duke's slides show it is budgeting to run at only 31% of capacity this year," the analysts said.

"Ironically, this low expectation does leave room for some upside if demand rises this summer."

Duke said the expected 2003 output is hedged at $51 per MWH, and Duke also said it is effectively hedged on gas costs through financial contracts. Brace also said prospects for selling merchant plants didn't look good, so Duke was planning to hold on to what it had.

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