Moody’s considers downgrade of some Duke ratings


New York, September 20, 2002 — Moody’s Investors Service placed the securities ratings of Duke Energy and Duke Capital Corporation on review for potential downgrade.

Ratings under review are Duke Energy’s Aa3 first mortgage bond rating, A1 senior unsecured and issuer ratings, and its P-1 short-term commercial paper rating. Also under review are Duke Capital’s A3 senior unsecured and issuer ratings, Pan Energy’s A3 senior unsecured rating and Texas Eastern’s A2 senior unsecured ratings.

Duke Capital’s P-2 commercial paper rating is not under review, nor are the long term Baa2 and short term P-2 ratings assigned to Duke Energy Field Services or the A1 secured rating assigned to Maritimes and Northeast.

The review is prompted by Duke’s announcement that its earnings expectations will be materially lower in 2002 and 2003 based on continued weakness in Duke Capital’s merchant energy subsidiary, Duke Energy North America (DENA).

Since Duke Capital’s credit profile drives business and financial risks at Duke Energy, Moody’s has placed the parent’s ratings on review as well. DENA contributed 13% of consolidated EBIT during the first six months of 2002.

The company’s revised forecast incorporates the current depressed environment for power prices and dim prospects for recovery in the intermediate term. This will impact operating cash flow relative to debt and other key measures of credit quality. With the outlook for 2003 earnings and cash flow flat at best, Duke’s ability to improve credit measures will be limited. The company further announced the deferral of three merchant plants contributing to a pre-tax charge of $250-$300 million in the third quarter.

Steps to mitigate the impact of poor performance at DENA include further capital expenditure reductions and asset sales to bolster the company’s overall liquidity position. Along with realized or announced asset sales proceeds of $500 million, the company expects that capex reductions of $800 million for the remainder of this year will enable cash from operations largely to cover capex with some external financing requirements.

Along with asset sales proceeds, management expects cash from operations to cover reduced 2003 capital expenditures of $3.5 billion. Duke estimates that non-core assets available for sale could realize proceeds in the $1 – $3 billion range.

The company’s core regulated businesses buffer cyclicality exhibited in the merchant energy sector. Core businesses include franchised electric (Duke Power Company) a 43% EBIT contributor for the first six months of the year; and gas transmission (the Texas Eastern, Algonquin, East Tennessee Natural Gas, Market Hub Partners and WestCoast Energy assets) a 32% EBIT contributor.

Moody’s review will focus on the following issues: the implementation and impact of capital expenditure reductions on the company’s cash generating capabilities; the company’s financial flexibility and liquidity position; longer term prospects for merchant energy and its ongoing impact on the risk profile of the company; the financial health and credit profiles of the regulated businesses; the timing and use of asset sale proceeds; and the likely outcome of various governmental investigations into the company’s trading operations. In addition, we will review the appropriate relationship between the long and short-term ratings assigned to Duke Energy and to Duke Capital. Duke Energy is headquartered in Charlotte, North Carolina.

Source: Moody’s

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