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Analyst Says Duke May Cut Dividend, Shut Down Southeast Power Plants

Analyst Says Duke May Cut Dividend, Shut Down Southeast Power Plants

Duke Energy could announce a dividend cut Wednesday and may have to shutdown significantly under performing power plants in the Southeast, according to Merrill Lynch analyst Steve Fleishman, who warned during a conference call Tuesday that investors should expect a dividend cut to between 70 and 75 cents/share from $1.10.

Duke said in media advisory Tuesday that it plans to announce the company's 2004 dividend and other financial actions during a conference call Wednesday morning.

"Basically we still believe that more likely than not [Duke Energy] will cut the dividend," Fleishman said. "Part of that is for more financial flexibility, and I think also more of a focus on viewing the stock as a full-return play. There is a scenario you could make that they keep the dividend, but it would leave the company with very limited financial flexibility."

Fleishman also warned that subsidiary Duke Energy North America (DENA) could make additional announcements regarding power plant shut downs, most likely in the Southeast region where reserve margins are substantial and spark spreads are particularly poor.

"They will take actions to reduce the carrying costs of the business, which might include getting rid of the biggest money losing assets, the biggest cash drains, the plants that are hardly running, which are the bulk of the plants in the Southeast," said Fleishman. "Whether they mothball those, sell them for pennies on the dollar, whatever, I think that is something that they likely will pursue while they keep the plants that are generating current cash."

Fleishman also predicted DENA likely will accelerate its exit from the international energy arena. But Duke probably will keep its real estate business for a while for credit rating purposes.

The significant changes expected at Duke are being orchestrated by new CEO Paul Anderson, who was brought in following the unexpected departure last fall of former CEO Rick Priory. Anderson is a former CEO of PanEnergy and more recently the Australian firm BHP Billiton.

Analysts had expected Anderson to unveil a major corporate restoration plan in February, but Fleishman believes the plan could come out sooner.

"It's possible the dividend announcement could come as soon as next week," he said. The typical time for Duke to make a dividend announcement is the second week of January. They could delay that or announce next week what their plan is," he said.

"The bottom line of all this is that we are neutral on the stock," he said. "We believe Paul Anderson was a great pick for CEO and we do think he can do some good things overtime. But we do think that the stock has gotten ahead of itself... given that there is real significant economic loss that has occurred at DENA that the company can't just build out of quickly."

The Merrill Lynch analysts added that they believe the company is committed to retaining its investment grade credit rating.

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