Duke Energy mounted a public defense of its investment-grade credit ratings on Tuesday by laying out the details of a three-year plan (2003-2005) to sell off billions of dollars in non-core assets, cut capital expenditures and pay down as much as $5.5 billion in debt over the period.

The Charlotte, NC-based energy company now expects to sell $1.5 billion in assets this year, which will yield $1.3 billion in after-tax proceeds. Although the asset sales might reduce earnings before interest and taxes, or EBIT, by as much as $50 million this year, Duke Treasurer David Hauser said that wouldn’t affect Duke’s earnings-per-share guidance for 2003. He projected an annual impact on EBIT of $155 million as a result of the asset sales. The company expects another $600 million in asset sales in 2004.

Duke expects to have positive cash flow of $1.8 billion this year, all of which will be put toward debt reduction. It plans to pay down an additional $2.7 billion in debt in 2004 through asset sales and capital expenditure reductions. Capital spending will drop to $2.4 billion next year from $3 billion this year. The company already has exited from proprietary energy trading, which freed up capital and appeased the ratings agencies.

However, it’s still too early to tell whether this news will be sufficient to hold off a downgrade by either Moody’s Investors Service or Standard and Poor’s. “Each rating agency has a different perspective, and they are working through their own numbers right now,” said Hauser in a conference call, adding it wasn’t appropriate to predict their decisions.

“If we went below investment grade (by S&P, which rates the Duke trading group) the impact would be at $400 million. If it were Moody’s, the impact would be much smaller,” he said.

In a note to bond investors, CreditSights said it still wouldn’t be surprising if Moody’s “took the various Duke structures down one notch across the board, but we do not expect Duke Capital to go below investment grade. We do not think it is likely, but if it becomes necessary to hold an investment grade rating at Duke Capital, we think DUK would sell more equity or further cut the dividend.”

CreditSights analyst Dot Matthews said Duke “made a strong case for keeping the current ratings on all of the DUK parts. DUK doesn’t have liquidity concerns, and the progression of debt paydown and equity conversions will take Duke Capital down to a reasonable debt to capital structure by 2005.”

Hauser said that Duke Energy will be at 44% debt to capital at the end of 2005 while Duke Capital will be at 38% after a $2.7 billion reduction.

“Unlike other merchant energy companies that have been forced to sell major assets to stay afloat, none of the ‘jewel’ assets of DUK are being sacrificed to bolster liquidity or lower debt levels,” Matthews said.

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