Duke shares rallied nearly 5% to $19.82 Tuesday after Moody’s Investors Service cut the company’s credit ratings but held them at investment grade levels.

Moody’s cut Duke Energy’s senior unsecured rating one notch to ‘Baa1,’ leaving it three notches above junk status, and dropped Duke Capital, which oversees the company’s trading and merchant power divisions, to ‘Baa3,’ the lowest investment-grade rating. The ratings of subsidiaries PanEnergy Corp. and Texas Eastern Gas Transmission also were cut one notch. The outlook for all the new ratings is stable, but Duke Energy Field Services’ ratings remain under review for downgrade.

“While we would have obviously preferred that Moody’s maintain the Duke Energy and Duke Capital credit ratings, we remain confident that the effectiveness of our actions in 2003 and beyond will significantly strengthen the balance sheet and limit our exposure to the current uncertainties in the merchant energy business,” said CEO Richard B. Priory. “We have made the tough decisions to ensure that we manage through this down cycle and maintain the financial strength necessary to capitalize on future opportunities.”

Priory said the action by Moody’s will not affect the company’s 2003 operational or financial plans. As a result,. he affirmed Duke’s 2003 earnings per share (EPS) guidance of $1.35-1.60, before the cumulative effect of changes in accounting principles, and the previously stated $1.10 per share annual dividend. On average, analysts expect the company to earn $1.42/share for the year, according to research firm Thomson First Call.

Duke shares soared to a five-month high on the news, which brought an end to months of speculation over whether the company’s ratings would be slashed to junk status. Moody’s assigned a negative outlook on both Duke Energy’s and Duke Capital’s credit ratings in December 2002 and began a review for downgrade on March 31.

Moody’s said the stable rating outlook for Duke Energy reflects the “strength and stability of the Duke Energy utility system and credit metrics that appear to be solidly investment grade. Moody’s lowered Duke Capital’s ratings due to an increase in debt that has outpaced cash flow growth, and a weak near term outlook for several sectors in which Duke Capital has made substantial investments.

“Duke Capital’s credit profile has been pressured by decreased cash flows from its non-regulated businesses and higher uncertainty associated with Duke Energy North America (DENA) and Duke Energy International’s (DEI) cash flow contributions,” Moody’s added. “Our greatest concerns reside at DENA. With approximately 16,000 MW’s of gas-fired generation, located in a number of regions of the country, DENA is expected to maintain a significant presence in the merchant energy market and will remain exposed to wholesale market spark spreads for several years. Our ratings, and financial forecasts, reflect a conservative outlook for DENA, and we anticipate underperformance of this business for several years, absent a significant and sustained improvement in the wholesale generation markets.”

Moody’s said the stable outlook for Duke Capital reflects the supportive actions by management, including exiting proprietary energy trading and boosting Duke Capital’s equity base, as well as the expectation that Duke Energy will continue to provide support as needed to underpin Duke Capital’s creditworthiness and financial flexibility.

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