Citing its concern that the company’s plan to reduce debt may be overly optimistic, Standard & Poor’s Ratings Services (S&P) on Tuesday dropped the corporate credit ratings on Duke Energy Corp. and its subsidiaries to BBB from BBB+.

Duke’s “A-2” short-term corporate credit and commercial paper ratings were affirmed, and S&P said the company’s outlook was stable.

S&P also affirmed its BBB- rating on Duke Energy Trading & Marketing LLC, but said the outlook for the unit was negative.

“The downgrade reflects weaker-than-anticipated financial performance during 2003 and an ambitious de-leveraging plan that could materially improve the consolidated financial profile, but which carries a measure of execution risk,” said S&P’s Dimitri Nikas.

“Furthermore,” Nikas wrote, “Duke Energy’s continuation of trading and marketing activities around the merchant generation assets means that the company will continue to be exposed to market risk and needs to dedicate material liquidity to support these activities, preserving the element of risk in the company’s business profile, despite the company’s recent pullback.”

This year, Duke has said it plans to repay between $3.5-$4 billion of debt. Of that, nearly a quarter is associated with Duke’s Australian operations, which are being divested. The balance includes debt that is contractually due in 2004, the remaining portion of the company’s trust preferred securities, as well as some debt that is to be redeemed ahead of schedule. The debt reduction is to be achieved through a mix of excess operating cash flow, proceeds from the sale of the southeastern merchant generation plants and the proceeds from the re-marketing of $1.625 billion of equity units.

“Standard & Poor’s is concerned that the forecast may be slightly optimistic, especially given that the bulk of the debt reduction is to occur in late 2004 and also given the company’s recent inability to deliver on forecasted operating results, thereby introducing a measure of execution risk,” said Nikas.

“Furthermore, prices for power plants in the Southeast U.S. are viewed as depressed, posing a potential challenge to Duke Energy in realizing the expected proceeds. Just as importantly, even if the debt is repaid as outlined, the consolidated financial profile does not demonstrate consistent improvement across the various credit metrics, but remains comfortably in line with the ‘BBB’ corporate credit rating given the company’s business position.

Duke has made “considerable efforts to moderate its exposure to the volatility of trading and marketing operations by winding down Duke Energy Trading & Marketing, terminating proprietary trading and reducing the scale of its merchant generation activities,” but S&P said the company “continues to remain exposed to this risk through trading and marketing activities conducted at the merchant generation unit, Duke Energy North America.”

The stable outlook on Duke Energy reflects S&P’s “expectation that the company will be able to reduce debt, as outlined, during 2004 despite any potential challenges.”

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