Moody’s Investors Service has changed the rating outlooks for Duke Capital and Duke Energy to “negative” from “stable” because of Duke’s report to the Securities and Exchange Commission this week that it engaged in 23 round-trip trades on electronic trading system IntercontinentalExchange (see Daily GPI, July 17 ). Although the $126 million in revenues from the trades “are not material relative to total sales, it causes some concerns about company trading practices and related controls,” Moody’s said.

John Diaz, Moody’s managing director, noted in his review that the revised outlook on the Charlotte, NC-based company “reflects the potential for further discoveries in the investigations or for negative ramifications from them such as fines, penalties or inhibited capital market access, which could become material.”

If the current investigations find no more evidence of impropriety and the “situation resolves itself without further implications,” he said, the outlook could again return to “stable.” However, if the investigations find more problems, or if other trading-related problems “materialize on their own,” Diaz noted that Moody’s would consider placing the securities under review for a potential downgrade. He could not provide a timetable on the review, pending the investigations.

Concerning Duke’s trading-related activity, Diaz said Moody’s will continue to evaluate the company’s financial flexibility and the extent to which the extensive capital expenditure program at Duke Capital could pressure ratings. “The existing ratings anticipate that the company will improve the level of cash flow relative to debt with the issue of $1 billion in equity and/or equity-linked securities this year. The negative outlooks also reflect the potential for a downgrade should this year’s equity issue not occur and should the level of cash flow not improve over the next several quarters.”

Most of Duke’s trading activities are conducted through North American Wholesale Energy (NAWE), which includes Duke Energy North America (DENA) and Duke Energy Trading and Marketing (DETM), a joint venture with Exxon Mobil, noted Diaz.

“NAWE forms one of the nation’s top two or three gas and power traders. Mark-to-market trading activity exists within DETM, the 60/40 joint venture with Exxon/Mobil (Aaa), DENA and Duke Energy Merchants. Considering Exxon Mobil’s participation, mark-to-market activity represents well under 10% of consolidated Duke Energy earnings before interest and taxes. While this amount is small relative to the consolidated business, trading is an extremely volatile and confidence sensitive business, with the potential to generate excessive losses should risk controls fail.”

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