Credit analyst sees $1.5 billion funding gap for Duke Energy, little upside

By Ronda Fears

Nashville, Tenn., Sept. 27 - Carol Levenson, director of research at Gimme Credit, mildly applauded Duke Energy Corp.'s efforts to improve its balance sheet but said the stock offering won't go far.

Moreover, the analyst sees a potential $1.5 billion funding gap at Duke and little upside in the credit.

"We are amazed Duke went ahead with the [$1 billion] common stock issuance this week, considering it had to issue stock 10% below the price before the earnings warning and 55% below its 52-week high," Levenson said in a report Friday.

"It's more symbolic than anything else. It tells us management believes it's more important in the long run to maintain credit quality and strengthen the company's acquisition-weakened balance sheet than to worry about diluting EPS in the short run.

"The balance sheet improvement from the equity offering won't be dramatic."

Although Duke says it has cut its capital spending budget for next year to a level it can fund internally, with some asset sales, the analyst estimates "there could be a gap of $1.5 billion to plug" amid "a substantial amount of negative free cash flow."

Including the expected charge in the current quarter resulting from changes in construction plans and an expected cash flow shortfall, she projects year-end leverage will improve only modestly from the low 60s to the high 50s, with cash flow to debt still extremely depressed in the mid-teens.

"Bear in mind things would be even worse, especially on the liquidity front, without this move," Levenson said.

"Our hope is the company will discover more avenues for preserving cash, either through additional capital spending cuts, trimming the dividend, or asset sales. Meanwhile we see little upside in this paper."

With the company taking drastic steps to conserve cash, such as deferring several power plant projects and slashing capital spending, she commented that equity investors must be worried about a dividend cut. It is an annual cash outflow item of nearly $1 billion.

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