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Reign of the Bond Kings

S&P, Moody's, and Fitch tell why credit issues now rule the energy sector.
Fortnightly Magazine - October 15 2002

grade credit rating (as some companies have had to do) and Duke Energy's CFO goes on the defensive.

"That's a hypothetical question that I think will not come to pass. Other companies are in different positions. We have a lot of balance in our portfolio. Total Duke Energy North America (DENA) [merchant trading operations] is only one part of the company. It's not all of our company, and only one part of the DENA operation relates to trading and marketing, and only one element of the trading and marketing relates to the risk element," he says, quite passionately.

"So, I accept that market investors are not terribly enthralled by trading and marketing, and arguably they were over-enthralled with it a year or so ago. We don't look at it as better or worse. We have always said that our trading and marketing operation was there to enhance returns from our power plants, not to take speculative positions in the market and try to make profits out of nothing," he says.

Brace goes one step further, saying that closing the trading business is not only a trade-off that Duke is not required to make, but a trade-off that he says would not make sense in terms of Duke's overall business.

"Our trading operations trade around our assets, and we have to sell the power from the plants and you need a trading operation to do that effectively," he warns.

But press him on what he would do if his credit rating was at risk, and Brace deflects the question.

"In terms of maintaining our [investment grade] credit rating, we have said that we believe having a premium credit rating is the right place for Duke to be. We said this last year and the year before that when it wasn't so popular."

The company announced last month that its earnings expectations would be materially lower in 2002 and 2003 based on continued weakness in Duke Capital's merchant energy subsidiary, DENA. That led credit rating agency Moody's to place the parent's ratings on review as well.

Duke Energy then announced the deferral of construction on three merchant plants, and said it would undertake further capital expenditure reductions and asset sales to bolster the company's overall liquidity position.

For his part, Brace doesn't seem unhinged. He views Duke's prospects through a larger lens.

"Returns are down in the market in which we operate, and we have pulled back because of that. We are looking at a reduced growth rate, but that is part of the normal market cycle."

Spoken like an a typical merchant energy trader.


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