has finally given up on the risky "asset-light" strategy made famous by
Following a parade of weaker peers, Duke will soon exit the speculative energy-trading business once embraced by the merchant-energy sector. Until now, Duke has clung to the risky trading strategy abandoned by all but a handful of financially strong players. But the North Carolina energy giant -- battered by credit downgrades and the threat of more to come -- announced Friday that it was throwing in the towel.
"The closure of these proprietary trading groups will reduce our risk profile and collateral needs and is consistent with our strategy of sizing our business to market realities," said Fred Fowler, Duke's president and operating chief.
Duke has historically relied on proprietary trading for roughly 10% of its gross margins. So experts predict that Duke's exit from the business will shave up to $110 million, or 7 cents a share, from annualized profits going forward. Prior to Friday's announcement, analysts were expecting Duke to earn $1.40 a share this year.
Still, many industry experts believe Duke's speculative trading division was costing the company more than it was worth. By maintaining the business, they say, Duke was risking a potential downgrade that would trigger an estimated $400 million in collateral calls.
"I'm surprised they're finally taking these steps," admitted one utility fund manager. "It's about time."
The market leapt to celebrate, pushing Duke shares up 3.3% to $14.55 at the open, although that gain evaporated as the morning wore on.
Still, some experts warn that Duke isn't out of the woods yet. They say that Duke Capital, a big subsidiary threatened by potential downgrades, still needs to pay off $4 billion in debt to be a solid investment-grade company. In the end, they believe Duke Capital must issue at least $2 billion worth of new equity to stay out of junk territory.
"I'm stunned they haven't done equity already," one utility expert said. "But I would view this
latest move as a positive. It's a step in the right direction."
Duke's departure from the speculative business follows an even more dramatic exit last month by
. Troubled Reliant, already a junk-rated company, fled the speculative trading business after weathering a swift $80 million loss on a bad bet on natural gas prices in late February.
With Duke following Reliant out of speculative trading, only a few big players with strong balance sheets -- including
and Entergy-Koch -- continue to engage in the once-popular business.
An analyst at Jeffries upgraded
, raising his price target on the stock from $47.50 to $51.50, early Friday. The stock, which hit a new 52-week high of $49.56 on Monday, was a top performer through the industry meltdown last year. It was up 14 cents to $46.88 in late-morning trading.
All for One
Elsewhere in the sector,
became the latest big utility to slash its dividend. The Florida-based company unveiled the dividend cut -- which drops the annual payout 46% to 76 cents a share -- along with a new $350 million credit facility during a meeting with analysts Friday.
"We are working to maintain our investment-grade credit rating," CEO Robert Fagan explained in an accompanying release. "And we're confident our actions will result in a stronger, healthier Teco Energy, which is good for all our investors over the long term."
The stock took a quick hit on the news, tumbling 5% to $10.05 after the open, but was trading in the green by midsession.