There is a big difference between surviving an explosion and having a safe path out of a burning building. Duke Energy's (NYSE:DUK) first-quarter earnings show that the utility giant is living through the merchant energy sector's meltdown but still faces plenty of hazards before it's in the clear.

For Fools, the question remains: Can Duke keep its promise to pay down debt while continuing its lofty dividend?

The first-quarter results show that Duke's earnings and revenues both fell from the same time last year. Operating profits were a full $0.10 per share below last year's results. Net profits were saved by the sale of pipelines and power plants in Australia.

Duke Energy North America, which makes and trades power for other utility companies and big industrial users, remains a headache. Over-exposed to energy price movements, the merchant's loss of $521 million was seriously off the mark. Duke is making efforts to reduce its exposure to merchant and trading risk, but that will take time.

This quarter Duke was forced to write down by $325 million the value of the eight merchant plants in the Southeast that Duke is trying to sell to pay off $3.5 billion in debt. The market, it seems, is saying the plants aren't worth much because their role for the next decade or so is so uncertain. Profits from turning natural gas into electricity at power plants are getting thinner.

It's not just Duke that's selling power plants. Dozens of power plants owned by some of the biggest names in the business -- such as CenterPoint Energy (NYSE:CNP), Reliant Energy (NYSE:RRI), PG&E's (NYSE:PCG) National Energy Group, and American Electric Power (NYSE:AEP) -- will be on the block this year, pushing down power plant sale prices even farther. Stricter anti-monopoly rules set by Federal Energy Regulatory Commission requirements mean that the number of qualified buyers will be pretty small.

This makes sticking to a $1.10 dividend awfully tricky, especially in light of the $1.15-per-share operating earnings that analysts expect for 2004. Duke will have to fight to keep the ratings agencies off its back. It needs about $1 billion in cash to pay the dividend. But if cash flow thins, there is a chance that Standard & Poor's and Moody's could stick it on negative watch, or worse, downgrade its credit to junk status, making it difficult for Duke to borrow the money.

For now Duke still has an investment-grade rating -- a rarity among players heavily exposed to trading, such as Dynegy (NYSE:DYN) and Calpine (NYSE:CPN). But that doesn't mean things will be easy for Duke.

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Fool contributor Ben McClure does not own any shares of companies mentioned in this article.