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1999
Duke

ROANOKE, Va. (AP) - A federal judge ruled that East Tennessee Natural Gas can immediately seize landowners' property in southwest Virginia and then pay them so it can build a natural gas pipeline.

U.S. District Judge Jackson Kiser will appoint a compensation commission to decide how much the landowners will be paid for their property.

``Money talks,'' said Ron Meadows, one of 67 landowners who held out in negotiations with East Tennessee.

``It appears to me that the landowner, being the little guy, has very few rights against the larger company, which is typically what happens in this country where money seems to have the final say,'' said Meadows. Kiser's ruling, filed Thursday and announced Monday, means landowners who refused to negotiate with the pipeline company lost every major point they tried to defend. The company gained immediate access to their land and the ability to choose the route the line will take across each parcel.

Joseph Waldo, an attorney representing the landowners, said he was considering an appeal of the issue of immediate possession to the 4th U.S. Circuit Court of Appeals in Richmond.

Because the Federal Energy Regulatory Commission already had allowed East Tennessee to build an interstate pipeline, the federal rule takes precedence over state law, Kiser said.

East Tennessee, a subsidiary of Charlotte, N.C.-based Duke Energy, placed $1.3 million into an escrow account in federal court to pay the 137 landowners who had not yet reached agreements with the company. About half still are holding out.

The company needs easements across the land so it can build a $209 million natural gas pipeline across parts of southwest Virginia as it stretches 93 miles from Tennessee to North Carolina.

The federal Natural Gas Act of 1938 allows companies to condemn property.

East Tennessee argued that the act allowed automatic, immediate possession of the land.

But attorneys for the landowners argued the law was silent on immediate possession.

The landowners said Virginia has state laws to protect their rights and those laws did not conflict with the Natural Gas Act.

Pipeline Battle

The similarities between Duke Energy and Enron were striking. Duke never crossed the line to the extent that Enron did, but Enron was clearly the model that Duke tried to emulate. What if Enron had been allowed to continue on their merry path for another ten years? Just how far would the Duke management have followed them?

It is also hard to read about TXU Corp. without thinking about Duke. There are more than a few parallels.

The Fort Worth Star-Telegram reports that TXU is also suffering from chasing deregulated energy. The price of TXU stock is severely depressed. Their credit rating has been damaged. They cut the dividend by a whopping amount. The Duke dividend is still standing, but it is viewed by many as being shaky.

The article mentioned that TXU's stock price is down 65 percent, Duke Energy is down 52 percent; Teco Energy, down 57 percent; Reliant, down 64 percent; CMS Energy, down 68 percent; Allegheny Energy, down 77 percent. There you have it. Duke is, once again, in solid as the “Best of the Worst.”

It is understandable that the CEO of TXU is going to have to move on. Not only has his performance been terrible, but he will soon turn 66. The time could not be more ripe for him to leave the company.

It is very hard to sympathize with most CEO’s, but the case of Erle Nye is a little sad. He is not a corporate raider; he has been with the company for 43 years. He started as an electrical engineer and clawed his way to the top. As the clock is running out on him, he is left with egg on his face.

Mr. Nye is in a predicament. He knows he must leave, but after 43 years, he does not want to leave as a failure. He has an idea to save face. He wants to select the next CEO! He said "It's my last opportunity to do something really good for the company." The last “really good” thing he did for the company was to lose $4.2 billion last year. The stock price fell 75 percent in a month!

Does this picture seem a little warped? Is the all time biggest failure really the right person to pick the successor who will have to fix his mess?

Just as with Enron, Duke is suffering the same symptoms as TXU, only to a lesser degree. As Duke management watches other energy companies crash and burn, they fully realize that it could be a glimpse of their future. They are desperately trying to pull out of the downward spiral, before they reach the point of no return. They are doing a lot of things right, but admitting their mistakes is not one of them.

There are some similarities between Rick Priory and Erle Nye. Mr. Priory is not a corporate raider; he has been with Duke for a long time. He clawed his way from an engineer to the top of the company. His performance, as viewed by employees, investors, and customers, has been dismal. However, he is not near the mandatory retirement age.

Mr. Priory too was a rising star. Greed and arrogance has transformed many rising stars into black holes. As they have imploded, they have sucked everything in behind them.

Rick Priory, Ruth Shaw, and Duke VP’s have been rattling on about being “completely exonerated” from any wrongdoing in California. No matter what else is discovered about the California wheeling and dealing, “completely exonerated” is a bit of a stretch. This implies conduct above reproach. No company joined at the hip with Enron can claim this!

If no new negative evidence is uncovered against Duke, about the best they can claim is to be the Best of the Worst! (Sure, we have mud on us, but just look at those other guys!)

The Wall Street Journal has reported that The Federal Energy Regulatory Commission ordered 11 energy-trading firms to prove that they have fixed natural-gas trades reporting problems or quit trading. Duke Energy was among the firms asked.

If FERC had completely exonerated Duke from wrongdoing, why would they again be knocking on Duke’s door? The matter is not settled, and may not be settled for some time.

The wildly positive spin of one article does not equal complete exoneration. But it’s true that drowning men are known to grasp at the smallest of straws.

(5/1/03) - SAN DIEGO -- Former San Diego Port Commissioner David Malcolm, who once headed the richest public agency in the county, pleaded guilty to a charge that could put him in prison for three years, 10News reported.

David Malcolm was one of the most powerful political figures in San Diego. As chairman of the Port District he negotiated deals that were worth hundreds of millions of dollars.

He pleaded guilty to conflict of interest facing prison time and agreeing to pay more than $200,000 in fines.

His career began to collapse three years ago when 10News reported a deal he did with Duke Energy. 10News discovered that after Malcolm leased the Southbay Power Plant to Duke for $110 million, he signed a secret contract with Duke. The deal paid Malcolm $20,000 a month to act as a consultant to Duke Energy and to put Duke's interests above the public interest, which Malcolm was sworn to uphold, 10News has learned.

Malcolm was forced to resign but the investigation into his misdeeds seemed to languish until District Attorney Bonnie Dumanis took over the office.

On Monday a criminal grand jury began hearing testimony. Malcolm walked into a courtroom Wednesday and admitted his guilt.

Malcolm will be sentenced May 29.

Prosecutors say they plan to reveal details of Malcolm's conflict of interest.

Sources told 10News there is much more than just the Duke Energy deal.

Malcolm filled his lap top computer with details of his deals as port commissioner. The district attorney's office got their hands on that computer and one source told 10News the hard drive was full of incriminating conflicts.

Duke Energy’s Private Commissioner

(5/1/03) - Duke saved the bad news for last.

Ending a two-month rally that had just culminated with a strong earnings report, Duke surprised the market Thursday with plans for a new securities offering. The North Carolina energy giant said it will issue up to $770 million worth of convertible bonds after the market closes Thursday, to raise money for corporate expenses and short-term debt obligations.

News of the offering, coupled with a downgrade warning shareholders of dilution, sent Duke's soaring shares into reverse. The stock sank 5.3% to $16.65 Thursday morning, halting a steady rise that had left the shares with a 44% gain since early March.

Still, Banc of America analyst Shelby Tucker sees even more dilution coming. He cut Duke from hold to sell on Thursday, primarily because he expects rating agencies to cut the credit of subsidiary Duke Capital to junk. To lessen that blow, he says, Duke must issue roughly $1.25 billion worth of common stock by the end of the year.

But even after issuing that stock, Tucker says, Duke will probably still have to cut the dividend it has so fiercely protected.

"Despite the significant recurring detriment to liquidity, management has ardently opposed [the dividend's] reduction," Tucker wrote Thursday. But "we believe the current dividend rate is hard to justify."

Dividend Watch

Still, Tucker believes Duke will postpone cutting the dividend until it has no other choice -- something he believes will finally come to pass in a year or so. Duke says that its "current business plans for 2003 fully support the dividend at this level." In the meantime, Tucker expects new stock offerings to shave 2003 and 2004 earnings by 7 cents and 14 cents, respectively.

The company, which topped expectations Wednesday with first-quarter profits of 43 cents, has promised to deliver full-year earnings of $1.35 to $1.60 a share.

For now, Tucker believes Duke can hit that target, though he's bearish on the company overall. Tucker penned his recent downgrade just before Duke announced plans for its convertible offering, which one short-seller labeled inadequate and even "absurd."

The short-seller pointed out that Duke is essentially issuing new debt "with very little equity" because the senior notes cannot convert to stock unless Duke shares jump to $24 -- a level unseen since last August. He says Duke is using new debt to refinance old debt and fund operations so free cash flow can pay the dividend and prop up Duke Capital.

But in the end, he says, Duke's dividend is vulnerable -- and Duke Capital's credit rating is even more so. Tucker agrees. He sees no justification for Duke Capital's investment-grade rating and points out that a downgrade to junk will hurt the parent company as well. He warns that potential credit downgrades -- which he views as likely -- will reduce the company's access to short-term debt by roughly $800 million and trigger another $400 million worth of collateral calls.

"We believe these issues are not reflected in Duke's current stock price," Tucker wrote. "We see little upside at this point and a lot more downside."

Tucker views Duke as clearly overvalued and expects the stock to head back down to $14 a share. In the meantime, he's found some bones to pick with the quarterly results that helped push Duke higher. And he is not alone.

Fog Rolls In

Wall Street, in general, recognized that Duke handily beat estimates with help from cold weather and a recent acquisition. But investors and analysts nevertheless view Duke's regulated businesses as sound, and they save much of their fretting for the company's troubled merchant energy unit.

Prudential analyst Carol Coale, who rates the stock a hold, never even figured out just how well -- or poorly -- the unit's closely watched trading business performed.

"Because of ... Duke's complex financial reporting, we found it virtually impossible to use the financial statements to reach meaningful conclusions related to trading profits and losses," Coale wrote Thursday.

Shelby made his own stab at deciphering the segment results -- and didn't like what he saw.

"While we had forecasted zero contribution from the segment for 2003, we are somewhat surprised that the unit was not able to capitalize on the same opportunities ... as some of its competitors," Shelby wrote. "We consider the merchant results lackluster."

Hard to See

The unit is clearly weighing down on Duke's overall performance. Contrasting sharply with big jumps in regulated income, quarterly profits in the merchant business continue to fall, dropping from $54 million a year ago to $35 million in the fourth quarter to $23 million in the period just ended.

Because of that slide, analysts have grown increasingly skeptical that the segment can still hit its $200 million profit target for the year. In the meantime, they are venting some new frustration about Duke's complicated financial statements.

Shelby, for example, complained that Duke has suddenly decided to expand its "other" division. By doing so, Duke has made it virtually impossible to determine how much real estate sales -- viewed by some as nonrecurring -- are contributing to the bottom line.

"It has become more difficult to assess the performance of this business at a time when more disclosure is needed," Shelby said. "We find this concerning."

Short-sellers were more blunt.

"There's a whole list of things these guys are not telling people," one said.

Previous TheStreet.com article:

Energy CEOs Find the Tank's Still Full

(4/25/03) - California officials will file a new complaint with the Federal Energy Regulatory Commission demanding an additional $4.3 billion in refunds from electricity suppliers, Reuters reports.

Last month, the commission ruled that up to $3.3 billion should be repaid to California energy customers.

Charlotte-based Duke Energy Corp. could be liable for some of the refunds.

Duke had been among several companies that California authorities accused of manipulating prices during the state's energy crisis in 2000 and 2001.

Staff at the commission, in a March 26 report, did not list Duke as one of the companies that actually manipulated prices. That means Duke would not have to disgorge any profits. However, Duke would still owe refunds because it sold energy in a market where prices were inflated by manipulation. A Duke spokesman says the company may have benefited from higher energy prices even though it was not itself involved in manipulation.

Along with an additional $2 billion in unconsidered overcharges from purchases by a state agency, additional refunds come to about $4.3 billion, Reuters quotes her as saying.

"The place where they lost us ... is not considering the impact of evidence we submitted on March 3," Whitney says.

The agency decision "slammed the door" on manipulation that began in May 2000, well before the Oct. 2, 2000, start date the commission used to calculate refunds, Whitney says.

The Associated Press reported that Duke is being sued again, along with South Carolina Electric and Progress Energy Carolinas. South Carolina's consumer advocate is also suing their state regulator. The claim is inflated power bills, due to the fuel cost recovery methods employed.

Elliott Elam said ``Consumers have been paying tens of millions of dollars more than they should have, because the state hasn't been following a statute that's as clear as water.''

The goal of the suits is to lower power bills. The companies claim to be saving the ratepayers money.

TECO Energy held its shareholder meeting on Tuesday, according to the St. Petersburg Times. A good time was not had by all – especially the CEO.

A shareholder read a letter to the CEO, stating: "I believe that you have failed miserably in your stewardship of TECO Energy Inc. Therefore, as a shareholder owner, I call for your immediate resignation. . . . You, sir, have to go."

There was applause from the crowd.

Another shareholder said that building power plants all over the united States had brought the company down. He asked the board to cut its pay in half and to consider new management.

Duke Energy has a few things in common with TECO Energy, other than being in the same business. The price of stock for both companies is down approximately 60% in the last 52 weeks. Both companies had a vast expansion program churning out more plants.

TECO cut its dividend by almost half. Duke has vowed not to cut the dividend. But many investors have little faith in promises issued by Duke.

Duke is having its shareholder meeting today. Some investors have already indicated that the meeting will not be a “love in.”

The Charlotte Observer reported yesterday that Duke Power will be laying off more employees. Duke declined to say how many managers in Electric Transmissions would lose their jobs.

Spokesman, Tom Williams, said: "There was no edict to save money. We combined two divisions, and there are only a certain number of chairs."

It’s strange, but Duke never does anything to save money. When Duke took a chunk of the employees earned pensions, it was announced that it was not to save money. Duke said that the decision to burn Metal Oxide plutonium fuel was not because of all of the government subsidies offered.

It was stated that Duke is asking for layoff volunteers first. Yes, Duke will be taking volunteers, in a sense. But the employees may feel a bit of “encouragement” to volunteer. Employees report that if they do not volunteer for the layoff and are laid off anyway, they will lose the “separation pay.”

Also, if they do not volunteer to be laid off, they may find themselves working in a position making less money. If an employee volunteers to be laid off, the company may decline his request.

These are the same employees who were told not to be concerned because they would not receive their promised pensions at age 55. They were told that they could just work to age 65 and draw about the same amount that they were promised at 55. But Duke did not tell them how to work until 65 if their jobs are eliminated!

In 1996, Duke projected the worth of a hypothetical 401 (k) (ESOP) plan. Duke assumed a certain positive annual rate of return. Workers were told that if they contributed the maximum to the plan and worked an extra ten years, that they could almost break even on their pension losses.

But a huge number of employees have all of their money in Duke Energy stock. Their accounts are down 60% in the last year. A 60% negative return in one year sort of blows a hole in Duke’s rosy projections! So what will employees do now – work to age 75? No, if their jobs are eliminated, they will not be able to work until even age 55.

One actuary said that employees will not know how much money that they have lost with a cash balance plan until they retire. Now it will become painfully clear to some employees just what has been taken from them. One employee observed that while one is working, he is just not aware of the losses.

Some employees believed what the company told them. They were prepared to work until age 65 in order to draw the pension amount promised to them at age 55. Duke never mentioned to them that their risk could be infinite. It is possible to lose all of one’s money in a 401 (k) account. Enron employees learned this lesson.

Anyone can make up numbers and project any amount of hypothetical growth. But it is always hypothetical. The grocery store will not accept “hypothetical bucks.”

What will Duke do for employees who lost their promised retirement at age 55, did not receive the projected 401 (k) returns, and suffered a loss of 60% in a year? Well, for some, Duke will lay them off!

(4/21/03) - Executive paychecks have held up far better than stock prices at some troubled energy companies.

While several challenged players have yet to file audited 2002 financial statements -- let alone compensation details -- early trends are already raising some eyebrows. Recent proxy filings show that many energy executives continued to pick up huge paychecks in a year when stock prices dwindled to record lows.

Overall, energy executives did see their pay decline from the lofty heights set before Enron's bankruptcy sent the industry into a tailspin. But to some, those paychecks still looked like bloated rewards for leading companies that lost billions of dollars in market value.

"It's morally incorrect," Tulsa money manager Fredric E. Russell said simply. "Executives should not earn millions of dollars when their stock prices plummet and thousands of employees lose their jobs."

Russell, whose firm weathered painful losses by investing in hometown Williams, said executive paychecks must plunge before they even approach a fair level.

"It's hard for me to imagine anyone -- unless he or she is really outstanding -- being worth more than $1 million a year," Russell said. "That's still a tremendous amount of money." Yet a brief survey of the big players in the energy sector shows there's a tremendous number of executives making that and much more…

Duke CEO Rick Priory also continued to collect on his company's strong performance during the booming Enron era. In 2002, a year that saw Duke's might challenged and its stock price cut in half, Priory's total compensation jumped by 24% to $5.9 million. While his base salary climbed by only 9% -- and he received no performance bonus -- Priory cleaned up with $2.2 million worth of long-term incentives and $1.7 million worth of restricted stock. He also received $100,000 to relocate for security reasons…

Previous TheStreet.com article:

Duke Throws In the Trading Towel

(4/11/03) - Duke has finally given up on the risky "asset-light" strategy made famous by Enron.

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.

Forestry

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 Reliant Resources. 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 BP and Entergy-Koch -- continue to engage in the once-popular business…

Previous TheStreet.com article:

Suddenly, Energy Traders Embrace Change

April 4 — Larry Redemann had worked in the mills at Bethlehem Steel since he was 19 years old, and has a bad knee and shoulder to show for it.

"My body is pretty much busted up after working for Bethlehem Steel for 36 years," he says. Still, he always figured that a well-funded pension was waiting for him when he turned 55.

"That's one of your only reasons for staying there when you work in a place like that," says Redemann.

What he never imagined is that, after a century in business, Bethlehem Steel would close its doors forever. A federal agency now controls the $7.8 billion pension fund for the Pennsylvania company's 95,000 workers.

And under its rules, Redemann will get a monthly pension of $1,600 — about half of the $3,100 he expected.

Workers at Bethlehem Steel are not alone. The 6,000 pilots at US Airways also feel betrayed. They were expecting pensions of between $50,000 to $75,000 a year before the airline's bankruptcy forced them to accept much smaller benefits.

"There are some pilots who are exposed to up to a 75 percent reduction in their retirement income," says Roy Freundlich of the Air Line Pilots Association in Washington.

Stock Slump Drains Pensions

Some 44 million Americans are counting on defined-benefit pension plans when they retire, benefits that are insured by the Pension Benefit Guaranty Corp., or PBGC, a federal agency. But many of those workers may end up with less than they're counting on.

Huge declines in the stock market, where many of these pension plans are invested, have thrown the pension funds of even profitable companies into debt.

At the end of 2001, 261 companies had $111 billion less in their pension plans than they had promised in future benefits. And the PBGC, which is supposed to insure these plans, is itself $3.5 billion in debt.

So now many companies are cutting back on the benefits they're promising in the future.

"Even if you have a good pension plan now, you may find that your company is going to switch that plan or freeze that plan and in the future you may not get everything that you expected," says Karen Friedman, director of policy strategies for the Pension Rights Center, a Washington-based consumer-rights group promoting retirement security.

Controversial Changes Afoot

The most controversial switch under way is toward so-called cash-balance plans, which have been adopted by more than 500 companies, including IBM, Verizon and Duke Energy.

Unlike traditional defined benefit plans, in cash-balance plans, the employer's contribution does not increase with a worker's seniority and salary. So in a conversion situation, the older workers lose out. Younger workers, however, like them because their pensions build up faster, earlier. And unlike traditional plans, they're portable, so if workers change jobs, they can take the plan with them.

"The problem is you're switching from one kind of pension plan that has one kind of formula into another kind of pension plan that has a completely different kind of formula, and the end result of that switch is that it reduces the expected benefits of older workers," says Friedman.

The overall trend in financing retirement has been away from defined benefit plans of any kind into defined contribution plans like 401(k)s, where the employee contributes and manages most of the money — and can often end up with less if there's a prolonged market downturn.

Friedman notes that even with cash-balance plans, workers would end up better off than employees of companies like Enron and WorldCom, who lost money by investing heavily in company stock in their 401(k) plans.

(4/3/03) - I can sort of understand how Bank of America's Ken Lewis earned his $18.3 million last year. He's a Wall Street kind of guy, cutting 9,000 jobs but pushing BofA stock to $69.82 a share, compared to $54.90 when he took over in 2001.

But Duke's Rick Priory?

The CEO of your friendly, neighborhood monopoly got a 9 percent raise to $1.2 million, and total pay of $5.9 million based on past performance.

There's just one problem: Duke's current performance. Duke stock fell from a yearly high of $39.60 to $14.11 now.

Throw in some curious accounting and investigations of Duke energy sales out West and well, the past 12 months won't draw many toasts on Wall Street or Tryon Street.

Now Duke is blowing a gimme, a chance to look like a great corporate citizen.

Duke apparently is waffling on its pledge to buy the 153-acre coliseum site on Tyvola Road. Duke's real estate arm, Crescent Resources, was to pay at least $24 million to help underwrite a new arena.

Duke says it will pay the full amount if it gets to build an office park on the Tyvola site. The city, though, wants homes and retail to go with the offices and says Duke's plans would drown the area in traffic.

Duke isn't backing off.

"We will factor those restrictions into whatever (we) would pay for the property," spokesman Randy Wheeless said. "We never officially agreed to pay $24 million."

Huh?

When the arena referendum failed, the two big banks and Duke offered $100 million to underwrite the city's investment. Duke's share became the purchase of this land. Nobody recalls Duke saying its participation was conditional.

Duke's moonwalking surprises county commissioner Parks Helms, who watched as the original deal took shape.

Maybe Duke has a reason that the rest of us can understand -- cash-flow problems. Stock analysts warn that Duke's credit could be downgraded because of mountainous debt. Some $1.3 billion is owed creditors this year.

In short, times aren't as good as when Duke stepped up with the banks.

Wheeless argues that Duke isn't strong-arming the city. It just doesn't want to pay more than it thinks the land is worth.

But there's the rub. What made the deal so great was that the companies took some of the risk from the $265 million arena away from taxpayers. Duke may be putting some of that risk back in our laps.

This isn't how you do business in Charlotte. Your word is your bond, and then some.

Helms told me a story of how former Bank of America CEO Hugh McColl Jr. invested millions in Gateway Village, putting BofA's call center on an iffy piece of uptown real estate off West Trade Street.

"He said, `I'm putting the anchor of the bank so deep here you couldn't move it for $10 billion dollars,' " Helms said.

The moral of that story: Corporations here have a history of doing more than their share.

This arena deal should have been a public relations bonanza for Duke. Priory helps save the day, Duke gets the land it wants.

Instead, it's becoming the latest in a year of bad headlines that Duke would like to forget.

(4/1/03) - NEW YORK (Dow Jones)--A growing number of energy company chief executives may soon be joining traders they laid off in the unemployment line.

Power and natural gas companies facing angry shareholders, unpaid creditors and tougher regulators are scrambling for new talent in what is shaping up to be an unprecedented, industrywide search for new chief executives this year.

The hope is that new leaders, untainted by scandal, can revive companies burdened by poor share prices, junk credit, federal investigations and weak cash flows. Greater scrutiny of corporate governance is also putting more pressure on boards to act.

"I think the board is going to take a stronger look at their CEOs and top management and evaluate whether a change is necessary," said Paul Benson, a partner in the energy and utilities practice of executive search firm Heidrick & Struggles. "In 2003, that's going to be more prevalent than any year prior in the utility sector. This is a significant year."

Hiring for the top spot is emerging as the one bright spot for employment in an industry that has spent much of the past year shedding staff. Several power and natural gas companies have said they're looking for new chief executives, and recruiters said others are conducting searches that haven't yet been made public. More announcements are expected throughout the year.

The turnover comes as the merchant energy industry struggles to restore its credibility and profitability, which were felled by the collapse of power prices beginning in the summer of 2001 and the evaporation of investor confidence that followed the stunning meltdown of former industry leader Enron Corp. almost 18 months ago.

CMS Energy Corp., Dynegy Inc., Williams Cos., Aquila Inc. and AES Corp. all replaced their chief executives last year.

Reversing Course

The move is a reversal of the industry realignment half a decade ago, which saw sharp, financially savvy traders take over at the helm from their stodgy utility predecessors. Companies that moved quickly into energy trading and building power plants to serve deregulated wholesale markets were rewarded with soaring share prices.

That model has since been junked, and a clear successor has yet to emerge. In the meantime, boards are looking for leaders who can guide their companies away from risky and complicated trading and accounting practices toward more conservative business models with steady revenues, according to recruiters and market analysts.

"Now the mantra is credibility and stability," said Ron Lumbra, managing director in the Houston office of recruiter Russell Reynolds Associates. "Search committees are generally looking for very solid, deliberate executives. They're looking for people that are low-profile, not terribly flamboyant or aggressive."

Heidrick & Struggles is working with Allegheny Energy Inc. to find a successor for chief executive Alan Noia, who announced his retirement early in March. Both companies declined to discuss the search, citing its confidential nature.

El Paso Corp., which is working to boost liquidity and cut debt, is also looking for a new chief executive. The company, under pressure from dissident shareholders, placed a board member in the top spot in mid-March, shoving aside Chief Executive William Wise, who had only recently announced his intentions to retire this year. The interim chief, Ronald Kuehn Jr., has already managed to settled market-manipulation charges with California and others in an arrangement that involves the forfeiture of some executive bonuses.

As reported, Xcel Energy Inc.'s struggling NRG Energy Inc. is also close to naming a new chief executive. Its former leader left in June with several top officials. The company has offered the job to David Wiggs Jr., general manager of the Los Angeles Department of Water and Power and former chief executive of El Paso Electric Co., a company he led through a bankruptcy and restructuring in the 1990s.

TXU Corp. has said it will begin easing a new leader into the company's top spot in the next year or two as Chief Executive Erle Nye prepares for retirement.

Energy Insiders Preferred, But...

Search committees say they're willing to consider candidates from outside the power and gas sector, but executives with energy experience usually wind up in the top spots. Ailing companies often can't wait for someone from another industry to get up to speed.

The pool of talent in the energy sector is deep enough, Benson and Lumbra said - with the caveat that the widening taint of trading and accounting impropriety has ruled out a number of candidates.

"Because of the downfall of some companies, there are some executives who may have the capacity to lead but may be tainted because of the reputations of their former employers," Lumbra said. "Boards don't want even an inkling of impropriety."

The staff of the Federal Energy Regulatory Commission reported last week that dozens of leading energy companies engaged in questionable trading practices during the energy crisis that struck the West in 2000-2001. The full commission has yet to determine whether any rules were violated or how serious any infractions were, but the finding further sullied the industry's credibility.

Bruce Peterson, managing director of the energy practice for search firm Korn/Ferry International in Houston, said qualified candidates are in short supply and reluctant to put their reputations on the line by defecting to a problem-plagued company. Reduced pay and bottom-dwelling share prices haven't helped. "Tell them they better hurry up, because there are not a lot of people out there," he said of companies looking to fill the top spot. "Most of the people that would look at these positions today are currently mercenaries in a jungle somewhere."

Some Are Willing

Bruce Williamson, 43, formerly chief executive of Duke Energy Corp.'s global markets unit, wasn't looking for a new job when Peterson called him last July. But after much persuasion and due diligence, he assumed the top spot at Dynegy in October.

"In my case, I saw an awful lot of value in Dynegy that wasn't being reflected in the market in terms of quality of assets," Williamson said. "It was a chance to come in and say, 'I know how to come in and do this the right way.'"

Candidates like Williamson are asking tougher questions and doing much more research on prospective employers than in the past, recruiters said.

They'd better, because the situations they're being asked to enter can be dire. Prudential Securities, for instance, dropped its coverage of Dynegy in January, saying it sees a low probability the company can remain a going concern over the long term. Still, new leadership can help.

"It certainly could work toward restoring confidence," said Ron Barone, managing director at Standard & Poor's utility group.

Even news that the chief executive of an ailing shop is leaving can cause a company's stock to pop - the sacrificial-lamb effect. Allegheny shares rose 8% the morning after the company announced Noia's retirement. The news came a week after the company staved off bankruptcy by refinancing a $2.4 billion loan package.

Investors and creditors might be willing to give a new leader some time to settle in but they'll be looking for results in about a year, said Paul Patterson, an independent energy analyst with Glenrock Associates in New York. A leadership shift, in itself, isn't necessarily a panacea for a company's ills, he added.

"I don't think people should get overly enthusiastic that there's new management," Patterson said. "Just because there's a new captain, that doesn't mean the ship won't still sink."

NEW YORK, April 1 (Reuters) - Shares of Duke Energy Corp. fell over 5 percent on Tuesday morning, after Moody's Investors service said it might cut its ratings on the company and its finance arm Duke Capital.

Moody's said on Monday afternoon that it may cut the company's and Duke Capital's long- and short-term credit rating, due to concerns about weaker-than-expected cash flow, a rise in operating expenses and Duke's volatile energy trading business.

JP Morgan analyst Jamie Waters said that he believes Moody's will downgrade Duke Capital's senior- and short-term ratings by at least one notch, and probably also downgrade Duke Energy's senior unsecured rating.

"The associated near-term funding needs, which could result in the issuance of new common equity, keep us cautious on (Duke)," said Waters, who has an "underweight" rating on the stock, in a research note..

Ratings downgrades usually increase borrowing costs.

Lazard analyst Andre Meade said it is important for Duke to take action in order to ward off further credit downgrades.

"We believe that additional downgrades can have serious consequences, and that Duke is likely to reduce its dividend and/or sell equity to avoid such an eventuality," said Meade in a research note.

Shares of Duke, among the most actively traded shares and top percentage losers on the New York Stock Exchange fell 84 cents, or 5.8 percent, to $13.70 late Tuesday morning.

Duke Energy Corp. Chief Executive Rick Priory's salary increased 9 percent to $1.2 million in 2002. But he received no bonus, as the energy giant's earnings per share fell with its wholesale energy business.

Priory's total compensation increased 24 percent to $5.9 million from 2001, not including stock options. Most of the increase came from long-term incentive payouts, worth $2.2 million, which were tied to the company's 2000 performance.

He also earned $1.7 million in restricted stock and $850,000 in other compensation, including payments for retirement savings and life-insurance plans, according to Duke's proxy statement filed Friday.

Duke's compensation committee hired a consulting firm to help it figure Priory's pay. Committee members are Leo Linbeck Jr. of Linbeck Corp., William Esrey of Sprint Corp., George Dean Johnson Jr. of Extended Stay America Inc. and former N.C. Gov. James Martin, now of Carolinas HealthCare System.

The committee said it wants Priory's compensation to be in the energy industry's 50th percentile when Duke meets expectations and in the 75th percentile when Duke exceeds them.

Priory also received $100,000 last year for relocation costs, after Duke's board told him to move as a security precaution. Priory was the only employee the board advised to move, Duke spokesman Terry Francisco said.

Francisco wouldn't detail reasons for the move, saying only "as the board looked at things related to security, it assessed what security risks (Priory) may have."

The energy industry has taken extra precautions since the Sept. 11, 2001, terrorist attacks. Nuclear plants shut down nearby visitors' centers when the nation's terror-alert status is raised to high, for example.

Duke's profits and share price have been hammered recently, as the price of wholesale energy has plummeted. Earnings per share fell to $1.88 last year from $2.64 in 2001. The company also cascaded to 118th from 14th on the Fortune 500 list, which rates U.S. companies by revenue.

Moody's Investors Service said Monday it may downgrade some of Duke's debt. The rating agency is concerned that Duke may not have accurately predicted cash flow from its wholesale energy division, which makes and sells power to other utilities and industrial users at market prices.

That division's weakness helped force Duke into its first net loss in three years in the last quarter of 2002. The division also endured a management shakeup last year.

Duke's proxy also notes the $2.84 million severance package given to Harvey Padewer, who was group president of energy services and oversaw Duke's swooning wholesale energy unit.

At Duke's annual meeting in Charlotte April 24, shareholders will vote on new board members. Duke is recommending Esrey to continue on the board, even after he gave up his Sprint CEO post last month. The Internal Revenue Service is auditing tax shelters Esrey established under the guidance of Sprint's accounting firm Ernst & Young. Esrey remains Sprint's chairman.

Duke's policy asks board members to resign if they have a "significant change in their professional roles and responsibilities."

(3/31/03) - NEW YORK (Dow Jones)--Moody's Investors Service Monday placed the long- and short-term debt ratings of Duke Energy Corp. and its Duke Capital unit on review for a possible downgrade.

That caused yield margins on the company's bonds to widen, with the spread to Treasurys on Duke Energy's 10 year bonds moving out by about 30 basis points, although there was little actually trading, a utility trader said.

Moody's currently rates Duke Energy's senior unsecured debt A3 and its short- term commercial paper P-2. Duke Capital's senior unsecured rating is Baa2 and its short-term commercial paper is P-2.

Approximately $22 billion of securities are affected by the action, said Moody's.

In a statement, the ratings agency cited concerns over Duke Capital's cash flow and in particular the volatility in its trading and marketing operations.

Duke Capital provides debt and equity capital and financial advisory services to businesses in the North American energy industry. Its parent Duke Energy is a diversified multinational energy company with an integrated network of energy assets and expertise.

Duke Energy said in early March that it plans to exit the merchant finance business. This sector of the energy business "is dead," said Jon Kyle Cartwright, senior power and energy analyst at Raymond James & Associates.

Energy trading has proved to be the downfall for such companies as Dynegy Inc. and Mirant Corp. . While it has proved troublesome for Duke as well, the company isn't as advanced in its commitment to long-term energy trading as were Dynegy and Mirant, said Cartwright.

What's more, Duke Capital's gas pipeline business produces stable, predictable cash flows, according to a recent report on Duke Energy published by equity analysts at Merrill Lynch & Co.

Nevertheless, Duke should be "viewed as a trading vehicle and not as a long- term investment," said Cartwright. In addition to its energy trading business, Duke is in a cyclical business that is very dependent on the success of the industrial segment of the economy, he said.

Duke is working with the credit agencies and attempting to allay their concerns through its plans for 2003, said Terry Francisco, a company spokesman.

Standard & Poor's rates Duke Energy single-A-minus and Duke Capital triple-B- plus. Both companies have a negative outlook. Fitch Ratings (News) rates Duke Energy single-A-minus and Duke Capital triple-B. The outlook is negative for both.

When companies fudge their numbers, they usually start with the top line. But it's hard to fudge cash receipts, so keep an eye on the cash.

(3/27/03) - A little over a year ago Duke Energy declared it had finished its "best year ever," despite Enron's collapse and the other problems afflicting the energy business at the time. It reported revenue of $60 billion, by that measure making it the 13th-largest U.S. corporation.

But the "best year ever" didn't look so great the following June, when a task force at the Financial Accounting Standards Board reached a new consensus on how to account for energy trading. Reversing a position taken in 1998, it decreed that energy trades should be recorded on a net, not a gross, basis. In other words, if a company trades an energy futures contract for $100,000 and makes a $2,000 spread on the trade, it should recognize as revenue only the $2,000.

Whoosh. Duke Energy restated its revenues going back to 1997. With 2002 sales of $15 billion, the company ranks 115th on this year's Forbes Sales 500. The stock has fallen from $37 to $13 over the past year.

A lot of puffery has been going into the top line. According to the Huron Consulting Group, a Chicago firm focused on corporate finance and restructuring, revenue recognition problems were behind 85 of the 381 accounting restatements of public companies in 2002. Typical mischief: recording a sale without accounting for the fact that the buyer has the right to return the goods, or, worse, hasn't even taken title to them; counting revenue from deals with unfulfilled obligations (such as future consulting services)…