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1999
Duke

Bloomberg reported that Exxon Mobil blames Duke Energy for the $28 million penalty paid by their joint trading venture. The biggest oil company and the biggest utility, based on revenue, teamed up to receive the biggest fine, to date. The $28 million fine is larger than any U.S. Commodity Futures Trading Commission penalty for “attempted manipulation and false reporting.”

Duke owns 60 percent of Duke Energy Trading and Marketing LLC (DETM); Exxon owns the rest.

It appears that Duke kept Exxon Mobil in the dark. Exxon Mobil did not even know about the investigation until it was over.

An Exxon statement read: “We are extremely disappointed in Duke Energy's management… The irregularities in the reporting of DETM transactional pricing data are inexcusable. We are holding Duke 100 percent responsible for the settlement and the actions that caused it."

The Federal Energy Regulatory Commission (FERC) has previously stated “Dysfunctions in the natural-gas market appear to stem, at least in part, from efforts to manipulate price indices compiled by trade publications.”

Court documents state that Duke Energy Trading “knowingly reported trades that did not occur and reported certain trades at false prices and/or volumes in an attempt to skew the indexes to benefit…”

Duke Energy's Attempted Market Manipulation

Reuters reported that Duke Energy will pay 60% of a 28 million dollar penalty to the Commodity Futures Trading Commission (CFTC). The fine was for attempting to manipulate energy markets by providing bogus natural gas prices to publishers.

This civil penalty is the largest paid by any energy company in the CFTC’s investigation of false price reporting.

The CFTC found that Duke Energy "knowingly reported trades that did not occur and reported certain trades at false prices and/or volumes."

The CFTC said that Duke Energy’s practice may have affected natural gas contracts on the New York Mercantile Exchange.

CFTC Chairman James Newsome said the penalty against Duke Energy will send "a clear message that such illegal conduct will not be tolerated."

Duke Energy Corporation announced that it has recorded a $17 million charge in the third quarter of 2003 to reflect the settlement. Duke Energy Trading and Marketing (DETM) received the fine and is 60% owned by Duke Energy.

Duke Energy Cannot Shake FERC

Duke Energy has a big problem, according to the Charlotte Business Journal. Duke Energy wants to cut off even more heads, but Duke Power (regulated) is already making so much money that regulators are forcing the company to return $30 million to customers. Duke offered to “pencil-whip” the excessive earnings, but the regulators wanted cash. Duke previously pencil-whipped over-earnings and was forced to make restitution of $25 million. Independent auditors found that Duke had intentionally understated its regulated profits in the Carolinas for years. The FBI and a federal grand jury are still investigating that deal.

One might ask, if the company is making more money that the law allows, why is it necessary to terminate the employees who are making the money?

It all began in the 1996/1997 timeframe. Brand new Chairman and CEO Rick Priory had a dream. He wanted to wreck the company, drive the stock price in the ground, alienate employees, and earn the reputation of being a con man. No, this was not really his dream – it’s just what happed in the years since.

His real dream was for Duke to become another Enron. This is not conjecture. It was explained to employees, in detail, how he planned to achieve his goal. Duke would not longer be an electric utility; it would be an energy company, like Enron. He envisioned the Price/Earnings ratio to increase, like Enron’s. Mr. Priory was not content to make and sell electricity. He wanted to buy, sell, and trade energy products and derivatives thereof, like Enron. Mr. Priory intended to exploit energy deregulation for everything it was worth, like Enron. He wanted to enter the merchant energy business, just like Enron.

He hacked away at employee benefits, terminated employees, and went on a worldwide buying spree.

Then a terrible thing happed – Rick Priory got everything that he wanted! Duke was fast becoming an Enron clone.

The problem was that the world had discovered what a sham Enron was. The viability and profitability of Enron was an illusion. It existed for one purpose only: to create vast sums of money for the executives. All else was window dressing. There was no real business; it was a Ponzi scheme.

Mr. Priory could not have tied his fortunes to a more pathetic loser if he had tried! All his big plans turned out to be disasters. All his arrogant predictions were 100% wrong. Everyone who had tried to warn Mr. Priory of his folly had been eliminated.

When Enron imploded, where did that leave Duke? It left executives scrambling for survival. Now, Duke wants to cut expenses to compensate for all of Mr. Priory’s bad ventures.

Duke Power was once a profitable electric utility with a worldwide, sterling reputation and a loyal workforce. It is now a subsidiary of Duke Energy. If one could get frequent flier miles for being sued, Mr. Priory could fly around the world 1,000 times. Employees know that he has tried to destroy them. Now that he has hit upon trying times, he can look elsewhere for sympathy.

Mr. Priory is not hurting for money. Apparently, wrecking companies is a lucrative endeavor. How is Mr. Priory’s goodwill bank account with employees doing? He has been overdrawn since day one.

So, you see the problem that Mr. Priory has created. He wants to layoff employees in the regulated business, that did not cause his problems, to bail out his losses in unregulated businesses. But the regulated business is already making too much money. Next time, Mr. Priory should be more careful of what he wishes for.

The unregulated ventures were partially financed on the backs of Duke Power employees. Now they must suffer even more because the grand schemes failed. Duke wants to cut $100 million in costs over the next year, because of Mr. Priory’s over ambitious buying spree.

South Carolina Commissioner James Atkins said “I am concerned about how much influence the nonregulated side has on the regulated side. If it gets bad enough, it's the responsibility of state commissioners to ensure the integrity of Duke Power.”

Duke is in this fix because Mr. Priory was not satisfied with the guaranteed rate that Duke Power was allowed to earn, as a regulated utility. He felt that he was clever enough to earn much more in unregulated ventures. Maybe he did not understand that potential for unlimited gains always comes with the potential for unlimited losses. Mr. Priory has been Chairman and CEO of Duke for almost seven years. But his training wheels are still not ready to come off.

Duke has found that answer to all of its problems - just layoff more employees. There is no problem that a good layoff will not solve!

But this may not be the best time to cut off employees heads, according to the Atlanta Business Chronicle. Some experts say that now is the time to focus on the retention of employees. Randstad's 2003 Employee Review, conducted by RoperASW, found that companies that do not focus on retention now, may face an exodus of employees during an economic recovery.

Bill Carpenter, Randstad vice president, said “You need to show that you value your employees; the study shows that employees who feel valued and more important are more likely to remain.”

The study found that only 40% of employees believe their employers are loyal to them. Bill Carpenter said “That is a huge red flag. Communication is one of several methods to achieve that loyalty, [but] as long as there is a disconnect about how employers feel about employees and vice versa, those companies can be at risk.”

A shortage of employees will develop in a few years, due to various reasons.

Roger E. Herman is president of The Herman Group, a human resources consulting firm, in Greensboro, N.C. He said “We're forecasting sufficient growth in the economy in the latter part of 2003 to stimulate turbulence in the employment market. The problem is that employers are paying more attention to their customers than to their employees. They're exposing their flank. They're very vulnerable.”

The companies that focus only on laying off employees and taking away benefits may eventually reap what they truly deserve. Duke has been on the wrong side of every other cycle. Who could expect the executives to get this one right?

Duke Energy admitted that its 2003 results would be at the low end of company projections, according to Reuters.

Duke President Fred Fowler declined to commit to paying a dividend in 2004 at the Lehman Brothers CEO Energy/Power Conference in New York. He said “It would be premature to say where we are on the dividend until we have completed an '04 plan, which we have not at this point.”

During the August Noon Meeting, Mr. Fowler did not give a direct answer to the dividend question. He talked around the edges of it and moved on.

Mr. Fowler does not rush to stick his foot in his mouth as other executives and spokespersons often do.

Speaking of spokespersons, one of these indicated that Duke does not anticipate eliminating its dividend. That was a weak statement, as it was intended to be. A spokesperson’s job is not necessarily to provide information; it is to provide spin.

The price of Duke stock has been dropping since Mr. Fowler’s presentation. The stock pump-up performances do not seem to be working anymore. The same thing happened to CFO Robert Brace during the last Duke conference call. The more he talked, the more the stock price dropped.

Other utilities have been forced to cut or eliminate their dividends.

Analyst David Schanzer said “If management intends to pay the dividend it needs to say so. Otherwise we are going to see continued deterioration until the uncertainty is removed.”

Duke executives, including Rick Priory, have previously said that the dividend will not be cut. Many investors do not believe them. Many analysts do not believe them. Employees have been burned so many times that they seldom believe anything!

(8/22/03) - The California recall election is a fascinating story. Few can deny that. But I have often wondered why the recall is occurring.

Gov. Gray Davis says ultra-conservatives with too much money orchestrated it as part of a national effort to "steal elections" from Democrats. I believe the recall is more about the state of the economy than anything else. People are upset with the state's debt, their shrinking bank accounts and their lost jobs. They are hungry for change.

Most Americans don't seem to be as concerned about the economy. We're unwilling to admit that things aren't all that rosy.

Our leaders tell us unemployment has decreased. While unemployment has fallen, it is up significantly over the past four years. And it's slightly down now only because tens of thousands of Americans have stopped looking for work and are therefore no longer counted in unemployment figures.

The budget deficit has grown to more than $400 billion under a Republican president and a Republican Congress. Weren't Democrats supposed to be the ones who spent like there was no tomorrow?

Two years ago, the administration predicted only an $80 billion deficit this year. What went wrong? Columnist Paul Krugman writes, "Realistic budget numbers would have undermined the case for tax cuts."

Productivity of American workers is up. But increased productivity leads to fewer manufacturing jobs. The value of the dollar is rapidly decreasing. My classmates who recently returned from school trips to Europe can attest to that.

More than 2 1/2 million jobs have been lost since President Bush took office. Two million of those were lost after the 2001 tax cut. Coincidence? Tax cuts for the wealthy do not generate employment! We have learned that the hard way.

Here in North Carolina, more than 5,000 of our own citizens lost their jobs at Pillowtex. And what about the thousands of jobs that have been lost over the past couple of years in furniture, textiles and tobacco? The banking industry is not immune, either. (Bank of America cut jobs, yet raised executive compensation packages last year.) Like it or not, the economy is in serious trouble. Why?

Many reasons exist, because this is a complex issue. I believe a primary cause is domestic economic terrorism. A terrorist strikes fear in the heart of the masses in order to promote a personal agenda. He or she may possess weapons, but the most powerful tool is fear. We often think of Islamic fundamentalists when we think of terrorism, but are there not others who fit this definition?

I would argue that corporate America promotes domestic economic terrorism, and this phenomenon has greatly contributed to our collective economic problems. Their agenda is to make a profit, and many will do so at any expense. Most often, the "expense" is the jobs of average Americans.

This constant worry about losing their jobs leaves most folks locked in a state of fear -- for their careers, families and health.

Who benefits from this terrorism? Those who inflict it -- the executives who make exorbitant salaries, are given huge bonuses and receive enormous tax cuts. Did you know that the average CEO makes over 400 times what his or her average worker makes per year? In 1970 the average CEO made 41 times what the average worker made.

Ken Lay, the don of domestic economic terrorists, still plays golf and yachts every day, while his former Enron employees struggle to survive. If the economy fails, executives like Lay don't have to worry. The state of the economy has much more of an effect on average folks like you and me.

So why is it that we ignore these atrocities in our own backyards? Why do we stand by silently when Duke Energy announces, as they did last week, that they have to cut jobs?

What about reducing executive pay and bonuses rather than cutting the jobs of hard-working, average Americans?

Or what about cutting the $100,000-plus that a Duke Energy political action committee gave to state politicians just weeks after the N.C. General Assembly approved huge corporate tax cuts in October of last year?

Middle- and lower-class Americans are under attack. People are tired of living in fear. The economy is not improving.

I will not sit silently while executives put profit before people, and I will not be quiet until I see the corporate world set standards that are truly higher. I invite you to join me.

Stephen Baldwin

Observer community columnist Stephen Baldwin is a senior studying political science at Queens University.

(8/20/03) - Duke Power told S.C. regulators that it earned too much profit in the past year because of unusual events that it couldn't have predicted: a colder winter and heavy rains.

To make up for the overearnings, Duke Power President Ruth Shaw offered in a letter to regulators to immediately write off up to $50 million in refinancing costs, instead of accounting for it over years.

She sent the letter to the S.C. Public Service Commission, after it asked Duke last month to explain why it earned $41 million more than its target profit rate for the year ended March 31. A regulated utility, Duke is supposed to stay under a 12.25 percent return on what it has invested in power plants and equipment.

Duke earned 14.25 percent in the year ending March 31.

Shaw agreed in her letter that the utility's earnings were "significantly" over its allowed rate. But neither the company nor regulators could have known this year's weather would boost profits so high.

The colder winter pushed more people to turn on heaters and buy electricity from Duke. And heavy rains this spring filled Duke's lakes and powered its hydroelectric dams. Neighboring utilities began buying more electricity from Duke, whose dams made cheaper electricity than their natural-gas fired plants.

Shaw asked in her letter for Duke and regulators to devise new ways to deal with such quickly-changing profits.

She also asked for permission to write off the $50 million in debt refinancing immediately. Duke had planned to write off the costs over the lives of the loans.

By accounting for all $50 million in costs now, Duke would push its profit return down to about 12 percent. S.C. Public Service Commission Executive Director Gary Walsh, who got Shaw's letter Monday, couldn't be reached Tuesday.

Utilities routinely come in above and below their target profit rates, which are set by the commission. Recently, Duke Power has come in under more often than over.

But Walsh has said this is one of the largest overearnings he can remember in the past 30 years.

S.C. regulators could vote to lower Duke Power's rates for customers. The last time they did was 1998, when S.C. Electric & Gas earned a 13.04 percent return, when it was allowed 12 percent.

The S.C. debate is separate from a federal investigation into whether Duke Power intentionally underreported $124 million in regulated profits between 1998 and 2000. Duke says it made unintentional, one-time errors but committed no crime.

Duke employees are used to reading about impending layoffs in the newspapers. In a rare move, Duke announced the next round of layoffs before the press. Dow Jones Newswires reported on the next Duke layoff, based on an internal message to employees.

It’s an old story. The mistakes of executives will be paid for by the elimination of jobs.

The plan is to cut 15% from the corporate division and 5% from business units budgets.

1,500 jobs were cut in the past year. COO Fred Fowler said it’s too early to know how many jobs will be lost.

Duke Energy executives have been celebrating being cleared by the Federal Energy Regulatory Commission (FERC), for activities in California energy crisis, at every turn. But the fact remains that the investigation continues and Duke is still not off the hook. The investigation will continue at least until 2004.

FERC did give Duke some relief in its announcement of 8/1/03. The announcement covered only physically withholding energy in California from May 1, 2000, to June 30, 2001.

FERC stated: “(Duke) will not be subject to further investigation, unless information comes to light that would require additional analysis.”

FERC further reserved the right to pursue Duke Energy in their concluding remarks: “Staff has determined that there is no credible evidence, at this time, to support further investigation of the entities discussed herein. However, should any such evidence come to light, Staff will pursue investigation of that evidence at that time.”

Duke is off the hook for one specific charge provided no new evidence is produced. This is a far cry from the spin that Duke executives have been putting on it. But there are more charges.

Reuters reported that 43 energy companies will meet with FERC to try to settle allegations the firms manipulated California's electricity market during the state's 2000-01 power crisis. The closed-door meeting will take place on August 26, 2003.

Firms that will be answering to FERC include Duke Energy and Enron.

Rick Priory used to want to see Duke’s name right up there with Enron. Now he shudders when he sees it.

FERC intends to "preserve fruitful settlement discussions for those cases that do not settle or are not dismissed before Sept. 3."

FERC Wants a Word with Duke Energy

Duke is looking for a new way to keep its promises to Wall Street.

The North Carolina utility rattled analysts last month by saying it had included gains from asset sales in its full-year guidance. That revelation, which sent Duke shares spiraling throughout a testy earnings call July 30, blindsided a number of observers who remembered Duke promising to exclude such gains from its earnings guidance this year.

Now Duke is backing away from the asset-sale comments, blaming the fiasco on "overexplaining." Contradicting repeated remarks on the conference call, the company insists that all along it had been excluding the gains from its earnings guidance. But in the meantime, it has gone back to its headquarters and requested significant cost cuts so that it can still please Wall Street.

"As [CEO] Rick Priory has said to you before, we're going to have to 'make our own breaks' this year in order to meet our earnings targets," operating chief Fred Fowler told Duke employees on Monday, according to a companywide email.

Fowler's address came more than a week after Duke rushed to reassure analysts that it had issued -- and maintained -- earnings guidance without expecting help from asset sales. But Fowler's comments indicate that Duke is now banking on brand-new cost cuts, beyond those already planned, to hit its profit forecast.

"We are looking for savings from the business units of about 5% from this year's projected spending," Fowler told the staff. "From corporate areas, we're seeking reductions of about 15%."

Without help from asset sales -- which generated 18 cents a share in the latest quarter alone -- Duke must battle to hit guidance even with additional cutbacks. Particularly challenging is the company's goal of snaring $200 million in EBIT (earnings before interest in taxes) from its unregulated business. That unit, Duke Energy North America, produced only $56 million of EBIT (excluding asset sales) in the first half and was off to a rocky start in the normally strong third quarter.

"For the first half, we were pretty much on track," CFO Robert Brace told analysts in last month's conference call. But "July weather has us a little behind on the third quarter. ... The $200 million for the year [is] still our target, but it's a challenge."

At that time, Duke executives repeatedly indicated that the company would need help from asset sales to hit anything above the low end of its full-year earnings guidance of $1.35 to $1.60 a share. And they simply said they were "hopeful" that Duke would need no asset sales to hit the low end of that target.

During the call, Brace also denied that Duke had pledged to exclude gains from asset sales in its guidance.

"We never said that," he stated. "I remember distinctly in January on the call, when Rick [Priory] was asked about that, he said that there were some asset sales included in the $1.35 to $1.60 range. But we weren't specific about it was."

He remained vague on the matter during the call.

"I can certainly tell you what the gains are in the year," he said. "What you include and what you don't [in operating earnings] , I can't."

But frustrated analysts pressed for clarity.

"I'm asking you, Robert, what you include and what you exclude," Zack Schreiber of Duquesne Capital said. But Brace said he was unable to provide those figures. And since then, the company has gone on to say that asset sales haven't impacted its earnings at all.

Contacted Thursday by TheStreet.com, Duke said the company quickly clarified the mix-up through one-on-one meetings with analysts in New York and Boston. But Wall Street remains skeptical. Bernstein analyst Hugh Wynne, who downgraded the stock to underperform last week, actually raised his profit forecast for Duke to reflect generous asset sale gains. But he dropped his expectations for operating profits at DENA.

Wynne expects DENA to generate only $135 million of EBIT this year and lose $120 million next. He says that DENA's safest income, generated through locked-in contracts, will dive from $600 million to $360 million next year. And he points out that DENA has been unable to muster the riskier profits, from noncontracted sales, that it has promised the market this year. By mid-year, DENA was already 50% behind on its goal of securing $400 million in noncontracted sales in 2003. Meanwhile, DENA's costs are actually rising. Wynne projected that DENA's expenses will jump by $200 million in the second half of 2003 alone.

Given the risks at DENA, and the murky outlook for Duke in general, Wynne views the stock as overvalued. "At a utility industry average of 12.1 [times earnings] -- potentially generous in light of the volatility of Duke's earnings -- this would seem to justify a share price of some $14.50 to $15," he wrote last week. "There seems little scope ... for the current price to absorb adverse developments in the direction of future earnings."

Meanwhile, Duke itself has acknowledged internally that it faces a tough road ahead.

"We see a challenging market at least through next year, and we're going to have to take decisive action to manage through it," Fowler told employees. "We can all help deliver results every day by managing our operations and costs as efficiently as possible, and by minimizing activities that do not directly and positively impact earnings."

Duke slipped a nickel Friday to $17.11.

Previous TheStreet.com article:

Duke's Trading Arm Atrophy

Chief Financial Officer Robert Brace tried to give Duke Energy analysts a little soft-shoe last week, according to The Charlotte Business Journal. From the tone of the report, he must have been wearing his clod-hoppers. There were some missteps, trips, and even some pratfalls.

Chairman and CEO Rick Priory usually does the mollifying dance for the analysts. They do not come any slicker than Mr. Priory. As Mr. Brace attempted to regain the investor confidence, he only proved that he may not be ready for prime time.

Contradictory information was given about reporting gains form asset sales in earning projections. Giving bogus information is not the best way to regain investor confidence. It only validates the feelings of no confidence. If the Chief Financial Officer cannot keep the numbers straight, who can? This conference call attempt to put a positive spin on the second-quarter financial report spun out of control. The more Mr. Brace talked, the more the price of Duke stock fell.

Of 25 analysts recommendations complied by Standard & Poor's, none rate Duke Energy a buy.

Mr. Brace said that earnings estimates included an unspecified amount from asset sales.

When Standard & Poor's analyst Craig Shere specifically asked if asset sales were included in the estimates, Mr. Brace said “When we set the range back more than six months ago, we said that they included some gains. It is a range so you can't say it includes one particular amount."

Now there is a circumlocutious statement, not to mention bogus.

Merrill Lynch analyst Steve Fleishman said "I thought going into this year you were not going to include (asset sale profits) in your guidance. Maybe I just misunderstood that."

Mr. Brace said "We never said that Steve. I remember distinctly that there were some asset sales included in the $1.35 to $1.60 per share range. But we weren't specific about what it was."

Can investor confidence really be restored by evasive answers, bogus information, and doubletalk?

It was reported that Duke executives traveled to New York and Boston in an attempt to control damage. They tried to soothe large investors over the comments of Mr. Brace.

Not all analysts had a warm, fuzzy feeling about Duke stock after the conference call.

Blaylock & Partners analyst Lasan Johong said “The guidance that the company gave was at the least confusing and at the most, contrary to what we were led to believe in prior circumstances. Wall Street was trying to understand Duke and, I think, trying to give them the benefit of the doubt. So it was somewhat disappointing.”

Mr. Priory used to have little interest in the electric utility and natural gas transmission businesses. He was convinced that he could break the bank by pursuing energy trading, derivatives trading, and promoting deregulation. The bank he almost broke was the Duke bankroll. Now that electricity and gas are expected to earn 80% of Duke’s profits, he is better able to tolerate them.

SNL Financial analyst Peter Wells said “There's a backlash right now that says that anything that is too complex is not good. The utilities that are better regarded at this time - like Southern Co. and Exelon – are those that don't appear as complex as Duke.”

Enron was once the idol of Mr. Priory. Complexity was the Enron trademark. No one understood how Enron was making money, not even the analyst! That is exactly the way Enron executives wanted it. Now Duke has stepped into the Enron slot with overwhelming complexity. Mr. Priory no longer wants to be known as another Enron CEO. But it is too late now. He wanted it and he got it!

Smoke, mirrors, and unnecessary complexity are the tools of a con man. If his game is too easy to understand, he will be exposed. Some people will always see through the con man anyway. But their warnings are never heeded - until it is too late.

It obvious that Mr. Priory has promoted the worst possible endeavors for Duke to engage in. He has downplayed the most solid assets of the company. And, he collects millions of dollars per year for promoting such follies.

Analysts also have doubts about Duke’s ability to keep paying the dividend. Mr. Priory indicates that the dividend can be maintained. But investors have been burned by Mr. Priory’s promises before.

(8/4/03) - Last year, Duke Energy won a huge legal fight -- against corporate heavyweight ExxonMobil, no less.

But the victory is turning out to be bittersweet at best. Now Duke's prize threatens to hamstring the company as it confronts a thicket of financial challenges.

Back in 2002, the North Carolina utility, which followed Enron into the high-stakes game of energy trading, had just scored the legal right to buy out ExxonMobil's 40% stake in Duke Energy Trading and Marketing, which is known as DETM. But DETM wasn't the trophy it had once been. During the two-year battle for control of the venture, Enron had rocketed and collapsed and taken practically the entire industry with it.

So DETM -- a big energy trader caught in the sector meltdown -- wasn't such a great investment anymore. Duke chose to keep its precious cash instead of buying out the rest of DETM. And ExxonMobil, the more creditworthy partner in the deal, has supposedly never forgiven Duke for seeking total control of DETM in the first place.

Meanwhile, the partnership has taken some bruising hits, and its health continues to suffer. In fact, by the end of the first quarter, DETM's stand-alone financial statements -- unavailable to the general public -- reportedly showed that equity, once pegged at around $500 million, had slipped deep into the red.

"They've been trading on the basis of their financial statements and credit rating for years," said one industry expert. "Continued trading losses and recent downgrades of DETM's credit rating do not sit well with their partners."

Duke failed to supply TheStreet.com with DETM's financial statements; regarding the drop in equity, Duke said DETM's equity capitalization will vary based upon the level of income and collateral at the unit. Although Duke does not release these particular figures, it did say the company has been limiting the amount of outgoing collateral at DETM for many months.

Standard & Poor's confirmed the equity drop but explained it as a mere accounting issue that has since been addressed. Still, the agency -- the only one to rate DETM as a separate entity -- has slashed DETM's credit three notches to BBB-minus, its lowest investment-grade level, in less than a year. And it continues to have a negative outlook on the company.

Even so, S&P downplayed the significance of a possible cut to junk during an interview with TheStreet.com last week.

"As far as the company has disclosed ... there's never been any discussion about DETM posting additional collateral" because of a downgrade to junk, said S&P credit analyst Dimitri Nikas.

But Duke has at least hinted at a backlash in its own regulatory filings.

"If further downgrades were to occur and to the extent that these downgrades placed certain of the entities -- primarily DETM and [Duke Energy Field Services] -- below investment grade, there could be a negative impact on that entity's working capital and terms of trade," the company's latest annual report states.

Shaky

Certainly, Duke has startled analysts before. Just last week, in fact, the company suddenly admitted that it had built proceeds from asset sales into full-year earnings guidance -- which it shakily maintained -- of $1.35 to $1.60 a share.

As the stock tanked, analysts peppered Duke with questions during a conference call later described as "disastrous" by some company employees.

"I'm a little bit surprised on the comments on the asset sale gains -- the included numbers -- because, if I recall, that was an issue we discussed in past years," said Merrill Lynch analyst Steve Fleishman, who has recommended selling Duke shares for months. "I thought, going into this year, you were not going to include those in your guidance."

Blaylock analyst Lasan Johong, also a bit stunned by the discovery, later shook his head at Duke's handling of the matter.

"They never really answered the questions until the last moment," said Johong, who rates the stock a hold. "The company has basically created a credibility issue."

Johong is less concerned about DETM's possible cut to junk. Instead, he thinks S&P will follow Moody's lead and revise Duke's credit outlook to stable. Still, he disagrees with the S&P analyst who said a DETM downgrade wouldn't hurt.

"It would accelerate the need for cash at DETM, which would have to come from Duke Capital [a subsidiary of Duke] , which would have to borrow money or draw down liquidity," Johong said, concluding that the repercussions for Duke itself "would be quite severe."

Super Crunchy?

Indeed, one industry analyst speculated that a junk-rated DETM might face sudden collateral demands of up to $1 billion. And Duke, as the majority partner of DETM, would need to pony up more than half of that amount.

"That's cash they would not be able to use to pay down debt, which would put pressure on their own ratings," he said. "I'm not suggesting a meltdown, but it would present a difficult situation for Duke."

Most experts agree that Duke -- with cash of $1.5 billion and borrowing capacity that's twice that amount -- could satisfy new DETM collateral calls and escape a real liquidity crisis. But Duke has recently stressed, in correspondence with its own employees, that it has little extra cash to spare.

"There remains considerable concern about Duke Energy and many other companies in our sector, primarily around ongoing cash flow, cash flow from operations and coverage ratios associated with that cash flow," Duke CEO Richard Priory said during a July address to company employees. "We must do whatever we can to enhance cash flow."

But the company, known for a sunny outlook that's burned investors before, isn't really expecting business to get better any time soon.

"We do not see an upturn in the market for at least 18 months -- and it is likely to be much longer," Priory said in the same internal speech. "It is clearly very difficult for any of our companies to grow while we are in this marketplace eclipse. The bottom line is that we have to make our own breaks."

In the meantime, Duke is a shrinking company -- selling off profitable assets to pay down debt -- that must shower investors with lavish dividends just to keep many of them around. Despite a clear need for cash, Duke will shell out nearly $1 billion this year to pay dividends with a 6.6% yield that far exceeds the 5.5% utility average. By bringing the dividend in-line with its peers, Duke could free up more than $400 million in precious cash flow. But so far, management has been fiercely protective of the rich dividend that helps support the company's high-teens stock price.

Duke shares dropped 16 cents Friday to close at $17.39.

"The implied stock price support at peer average yields would be $11.45, and management is highly unlikely to take that risk," Prudential analyst Carol Coale wrote last week. So "it may come down to a forced decision by the rating agencies."

Payout Payback

Although Coale believes Duke would not voluntarily cut its dividend until at least next year, she suspects that the generous payout -- coupled with recent one-time gains in earnings -- "may send an alarm" to the credit rating firms before then. And her recent comments came even after rumors were already swirling about an alleged meeting between Duke and S&P last week.

Some industry experts believe that DETM's credit is highly vulnerable to a cut right now. In the meantime, they're concerned by what DETM's first-quarter deficit might imply. Duke reportedly blamed most of the equity plunge on a timing issue, saying the two partners simply hadn't made routine funding contributions that would be forthcoming. But some experts were startled -- and deeply troubled -- to learn that money seems to pass right through DETM.

"Rather than being a separately capitalized company, DETM appears to rely almost entirely on affiliate support," one said. "To rely on the company's financials, you have to believe the partners will still be ready to fund DETM on a tough day."

For some reason, the partners didn't fund DETM by the end of the first quarter -- and the division's credit rating has tumbled since that time. Although S&P indicated that the situation has been remedied, some industry insiders see fresh risk that DETM could fall short on funding again.

Duke Energy North America, or DENA -- the unregulated division that includes DETM -- continues to drag its parent down with disappointing earnings. As TheStreet.com projected in early February, DENA is already struggling to hit its aggressive earnings targets for the year. Quite simply, the division has been unable to generate the extra profits -- beyond locked-in contracts -- it was banking on when issuing its optimistic guidance.

"So far this year, DENA is running about 50% behind its goal in generating the alternate source of gross margin, and we see little reason for conditions to improve in 2004," wrote Coale, who rates the stock a hold. We "assume that the challenges for DENA to deliver earnings from other sources of gross margins may have been underestimated."

Meanwhile, some energy traders are starting to speculate that Duke's trading partnership with ExxonMobil -- whose triple-A credit lends support to DETM's rating -- could be at risk. Rumors are swirling that Duke may set up an entirely new trading shop and attempt to go it alone. And ExxonMobil, which accused Duke in heated litigation of "looting" the partnership, has expressed clear dissatisfaction with the business relationship already.

"There are enough outstanding issues right now that it wouldn't surprise me if DETM got downgraded," said one industry analyst. "There's a lot of pressure on Duke -- and there may well be additional pressure to come."

Previous TheStreet.com article:

Rate Case Gives Duke New Headache

The IRS is the latest agency to make inquires of Duke Energy, and other companies, according to The Charlotte Observer. The subject of the inquire is about as mundane as it comes – coal!

Who, you ask, could possibly get into any trouble over coal? Some corporations just have a talent for it. This issue involves tax credits and potentially millions of dollars. The tax credit is available to companies who covert the coal into a synthetic fuel. The IRS wants to know if the coal is really being converted into synthetic fuel or merely being converted into tax credits.

The Charlotte Business Journal reports that Duke Energy employees are still loaded up with Duke stock. The Enron episode should have demonstrated the danger of keeping all of one’s 401 (k) money in company stock. It is the riskiest place to keep it. Employees of several companies have literally gone from millionaires to paupers, due to being saturated with company stock.

Duke employees have already been burned because of holding company stock. Duke stock lost 12 percent in 2002, alone. A recent SEC filing revealed that 59 percent of Duke employees’ 401 (k) money is tied up in Duke stock. At one point, Duke stock was down approximately 60 percent over a one-year period. 71 percent of employees' 401 (k) money was in Duke stock at the end of 2001.

Duke executives have been trying to sweep the California energy deregulation fiasco under the rug almost since its inception. All they have to show for their efforts is a big lump in the rug. Executives keep claiming exoneration, even as FERC continues the investigation!

Reuters reported that the Federal Energy Regulatory Commission (FERC) will hold talks with 43 energy companies on July 24. These meetings will be to resolve allegations of manipulating the California energy market in 2000/2001. Of course the meeting will be closed-door. The secrecy of the meetings is NOT to protect the innocent.

These inquires are not to select candidates for “The Most Admired CEO.” They are not to select candidates for “Corporation of the Year.” They will be to resolve allegations of manipulating the California energy market.

And yes, Duke Energy was specifically named as one of the 43 companies. In fact, Reuters put Duke at the top of the list of the three companies that it named.

Reuters stated: “The invitation list for the meeting reads like a ‘Who's Who’ of U.S. power marketers, and includes most of the biggest current and former players like Duke Energy Corp., Dynegy Inc. and bankrupt trading giant Enron Corp.”

Rick Priory indicated to employees that he wanted Duke Energy to like Enron. He got his wish. Duke was mentioned in the same sentence as Enron, and Duke got top billing!

Mr. Priory wanted a lot of other things and got them all! Now he does not want them anymore. It has been said that one should be careful what he asks for.

Some companies may make settlements, but not admit any guilt. This will not mean that they are innocent. It will mean that they bought their way out of a possible conviction. It happens all the time.

Companies may say that they were innocent, but settled to “move forward.” The translation is: “We were guilty as sin and did not dare face the charges in court.”

Some companies may say that they committed no wrongdoing, but “wanted to end the expense and distraction of litigation.” The translation is, again: “We were guilty as sin and did not dare face the charges in court.”

The corporate spin doctors will be going insane trying to put a positive spin on whatever happens.

Duke Sued for Energy Price Manipulation

Duke was in the middle of the California power deregulation blow-up of 2000/2001. Now Duke has experienced another California blow-up, but this one was literal. There were explosions and at least a million gallons of oil caught fire, according to The Mercury News. This all happened Tuesday at Duke Energy's Moss Landing power plant.

Thick, black smoke filled the sky. The fire, which was close to a national wildlife sanctuary, was extinguished Wednesday.

The plant was purchased five years ago from Pacific Gas & Electric Co. You will remember the time frame. The purchase was shortly after Duke decided that world domination of the energy market was more important than keeping retirement promises to employees.

On June 30, 2003, Montana Attorney General Mike McGrath sued Duke Energy Trading and Marketing LLC and 14 other energy companies, according to The Montana Standard. They are charged with manipulating the electricity and natural gas markets in the West to illegally drive up prices.

Mr. McGrath said “These guys 'gamed' the market in California, fixed prices, withheld supply, and by doing so affected all the prices on the western power grid.”

A settlement of three times the damages is being sought.

The suit stated “Defendants committed massive fraud on the entire western electric and natural gas market in 2000 and 2001 in order to artificially and illegally inflate electricity and natural gas prices. Defendants acted with the intent and result of depriving millions of persons of electricity and natural gas, including commercial and residential ratepayers throughout the West, costing such persons money and detrimentally affecting state economies throughout the West.”

Mr. McGrath added “We didn't file until now until FERC made a specific finding in March that there was indeed manipulation of the California energy market.”

Duke Energy’s plans to modernize the Morro Bay Power Plant in California is still in a state of controversy, according to the San Luis Obispo Tribune. A state committee conducted a hearing on June 30, 2003. Former City Councilman Colby Crotzer complained that the committee was going to allow Duke to use public water "virtually cost-free, to make this company money."

Mr. Crotzer labeled the guaranteed minimum of $2 million a year in tax money deal with Duke “a bribe.”

There were protests of Duke’s plan to cool the plant with seawater. Babak Naficy, a lawyer representing the Coastal Alliance on Plant Expansion, said “We urge the committee to consider the project as having a serious impact on the bay and not grandfather it in for another 50 years.”

Previous Morro Bay article:

Ruling Against Duke CA Plant