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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 10 - 2002

``The whole thing with round-trip trades is that they were supposed to have no impact on
income, only increase revenue'' - Skip Aylesworth, manager, FBR American Gas Index Fund

Duke Energy is Considering Mass Layoffs

San Francisco Chronicle – by Mark Martin – August 22, 2002

(8/20/02) - California continues to build its claim that the state was unfairly gouged by power companies last year, but consumers paying record-high electricity rates shouldn't expect to see refund checks anytime soon.

While Gov. Gray Davis loudly maintains the state is owed $8.9 billion by the nation's generators, experts say the final tally will be nowhere near that high even if California wins its case.

Already, a federal administrative law judge drastically slashed the overall claim. The Federal Energy Regulatory Commission has urged the state to settle their differences with the generators. Several companies have signed long-term power contracts with the state that Davis wants to renegotiate, and despite a report last week that seemed to buttress the state's refund claims, regulators have suggested negotiating lower-priced contracts in exchange for dropping the refund case.

"If I were California, and I was as close to settlement as has been indicated, I'd get on with it," said Commissioner Nora Brownell in a telephone interview with The Chronicle. "This (the report's findings) may have an impact on the amount of refunds, but is it worth the price of prolonging it and running the exposure of ongoing litigation? My own view is that the litigation could go on for five or six years when California needs to settle this sooner."

And many of the companies that allegedly owe the state money are suffering major financial troubles and starving for cash.

"I do think we will see refunds someday," said Michael Shames, executive director of the Utility Consumers Action Network based in San Diego. "But will it be the $9 billion the governor talks about? That's tougher. A lot of the money that was reaped by these companies is essentially gone."

On Monday, a roomful of lawyers convened in San Francisco to sort out who owes what to whom for a period the judge overseeing the hearing called "California's darkest hours." Administrative Law Judge Bruce Birchman will listen to five days of testimony as he works to dissect the financial mess that was the California energy crisis.

Power companies claim the state's power grid and bankrupt trading market owe them hundreds of millions; the state's utilities, teamed with lawyers representing the governor and Public Utilities Commission, allege they're owed billions. Birchmam's daunting job is to calculate how much power prices went above fair rates during the crisis and review energy transactions to come up with the bottom line for each entity in the case.

He is expected to deliver his ruling sometime this fall to the Federal Energy Regulatory Commission, who could accept the decision or alter it.

The state's arguments already have suffered a major setback. Last summer, federal regulators limited the time frame for the refund case to October 2000 to June 2001, instead of a 13-month period California wanted. That dramatically reduced the amount of money the state can claim it is owed, with one federal judge saying it might be $1 billion.

The state may have received a big boost last week, however.

In what some characterized as at least a partial endorsement of California's gouging claims, FERC opened formal investigations into several Enron affiliates and two business partners for allegedly gaming the market. The commission also suggested the market for natural gas -- which fuels power plants -- was an easy target for manipulation.

Because generators have long pointed to high gas costs as a major reason for high power prices, the fact that the commission suggested recalculating gas costs for the refund period could add $1 billion to the state's refund case, said Erik Saltmarsh, a lawyer representing the California Electricity Oversight Board.

But just as the state may be gaining ground, the companies it hopes to get money from are hardly in a position to hand out money.

Enron's record-breaking bankruptcy last December, coupled with several federal inquiries into energy trading practices begun this year, have sent the entire power industry into a tailspin.

Duke Energy is considering mass layoffs. Stock prices for companies such as Reliant Resources and Mirant are less than half of what they were at the beginning of the year. Dynegy Inc. of Houston reported last week it was nearing bankruptcy, although the company received a boost Monday when it agreed to sell a gas pipeline to a company controlled by billionaire Warren Buffet.

All are companies that figure in the state's refund case.

Added to those obstacles, the state still faces a FERC that has shown extreme reluctance to truly punish generators, said Peter Navarro, a professor of business at UC Irvine who studies the energy industry. Enron is an easy target because it is already bankrupt and well-publicized internal company memos detailing dozens of schemes, some illegal, make it hard to ignore wrong- doing.

"They aren't going to cripple the generators," Navarro said.

Duke Cuts Trading Profit 8%

Bloomberg News – by Jim Polson – August 22, 2002

Charlotte, Aug. 20 (Bloomberg) -- Duke Energy Corp. reduced energy-trading unit profit by 8 percent in the second quarter after a review of sham energy transactions requested by the U.S. Securities and Exchange Commission.

Earnings before interest and taxes were cut by $17 million at Duke Energy North America and by $2 million at other units after the second-biggest U.S. utility owner revealed 89 so-called round- trip trades, Duke said in a regulatory filing.

Duke expects to book the profit after settling contracts identified as part of round-trip trades, spokeswoman Cathy Roche said. The SEC, federal energy regulators, some state agencies and the U.S. Attorney's office are probing several companies' accounts and trading practices.

``The whole thing with round-trip trades is that they were supposed to have no impact on income, only increase revenue,'' said Skip Aylesworth, who manages about $200 million, including Duke shares, in the FBR American Gas Index Fund. ``Does this mean we have to go back and look at all the companies who said they had trades with no effect on income?''

In round-trip trades, companies simultaneously buy and sell power or natural gas at the same price and quantity. The transactions have little use except to boost revenue or trading volumes.

Duke's investigation found one trader had incorrectly reported so-called mark-to-market transactions, which can be booked as income in the latest period, and those that should have been accounted for on an accrual basis, yielding income only when Duke is paid, Roche said.

``There were a lot of adjustments back and forth,'' she said. ``The net result was $17 million at Duke Energy North America.'' The trader was among two employees Duke fired earlier this month for ``improper'' energy transactions, she said.

The shares of Charlotte-based Duke rose 4 cents to $27.55. They have dropped 28 percent in the past year.

Second-Quarter Earnings

Duke reported second-quarter net income of $474 million, or 65 cents a share, on revenue of $16.3 billion. It had earnings before interest and taxes of $1.05 billion, including $196 million at Duke Energy North America, its main trading unit.

Duke had said the 89 transactions represented about $217 million in revenue in 2001 and the first half of 2002 out of electricity and gas trading and marketing revenue of $75.6 billion. The trades were ``not material,'' to the company's financial statements, Duke said.

``It's all in how you define material,'' said Allan J. Meyers, who has Duke shares among about $1 billion he manages in the Fifth Third Large Cap Value Fund. ``On an annual basis, it's probably not material.''

Reliant Resources Inc. and CMS Energy Corp. have revealed round-trip transactions inflated revenue..

Future of Halted Duke Plants

Reuters – August 22, 2002

SAN FRANCISCO, Aug 21 (Reuters) - Duke Energy Corp. said on Wednesday it would announce within the next couple of weeks what it intends to do with two unfinished power plants it has shelved in the western U.S.

Duke said earlier Wednesday it halted further construction on a 570-megawatt power plant in Deming, New Mexico, and a 600 MW plant in Grays Harbor, Washington.

"In the next couple of weeks, we'll determine an appropriate construction schedule for moving forward on these projects," said Duke spokeswoman Diana Vavrek. She declined to comment on whether the plants might be sold.

The two plants, both to be fueled by natural gas, were about 40 percent complete.

Duke, based in Charlotte, North Carolina, said the decision to halt work on the plants was based on a steep drop in wholesale power prices.

But the company has also been struggling with a sagging share price and is involved in a probe by federal energy regulators into possible market manipulation during the 2000-2001 California energy crisis.

The $300 million facility in Washington was originally scheduled to start commercial operation next summer while the $250 million power plant in New Mexico was slated to start up in the autumn of 2003.

The company is currently building three other power plants unaffected by today's announcement, including a 1,200 MW gas-fired power plant outside Las Vegas, Nevada.

Duke recently stopped paying overtime to workers at the Nevada plant, which is set to go into operation next summer.

Two other plants capable of generating a total of 1,870 megawatts are being built on the East Coast, Vavrek said.

No cost estimate was immediately available for the three plants.

Wholesale energy prices in the Western United States have fallen sharply from about $300 per megawatt hour during the height of the 2000-2001 California energy crisis to $25 to $30 today.

Shares of Duke finished Wednesday up 81 cents, or 2.94 percent, at $28.36 on the New York Stock Exchange, but are still well off the year high of $41.35.

‘Round Trips’ Good for Bankers

Employee Advocate – DukeEmployees.com - August 21, 2002

Bankers have made billions of dollars in fees from energy companies, according to The New York Times. Bankers advised energy companies to buy rivals, and made hefty fees. Now, as the companies unload the companies, the banks are making even more fees.

Paul Patterson, an independent energy analyst, said "It is safe to say that many of these companies' strategies were driven by a kind of Enron envy that Wall Street was more than willing to facilitate.”

Despite the bluster of some CEO’s, the collapse of Enron has dealt a blow to energy companies – especially the Enron clones. Agencies are lowering debt ratings, and energy companies are unloading assets.

Andrew Ross Sorkin reported “The Williams Companies, Duke Energy and CMS Energy are among dozens of utilities now selling assets that they acquired only last year on the advice of bankers.”

The fees are still rolling in for the bankers. The tears are rolling from the energy companies.

Duke Generators on Hold in NM

Albuquerque Journal – by Rosalie Rayburn - August 21, 2002

(8/20/02) - Duke Energy North America has halted construction of a 570-megawatt power plant near Deming and postponed startup work on a second power plant near Clovis.

Charlotte, N.C.-based Duke blamed a prolonged slump in the wholesale power market. The company said it will monitor the market conditions and expects to announce a new construction schedule within a few weeks.

"The dramatic and persistent decline in the wholesale energy market" prompted Duke's decision after close of business Friday, said Duke spokeswoman Diana Vavrek. The gas-fired Deming plant was a $250 million project.

"It's pretty alarming when a plant that's being constructed is halted, because a significant investment has been made," said Steve Piper, senior consultant with Boulder, Colo.-based Platts RDI Consulting, which tracks the power industry.

Duke is under investigation by the Securities and Exchange Commission after admitting in July that it engaged in "wash trading," a practice that helped drive up prices.

"The fact that they are postponing these plants is evidence that they are hurting," Piper said.

The decision about the Deming plant came just days after Duke said it would postpone plans to develop a 600-megawatt, gas-fired power plant near Clovis.

Duke broke ground at the Deming site last October and expected the plant to be operational by fall 2003.

The Clovis plant was expected to be operational a year later. Duke put that project on hold shortly after receiving the final permits Aug. 6

Both plants were conceived during the heady days of the 2000-2001 California power crisis, when wholesale electric prices reached record levels.

Since then, wholesale power prices have plummeted, forcing power companies to scale back plans to build plants.

Duke also recently halted construction at a $300 million 600-megawatt power plant at Grays Harbor, near Olympia, Wash., Vavrek said.

Employee Advocate: A curious reader asked the Journal reporter if she got the story from a press release. She said “no.” She got a tip and had to dig the story out!

Duke Will Have to Give True Revenue Reports

The Charlotte Observer/Bloomberg News – by Bradley Keoun – August 18, 2002

(8/17/02) - NEW YORK - A new accounting rule could topple Duke Energy Corp. from its new spot as Charlotte's largest Fortune 500 company.

Duke and other energy traders are being forced to slash their revenue by abandoning an accounting method that Enron Corp. pioneered and used to enter the top ranks of U.S. companies. Two companies have said the change -- which does not affect profits -- would have cut revenues by more than 70 percent.

Duke hasn't finished calculating the revenue impact. Last year, energy trading accounted for 86 percent of the company's $59.5 billion in revenue that made it No. 14 on the Fortune list -- ahead of Bank of America Corp.

Not all trading revenue is affected by the change, said Duke spokeswoman Cathy Roche. But, she added: "I would consider it significant. The important thing is, it doesn't impact our earnings."

Starting this quarter, power and natural-gas companies must report trading revenue as sales minus commodity purchases under a change by the rulemaking Financial Accounting Standards Board. Many energy traders have reported "gross" revenue, or sales only, with associated costs elsewhere in the income statement.

Accountants and investors said the rule will remove an incentive to inflate revenue with sham trades and offer a more realistic measure of energy trading relative to other U.S. businesses. Energy companies now have to calculate trading revenue similar to the way it's done by bond and stock traders.

"What gross revenue did was make the energy market look bigger and more liquid than it really was," said Timothy O'Brien, who manages $225 million in the Evergreen Utility and Telecommunications Fund.

Profits won't be affected because costs are just being shifted.

Even with the new rule, companies won't have to break out trading costs and purchases, obscuring whether their trading desks are successful.

"All it does is lower their visibility in the Fortune 500," said Allan Meyers, who manages $2 billion at Fifth Third Bancorp. "It takes care of one of the ills that have been bothering people, but much else is needed."

Traders' shares have tumbled this year as regulators probe so-called "wash" or "round-trip" trades by Duke, Reliant Resources Inc., CMS Energy Corp. and other companies. In the trades, firms bought electricity or natural gas and immediately sold it back to the same party at the same price.

CMS Chief Executive William McCormick Jr. resigned in May after CMS said sham trades inflated revenue by a third last year.

The new rule will discourage the trades because the proceeds from a sale will be canceled by the costs of buying the commodity, accountants said.

"One of the benefits of the new rule is that your revenue won't benefit from a round-trip," said Sam Lynn, a FASB staff member who worked on the change.

El Paso Corp., which adopted the change early, last week said second-quarter revenue was $2.99 billion under the new rule and would have been $15.9 billion under the old method.

American Electric Power Co. Inc. said applying the new rule to the first six months of this year would have cut revenue by about 75 percent to $7 billion, from $27.9 billion under the old method.

Staff writer Stella M. Hopkins contributed to this article

Duke Seen to Decline

Salomon Smith Barney – August 18, 2002

(8/16/02) - We have established our 2004 earnings expectations for 3 power wholesalers: Duke Energy, Mirant and Calpine. In all three cases, we see a meaningful decline in 2004 versus 2003. The declines are larger for "pure-play" MIR and CPN. The decline is a more modest 9% for DUK, a wholesale-focused utility, which combines the protected cash flows of a utility, with the commodity-sensitivity of a large fleet of merchant generation plants. Increasingly, we see a more cloudy earnings picture for 2003. We also expect 2004 estimates, as they are published, to show declines from 2003 levels for most wholesalers, whether "pure-play" or "utility".

Paul Anderson Hangs It Up

Forbes Magazine – by Benjamin Fulford – August 18, 2002

(8/15/02) - The world's largest mining company teaches us a thing or two about commodity markets.

A giant change in the $200 billion global mining industry took place last November and almost went unnoticed. With copper prices plunging rapidly, BHP Billiton, the world's largest mining company, announced it was cutting back production. Competitors could have stood pat, capturing the benefit of a firming copper price without sacrificing volume. But if they played the game that way, BHP would presumably have rescinded the production cutback. Wising up, enough of big copper producers followed suit with plans of their own to reduce output.

Game theory at work. Copper's price shot up from a 15-year low of 62 cents a pound before the announcement to 72 cents three weeks later and a recent 76 cents. The action signaled the emergence of a group of mining giants with both the power and the will to moderate the volatile price cycles that have long been the scourge of mining companies and their customers.

This change will affect many people because "almost everything you touch is made of metal, or involves metal," points out Brian Gilbertson, a 58-year-old South African who has taken over the management of the company. The successful production cutback crowned a turnaround by just-retired Paul Anderson, 57, an American chief executive hired in 1998 from Duke Energy to fix up troubled Australian mining giant BHP.

Anderson and Gilbertson formed their company in June 2001 by merging Australia's BHP and the U.K.'s Billiton to create a monster with $18 billion in revenue and $2 billion in profit. BHP Billiton has topped Alcoa to become the world's most valuable mining company, and has joined Rio Tinto and Anglo American in a giants club accounting for half of the world mining industry's $200 billion in market capitalization.

The venerable BHP, founded in 1885 as Broken Hill Proprietary, needed a shaking-up, and Anderson gave it one. The company had been such a dominant part of the Australian economy that in the prewar years the government could not write up its budget without getting a forecast from BHP of its projected tax payments. It had become so inbred, says a spokesperson, that before Anderson took over, the public relations department never sent clips of negative news stories to management.

Anderson reorganized the company, shut down unprofitable mines, spun off a steel division and shifted management focus from production to shareholder value. But without consolidation in the industry he couldn't do much about changes in the prices of the copper, aluminum, iron ore and oil (BHP is the world's 19th-largest oil producer) that he sold. When Billiton head Gilbertson hinted at a merger, Anderson listened.

Companies in a fragmented industry producing a single commodity are destined to suffer booms and busts. When prices are high, they add capacity, leading sooner or later to a glut. Then, as prices crash, no single player can afford to cut back. Since companies must pay fixed costs no matter what, their instinct is to open the spigot. Eventually the financially weakest producers go out of business, restoring prices but setting the scene for the next round of overcapacity. Price swings are as much a feature of metals as they are of airplane seats or pulp.

What broke the cycle last November was the fact that BHP Billiton had diversified. It could afford to eat some dust in copper for a while by relying on its coking coal and oil to pay the bills.

The industry, and BHP Billiton, still face huge challenges. Commodities prices have fallen by an average of 2% a year in recent decades, meaning that even a market leader has to constantly run just to stay in place. Consumption, meanwhile, stays closely linked to GDP growth. Fortunately, though, there is growth out there. Example: Each year for the next two decades China will be needing structural steel to build a Manhattan's worth of new buildings, meaning plenty of ore from places like the BHP Billiton mining complex near Pilbara in Western Australia.

Quite an uphill battle. Anderson, indeed, did not seem too unhappy about retiring from a job of running a company with 100 operations on every continent except Antarctica: extracting diamonds from the Canadian arctic, copper from Chile and Peru, and iron ore and coal from Australia and South Africa; smelting aluminum in Mozambique; operating offshore oil rigs in the Gulf of Mexico and the U.K.; and codeveloping a $10 billion natural gas plant in Australia. "I don't want to wake up and worry anymore about what is happening in Mozambique or South Africa or the highlands of Peru," says Anderson. Or in BHP's home country, where miners' camps are bedeviled by poisonous snakes and wild dogs. And it's not just Mother Nature that you have to worry about. An employee was murdered in tribal warfare in Papua, New Guinea; a BHP train was blown up in Colombia.

Visit the Pilbara mines such as Mt. Whaleback, in an especially remote part of western Australia, and you will see what lengths a producer must go to nowadays to stay competitive. Every day the miners put 200,000 tons of red dirt, enough iron ore for 100,000 autos, onto the world's heaviest train, up to five miles long. The typical train, much shorter, still takes 13 minutes to roll by a crossing. At the Indian Ocean the train cars are flipped over and the ore is loaded onto Japanese, Chinese and Korean ships.

At the pits a computer monitors the location of each 240-ton truck and sends it on an optimal path to a 450-ton digging machine. The software is supposed to squeeze 25% out of the truck fuel costs.

Fuel-saving algorithms are one thing. Getting the right workers is trickier. Pilbara has an official policy of hiring enough Australian aborigines to lift them up to 12% of the work force (their proportion of the local population). In this part of Australia, aborigines who had never seen a white man before were being found as recently as the early 1980s. Their cultural rhythms are not adapted to the 9-to-5, Monday-to-Friday, year-round routine much of the world follows, says Eric Brahim, a BHP Billiton officer who is himself of aboriginal descent. "It is a very traditional lifestyle. They have ceremonies from October to February, and they have many funerals [of often distant relatives] to attend as well. If they fail to return to their community for these events they can get beaten up," he says. As a result, aboriginal employees "sometimes just vanish." To meet its quota, BHP Billiton is educating aboriginal children to provide tomorrow's work force.

An unexpected effect of the Pilbara work force and the algorithms they use is the threat to jobs of U.S. auto and appliance workers. How so? The Australian ore becomes Asian steel, which costs less than American steel made from Mesabi ore. Thanks to George Bush's tariffs, the Asian ore can't get into the U.S. in the form of steel billets. So it comes in as Korean cars and Chinese refrigerators. To paraphrase Brian Gilbertson a bit: Almost anything you touch in the world metals market has powerful consequences.

Duke’s Long Lobbying Arm

Associated Press – by John McElhenny – August 17, 2002

Massachusetts gubernatorial candidate Robert
Reich to return $1,200 in lobbyist contributions

(8/15/02) - Gubernatorial candidate Robert Reich, who vowed to take no money from lobbyists, said Thursday he would return $1,200 in donations after The Associated Press reported the money came from registered lobbyists.

Reich also said a well-known state lobbyist who had been planning to host a fund-raiser next week would be asked to step aside.

The contributions from four federal lobbyists had contradicted Reich's message in a widely run television ad in which he said, "I'm not taking any lobbyist contributions, because this is a people's campaign."

Reich decided to return the contributions, made between March and June, after an AP review of federal and state campaign finance records made them public on Thursday.

"We have decided to return the $1,200 to those people lobbying outside the state so that no one can question Bob's commitment to taking the monied influences out of state government," Reich spokesman Michael Goldman said.

Reich has made the lobbyist issue a cornerstone of his campaign, portraying himself as the only candidate who has never worked in state politics and who will owe nothing to lobbyists once in office.

He returned contributions earlier in the campaign from eight state-registered lobbyists. On Thursday he challenged Democratic opponents Shannon O'Brien, the state treasurer, and Senate President Thomas Birmingham to return lobbyists' contributions to their campaigns.

O'Brien and Birmingham said through spokesmen that Reich was taking a hypocritical stance by accepting federal lobbyists' contributions.

Reich accepted $500 from a federal lobbyist who represents interests including the University of Massachusetts, Lexington-based Raytheon and Duke Energy, the Charlotte, N.C.-based energy giant that is building a 30-mile natural gas pipeline under Boston Harbor.

In all, federal lobbyists have contributed about $1,200 of $1.4 million Reich has taken in since entering the race, aides said.

Reich also said Thursday that former state Sen. Joseph Timilty, now a lobbyist for the Wonderland dog track in Revere, would not be co-hosting a fund-raiser for Reich next week.

Duke Battles ExxonMobil

Houston Business Journal – by Monica Perin – August 17, 2002

This April 26, 2002 article is posted for background information

An arbitration panel is expected to issue a decision soon in a dispute between Duke Energy Corp. and ExxonMobil Corp. that could have significant implications for Duke's Houston-based merchant energy business.

At issue is Duke Energy Trading and Marketing, which is a joint venture entity in which Duke Energy holds a 60 percent interest and ExxonMobil a 40 percent interest.

Duke has been trying to buy out ExxonMobil's interest since 1999. But ExxonMobil has fought the buyout and has made counterclaims alleging that Duke Energy has systematically shifted the assets and business of DETM to wholly-owned Duke entities.

The dispute has been in arbitration since January 2000, and since arbitration proceedings are confidential, neither company would comment on them.

But the dispute is laid out in detail in documents filed in state district court in Houston in January 2001, when Mobil Natural Gas Inc., the entity that signed the original joint venture agreement, attempted to litigate the issues. Duke objected, and the court ruled that Mobil's claims had to be handled through binding arbitration, as called for in the joint venture agreement.

Friendly venture

The joint venture now known as Duke Energy Trading and Marketing was originally created in 1996 by PanEnergy Corp. and Mobil Natural Gas Inc. to engage in the business of purchasing, selling and marketing natural gas, electric power and other energy products and services -- including risk management and trading in energy-related financial instruments -- in the United States.

Mobil (which is now ExxonMobil) transferred all its domestic natural gas trading and marketing-related assets to DETM and signed a 10-year gas supply contract with DETM.

A year later, Duke Power Co., a North Carolina-based utility, acquired PanEnergy, a Houston natural gas pipeline company, and PanEnergy's 60 percent interest in the joint venture marketing operation. In late 1998 Exxon Corp. began its acquisition of Mobil Corp., taking over the 40 percent interest which Mobil Natural Gas had held in the joint venture.

According to Mobil's court petition, after Duke's takeover of PanEnergy, as Duke became more familiar with DETM and the energy trading business, "Duke began to regret the bargain that PanEnergy had made with Mobil."

Duke then began "a campaign to devalue DETM, appropriate DETM's business opportunities for Duke's sole benefit and force Mobil Natural Gas out of DETM," Mobil claims.

Duke created two wholly-owned subsidiaries -- Duke Energy North America and Duke Energy Merchants -- and appointed Harvey J. Padewer president of Duke Energy Services Group.

"From the first, Mr. Padewer made it crystal clear that Duke would either force Mobil to sell its share of DETM to Duke or barring a sale, Duke would simply transfer the DETM business to 100 percent-owned Duke entities," Mobil's court petition claims.

In August 1999, Duke informed Mobil that Duke no longer wished to conduct its gas and electricity trading business in an entity not 100 percent owned by Duke and made its first buyout attempt.

Duke proposed slashing the joint venture's daily operating risk level by 60 percent, which would drop the entity's expected earnings for 1999 to $80 million from $143 million in 1998.

Mobil, in the midst of its merger transaction with Exxon at that time, says it had no choice but to go along with Duke's proposal in order to avoid triggering the buyout provisions in the joint venture agreement.

Meanwhile, Duke's income from its own natural gas and electric trading soared to almost $600 million in 2000 -- more than five times larger than its income from DETM.

The joint venture agreement prohibits both Duke and ExxonMobil from creating a natural gas or electric power trading business that competes with DETM.

Duke entities, ExxonMobil says, "now conduct substantial portions of the business formerly done by DETM." DETM no longer has any employees of its own; its business is carried out by employees of various Duke subsidiaries. Duke traders make trades for both DETM and several Duke subsidiaries and "Duke decides which trades are assigned to DETM and which are assigned to Duke," ExxonMobil says.

In a December 1999 letter to Mobil, Padewer says the fact that some employees who formerly worked exclusively for DETM "are now involved in the management of Duke Energy Merchants' affairs ... in no way violates the venture agreements."

ExxonMobil also claims Duke has acted in "bad faith" toward DETM in connection with several specific business deals.

Escalating disagreement

Finally, in July 2000 DETM's management proposed a new business plan for DETM that would transfer substantial parts of DETM's business to Duke. This time, ExxonMobil opposed the plan, triggering the buyout provision and sending the dispute to arbitration.

In his December 1999 letter, Padewer defends Duke's exercise of its buyout rights, terms Mobil's claims "unsubstantiated," and asserts that all of Duke's transactions with regard to DETM were "in complete accordance with the venture agreements."

A three-member arbitration panel held an evidentiary hearing on the disputed claims last October. Its decision will be binding and unappealable.

According to arbitration experts in Houston, the arbitration panel has wide latitude in what it can decide to do. It could order one or both parties to take certain actions to carry out the joint venture agreement, or it could terminate the agreement and determine who gets to keep which parts of the business and who pays how much to whom.

Duke, ExxonMobil Dispute Raises Questions

Houston Business Journal – by Monica Perin – August 17, 2002

This April 26, 2002 article is posted for background information

When natural gas and power traders deal with Duke Energy Trading & Marketing, are they aware that DETM is a joint venture co-owned by Duke Energy and ExxonMobil? Or do they assume they are dealing with Duke? Do they know that ExxonMobil is accusing Duke of taking over DETM?

"Most people just think they're dealing with Duke," says the director of a power trading desk in Houston. "Everything (all trades, whether with the joint venture or with Duke itself) goes through DETM. Traders are oblivious to the dispute. They're using Duke's balance sheet. Mobil gets a percentage of the earnings, but Duke does all the bookings."

But "people at higher levels" -- such as this power trading director -- know DETM is a joint venture and are aware of the dispute, he says.

The case raises a lot of interesting issues in addition to the substantive ones that are currently being arbitrated.

Mobil Natural Gas Inc., the original party to the joint venture with PanEnergy (which was later acquired by Duke Power Co.) has alleged that about one year after acquiring PanEnergy, Duke embarked on a calculated campaign to either force Mobil to sell its interest in the joint venture to Duke or to simply transfer major portions of the joint venture's trading business to Duke.

And -- according to court filings and correspondence -- Duke made no secret of its intentions.

That squares with an Atlanta energy analyst's take on Duke:

"Duke is a well-managed company, but they are slick, very wily," the analyst says. "They don't have a reputation for doing anything untoward -- they're very straight-up. They'll cut your throat, but you'll know about it."

So, from early on, Duke didn't like the joint venture arrangement and wanted out of it. And not surprisingly, since the agreement prohibited either party from trading natural gas or electricity in competition with the joint venture. It also required that material disputes be submitted to binding arbitration.

Arbitrations are confidential. And that raises concerns about openness and transparency in the affairs of public companies -- especially anything that could have a material impact on a company's business.

Duke summarizes the dispute and arbitration in its most recent annual report but states unequivocally that the "final disposition of this action will have no material adverse effect on Duke Energy's consolidated results of operations or financial position."

But who's to know? It's all secret. If Mobil hadn't at one point filed a petition in court in a futile attempt to litigate the matter, there would be no public documents on the matter at all.

"Material risk is the bottom line," says the analyst. "Are they understating it? And what about shareholders' rights? Is arbitration a way to hide material issues from shareholders?"

Even in arbitration, U.S. companies are still required by the Securities & Exchange Commission to disclose material events, says Mark Baker, an attorney in the arbitration practice of Fulbright & Jaworski in Houston.

Arbitration, both domestic and international, is exploding and making substantial inroads on commercial litigation, arbitration practitioners say. So there will doubtless be growing attention focused on these and other issues relating to commercial arbitration.

Meanwhile, some of the substantive issues raised by Mobil against Duke are interesting, too. Mobil (which is now ExxonMobil) details several specific deals in which it claims Duke acted in "bad faith" and not in the best interests of the joint venture, in violation of the venture agreement.

When Duke acquired Union Pacific Fuels' gas marketing assets as part of its purchase of Union Pacific Resources' midstream gas business in 1999, it was agreed that DETM would purchase the gas marketing assets from Duke, ExxonMobil says. This was necessary because the joint venture agreement prohibits both Duke and ExxonMobil from creating a natural gas or electric power trading business that competes with DETM.

During negotiations, DETM valued the UP Fuels gas marketing assets at about $90 million. But in a March 4, 1999, letter to DETM, Duke Energy president Harvey Padewer offered to sell the assets to DETM for $159 million.

"Duke knew that Mobil could not agree to this proposal without materially harming DETM," Mobil's court petition claims. And on April 1, 1999, Duke acquired UP Fuels' gas marketing business for itself.

In 1998, Duke acquired three power generating plants in California and signed agreements under which DETM provided natural gas and other fuel to the plants and sold the electricity. The deal was "quite profitable to DETM," according to Mobil's petition.

But Duke soon replaced those agreements with new contracts that were "far more favorable" to Duke while "eliminating all opportunity" for DETM to generate any profits from marketing and trading the energy services produced by the California plants, Mobil claims.

Mobil also claims that Duke "usurped" DETM's opportunity to participate in the Intercontinental Exchange, or ICE, an Atlanta-based electronic trading platform organized by a consortium of major energy and investment banking firms worldwide.

In early 2000, DETM began negotiating to secure an equity share in ICE. In August of that year, Duke informed Mobil that there must have been "some miscommunication" regarding DETM's participation in ICE and that Duke itself would be the equity owner of an interest in ICE.

Furthermore, as an equity member of ICE, Duke is required to transact a certain volume of business on ICE, so it met that obligation by committing DETM gas and power transactions to ICE, Mobil says.

In a December 1999 letter to Mobil, Padewer termed Mobil's allegations "unsubstantiated" and denied that any of Duke's actions had violated terms of the venture agreement.

An arbitration panel is expected to issue a decision soon in the dispute.

S&P Cuts Duke Energy Corp's Ratings

Reuters – August 15, 2002

(Full text of press release provided by Standard & Poor's Ratings Services')

NEW YORK, Aug 14 - Standard & Poor's Ratings Services today said it lowered the corporate credit ratings of Duke Energy Corp., Duke Capital Corp., Westcoast Energy Inc. and Union Gas Ltd., and other related subsidiaries to single-'A' from single-'A'-plus, and removed them from CreditWatch with negative implications where they were placed on July 16, 2002. The outlooks are stable.

The corporate credit rating for Duke Energy Trading and Marketing, L.L.C. (DETM), which is 40% owned by Exxon Mobil Corp.(AAA/Stable/A-1+), is lowered to 'BBB+' from 'A-'; the outlook is stable. Duke Energy Field Services LLC's rating is affirmed at BBB/Stable. Ratings on debt issues have also been lowered, although the short-term corporate credit and commercial paper ratings remain unchanged at 'A-1' for U.S. entities and 'A-1' (mid) for Canadian entities, the ratings were removed from CreditWatch negative.

Charlotte, N.C.-based Duke Energy has about $21.5 billion of consolidated debt outstanding. The company conducts its electric utility operations through Duke Power and owns Duke Capital, which is the holding company for U.S. and Canadian gas pipelines and distribution, international ventures, merchant generation through Duke Energy North America (DENA) and trading and marketing activities through DETM.

"The downgrades reflect a reassessment of Duke Energy's consolidated creditworthiness given the increasing risk of energy trading and merchant generation activities," said Standard & Poor's credit analyst Cheryl Richer. "The CreditWatch negative designation is removed because Standard & Poor's does not expect the outcome of the ongoing Federal Energy Regulatory Commission and Securities and Exchange Commission investigations into round-trip trades to be onerous. Duke Energy has said that less than 1% of its trading revenues were comprised of round-trip trades. Standard & Poor's believes that its revised ratings incorporate this risk due to its evaluation of DETM's risk management policies and procedures," she added. "The downgrades also incorporate the financial implications of the current decline in wholesale electricity prices in the United States," Richer said.

This deterioration is mitigated by cash flow stability provided by Duke Energy's regulated electric and gas pipeline businesses, which are expected to contribute about 65% to 70% of earnings before interest and taxes over the next several years. Standard & Poor's expects that management will continue its efforts to maintain a sound balance sheet. Importantly, Duke Energy continues to make reductions in its capital expenditure program commensurate with expectations of reduced cash flow from DENA and DETM.

A complete list of the ratings is available to RatingsDirect subscribers at www.ratingsdirect.com, as well as on Standard & Poor's public Web site at www.standardandpoors.com under Ratings Actions/Newly Released Ratings. Contact: Cheryl E Richer, New York (1) 212-438-2084 Copyright 2002, Standard & Poor's Ratings Services

Duke, Others Accused of Overcharging

Reuters – August 14, 2002

WASHINGTON, Aug 13 (Reuters) - The city of Burbank, California is the latest Western electricity buyer asking federal regulators to investigate if suppliers inflated prices in long-term, multi-million dollar contracts signed during the height of the state's energy crisis.

A city-owned utility accused Calpine Corp., Duke Energy Corp. and El Paso Corp. of overcharging for wholesale electricity in five contracts signed in the spring of 2001.

Burbank asked the Federal Energy Regulatory Commission to investigate the prices, "abrogate or reform" the contracts and refund the overcharges, according to documents filed late Monday with FERC.

Power wholesalers have repeatedly said they charged fair prices based on market conditions to guarantee long-term supplies to California.

As prices rocketed higher during California's power crisis in early 2001, Burbank's municipal utility signed long-term supply contracts to pay from $56 per megawatt hour (mwh) to $130 per mwh for power in 2002, 2003 and 2004. California wholesale electricity has been selling for about $30 per mwh for much of this year.

The total value of Burbank's five contracts, based on the prices and volumes summarized in its FERC filing, was about $92.8 million.

A series of similar cases have been filed by other municipal utilities, investor-owned utilities and California state officials against electricity sellers.

The most recent FERC complaints were filed by American Electric Power in May, Truckee Donner Public Utility District in July and Sacramento Municipal Utility District in July.

In one case involving state officials, a FERC administrative law judge has set an Aug. 30 deadline for California and eight power suppliers to reach settlements resolving billions of dollars in contracts. El Paso is among the eight companies involved in those negotiations.

But in another case brought by PacifiCorp, a Portland utility owned by Scottish Power Plc, settlement talks collapsed last week. The FERC will now launch a formal hearing in the case, which involves El Paso and other power suppliers.

The new complaint filed by Burbank against El Paso, Calpine and Duke is pending before FERC in docket EL02-117.

FERC Sham Trade Investigation

Reuters – August 14, 2002

WASHINGTON, Aug 13 (Reuters) - The Federal Energy Regulatory Commission (FERC) on Tuesday did not rule on the status of sham electricity trades meant to inflate prices and volumes, but pledged to address them in its final report to Congress.

In an interim report released on Tuesday, FERC said it is investigating "possible misconduct" by Avista Corp., El Paso Electric Co. and units of bankrupt Enron Corp. related to power prices during California's energy crisis.

The agency's final report, to be released an at undetermined date, will include "an analysis of wash trades in electricity and natural gas in the West" during 2000 and 2001, FERC said in its interim report.

FERC Chairman Pat Wood has voiced support for legislation to ban so-called "wash trades" or round-trip trades, which involve essentially identical swaps between two trading companies of the same amount of energy at the same price.

FERC is investigating wash trading along with the Securities and Exchange Commission and Commodity Futures Trading Commission.

Several U.S. power companies -- including Dynegy Inc., Mirant Corp., Reliant Resources Inc., Duke Energy Corp., and CMS Energy Corp. -- are facing scrutiny by federal regulators into alleged sham trades.

California officials have blamed wash trades for contributing to the state's power crisis and soaring prices in late 2000 through mid-2001. California is seeking refunds of nearly $9 billion for alleged overcharges by several wholesale electricity suppliers.

Arthur Andersen to Save Duke?

Dow Jones – August 10, 2002

CHARLOTTE, N.C. -(Dow Jones)- Duke Energy Corp added three new positions to its controller's department, including Dwight L. Jacobs as managing director, corporate.

In a press release Friday, the energy company said Jacobs will be responsible for managing internal and external financial reporting. He spent the past 14 years with Arthur Andersen LLP's Washington, D.C., Columbia, S.C., and Greensboro, N.C., offices.

J. Danny Wiles was named managing director, accounting research and business unit support. Wiles will be responsible for leading the research and implementation of accounting standards guidelines and emerging issues from regulatory and authoritative agencies. He was a partner with Arthur Andersen in Chicago.

Duke named Daniel R. Zakerski director, financial systems. He will assume responsibility for managing the enhancement of financial reporting systems. Zakerski had worked for Kmart Corp the past year. Prior to that, he spent seven years as audit manager at PriceWaterhouseCoopers in Detroit.

Duke, like the rest of the energy sectors, has come under scrutiny for round- trip trades, which involve the simultaneous buying and trading of power for the same price and amount. The exchanges are designed to inflate trading volume and revenue.

On Aug. 1, Duke said it identified a "very small number" of round-trip transactions in one segment of its trading operations and acted to make sure such behavior doesn't happen again. The company added those trades had a " minimal" impact on reported trading revenue and no material impact on its financial statements.

On top of an ongoing Securities and Exchange Commission probe, Duke disclosed in July that the Commodity Futures Trading Commission and the U.S. Attorney's office in Houston issued subpoenas to the company for information on round-trip trades.

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