Duke Index

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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 13 - 2002

"It is unfortunate we can't buy many business executives for what they are worth and
sell them for what they think they are worth." - Malcolm Forbes (1919-1990) publisher

Root Cause for Duke’s Problems

Employee Advocate – DukeEmployees.com – November 11, 2002

Vice President of Nuclear Generation, Mike Tuckman, made some interesting comments in his newsletter of November 4, 2002.

Regarding projected earnings, he stated: “If you are like me, you feel like a truck has run over us.”

Mr. Tuckman was not the cause for any of the problems that the company is facing now. He did not concoct the scandalous cash balance pension conversion, and he was not the one who make the outlandishly optimistic earnings growth rate promises.

The worse thing that can be placed on his doorstep is his being an apologist for many corporate blunders. But Duke demands that all in management blindly support even the most ridiculous polices given from on “high.”

Mr. Tuckman told of a recent meeting with Rick Priory and the Policy Committee about just where they went wrong. He stated that Mr. Priory recognized the value of the nuclear culture in analyzing the root cause of events and he attempted to emulate it.

That must have been a humbling admission for Mr. Priory to make. He has always given the impression that he regarded everyone in electric generation to be “knuckle draggers.” There was a time that he was only interested in energy and derivatives trading. Oh well, any port in a storm!

Mr. Priory concluded the causes of the problems were:

  • The California energy crises,

  • SEC and FERC investigations,

  • bankruptcy and fall of Enron,

  • declining economy,

  • lack of confidence in corporate management,

  • disillusionment of trading and marketing,

  • accounting allegations for Duke Power,

  • reduced volatility in energy prices, and

  • reduced cash liquidity in our sector.

Not too bad for one unaccustomed to analyzing what he did wrong. But, it still shows a reluctance to accept full responsibility.

Our root cause analysis for the creation of the many problems:

  • Greed,

  • a lack of ethics and integrity,

  • selling out the employees,

  • deregulation,

  • deception,

  • arrogance,

  • relying on spin doctoring to solve all problems,

  • thinking that bigger is always better,

  • Enron envy,

  • thinking the CEO’s primary job is to court investors and promise them anything,

  • viewing all things with a day-traders personality, and

  • valuing money over people.

The list could be condensed. All other causes are really sub-headings of “greed.” Not a little greed, mind you. But all-consuming, overpowering, blinding greed. Such greed tends to poison all that it comes in contact with.

The California energy crisis was not a root cause; it was a byproduct of greed. Deregulation was the vehicle that enabled the whole sordid affair to be pulled off.

SEC and FERC investigations were not a root cause. They were the natural and necessary reactions to the plundering of the California ratepayers.

The bankruptcy and fall of Enron were not even a root cause. The root cause of the Enron failure goes back to greed and all of its byproducts. Without these corrupting elements, Enron would have never failed.

The declining economy is not the root cause either. The root cause for the declining economy is, again, greed, and its byproducts.

The lack of confidence in corporate management is not a root cause. That is merely the public facing the fact that there is little reason to have any confidence in most corporate management. Why? Greed and byproducts!

The disillusionment with trading and marketing is not the root cause. That is, again, the public just facing facts. Turning one’s back on a viable business and the employees to chase day-trading fantasies is the cause for the disillusionment.

The accounting allegations for Duke Power were not the root cause. And isn’t it about time to stop referring to them as “allegations”? They are a proven fact, according to the auditing firm. Without greed, deception, and the desire to spin away any concerns, there would have never been an accounting issue.

The reduced volatility in energy prices was not the root cause. It was the result of everything under the greed heading.

The reduced cash liquidity in our sector was not the root cause. It too is a natural consequence of companies leaving the tainted energy trading game. It is also the result of greedy companies reaping rating penalties for their actions. It is a result, not a cause.

Mr. Priory’s list turns out to be a pretty good list - for continued denial of the truth.

The journey to failure began in 1997. Duke had a new CEO and the employees had a new cash balance pension conversion. It is obvious that the attempt at world domination of the energy markets was to be financed by the employees. Not financed in the sense that employees would ever see a return on their lost retirement. It was just that – lost. Any return would flow to the executives.

Rick Priory started down a ski jump in 1997. He intended to make a masterful jump and be forever enshrined in the hall of greatness. But a stumble was made at the top of the jump by selling out the employees. You know what happens when one stumbles at the top of the jump. No amount of gyrating and contortions can compensate for a fatal beginning error. The planned masterful jump turned into “the agony of defeat.”

To add insult to injury, many employees saw it all along. Those making millions of dollars were the only ones oblivious to the facts!

Mr. Priory came up with some lessons learned:

  • Avoid over-exposure in any one area,

  • diversification is a critical survival skill,

  • reliable market knowledge is essential,

  • don’t outrun your headlights,

  • measure what matters – economic profit and not just EBIT,

  • if it looks too good to be true, it probably is, and

  • bad news converges.

It is gratifying that Mr. Priory is learning. But time is running out. Sometimes, before employees can break in a neophyte CEO, he self destructs!

Over-exposure in any one area should always be avoided. Especially when the exposure is based on a half-baked premise and driven by greed.

"Diversification" is merely the inverse of his first lesson, to swell the list.

By stating that reliable market knowledge is essential, does that mean that Mr. Priory did not know this before? “Knowledge” and “brainpower” are bantered around a lot by senior management, as if they had some sort of monopoly on it. Is this an admission that they actually had none?

We cannot argue with “don’t outrun your headlights,” but that too seems a little naive.

“Measure what matters – economic profit and not just EBIT” – is anyone else sick of hearing about EBIT? When measuring what matters, what about integrity, ethics, keeping one’s word, and not destroying those whom you totally depend on?

“If it looks too good to be true, it probably is” – a day-trader gets a dose of reality!

Bad news converges only when one does everything wrong. If one does everything right, good news will converge. Be excessively greedy, exploit innocent people, apply deceptions, answer all questions with evasions and bad news is guaranteed to converge!

The policy committee is holding meetings to straighten everything out. Pardon our skepticism, but it seems that the foxes are going to design another hen house alarm system. All of their other ones did not work; the chickens kept disappearing.

Employees are being laid off. That’s always a good knee jerk reaction for management indiscretions.

The nuts and bolts business that Mr. Priory used to hate so much is now recognized as holding the company together. It’s about six years late to be finding this out, but better than never.

Mr. Tuckman mentioned the retirement fund being under-funded. That too is a result of corporate greed, but we will cover that later.

Duke Gets Another Federal Subpoena

Reuters - November 9, 2002

CHARLOTTE, N.C. (Reuters) - Duke Energy Corp. on Friday was subpoenaed by the U.S. Attorney's Office in San Francisco for information on its activities in the California energy markets, the utility company said.

A Duke spokesman said the company was in the process of reviewing the subpoena and could not immediately furnish more details about the activities or timeframe under question.

Duke, which received the subpoena as part of an ongoing grand jury investigation, said it will cooperate with U.S. Justice officials as it has with other government organizations inquiring about similar issues.

The Charlotte, North Carolina-based company is the subject of numerous investigations into "round-trip" trades, where energy is traded to artificially increase trading volume and revenue. The Securities and Exchange Commission in mid-October "formalized its inquiry" into Duke's trading activities, while the company has responded to subpoenas from the Commodity Futures Trading Commission and a federal grand jury in Houston.

Before the announcement, Duke shares closed at $19.96, down 85 cents, or about 4 percent, in Friday trade on the New York Stock Exchange. Duke shares have fallen 49 percent this year amid an industry downturn over questionable trading practices and the demise of former trading giant Enron Corp.

Rick Priory Blows Smoke

Employee Advocate – DukeEmployees.com – November 6, 2002

Duke Energy Chairman and Chief Executive Rick Priory delivered a speech to The Economic Club of New York on Monday, according to Dow Jones. He admits that corporations need to clean up their act, but is afraid of government regulations.

Here’s a flyer: If the corporations, including Duke Energy, had not been so greedy and broke (or severely bent) about every rule in the book, they would not be facing increased government regulations. In fact, with “selected” President Bush firmly in their pocket, corporations were set to get by with financial murder. But the companies were just too greedy. They tried to consume the whole world in one gulp – and got choked!

The corporate schemes and scandals were so putrid that even Bush, who was bought and paid for, could not overlook them. He went so far as to disown “Kenny Boy.” Even the politicians, who had been slopping at the corporate trough, were forced to vote for increased regulations. Mr. Priory and his kind begged for more regulations by their own actions. Now it's time for the whining.

Corporations that had bought almost the whole political system were so inept that it all crashed about their heads. There cannot be enough regulation put on these blood-suckers! Any regulations imposed will be circumvented by any and all means, so don’t feel too sorry for the corporations.

Mr. Priory admitted that energy companies have played a large role in the loss of investor confidence. But he then tried to shift the blame to Enron. Here’s news: Enron was not the only player in the failed con game. Enron was the company that Mr. Priory encouraged employees to emulate when he became CEO! Of course, he has not said that lately.

While Mr. Priory is throwing rocks at Enron, he should not forget that Duke Energy is under a number of federal investigations and facing numerous lawsuits. It would be a nice trick if all corporations could lay all of their indiscretions on Lay. Since Ken Lay is going to have to suffer the penalty for his sorted deeds, why not let him take the transgressions of all other companies also? Sorry, “that dog won’t hunt.”

As bad of an actor as Enron was, it did not act alone. More evidence is being revealed on a daily basis. Enron is by no means the only company to be implicated in the market manipulations. Enron will not be the only corporation to suffer, and should not be the only one to suffer. Those who wanted to share in the spoils of deregulation should also partake of the retribution.

Mr. Priory said "What angers and alarms me about the almost daily news of wrongdoing is the resulting breach of trust in the institution of business."

Well, good for Mr. Priory! That is what angers employees also. When corporations break the trust of employees by reneging on retirement promises made for decades it is time for anger. When corporations take away retirement health care that had been promised for a quarter of a century, it is time for disgust. To make matters even worse, these same CEO’s used those very actions to take enormous wealth from the corporations.

The executives already have their millions. The employees have paid with lost pensions, lost heath care, and will now further pay through lay offs. Not one bit of this happened by accident – it was all calculated. Where the calculations failed were on the probabilities of getting away clean.

Mr. Priory went on to say "Business must set about the work - and many have - of clearing up our own corporate backyards. That requires brutal, self-critical honesty. We've got to prune out excesses, deception and any practice that threatens the moral roots of the organization."

Well, Mr. Priory said it. Now all he has to do is do it!

As “luck” would have it, the very time Mr. Priory became CEO many employees lost a large portion of their pensions. Part of the “deception” that he speaks of was that Duke never told the whole truth of the pension take away. The company gave every flimsy excuse for the cash balance pension conversion, except that it was designed to reduce company liabilities. In other words, promised pensions and retirement benefits would now go to the executives rather than the employees who earned them. That is where the “excess” comes in. Over the last six years, executives have taken millions of dollars out of the company through stock options and bonuses, while employees do not even get the meager amounts that they were promised for years. These retirement promises allowed corporations, such as Duke, to pay the employees less up-front. Now employees find that they have worked for less for years – and will not even get the promised deferred compensation. Is it any wonder that this has been called highway robbery?

Mr. Priory said that he applauded the accounting change that eliminated mark-to-market for energy companies. This was the loophole that allowed them to grossly inflate revenues by taking credit for future earnings. This creative accounting nugget was a gift from Ken Lay and Company, bought by lobbying dollars. A senator's wife was involved, who happened to chairperson of the Commodity Futures Trading Commission. She shortly thereafter "officially" went on Enron’s payroll.

Deregulation Aids Enron’s Looting

Enron Influence

Anyway, if Mr. Priory did not like mark-to-market accounting – he was under no obligation to use it! The bought loophole was a way for energy companies to distort their true revenues – and Mr. Priory gleefully used it as long as he could. Now that it has been declared illegal – he says that he is glad! Again, he never was forced to use it in the first place.

Mr. Priory went on to say "I'm not often excited in a positive way about accounting rules - but this one makes a whole lot of sense."

Yes it does, and so does increased energy regulations.

Rick Priory does not like price caps, but that’s what happens when corporations gouge the ratepayers.

Mr. Priory does not want long-term power supply contracts to be re-negotiated. He feels that California should have to honor its agreement. No mention was made of all the machinations and quadrupling of rates that took place to force the state into these contracts.

And, if Mr. Priory believes so deeply in honoring one’s agreements, what happened to the employees pensions and retirement health care?

The company voluntarily entered into the agreement with employees. In fact, the agreement was forced upon employees; there was no option to get the compensation up-front. Employees had to wait up to thirty years and “trust Duke.” Of course the employees had no say when the deferred compensation was taken away, in some cases after laboring twenty-five years to get it.

Mr. Priory is now lamenting that long-term energy contracts may face “forced re-negotiation.” So now, Mr. Priory gets a chance to see how it feels. It is said that “what goes around, comes around.” It seems that Mr. Priory likes it better when the money goes out of the employees pockets than when the bill comes around to him.

Mr. Priory even referred to the “sanctity of contracts.” What contract is more sanctified than a person’s pension and health care that he has worked all his life for? It is much more sanctified than a two-bit energy contract brought about under conditions of duress!

As if he had not dug himself into deep enough hole, he went on to say “When contracts that are entered into in good faith are broken, or even threatened, the fracture to our economic system goes deep and can spread far. The refrain gets familiar here: a breach of trust and market failure.”

Duke Energy breached the trust of employees almost six years ago, and in so doing, sowed the seeds of today’s failure. How much longer will Mr. Priory try to ignore the elephant in the room?

Duke Warns Against Breaking Contracts

Dow Jones Newswires – by Mark Golden – November 6, 2002

(11/5/02) - NEW YORK -(Dow Jones)- Though U.S. corporations need to clean up their act generally, heavy-handed government regulation of the energy sector would be counterproductive, Duke Energy Corp. Chairman and Chief Executive Richard B. Priory told a financial group in New York.

Energy companies have played a substantial role in the loss of investor confidence in U.S. businesses, with Enron Corp. straddling the dual scandals of corporate malfeasance and perceived energy market manipulation. Enron's head of western U.S. electricity trading pled guilty last month to fraudulently boosting prices in California's main electricity purchasing system.

"What angers and alarms me about the almost daily news of wrongdoing is the resulting breach of trust in the institution of business," Priory said at a meeting of The Economic Club of New York on Monday evening.

"Business must set about the work - and many have - of clearing up our own corporate backyards. That requires brutal, self-critical honesty," Priory said. "We've got to prune out excesses, deception and any practice that threatens the moral roots of the organization."

The energy sector's recently formed Committee of Chief Risk Officers is developing stricter standards for financial reporting and risk management in merchant energy. And Priory applauded the recent accounting change that moved physical energy contracts from mark-to-market to the accrual, or normal, method of accounting. Under this change, profits from delivering purchased power, gas or oil will be declared in the quarter of delivery rather than in the quarter a deal is done.

"I'm not often excited in a positive way about accounting rules - but this one makes a whole lot of sense," Priory said.

Nevertheless, electricity market price caps and the forced renegotiation of long-term power supply contracts are uncalled for, he warned. The California energy crisis was fundamentally caused by imbalance of supply and demand, coupled with a bad deregulation approach in the state, Priory explained. Price caps interfered with proper market signals in California and continue to do so throughout the West, while calls for overturning long-term contracts threaten the sanctity of contracts in the U.S. economy generally.

The Federal Energy Regulatory Commission plans hearings early next month on requests that it void long-term power contracts signed by the state of California in early 2001. Many western utilities have made similar requests on contracts they signed when the bulk power prices were much higher than they are today.

"When contracts that are entered into in good faith are broken, or even threatened, the fracture to our economic system goes deep and can spread far," Prior said. "The refrain gets familiar here: a breach of trust and market failure."

Duke, which owns several independent power plants in California, has been implicated by California politicians as one of the out-of-state gougers that created the crisis. Priory said his company will continue to defend itself with facts, as it recently did with an erroneous report by the California Public Utilities Commission. The CPUC claimed that Duke and other generators withheld power even as blackouts had to be ordered, but the California Independent System Operator last week said the commission's accusations against Duke were wrong.

Duke doesn't see how dishonest traders could have caused the enormous rise in wholesale power prices in the West from May 2000 to May 2001, but cases of bad actions should "see the light of day, and we should make sure that never happens again," said Priory.

"While I won't argue that change is needed, I will caution against counterproductive measures and the unintended consequences they often produce," he said.

Duke a Royal Pain?

TheStreet.com – by Melissa Davis – October 30, 2002

(10/28/02) - In the eyes of some investors, Duke has gone from royalty to royal pain.

The North Carolina energy giant -- one of the last real powers in the ragged merchant energy sector -- keeps buckling under the weight of its own lofty promises. Duke's latest tumble came last week after the company missed third-quarter earnings by a nickel, pressuring full-year guidance that was sharply lowered just weeks ago.

The stock plunged on the news, and analysts -- rattled by fresh disappointment -- took advantage of a Thursday morning conference call to vent their frustrations. Even polite investors revealed a growing unease about Duke's rose-tinted view of its future. One fund manager outright challenged Duke's ability to meet unchanged earnings guidance for 2003, which includes no room for further deterioration in the battered energy market.

"That might be viewed as even a little optimistic compared to what the message of the market is saying," said John Fisher of Raymond Capital.

Duke points to its healthy utility and pipeline operations and dismisses worries expressed by some investors about its disclosure practices and liquidity position. But with its stock still valued at $17 billion even after a 50% haircut in the last year, Duke's critics say the company faces a long uphill climb in an unforgiving environment just to meet its future goals.

Duke rose 46 cents Friday to $19.54.

Ahead of the Curve

Unlike most of its peers, Duke sees a "slight uptick" in next year's market conditions but acknowledges that its projections are vulnerable.

Analysts aren't waiting around for another surprise. On average, they expect Duke to miss the low end of its own 2003 guidance by 4 cents a share. In the meantime, they're still picking apart the contributors to Duke's recent miss.

The biggest drag, unsurprisingly, stems from Duke's energy trading unit. The company recorded a $161 million mark-to-market loss just one quarter after posting a $46 million MTM gain that helped push earnings ahead of estimates and -- because of huge MTM losses elsewhere in the industry -- raised the eyebrows of some critics.

Duke showed other signs of weakening as well. Because of the depressed merchant energy market, the company scaled back some power plant projects, which resulted in a $163 million third-quarter loss. Interestingly, the company wrote off only one-quarter of the value of its unused turbines, indicating that even larger charges could be forthcoming.

The plant deferrals also contributed to a massive decline in Duke's "accrual" book, future power contracts that lost more than $1 billion -- or 17% -- of their value in the latest quarter. Such hits led some analysts to question Duke's unwavering commitment to a disastrous business that's crushing so many players.

Duke defended its trading operation, saying it plans to emerge from the meltdown as one of the few survivors.

"We're very proud of our trading and marketing operation," CFO Robert Brace told analysts Thursday. "We're not looking at pulling back."

Flirting With Danger

Given the industry's violent slide, some bears are forecasting a risky year ahead for the company. Like many corporations, Duke still needs to address a significant shortfall in its pension funding. The company's pension liability has ballooned to $772 million, or about triple the amount Duke threw out to analysts earlier this month.

"They said it was their best guess at the time," one critic said. "If their best guess is three times lower than the actual number, just how well do they really know their business?"

Such missteps have led some observers to question more than Duke's earnings projections. They believe the company is unjustifiably optimistic about its ability to fund its entire business with next year's cash flow. Barring a strong turnaround, they predict that a liquidity crunch could send Duke on a desperate chase for short-term financing to pay off long-term debt.

"People think Duke has major cash problems," one short-seller said

Duke Energy Receives Data Request

Reuters – October 30, 2002

CHARLOTTE, N.C., Oct 28 (Reuters) - Duke Energy Corp. on Monday said it was one of several companies to have received a request from federal regulators for data related to energy pricing information provided to publications.

The utility and energy marketer said the request, from the Federal Energy Regulatory Commission, dated Oct. 25, was addressed to the largest North American gas marketers, as measured by 2001 physical sales volume.

Last week Williams Cos Inc. became the third major energy company to admit some of their employees gave false or inaccurate natural gas trade data to publications that compile price benchmarks following earlier admissions from American Electric Power Co Inc. and Dynegy Inc.

Duke Energy said it will fully respond to the request.

The published benchmarks are used to price some natural gas contracts, raising fears that inaccurate information may have been provided in an attempt to influence the value of deals.

The energy sector has suffered a series of blows to its reputation since industry leader Enron Corp. filed for bankruptcy last year.

Earlier this year, Duke Energy was one several companies that admitted to taking part in wash or round-trip trades, where energy is simultaneously bought and sold at the same price to increase trading volume and revenue.

Numerous investigations have been launched into energy trading practices in recent months, with the FERC, the Securities and Exchange Commission and the Commodity Futures Trading Commission among those scrutinizing the sector.

Buying Lake Property Cheaply

ShoreLine – by Doug Mayes – October 28, 2002

(2001) – Westport, the community bordering on Lake Norman in east Lincoln, has been called a variety of names.

Some reporters refer to it as a neighborhood of “upscale homes.” Some people who grew up in the area, and now drive through “just looking” call it the place “where rich drunks live.” Others have called it a “good place to live and raise a family and enjoy the lake.”

It’s now part of a region that is trying to incorporate, but that’s another story.

Today, in this, my first (and possibly last) column for the ShoreLine, is the story of how Westport came to be, as it was told to me.

It all began back in the mid-50’s. Television was all black and white and I was “Your Esso Reporter” on WBTV.

Charlotte developer Dwight L. Phillips was looking for a site for an industrial plant on the Catawba River.

What he found was approximately 850 acres of land in east Lincoln County known as the “Old Alfred M. Burton Farm.” Alfred was a cousin to the late N. C. Gov. Hutchins G. Burton.

Phillips’ search led him to Davidson and the sole surviving heir, Mary L. Young. She had no idea Duke Power would begin building a dam on the Catawba within a few years, creating a 33,000-acre lake that would be named “Norman,” after Duke’s President and CEO Norman Cooke.

Phillips would say later he knew nothing of Duke’s plans either, he was only looking for an industrial site.

But, he was interested in the land where cotton had once grown and Burton Creek meandered towards the Catawba. Much more land than enough to build a manufacturing plant!

“Would you sell the farm?” Phillips asked Ms. Young. She said she would “give it some thought.”

“How much would you want, if you decide to sell?” Phillips pressed.

“Well,” she answered, “I’ve always wanted to take a trip around the world --.”

Phillips said, “Lady, I’ll give you a first class trip around the world for the farm!”

They shook hands, and the deal was made.

Today, the Old Alfred M. Burton Farm is Westport #1, Westport #2, Westport #3, Governor’s Island, the Westport Golf Course and the land under Burton Creek.

Realtor Marty Wulfhorst, who’s been selling Westport property for 20 years, says a waterfront front in Westport ranges from $66,000 to $190,000, if you can find one, and a lot on Governor’s Island will cost $295,000.

An insider tells me Ms. Young’s fist class trip around the world cost Mr. Phillips about $40,000. Tax stamps on the deed add up to $44 – indicating a value of $44,000.

A good investment for Mr. D L. Phillips, indeed.

ShoreLine editor’s note: Doug Mayes, considered the dean of Charlotte broadcasting, is a long-time Westport resident.

Duke Energy Headquarters Picketed

The Charlotte Observer – October 27, 2002

(10/26/02) - About 20 N. C. electricians and contractors picketed outside Duke Energy Corp.’s Charlotte headquarters Friday, asking the company to hire more in-state contractors for its environmental project. The pickets, who are not Duke employees, said they were angry that a Duke subsidiary hired out –of-state workers for a power plant project. Robert Barber and Ken Clodfelter are from Winston-Salem.

Duke's Profit Drops 71%

Wall Street Journal – by Rebecca Smith - October 26, 2002

(10/25/02) - Duke Energy Corp.'s profit plunged 71% in the third quarter, reflecting a collapse in its wholesale merchant energy business, while AES Corp., hit hard by investments overseas, announced a $314 million loss.

Duke, one of the nation's largest integrated utility holding companies, earned $230 million, or 27 cents a share, down from $796 million, or $1.01 a share, a year earlier. Revenue dropped 12% to $4.2 billion from $4.8 billion. The company said it would lay off 1,500 workers, or nearly 5% of its work force.

AES, a large independent power producer based in Arlington, Va., posted a loss of 58 cents a share for the third quarter, compared with profit of $3 million, or one cent a share, a year earlier.

Duke, Charlotte, N.C., also disclosed that the Securities and Exchange Commission "a month ago" elevated to "formal" its investigation of the company's energy-trading activities and has subpoenaed documents from its external auditor, Deloitte & Touche. The company's general counsel, Richard Blackburn, said Thursday the company didn't previously disclose the information because it didn't "consider it material." Deloitte & Touche partners assigned to the Duke account couldn't be reached for comment.

In recent months, the entire power sector has been pummeled by low wholesale prices, disclosures of improper accounting and unethical trading activity, and difficulties at once-promising overseas units. Just two days ago, Duke said it would make a $25 million payment to customers of its regulated utilities in North and South Carolina after auditors found it had improperly charged expenses from its unregulated businesses to its utilities. Duke said that it doesn't believe it did anything wrong and is settling the case to put the issue behind it.

Duke's third-quarter results suffered because of the poor performance of Duke Energy North America, its merchant unit that develops new power plants and trades energy. It generated a pretax loss of $107 million in the third quarter, partly reflecting low electricity prices and $207 million in charges stemming from turbine-order cancellations, postponement of power projects and employee-severance costs. A year earlier, it earned $654 million.

AES, which owns utilities and power plants around the world, has been hurt by market instability in the U.S. and United Kingdom and currency problems in Brazil. Charges during the quarter included $215 million from discontinued operations and $182 million from foreign-currency losses. Revenue for the third quarter was up 16% to $2.14 billion.

Some analysts complain that AES is simply too complicated to try to understand, although company officials have said they are trying to simplify its finances.

In 4 p.m. New York Stock Exchange composite trading, Duke Energy shares closed at $19.08, off $1.06, or 5.3%, while AES shares fell six cents, or 4.5%, to $1.28.

Duke to Cut 400 Jobs in Charlotte Area

The Charlotte Observer – by Stan Choe – October 25, 2002

Post-Enron weakness in wholesale market blamed for lowered profit in 3rd quarter

Duke Energy Corp. will cut at least 1,500 jobs, including up to 400 in the Charlotte area, as the company battles a weak economy and plunging returns from its wholesale energy divisions.

The tough market dragged Duke's profit last quarter to $230 million, or 27 cents per share, down from last year's $796 million, or $1.02 per share, the company said Thursday. Excluding one-time items, Duke would have earned 52 cents per share, short of analysts' expectations of 57 cents.

Most of the fall came from the wholesale energy market's severe downturn; wholesale power prices are still low and trading is more difficult because of the fewer number of traders after Enron Corp.'s collapse.

The good news, Duke said, is that its natural-gas transmission and Duke Power subsidiaries are still performing solidly.

"The strength of these businesses ... will enable Duke Energy to manage effectively through this severe downturn in the energy merchant sector," said Richard Priory, Duke chief executive and chairman.

The company expects to finish the year at the low end of its projection for earnings per share of between $1.95 and $2.05. Next year's profits should be about the same, if the wholesale power market improves modestly, the company said.

The company also disclosed Thursday that the Securities and Exchange Commission has formalized its investigation of several power trades made by Duke. The SEC's move is "standard operating procedure" and not necessarily indicative of anything serious, Duke and securities attorneys said.

In addition to laying off more than 1,500 full-time workers and managers, or 5.6 percent of its work force, Duke Energy will eliminate more than 400 contractor positions.

"There is a lot of anxiety and angst," said one longtime N.C. Duke employee who asked not to be named. "It's pretty traumatic."

The layoffs will somewhat mirror divisions' recent performances.

The bulk, 60 percent, will be in the energy services division, which include Duke's North American and international merchant power groups. Most of the North American employees are in Houston.

The North American unit, which produces and trades power outside of the Carolinas, lost $107 million before interest and tax payments, after turning a $654 million operating profit in the third quarter last year.

About 20 percent of Duke's cuts will be within Duke Power Co., the regulated Carolinas utility. These workers are concentrated in Charlotte and across the Carolinas.

Between 300 and 400 Charlotte-area Duke employees will lose their jobs, Duke spokesman Randy Wheeless said.

A portion of the overall layoffs have already begun, and they will continue through next year, Wheeless said. Most will be finished by March.

With the cuts, Duke adds to a recent cascade of layoffs across the energy industry, as companies cut costs to counteract falling profits.

Duke's natural-gas transmission division was the only one to significantly improve its results this quarter, as it cut operating and maintenance costs and sold some assets. The unit doubled its operating profit to $287 million from $143 million last year.

Duke Power, which serves 2 million Carolinas customers, saw its profit fall to $585 million before interest and tax payments, from last year's $607 million. It suffered from lower industrial sales and increased costs due to a scheduled nuclear outage.

The power subsidiary is also under scrutiny by Carolinas regulators. An independent audit this week concluded that Duke hid profits that could have led to a cut in customer power rates. Duke acknowledged accounting errors but said there was no intentional wrongdoing by any employee.

Duke is also one of a host of energy companies under SEC scrutiny for so-called "round-trip" trades, where companies buy and sell power simultaneously at the same price. The practice could boost revenue.

Duke officials downplayed the SEC's formalization, saying the agency did it only to get authority to subpoena Duke's accounting firm.

SEC spokesman John Nestor said the commission regularly formalizes investigations when it wants to subpoena items.

David Schanzer, a utility analyst at Janney Montgomery Scott, said he was beginning to worry Duke's image as an industry leader and icon could begin to fade with the regulatory questions swirling around it.

He said the SEC inquiry wouldn't hurt Duke in the future, but he worries about Duke Power's alleged accounting irregularities. They could suggest problems in the company's management culture, he said.

"I don't think it's knocked anything off any perch yet," he said, "but certainly it's a sign that management needs to address."

Still, some shareholders see Duke as an industry steward.

"It's very well run from our perspective," said John Kuhns, a senior vice president of Boys, Arnold & Co., which holds about 79,000 shares. "It's highly reputable and the leader in the Southeast."

Staff Writer Rick Rothacker contributed to this article.

Duke Energy's Q3 Profit Gets Halved

CBS.MarketWatch.com – by Myra P. Saefong – October 25, 2002

(10/24/02) - CHARLOTTE, N.C. (CBS.MW) -- Shares of Duke Energy fell Thursday after the company's third-quarter profit was sliced nearly in half on weak conditions in the merchant energy market and the firm disclosed plans to cut nearly 2,000 staff and contract positions.

The shares lost $1.06, or 5.3 percent, to close at $19.08. They've now lost about half their value since the start of the year.

The company reported a third-quarter profit of $230 million, or 27 cents per share, down from the prior year's $796 million, or $1.02 per share.

Excluding charges totaling $319 million related to strategic restructuring moves, the company earned $441 million, or 52 cents per share. This was a nickel short of the average estimate of analysts polled by Thomson First Call.

Third-quarter revenue fell to $4.21 billion from $4.78 billion in the year-ago quarter.

"We are dealings decisively with the consequences of the extremely depressed energy merchant marketplace," said Richard Priory, chief executive.

As part of ongoing strategic moves, Duke Energy said it expects to eliminate more than 1,500 staff positions and more than 400 contract positions in the remainder of 2002 and during 2003.

Priory said the job cuts were aimed at reducing costs and realigning Duke Energy for a "new environment," and will, along with other cost-cutting measures, likely reduce operating expenses by more than $100 million annually.

David Schanzer, an analyst at Janney Montgomery Scott, lowered his expected three-year growth rate for Duke Energy to 7 percent, down from 8 percent to 10 percent, even though he believes the company "can get past this period."

"Longer-term growth of over 7 percent will likely justify a more positive outlook in the future, but for the time being, we would rather remain on the sidelines," he wrote in note to clients Thursday.

Schanzer noted that the company's "standard vote of confidence" following a conference call question about its common stock dividend "seemed largely convincing," indicating that Duke Energy understands the danger of a dividend cut at this time.

He maintained a "hold" rating on the stock.

2002 profit seen at low end of range

Looking ahead, Charlotte-based Duke Energy forecast ongoing earnings at the low end of its range of $1.95 to $2.05 per share in 2002. Wall Street's current consensus estimate is for a profit of $1.97.

Duke Energy also expects earnings for 2003 to be flat with 2002, "assuming a modest improvement in the current extremely depressed merchant energy market," said Priory.

But, if the North American merchant energy market doesn't improve in 2003, "earnings may be lower than 2002 ongoing earnings," he said.

The news comes just days after the company said subsidiary Duke Power expects to lay off hundreds of employees, in part due to a slow economy in the Carolinas. Duke Power expects to complete the layoffs by the first quarter of 2003, with the bulk of them done by the end of this year.

Last month, Duke Energy announced it would fall short of analyst expectations for the year and that 2003 earnings would be flat or lower than that posted in 2002 because of the economic downturn, low natural-gas prices and other factors.

It forecast a profit of $1.95 to $2.05 a share for 2002, down from the average $2.46 estimate analysts polled by Thomson First Call had at the time. See full story.

The company also announced plans last month to delay the building of three natural-gas power plants in Washington, Nevada and New Mexico that were to go on line in 2003.

Duke Energy to Slash 1,500 Jobs

Associated Press – by Paul Nowell - October 25, 2002

Duke Energy to Slash 1,500 Jobs, Third-Quarter Profits Tumble 71 Percent

(10/24/02) -CHARLOTTE, N.C. (AP) -- Duke Energy Corp. said Thursday its third-quarter profit plunged 71 percent because of weakness in the U.S. economy, forcing it to cut 1,500 regular positions and 400 contract workers.

Duke chairman and chief executive officer Richard Priory said the move will save Duke about $100 million a year.

"One of Duke Energy's strengths is our operating efficiency and ability to adapt to rapidly changing market conditions," Priory said.

"Labor reductions related to reduced capital expenditures represent an additional $75 million of capital savings."

Duke Energy shares fell 5.3 percent, or $1.06, to close Thursday at $19.08 on the New York Stock Exchange.

The Charlotte-based company said net income for the third quarter was $230 million, or 27 cents a share, down from $796 million, or $1.01 a share, in the same period in 2001.

Excluding charges, earnings per share were 52 cents, which fell short of Wall Street's expectations. The consensus forecast of analysts surveyed by Thomson First Call projected 57 cents a share for the quarter.

Revenue fell to $4.21 billion, down from $4.78 billion a year earlier.

Duke also said its earnings statement it has been subpoenaed by the Commodity Futures Trading Commission and by a federal grand jury about its energy trading activities.

"Duke Energy was advised in mid-October that the SEC has formalized its inquiry regarding so-called "round-trip" trading," the company said. "All information requests and subpoenas seek documents and information related to trading activities, including 'round-trip' trading."

The company said it was cooperating with all of the governmental agencies.

Earlier this year, Duke acknowledged that it identified 61 "round trip" or wash trades. In such a trade, an equal amount of electricity is bought and sold at the same price. Such trades inflate revenue and trading volume.

"We investigated 750,000 trades beginning in January 1999," Duke chief financial officer Robert Brace told analysts on a conference call. "We have given the SEC significant information."

Meanwhile, Duke forecast that its 2002 earnings per share would be at the low end of its previously stated estimate of $1.95 to $2.05, which the company already lowered in September.

The company also said it expects earnings in 2003 to be about the same as 2002. Thomson First Call's forecast is for Duke to earn $1.97 per share this year and $1.92 in 2003.

"This range is achievable, but with current performance and market conditions, we expect our results to be at the low end of the range," Priory said. "Our earnings outlook for 2003 is flat, assuming a modest improvement in the current extremely depressed merchant energy market.

Earlier this week, Duke Power Co., a unit of Duke Energy, said it will pay $25 million after an independent audit found the utility underreported its profits by nearly $124 million over three years.

The audit of Duke Power's accounts said the utility, which serves parts of North Carolina and South Carolina, devised a plan to underreport earnings. Regulators in both Carolinas must approve the proposed deal.

The settlement would entitle residential customers to several dollars over 12 months starting in the summer of 2003 as a result of fuel cost adjustments, Duke said. If approved, Duke Energy would take a $19 million charge against its fourth-quarter earnings as a result of the deal.

Concerns about Duke's accounting practices were first raised by Duke accountant Barron Stone, who contacted South Carolina regulators in 2001. He said Duke excluded refunds it received from nuclear-plant insurance and included executive compensation and other costs that should have been charged to shareholders.

The Grant Thornton LLP audit said Duke officials were concerned about the threat of a rate reduction after the South Carolina Public Service Commission in 1998 reduced rates charged by another utility.

In its proposed settlement, Duke Energy did not admit wrongdoing. The company acknowledged its internal investigation found that some accounting errors were made. Regulators in both states are expected to consider the proposed settlement next week.

Duke Energy Will Cut 1,900 Jobs

Reuters - October 25, 2002

(10/24/02) - CHARLOTTE, N.C. - Integrated utility Duke Energy Corp. on Thursday said it would cut nearly 2,000 jobs as its third-quarter profit tumbled 71 percent, hurt by a lackluster energy trading market and weak economic conditions.

The company will cut more than 1,500 staff jobs and more than 400 contract jobs this year and next, as part of a move to cut costs, it said. The reductions will lower operating expenses by more than $100 million a year.

Charlotte, North Carolina-based Duke reported third-quarter net income of $230 million, or 27 cents a share, down from net income of $796 million, or $1.01 a share, in the year-earlier quarter.

Excluding certain charges, the company posted earnings per share of 52 cents. On that basis, analysts had forecast earnings of 40 cents to 65 cents a share, with a consensus estimate of 57 cents a share, according to research firm Thomson First Call.

For 2002, the company forecast earnings per share at the low end of its $1.95 to $2.05 range. For 2003, it expects earnings to be flat from 2002, assuming a "modest" improvement in the "current extremely depressed merchant energy market."

The First Call estimates are $1.97 a share for 2002 and $1.92 for 2003.

Duke, which warned last month it will miss 2002 and 2003 profit forecasts, said revenue for the third quarter fell to $4.21 billion versus $4.78 billion a year earlier.

Duke joins a growing list of power companies trying to unload assets, issue stock, or both as the energy industry's financial problems deepen.

Earlier Thursday, independent power producer AES Corp. reported third-quarter profit fell 39 percent to $92 million, in line with analyst forecasts. The Arlington, Virginia-based company said earnings per share came in at 17 cents, down from 28 cents in the year-earlier quarter.

Duke, meanwhile, has slashed spending and deferred several major power projects this year, in addition to selling about $1 billion worth of stock, to raise much-needed cash.

As a result of the depressed merchant energy market, Duke expects to limit spending to $6.2 billion in 2002 and $3.5 billion in 2003.

The Duke Energy North America (DENA) unit, which includes Duke Energy's 60-percent share in Duke Energy Trading & Marketing, swung to a loss of $107 million, before interest and taxes (EBIT), compared with earnings of $654 million, before interest and taxes, the year before.

"I have some questions about the trading and marketing. What's driving the results there?" asked analyst Paul Patterson of Glenrock Associates…

Duke Layoffs to Hit Houston

Houston Chronicle – October 25, 2002

(10/24/02) - CHARLOTTE, N.C. -- Duke Energy Corp. said Thursday its third-quarter profit plunged 71 percent because of weakness in the U.S. economy, forcing it to cut 1,500 regular positions and 400 contract workers.

The cuts are to be carried out this year and next.

About 60 percent of the 1,500 cuts will be made in Duke's Houston-based energy services division, said spokesman Terry Francisco.

Energy services has 5,000 employees worldwide, with about 700 in Houston. Of Duke's 27,000 employees, about 2,000 are in the Houston area.

Duke Customers Seeks Bigger Credits

The Charlotte Observer – by Stan Choe - October 25, 2002

$25 million offer by utility called `token' by association official

(10/24/02) - A proposed $25 million settlement isn't enough to appease some of Duke Power Co.'s biggest industrial customers.

The Carolina Utility Customers Association, which represents 55 N.C. manufacturers, says that offer doesn't go far enough to settle allegations that Duke underreported $124 million in profits from 1998 to 2000.

An independent audit released Tuesday found that Duke hid profits that could have led to a cut in customer power rates. Duke acknowledged accounting errors but said there was no intentional wrongdoing by any employee.

In a proposed settlement, the Charlotte-based company, a unit of Duke Energy Corp., offered $25 million to help pay for fuel cost increases for Carolinas customers next year. Duke also said it would restore about $50 million to its nuclear insurance reserve fund; the bulk of Duke's underreporting involved money in the fund."If you look at the $124 million of accounting irregularities, a $25 million settlement appears to be more of a token settlement," said Sharon Miller, the manufacturing association's executive director.

The group, which represents companies such as Continental Tire and R.J. Reynolds Tobacco Holdings Inc., will ask the N.C. Utilities Commission on Monday to review and possibly change Duke's rate structure for electricity.

It has made the same request before, as recently as June. The commission rejected that request, pointing to the rate freeze Duke agreed to earlier this year in an air pollution deal with Gov. Mike Easley.

But now the association believes Duke's accounting errors are serious enough to warrant a new rate case.

Even some residential customers are feeling uneasy about the alleged accounting manipulations at Duke, which traditionally has won strong customer satisfaction ratings.

"When I first heard about it, I thought they were like some of the other big companies -- they were cheating us," said Mildred Savage, a 73-year-old retired supervisor of a hosiery company.

Judith Owens, who was a Duke customer for 20 years before moving to Union County, said she wasn't surprised by the audit findings, especially after Duke was accused of price gouging in California's recent power crisis.

"I think Duke was shady in California a couple years ago, and it's come over to North Carolina," she said.

Duke has denied wrongdoing in California.

But both Owens and Savage said they felt Duke's electricity rates were lower than they'd experienced elsewhere, and they thought well of the company in that regard.

Savage's beach house on Oak Island and Owens' former home in New York both had much higher rates than Duke's, they said.

Duke will meet with N.C. regulators on Monday and their S.C. counterparts Tuesday to talk about the proposed settlement.

Duke Customers Appeal Deal

Duke - Page 12 - 2002