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Duke

The 2002 pension change information has been mailed to Duke employees. If you have not read it, don’t worry, nothing is being taken away - this time.

The change is to the Retirement Savings Plan (RSP). The Retirement Savings Plan was never the problem. The problem was in the conversion of the retirement plant into a cash balance plan. That is when employees lost their early retirement subsidy. That is when many employees were locked into the wear away period for years (a period in which they accrue no retirement benefits).

The improvements to the Retirement Savings Plan are nothing to “write home about,” and come largely courtesy of the federal government. Duke merely changed rules to conform to the new IRS rules.

Duke did add investment fund choices, an obvious knee-jerk reaction to the Enron disaster. There were no outstanding problems with the old choices. But Duke has been burned so many times lately, that they are taking no chances. Duke would like to distance itself from Enron.

Even with the changes, Duke employees can still get into similar trouble as the Enron employees, should the price of Duke stock crash. How so? Because many employees are 100% invested in Duke Energy stock. To compound matters, some employees think that Duke stock is the least risky place to keep their retirement savings.

Of all the old and new investment choices, Duke stock is the most risky place to keep one’s retirement savings. We reported about a retirement seminar where Duke employees were asked if they thought that Duke stock was the least risky investment choice. The majority in the room raised their hands! And, many said that they were fully invested in Duke stock. That is fine, as long as one is aware of the risk being taken. Enron went from around $90 to around a quarter of a dollar in a year or so. No other company, including Duke, can guarantee that the same will not happen to them.

The RSP changes due to new IRS rules will allow for a small increase in the investment amount. Those at least fifty years of age will be allowed a small, extra “catch up” investment amount. The problem is that these employees are already too close to retirement for the changes to have a profound effect.

The changes are too little, too late. They will not come close to compensating for the losses the employees have suffered from the cash balance plan conversion.

"RETIREMENT PLANNING"

As Enron spiraled into bankruptcy this week, some observers worried the shock wave from the Houston energy trader's crash would set off a domino effect in the financial markets, just as the collapse of Long-Term Capital Management, the giant Connecticut hedge fund, did three years ago.

Like LTCM, Enron traded exotic derivatives in a wide range of markets. Both firms supercharged their bets with enormous leverage. And both concealed their activities with extraordinary secrecy. In 1998, regulators were so concerned that LTCM's money-losing bond bets would trigger a sequence of defaults costing trillions that the Federal Reserve quickly brokered a Wall Street rescue to avert a worldwide crisis.

So when Enron announced on Dec. 2 that it had filed for Chapter 11 bankruptcy protection, the immediate question was: Who will the company take down, and how soon? "The quickness of it is just absolutely astonishing," said Paul Kleindorfer, co-director of Wharton's Risk Management and Decision Processes Center, who specializes in deregulation and has studied Enron.

If Enron failed to pay its debts and to fulfill its contract obligations on energy and other trades, counter-parties would suffer losses. Conceivably, the damage could spread beyond the gas, electricity and other energy markets in which Enron specialized, since investors suffering losses on energy trades might be forced to liquidate holdings in stocks, bonds or other securities to make good on their own obligations. In its bankruptcy filing, Enron listed debts of $31.2 billion, and numerous companies hurried to disclose the extent of their own "exposure" in Enron-related loans, trades and investments. A few examples of potential losses:

• Pension funds from around the country indicated they could lose $4.9 billion, largely from holdings of Enron stock, now trading around $1, down from $90 a year ago.

• The list of creditors in Enron's bankruptcy filing suggests Citigroup Inc. could lose $800 million and J.P. Morgan Chase & Co. could lose $500 million.

• John Hancock Financial Services Inc., the Boston insurance and financial-services company, said it had about $320 million in Enron-related investments.

• A Salomon Smith Barney Inc. analyst estimated that American life insurers had about $1.5 billion in Enron exposure. Others have put the figure as high as $3.5 billion. These would involve investment losses, such as holdings in Enron stock or debt, as well as claims paid in lawsuits against Enron directors and officers and financial-guarantee insurance.

The Enron-related losses appear large, but the disclosures so far are not on the LTCM scale. Indeed, even the energy markets where Enron was dominant appear likely to endure this shock without severe long-term damage.

The reason: Enron was an extreme player - a trailblazer to its admirers, a renegade to its critics. Other players aren't so far out on the edge. "This is pretty idiosyncratic to Enron," Kleindorfer said. Enron was the leader in the formation of the wholesale energy markets made possible by deregulation in the 1990s, and Enron was the biggest player. But a number of other companies have entered the business as well: Reliant, El Paso, Mirant, Duke, Dynegy, Williams, Cinergy and Calpine are the largest. Energy is also traded on the New York Mercantile Exchange or Nymex.

Enron, said Kleindorfer, served as both broker and counter-party in many transactions, putting it in a position to guarantee fulfillment of contracts it was involved in trading. Nymex members also must make guarantees, he said, but the exchange requires that traders make large cash deposits to assure that defaults will not swamp the exchange. Enron did not protect itself in this way, he said.

Analysts also have noted that the other energy-trading companies do not rely on off-balance-sheet transactions to the extent Enron did. Enron used this technique to keep debts off its books and to allow it to operate with little public disclosure. But when Enron's fortunes started to sour, trading partners, investors, lenders and credit agencies began to worry about hidden surprises. The more conservative companies - more open and not leveraged as much - are less likely to suffer such a crisis of confidence. "To go to the wrong side of the line and damage investor confidence, or the confidence of those you do transactions with, is a terrible sin," Kleindorfer said.

Seeing trouble mount, many trading companies hurried to trim their dealings with Enron. For instance, Calpine, the San Jose-based electricity generator and trader, said December 3 that it had reduced its contracts with Enron by 90% in the previous month. The remaining positions were financial hedges rather than contracts for physical delivery of energy products such as gas. The hedges could easily be replaced elsewhere, Calpine said.

Moody's Investors Service, the rating company, announced Dec. 3, that a survey of 50 of the country's largest public power utilities found they "are expected to face only minor exposure" to Enron's collapse. "Most electric utilities over the past several years have put in place trading policies that provided for conservative risk tolerance, so that a failure by one counter-party would not have significant impacts, since the contract would represent only a small percentage of total activity," said Moody's vice president Dan Aschenback.

In fact, Aschenback added, many utilities had discontinued trading with Enron as the company's problems snowballed, averting any losses. At the same time, bond-raters at Standard & Poor's said bond insurers were "not threatened" by Enron defaults because Enron debts were widely dispersed among large pools of insured bonds.

Though Enron has let go more than 4,000 of its 21,000 employees, the company's trading operation is still running, softening the blow to the energy-trading markets. The other big players can take over Enron's share of the market, though "it's my sense that the market will take some time to digest the Enron withdrawal," said Ehud Ronn, director of the Center for Energy Finance Education and Research at the University of Texas at Austin.

To fill Enron's shoes, other firms will have to raise the limits on trade sizes, he said, noting, however that there were only a few types of products in which Enron was the exclusive provider. "In the short term, we are likely to see wider bid-ask spreads, lower liquidity and probably greater volatility in the prices of energy - especially electricity prices," Ronn said. But he expects no long-term damage to the energy markets.

Enron could survive bankruptcy without being liquidated, Kleindorfer added. But even if it does not, its trading system may be acquired by another company in a bankruptcy sale.

That system is valuable to the market because many other companies rely on it for essential data on energy prices. Many industry practices and software are built around the Enron model, according to Kleindorfer. "My own view is that this role will certainly be missed if Enron does not manage to emerge fairly quickly with its trading platform in place." But it would not be a disaster, he added. It's as if all of a city's ATM machines went down - a big inconvenience for customers, but not the same as a banking collapse. While there has been much hand wringing among the devastated Enron shareholders, there has been no serious talk in Washington of a government-backed rescue along the lines of Long-Term Capital Management. Instead, most of the rumblings involve cries for more stringent oversight of energy markets, including perhaps requirements for more disclosure of the risks participants take.

The Enron collapse is an indictment of that company's management style, but not of deregulation, Kleindorfer said. In fact, a bill to further deregulate electricity markets is to be introduced in the U.S. Senate next week. The Enron debacle, Kleindorfer stated, "is not going to turn out the lights anywhere that I know of."

Retired Duke Power CEO Bill Grigg reminisced with the Big I last week about a congratulatory letter he received from Enron CEO Ken Lay after Duke inked a $7.7 billion deal to buy PanEnergy.

At the time, Grigg told Lay that Duke and Enron would be energy's two leaders.

"That was true for a time," Grigg observed.

Now Enron, which grew even larger than the new Duke Energy, faces an SEC investigation because it overstated earnings for years. Enron's stock plunged some 80 percent when investors learned of the shady accounting, and the company hopes to merge with Dynegy Inc.

Not too long ago, Mr. Priory was so envious of the prospering internet companies that he threatened to rename Duke to DukeEnergy.com. Then the internet companies went down in flames, and just plain Duke Energy did not sound so bad after all.

Mr. Priory has been striving to downplay regulated activities and lean more to wheeling-dealing type enterprises. He was no doubt envious of Enron. They had zero regulated businesses and were strictly a wheeling-dealing corporation. Enron was much like the internet companies; everything they touched turned to gold.

Now it is Enron’s time to crash and burn. "Everybody is very alert to the shenanigans at Enron," said Christopher Ellinghaus of Williams Capital in New York. "I'm not willing to say it's fraud yet. Enron just likes to be fancy. They may have been too fancy for their own good."

Enron would probably like to have some regulated businesses, with guaranteed profits! But those that desire to soar with eagles, need to be cautious not to touch the sun!

There are more than a few parallels between Duke and Enron. The Associated Press reports that Enron has a few accounting problems. Duke is under multi-state investigations for possible accounting improprieties.

Enron is based in Houston. Duke has a base in Houston.

Both companies are in the same business.

Enron made a large percentage of its profits from derivatives. The Securities and Exchange Commission reports reveal the same evolvement in derivatives by Duke.

Enron is suffering a credibility problem. Duke's credibility is at an all time low.

All of the about is purely circumstantial, and does not necessarily mean that Duke is doomed to imminent failure. The apparent similarities with Enron may be incidental. Unlike Enron, Duke does own infrastructure. The very thing that Mr. Priory seems to hate so much, may turn out to be his lifeline.

There have been several studies that show the negative long term side effects that indiscriminate layoffs have on corporations. Did any of these studies seem to slow down any layoffs? Not that we can tell! Many short-sighted CEO’s go for the short term profits, with no regard for the future price.

Forbes has published a layoff article: “Cease Fire,” dated November 26, 2001. The article mentions that a few companies are bucking the layoff trend. “…some say it is just too costly to ax, then recover, the skilled labor they fought to hire. Even more see benefits, both inside and outside the firm, from inspiring company loyalty.”

Fred F. Reichheld, Bain & Co., said: "People see top management manipulating short-term earnings. It kills trust. If you don't have a monopoly, you'd better have trust."

A certain electric utility used to have a monopoly and employee trust. They now claim to be an “energy company.” Their monopoly is shrinking, and after their pension games, employee trust is non-existent! (A few good layoffs should straighten everything out.)

Plan Sponsor Magazine is written for corporations sponsoring pension plans. One might think that a magazine catering to the “enemy camp” would be of no interest to employees. But to the contrary, Plan Sponsor has some very interesting articles. And, they don’t always cater to the corporations.

They have published an article about the pension plan revolution: “Mad As Hell.” The article mentioned some of the people who are actively pursuing pension justice.

Several corporations were named, including Duke Energy.

Mad As Hell

Ted Reed (The Charlotte Observer) reports that Duke Energy’s third-quarter earnings are up 50 percent! Duke seems to have no trouble making money. They have tremendous difficulties in making good on their promises to employees.

As corporate profits continue to go up, employee benefits continue to go down. When you sign up for your health coverage this year, once again, you will pay more for less coverage. Employees used to have a medical deductible of from twenty-five to seventy-five dollars, yearly. The only comparable plan now has a deductible of twenty-six hundred dollars!

What if there were a Truth in Profits Law, where the real source of all profits had to be itemized? Would we see such categories?

• Benefit money taken from employees.
  
• Money made from playing ratepayers.
  
• Money from “fun with the books.”
  
• Return from political donations.

Many corporations that have cut benefits were under zero financial pressure. But these companies did have a reason for cutting benefits: an uncontrollable lust for money – anybody’s money – by any means that they could get it!

Reuters reported that Polaroid Corporation is terminating health and life insurance benefits for retirees, because they are facing bankruptcy.

Duke Energy terminated promised retiree health insurance benefits, because of greed.

Bank of America started the fad of taking employee retirement benefits through cash balance pension conversions in 1985. The reason was because they made a huge number of bad loans.

Duke Energy took employee retirement benefits in 1997, because of greed.

Everyone has been sold out to appease Wall Street investors. But they can only be bought one day at a time. Each new day, they require another sacrifice. Employees and ratepayers continue to be marched to the volcanoes!

In response to "Lake sites went cheap to Crescent execs" (Oct. 7):

Yet another case of greed and corruption. If Duke Energy isn't jacking up prices or necessitating whistle-blowers, it's discounting premium land to make their executives even richer.

Of course, this isn't Duke Energy per se, and Duke Energy says these transactions are reviewed by the company board, but do you think it's going to tell on itself? As Bruce Henderson points out, several Duke Energy executives have sat on the Crescent Resources board!

It's deplorable how this monopoly has been allowed to take advantage of the public time and again. What can government - or anyone else - do about it?

Greg Finger

Concord

Our power bills subsidize Duke Energy's rich executives. How greedy can they become? Let's negotiate a better deal for the public the next time Duke wants permits and favors.

Charlotte Lauer

Matthews

Crescent Resources, the land-management and development arm of Duke Energy, sold S.C. lakefront property to four of its executives at prices the company has rarely accepted from the public.

Crescent's president, his wife, two vice presidents and two other employees bought 1,658 acres on Lake Wateree, in five forested tracts bordering the lake, for an average price of $1,090 an acre. That compares with the $7,548 average price per acre for Crescent's largest other sales on the lake - some with little or no shoreline - over the past decade.

Another executive bought land along Fishing Creek, a Duke reservoir west of Lancaster, S.C., for $412 an acre. None of the tracts was advertised for sale, and the public was not notified when employees bid on them. Crescent has since adopted a policy to publicly disclose such sales.

The company says it gave employees no advantages over the public. Outside experts say no laws were broken.

Still, the transactions between 1997 and 1999 raised eyebrows around Wateree, where good waterfront lots can sell for $100,000 or more and Crescent owns 25,000 acres. The Duke reservoir sprawls across two rural counties between Charlotte and Columbia.

On Wateree's west side, in Fairfield County, Crescent sold three parcels to employees at the lowest prices the company has accepted for lakefront acreage there since 1991, according to county records.

Across the lake in Kershaw County, records show, Crescent sold two large tracts to its president for the lowest waterfront prices the company has accepted there in a decade, with one exception.

Some property buyers who paid Crescent much more, or had offers refused, said they feel they were treated unfairly. After leasing a waterfront lot from Crescent for several years, Tom and Judy Fulmer bought the wooded 0.7-acre tract in 1998 for $59,000. Two months earlier, across the road, now-retired Crescent vice president Fred Hardee Jr. had bought 85.6 acres for $77,023.

The per-acre costs: $900 for Hardee; $84,285 for the Fulmers. "I feel like we got ripped off," Tom Fulmer said. "Somebody buying 80-some acres for about the same as we paid for three-quarters of an acre, that's just not right."

Such comparisons are unfair, Crescent says, because so many factors - utility service, access to paved roads or deep water, floodplains, market conditions - influence land values.

The company says it gives extra scrutiny to employee sales. Independent appraisals and oversight by the company's board guaranteed that employees had no insider advantage over other potential buyers, said chief executive Robert Lilien.

"We went to extreme measures to ensure that we made good business judgments about the property," Lilien said. "I have no reservations about it, because I think the process ensures fairness for (Duke) shareholders and for potential land buyers."

A few months after the last of these sales, however, Crescent changed its public-disclosure policy on employee land purchases. Now, when employees bid on land, Lilien said, the company lets the public know it's available by posting notices on the property and in local newspapers.

A former executive said concerns about how the sales might appear to the public led to the change.

"It not only had to be right, it had to look right," said Ronald Bost, who bought 511.8 acres before retiring as a Crescent senior vice president.

In most cases, the Crescent officials paid prices close to the property's tax values.

But tax values might not fairly reflect the value of timber, which covers most of the employees' land, one county assessor said. An average acre of timber in the S.C. Piedmont is worth about $715, the S.C. Forestry Commission says, but can reach $2,000 or more.

Two Crescent employees jointly bought 353.5 acres on Wateree for $275,000, records show, and sold the timber rights the same day.

Records don't say how much they got for the trees. But another buyer, not connected to the company, paid Crescent $450,000 for 201.2 adjoining acres last year. He sold the timber for $205,000.

Sales to company officials

Charlotte-based Duke Power created Crescent in 1969. The former subsidiary grows timber on thousands of acres and, in recent years, began developing lakeside properties around the Carolinas.

Duke Power and Crescent are now separate business units of Duke Energy, a Fortune 100 company that reported $49billion in sales last year.

Deeds signed by top Crescent officials show that the company sold land to:

President Art Fields, who paid $500,000 for 323.7 acres in April 1999. Cost per acre: $1,545. Fields' wife, Joleen, paid $500,000 in July 1998 for 383.4 adjoining acres on the opposite side of a cove on Wateree. Cost per acre: $1,304.

Bost, who paid $475,000 for 511.8 acres on the Fairfield County side of Wateree in January 1998. Cost per acre: $928.

Hardee, the retired vice president in the company's Great Falls, S.C., office, who bought 85.6 acres on Wateree for $77,024 in November 1997.

George Mattox Jr., a Crescent forester, and forest technician Andrew Beaver, who paid $275,000 for 353.5 acres in June 1999. Cost per acre: $778.

James Short, a Crescent senior vice president, who bought 155.2 acres on Fishing Creek reservoir for $64,015 in July 1997. The Lancaster County tax office says the land is now worth triple that amount.

Lake about to be discovered

Wateree is the second-largest of Duke's chain of 11 reservoirs on the Catawba River. Neat cottages, landings and forests share the shoreline, and the pace of life is slow. In contrast to Lake Norman, boaters say they can take a Sunday afternoon cruise without dodging personal watercraft.

But residents say Wateree is being discovered - and land prices are rising fast.

In a first for Crescent on Wateree, the company last month advertised 339 acres of waterfront, zoned for about 90 homes, for sale on the western shore. Crescent is accepting bids over $2.5 million for the tract, a spokesman said. Crescent, which manages more than 175,000 acres, mostly in the Carolinas, doesn't normally advertise its undeveloped properties but considers offers, Lilien said. If the sale makes business sense, he said, Crescent will sell at fair market value.

That's what happened with the Wateree and Fishing Creek sales, company officials say.

Bost, a forester, said he wanted to buy timberland as an investment, and Crescent was willing to sell.

"We did one (employee sale) and said, `Well, if you sell him one, would you sell me one?'" Bost said.

The company executives "knew the land," he said. "We didn't have a whole lot of money and we identified tracts that we thought would appraise for what it appraised."

About 100 acres of the 511 he bought on Wateree had been clear-cut, he said, while the rest was in 12-year-old loblolly pine. Bost said he thought the $928 an acre he paid was market value or maybe a bit higher.

Crescent has sold only four other tracts of 100 acres or more around Wateree, an examination of more than 100 deeds shows. Company employees paid prices per-acre more typical of land well off the lake than of lakefront property.

In 20 other Crescent sales this decade of 10 acres or more, on or near the lake, the per-acre prices ranged from $963 to $22,645. Off the lake, where land is much cheaper, six Crescent tracts sold for an average price of $979 an acre. In 1996 an Illinois retirement fund paid Crescent $974 an acre for a block of 1,958.6 acres in Kershaw County. Most of the property is separated from the lake by a row of houses but fronts a paved road and includes 1,270 feet of shoreline.

Two years later, right next door, Fields paid $1,304 an acre for 383 acres off a county dirt road with more than 6,000 feet of undeveloped shoreline.

Across the lake, Crescent employees Mattox and Beaver paid $778 an acre for property with more than 8,600 feet of shoreline. Crescent sold an adjoining 201.2 acres with half as much shoreline for $2,236 an acre - nearly three times more - a year later.

None of the six current or former employees has filed development plans for the land.

Much of their shoreline is not suitable for docks because of shallow water, according to Duke Power management maps. But each tract also has at least some shoreline suited to future commercial or residential development, the maps show.

"There is just not a lot of development down there, and I did not buy it with that in mind," Fields said. Crescent's president said he moved a triple-wide mobile home to his property. He said he likes to hunt there.

A member of the public would have "absolutely" gotten the same terms, Fields said.

Bill Sutton doubts that.

Sutton, who owns a small landing on Wateree, said he made an offer to Crescent three years ago for 60 adjoining acres. The land, hilly and swampy, had been clear-cut and had a power line right-of-way across it.

Sutton thought his offer of $1,250 an acre was fair - especially in light of the price he knew a Crescent official had paid for land nearby. "I offered them a better deal," he said.

The answer - no sale - came from Crescent's Great Falls office four days later, he said. Crescent said it will not discuss purchase offers it has received.

"Why should they, as employees that set the prices, be able to buy property that wasn't for sale?" Sutton said. "I'm sure that others were treated the same way. I guess the whole deal was, if somebody else got a good deal, I wanted one too."

Appraiser sets prices

Crescent says there is nothing unusual about its land sales to executives, since Duke Energy employees have bought company lake lots for decades. Officials say the company began selling land in bulk only in the mid-1990s.

Crescent says the sale prices were set by an independent appraiser, reported to auditors and reviewed by the company's executive committee. The company board also reviews sales to Crescent employees.

Fields, Bost and Short sat on Crescent's board at some point during the employee sales on Wateree. So did Duke Power President Bill Coley and Richard Osborne, executive vice president of Charlotte-based Duke Energy.

Despite the company's position that the employee sales were handled properly, some lake residents say the public did not have an equal shot at Crescent land.

"Our concern was that the land just never gets advertised, never gets onto the real-estate market, and then all of a sudden it ends up in the hands of somebody from Crescent," said Bill Ethridge, president of the Lake Wateree Homeowners Association in Fairfield County.

Lilien said Crescent, in early 2000, began posting property on which employees had bid. Increasing sales and poor record-keeping, he said, made it hard for the company to keep track of potential buyers who had expressed interest in company land.

Crescent's oversight procedure, real estate and business authorities say, appears to protect Duke Energy shareholders and potential land buyers.

"It would seem that those would be the steps that would establish that this is an arm's-length transaction," said Ronald Rogers, director of the Real Estate Center at the University of South Carolina's business school. A spokesman for Duke Energy said the procedure "seems like proper oversight."

"We'd have given a technician the same opportunity as the president, and we'd do the same thing with a third party," said Lilien, Crescent's chief executive since late 1999.

"We are very careful about who we sell property to."