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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 9 - 2002

"Corporate executives who cheat investors, steal savings and squander pensions will meet
the judgment they fear and the punishment they deserve." - Attorney General John Ashcroft

Peaceful Home Becomes a Nightmare

Employee Advocate – DukeEmployees.com – August 6, 2002

The message below was received from a reader. It is posted with permission

We have been reading your web pages on Duke Energy and would like to tell you our story about Duke. We live about l2 miles south of Carlsbad, New Mexico. We have lived here for 22 years. We have 4 children that we have raised on the country, in peace and quite. Our nearest neighbor was 1/2 mile away, until Duke Energy moved in 500 ft. from our home, March 21, 2001.

The 1200 hp Compressor Station is on a natural gas pipeline. It is loud it, vibrates our home, and they dump gas on us all the time. We can't stay outside. We can't have family get-togethers like we have had in the past. My husband has to take medication to sleep and keep from having a stroke.

We have talked to all everyone we can think of from the police to the Senators and Congressmen; no one will help us. We just July 16 &17, met with our politicians in Washington DC. We have had a good response from Senator Jeff Bingaman, and are waiting for the rest of them.

We have teamed up with New Mexico Wilderness Alliance. They have been very helpful and we are helping them fight Oil and Gas drilling in Otero Mesa Wilderness, before they destroy it like they have our corner of the state.

We have been working with the New Mexico Regulatory Commission, to revise the Laws governing pipelines in the state. It is an uphill battle. The Energy Co. has so much money and so many politicians in their pocket, its worse than fighting city hall.

We have hired an Attorney, but we are going to wait a couple of months before we file on Duke Energy, to give Washington time to respond.

I don't know if you remember about the 12 people who were killed by a pipeline explosion (El Paso Natural Gas). It was only 20 miles from our home; we could see the fire ball from it. Duke Energy never slowed down with their plans to put this Compressor Station in.

I am not an employee of Duke, thank God, but thought you might be interested in our story. Thank you.

Roy and Louise Dearing
1112 Black River Vilg. Rd.
Carlsbad, NM 88220

Quality Questions Tarnish Duke's Ascent

TheStreet.com – by Melissa Davis – August 6, 2002

(8/5/02) - Even nobility carries few privileges in the energy-trading business nowadays.

The acknowledged royalty in the sector is North Carolina's Duke Energy, which despite a sharp fall in its stock this year continues to boast a solid balance sheet and a market value of around $20 billion. The company's shares have actually risen in recent weeks following a strong second-quarter earnings report.

That puts Duke in sharp contrast with cash-strapped rivals such as Williams and Dynegy, which have seen their shares drop into the low single digits as the companies succumbed to raising cash by selling their crown jewels -- their highly profitable pipeline businesses.

But some investors and analysts are increasingly wondering whether Duke deserves the red carpet treatment after all. Though the company beat second-quarter earnings estimates, some critics say it did so only by counting proceeds from asset sales and a gain on how Duke values its mark-to-market trading portfolio -- gains the company can hardly count on recognizing every period.

Moreover, these people say that even in a post-Enron market obsessed with disclosure, Duke doesn't give investors enough information to truly justify a premium valuation. Others note the company is poised to issue stock in a market that's been very jittery about the very viability of the energy trading business.

Duke defends its earnings and disclosure practices, saying that the earnings boost came after an internal reorganizaion of its modeling practices. But with questions about earnings quality hovering, analysts at several firms have turned gloomy about the prospect that the stock will regain its highs of this spring.

Behind the Numbers

Earnings quality is perhaps the biggest question for many watchers of Duke. Almost without exception after last month's second-quarter earnings report, analysts immediately noted that Duke needed padding from one-time gains to meet its targets.

But some were harsher than others. Particularly bearish were two J.P. Morgan analysts, who labeled their post earnings-conference report "Missed Opportunity." They chided Duke for fueling, rather than addressing, nagging issues that could affect the company's share price. They singled out Duke's new mark-to-market assumptions, which resulted in a $46 million gain.

"Comments by management on the 2Q conference call and actions taken during the quarter have raised additional concerns and, in fact, confirmed some of our fears about what might be lurking in 'left field,'" wrote analysts Jim von Riesemann and Jamie Waters, who rate the stock a market performer. "We would highly discount any 'earnings' associated with these changes in model assumptions, similar to our view of earnings from asset sales."

They weren't alone. Analysts at Merrill Lynch joined the chorus, questioning a second-quarter accounting gain that comes even as many peers are reducing their trading expectations.

"While this does not sound unreasonable per se," they wrote, "it is worth noting that the Q2 changes come on top of $36 million of similar gains included in the Q1 results. While we recognize that the process of improving valuation assumptions may have taken some time, it would certainly be preferable not to have further significant gains at this line in coming quarters." Merrill Lynch rates the stock near-term neutral and long-term strong buy; both Merrill and J.P. Morgan have underwritten for Duke.

Duke spokesman Terry Francisco said much of the mark-to-market gain came after the company streamlined separate models used at its two domestic trading headquarters. "We have a very extensive Western trading operation headquartered in Salt Lake City and an Eastern trading operation headquartered in Houston," Francisco said. "We changed our modeling technique to report both East and West together."

Quality and Earnings

Unlike most companies, Duke has always included one-time gains -- and, to be fair, one-time charges -- in its regular reported earnings. The company considers buying and selling assets, such as power plants, a routine part of its business.

"It fits into our portfolio management strategy," Francisco said. "It's analogous to real estate. Everything's for sale at the right price."

But some critics have scoffed at the practice, saying a company can sell only so many assets before it eventually runs out. Therefore, they added, proceeds from asset sales should not be mixed with the steady stream of earnings that flows from ongoing operations.

In Duke's second quarter, that mixture proved instrumental to hitting earnings targets. The company racked up a net gain of 4 cents a share through asset sales and a one-time construction fee. Mark-to-market "improvements" added another 3 cents a share, allowing Duke to post second-quarter earnings of 56 cents a share -- topping analyst expectations by a nickel instead of missing by 2 cents.

Even the company's operational income, particularly from trading, can be difficult to evaluate. Unlike some of its peers, Duke withholds specific information about the gross margins it earns from power and gas trading.

"In today's environment, we look hard at what we disclose and what we don't disclose," Francisco explained. "We choose not to disclose that for competitive reasons."

Revising Downward

Duke also refuses to break down its capital expenditures by segment, citing the need for spending flexibility. But overall, the company has slashed its 2003 capital spending budget from a previous high of $8 billion to as little as half that amount.

Even Duke admits it cannot entirely avoid the industrywide meltdown that has spared it for so long. After delivering on second-quarter earnings promises, the company backed off its guidance for the full year, blaming turmoil in the merchant energy sector.

Duke now expects 2002 earnings of $2.45 to $2.55 a share, below the low end of its previous guidance of $2.54 to $2.78. The company described its new expectations as "conservative," but admitted they could go lower.

"The downside risk," Francisco said, "is what's happening in the energy services market."

Fire in the Belly

Last week, Duke suddenly fired two employees linked to round-trip energy trades that artificially boosted the company's trading volume and revenue.

Duke discovered the 66 questionable transactions while gathering information for an industrywide investigation by the Securities and Exchange Commission. The company had already uncovered 23 other wash trades, transactions previously tied to more beleaguered energy merchants like CMS Energy.

All told, the wash trades boosted Duke's revenue by $217 million during the past two-and-a-half years. Standard & Poor's viewed the transactions as "marginally negative" and, despite their immaterial financial impact, said it will continue to examine Duke's treasured A+ credit rating for possible downward revision.

In addition to inquiries by the SEC, Duke also faces subpoenas from both the U.S. Commodity Futures Trading Commission and the Houston office of the U.S. attorney. Many analysts rank regulatory investigations as one of the biggest threats to Duke's current share price.

But others are dwelling on a separate matter that's almost certain to hurt reported earnings.

The Dilution Solution

Before the end of the year, Duke will issue $1 billion worth of new securities in an effort to bolster its financial strength and satisfy increasingly merciless credit rating agencies.

Given the unfavorable bond market, many believe Duke will issue equity -- including a major slug of common stock -- at a time when its share price is trading around near-decade lows. Analysts have already revised their future guidance downward in anticipation of dilution, while warning they may not be finished yet.

J.P. Morgan, for example, has dropped its 2003 earnings estimate from $2.85 to $2.60 a share and predicted that earnings could take a hit from dilution well before that time.

"We believe recent comments by the rating agencies mean the issue could come sooner rather than later and reflect a greater portion of common equity than is reflected in our current estimates," J.P. Morgan analysts said.

Merrill Lynch offered a similar opinion.

"While we are already assuming earnings at the lower end of Duke's range, we continue to see more downside risks than upside," analysts wrote.

Others describe Duke's stock as "oversold" and predict significant appreciation in Duke's share price. But many have issued target prices in the low $20s and teens, below the stock's $24.26 close Friday.

Even some who recommend the stock have expressed disappointment at Duke's weakened outlook and surprise at the company's new vulnerability to merchant energy woes.

"The new outlook is well below our previously revised 2002 EPS estimate," wrote Vestigo Associates, the independent research arm of Fidelity Capital Markets.

"We had previously scaled back our expectations for [energy trading] but obviously not enough."

Bluster and Sacrificial Employees

Bluster and Sacrificial Employees

Employee Advocate – DukeEmployees.com - August 3, 2002

When corporations are investigated for possible violations of the law, their reaction is often predictable. Some will feign outrage and deny everything. Some will offer up sacrificial employees to appease the gods. When all their ploys collapse, they will promise a “vigorous defense.”

Arthur Andersen tried it all. They denied any wrongdoing. They offered a sacrificial employee. When they started losing clients, they said that it would not affect the company! The sacrificed employee joined forces with the prosecution. Arthur Andersen moved on the vigorous defense stage.

After the denial, bluster, sacrificial employee, and vigorous defense, the company is now, for all practical purposes, history.

Duke has denied any trading improprieties for a very long time. This means zero round trip trades or anything else questionable.

Some Enron memos turned up which implicated other energy companies. The Federal Energy Regulatory Commission ordered energy companies, including Duke, to report whether they had used similar shady techniques while trading energy.

Duke acknowledged 23 round trip energy trades.

Duke then reported 46 round trip trades to the Securities and Exchange Commission.

The latest number, as reported by The Charlotte Observer, is 89 round trip trades.

Duke has offered two sacrificial employees and is rapidly approaching the “vigorous defense” stage.

A congressman recently produced a “vigorous defense” to charges. It was, indeed, one of the most vigorous defenses ever witnessed in Congress. There was ranting, raving, and accusations aplenty. After the congressman’s “vigorous defense,” he began serving his 8-year prison term.

Arthur Andersen and this congressman have demonstrated that a vigorous defense is not necessarily a get-out-of-jail-free card.

Duke’s Round Trip Trades Keep Growing

Duke’s Round Trip Trades Keep Growing

The Charlotte Observer – by Ted Reed - August 3, 2002

(8/2/02) - Duke Energy Corp. said it has fired two employees and restructured its trading and management operations after finding that its traders committed 89 "round trip" trades over the past three and a half years.

In an initial report in July, Duke had identified 23 such trades.

The company said late Thursday that it was sending information on its trades and its corporate reaction to the Securities and Exchange Commission, part of its final response to the agency's May 31 inquiry for information on "round trip" trades.

"Round trip" or "wash" trades occur when a company simultaneously buys and sells energy from another company at equivalent prices, making market demand appear higher and driving up prices.

Duke said in a statement it had identified 61 round-trip transactions "done at the direction of one trader that did not have a legitimate business purpose and that were contrary to corporate policy."

Duke spokeswoman Cathy Roche said the trader and a manager overseeing him were fired. She declined to discuss the purpose of the trades.

Duke also said it had found 28 instances of round-trip trading on the Intercontinental Exchange, an electronic exchanged based in Atlanta. The company had first reported 23 trades on the Intercontinental Exchange. Asked why no one was fired in connection with the 28 trades, Roche said "We took the action we thought was appropriate."

Revenue for all the trades totaled about $217 million, compared with total electricity and gas trading and marketing revenues of $75.6 billion during six quarters during 2001 and 2002. That amounted to less than a third of 1 percent of the company's revenues from electricity and gas marketing activity during the period.

All of the trades were done on the Houston trading floor, which involves eastern markets, Duke said. None involved the California market.

Duke's trading and marketing unit, which conducts most of the company's trading activity, has been part of the sprawling Duke Energy North America division. But it and two smaller units have been moved to a separate division that will report directly to Harvey Padewar, one of the company's eight highest-ranking executives.

The new division will be overseen by Nancy DeSchane, currently senior vice president of western natural gas and power trading. She will become president and chief executive officer of Duke Energy Services Trading and Marketing. It has not been determined whether the division will separately report its results.

Roche said the restructuring will provide "consistent management and oversight."

Duke Energy Fires "Round-Trip" Traders

Duke Energy Fires "Round-Trip" Traders

Reuters – August 2, 2002

(8/1/02) - CHARLOTTE, N.C., Aug 1 (Reuters) - Duke Energy Corp. (NYSE:DUK - News) said on Thursday it fired two employees after a review discovered several "round-trip energy trades," but it said the sham deals were not material to the company's financial statements.

In response to Securities and Exchange Commission request, Duke said that, out of about 750,000 trades, it identified a "very small number" of round-trip transactions -- essentially identical swaps between trading companies for the same quantity of energy at the same price.

These transactions had a minimal impact on reported trading revenue and no material impact on the company's financial statements, said Duke, which operates a variety of natural gas and electric supply, delivery and trading businesses.

Harvey Padewer, group president of Duke Energy Services, said that, although the improper trades were confined to a single segment of the trading operation and involved only a handful of the company's nearly 300 traders, it has added trading controls to ensure such behavior does not recur. Two traders were fired.

Duke stock fell in after-hours trading Thursday to $24.80 after ending the day down 5 cents at $25.44 on the New York Stock Exchange.

Moody's affirms Duke’s Negative Outlook

Reuters – July 26, 2002

Approximately $21 Billion of Securities Affected

(Press release provided by Moody's Investors Service)

NEW YORK, July 24 - Moody's Investors Service affirmed the credit ratings of Duke Energy and Duke Capital following a review of management's revised strategic plan announced on July 23 that includes the issuance of $1 billion in equity and/or equity-linked securities by Duke Energy this year along with substantial capital expenditure reductions at Duke Capital.

Specifically, capex will be reduced by as much as $1 billion in 2002 followed by up to $4 billion in each of 2003 and 2004. Moody's believes that these actions will allow Duke Capital to improve its cash flow to debt measures, which is necessary in order for the company to maintain its current ratings.

Moody's said that Duke's rating outlook remains negative driven primarily by recent disclosures about round-trip trading and ongoing investigations by several government agencies. The outlooks reflect the potential for further discoveries in the investigations or for negative ramifications from them such as fines, penalties or reduced capital market access which could become material. The negative outlooks also reflect the potential for a downgrade should this year's equity issue not occur and should the level of cash flow relative to debt not improve over the next several quarters.

Ratings affirmed are Duke Energy (A1 senior unsecured), Duke Capital (A3 senior unsecured), Pan Energy (A3 senior unsecured), and Texas Eastern (A2 senior unsecured.) We expect that capital expenditure reductions will most likely be taken from growth areas-North American Wholesale Energy, Duke Energy International and Other Energy Services.

Going forward, Duke Energy will spend $4-6 bn per year in capex, all but $2 bn of which is discretionary. Moody's will monitor the extent to which the remaining program is debt financed in ordere to gauge further ratings pressure.

Duke Energy is headquartered in Charlotte, North Carolina.

Shooting, Brawl at Duke Project

St. Louis Post-Dispatch – by Alexa Aguilar - July 23, 2002

(7/17/02) - The Illinois State Police and the Williamson County Sheriff's Department are investigating a brawl last week between union and nonunion workers at a construction site in Southern Illinois.

About 50 union workers and 20 nonunion workers were involved in the incident Friday morning at the site at the Lake of Egypt near Marion, about 100 miles southeast of St. Louis.

Four men were injured, including one with a bullet wound in the leg, and several vehicles were damaged, Williamson County Sheriff Tom Cundiff said.

The site is where Rogers and Phillips, a nonunion contractor from Houston, is replacing a gas pipeline for Duke Energy of Charlotte, N.C.

Danny Gibbs, spokesman for Duke Energy, said the 20 nonunion workers were having a pre-work meeting about 7 a.m. when 50 men appeared at the site and "violently overtook" the guards at the site.

Gibbs said that at least one pistol and some wooden posts and metal cylinders on the site were used as weapons. Several of the nonunion workers' cars were damaged, according to a statement from the Sheriff's Department. It said that a .22-caliber pistol used in the fight was found in a ditch.

The union workers were members of Plumbers and Pipefitters Local 551 in nearby West Frankfort.

Tom Caliper, a union spokesman, told the Southern Illinoisan newspaper that his members were peacefully protesting the use of nonunion workers, a tactic he said worked about a year ago. He said the nonunion employees had clubs and a pistol at the site, and that the union members did not go intending to fight. He could not be reached for comment Tuesday.

Three men, including the person with the bullet wound, were treated and released at Marion Memorial Hospital. Another person was treated and released from Lourdes Hospital in Paducah, Ky.

The identities of those injured were withheld.

Gibbs said work on the pipeline resumed Friday afternoon, and is continuing on schedule.

Illinois Officials Stand Behind Union Workers

Citizens Victory Over Duke

The News-Star - July 23, 2002

(7/18/02) - RUSTON - Duke Energy has decided not to build a merchant power plant in Lincoln Parish.

The company has asked Louisiana's Department of Environmental Quality to rescind permits granted earlier this year that cleared the way for construction to begin on what would have been a $200 million generating plant, Duke spokesman Brandon Maxwell said Wednesday.

He said the company's request was made earlier this week. DEQ is also preparing to ask for the dismissal of a lawsuit filed against it by parish residents opposed to the power plant.

"The little guy prevails from time to time," Greenwood Action Group for the Environment member Jim Hall said Wednesday, echoing the excitement that began filtering through the group as word of Duke's retreat spread.

"I think it's one of the best things that could happen to us," GAGE President Patricia Jones said.

Maxwell said the decision to abandon the proposed Lincoln Parish project was "a business decision" based on a change in the economy.

"The markets have certainly changed since we began (the Lincoln Parish project)," he said.

Residents' objections were considered, but were not "a sole factor" in the decision, Maxwell said.

"It was business decision," he said. "The numbers don't fit."

DEQ spokesman Jim Friloux said the department has not yet responded to Duke's letter asking that the permits be canceled.

The cancellation of the Lincoln Parish project comes amid deepening troubles for Duke. The company is being investigated for possible federal securities violations. Duke has also been implicated in California's energy crisis.

"They're under such scrutiny right now, I suspect they don't want to fight these little side battles," said Hall.

Though Duke has held an option on an 89-acre tract northwest of Ruston for almost two years, the company's board of directors had never given the final go-ahead for the 640-megawatt plant. Company officials have said all along that the Lincoln Parish project was competing with other proposed plant projects outside Louisiana.

Maxwell said the North Carolina-based energy company has no plans to revisit the Lincoln Parish project, even though it still thinks the site, with its close proximity to electric and gas transmission lines, is attractive.

Lafayette attorney Charley Hutchens, who represents GAGE, said DEQ notified him Tuesday of Duke's request.

"I'm elated," he said. "I think this is great. ... They cannot build the plant with the permit rescinded. I think it means it's over for now."

GAGE filed suit against DEQ in February after the agency approved Duke's permit application. Opponents said Duke violated proper site-selection procedure, failed to use the best available technology in planning the plant, and couldn't assure citizens that the plant wouldn't jeopardize their only source of drinking water, the beleaguered Sparta Aquifer.

"The effort we put forth was pretty considerable, but we were prepared for the long and hard battle," said Hall.

Hutchens said Duke's decision might have a ripple effect on other energy companies wanting to build merchant plants in Louisiana. Merchant plants, sometimes called peaking plants, operate only during high-demand periods such as hot summer days.

The electricity generated is sold to municipalities, industries and other large-volume users, and not directly to residential or business customers.

Had the plant gone on-line, it would have used an estimated 200,000 gallons of Sparta Aquifer water every day to cool its generating equipment. Water levels in the aquifer are currently dropping an average of two feet annually because water is being pumped out of the formation faster than nature can replenish it. Engineers say a concerted effort to decrease dependence on the aquifer across the Sparta region should result in a significant turnaround by the 2025.

Duke Energy Outlook Revised to Negative

Reuters – July 20, 2002

(Press release provided by Fitch Ratings)

NEW YORK, July 19 - Fitch Ratings has changed the ratings outlook of Duke Energy Corp. and subsidiaries Duke Capital Corp, Texas Eastern Transmission Company and PanEnergy Corp. to Negative from Stable. Fitch also lowered Duke Energy's commercial paper rating to 'F1' from 'F1+'. The rating action reflects the uncertainties arising from the company's response to the Securities and Exchange Commission (SEC) request for information about round trip energy trades.

In its response to the SEC, Duke identified 46 round trip trades that had the apparent purpose of increasing volumes on the Intercontinental Exchange (ICE) electronic trading platform, of which Duke is one of 13 equity owners. The trades inflated revenues by $126 million, but had no impact on earnings. The company also indicated it was still investigating 3,000 additional trades. Duke had previously disclosed $1.1 billion of revenue associated with round trip trades in the western market in response to a Federal Energy Regulatory Commission (FERC) inquiry. While the revenue associated with the matched trades is immaterial in comparison to consolidated revenue of $51 billion, the negative outlook reflects the potential for further disclosures and the impact on capital market access.

The previous Stable Rating Outlook assumed Duke would issue about $1 billion of equity or equity hybrids in 2002 to provide permanent funding of its acquisition of Westcoast Energy. Fitch will continue to monitor Duke's ability to execute its financial plan as well as the credit impact of its substantial capital program.

The ratings of Duke Energy and its subsidiaries are as follows: Duke Energy --First Mortgage Bonds, 'AA-'; --Senior Unsecured Debt, 'A+'; --Preferred Stock, 'A'; --Trust Preferred, 'A'; --Commercial Paper, lowered to 'F1' from 'F1+'. Duke Capital --Senior Unsecured Debt, 'A'; --Trust preferred Stock, 'A-'; --Commercial Paper, 'F1'. Texas Eastern Transmission Corp. --Senior notes, 'A-'. PanEnergy Corp --Debentures, 'A-'.

Duke Can't Afford Disdain Right Now

The Charlotte Observer – by Tommy Tomlinson - July 19, 2002

(7/18/02) - Here's my theory on how Duke Energy got in all this trouble:

It goes back to when they booted regular folks out of the lobby.

For years, customers could come to Duke's headquarters uptown to pay their power bills. Duke also had an appliance store in the lobby where you could look over the latest stoves and such.

These were nice touches, the little things that make a customer feel closer to a company.

But they weren't Efficient! They weren't Cutting Edge! They weren't Big Profit Centers! So of course Duke got rid of them.

Now look.

Duke is still in trouble in California for jacking up prices during last year's blackouts.

A federal grand jury is looking into whether Duke made bogus energy deals to drive up prices.

Company stock is the lowest it's been in a year.

Fishermen and swimmers are complaining that Duke's lakes on the Catawba River don't have enough open shoreline for the public.

And here comes the hammer: the Charlotte area's four-year drought.

The more Sahara-like it gets around here, the tighter Duke gets squeezed.

More than a million people around here depend on full lakes for their drinking water. Duke depends on water flow through the dams to generate power.

Problem is, right now it's just about impossible to do both. Let the river flow, the lakes dry up. Keep the lakes full, Duke can't generate much juice from the dams.

Meanwhile, we all have our air conditioners cranked up, and Duke is worried about having enough power to meet the demand. The company might even have to buy electricity from somebody else.

(Hint: Don't ask California.)

When Duke takes a whupping, so does Charlotte. We talk about this being a banking town, but Duke is our biggest company -- No. 14 on the Fortune 500.

Duke also has the most sway over our daily lives. You can always switch banks. You can't just switch power companies.

That control -- over our water, our electricity, our access to the lakes -- obligates Duke to the highest standards as a corporate citizen.

At least it should.

But history provides a pile of evidence that companies with that much control start to get all puffed up with themselves.

Why gouge California? Because we can.

Why do shady trades when you're already making bookoodles? Because we can.

Why crimp public access to the lakes, ticking off the very people who send you a check every month? Because we can.

In one way, it was no big deal when Duke shooed people out of the lobby a few years ago.

But it made you wonder whether Duke was becoming another one of those companies that treat ordinary customers like they're infected with something.

That kind of attitude can come back to bite you at just the wrong time.

And the people's goodwill, like the river, can simply dry up.

Tommy Tomlinson

Duke Shares Drop Over 7 Percent

Associated Press – by Paul Nowell- July 19, 2002

CHARLOTTE, N.C. (AP) -- Duke Energy Corp.'s shares fell more than 7 percent Thursday as the Charlotte energy company's stock continued to falter in the wake of its disclosure that it made nearly two dozen "round-trip" energy trades.

Duke's stock price closed Thursday at $20.72, down $1.70, or 7.58 percent, on the New York Stock Exchange.

Earlier this week, credit rating service Standard & Poor's said it placed its ratings for Duke Energy Corp., Duke Capital Corp. and its subsidiaries on review with negative implications. Duke Energy has $21.5 billion of debt outstanding.

Before Thursday's plunge, shares of Duke had already lost more than 28 percent since the start of July. On Tuesday, Duke Energy acknowledged that it made 23 "round-trip" energy trades, which inflate revenue and trading volume.

The apparent purpose of the trades was to increase volume on the Intercontinental Exchange electronic trading platform, of which Duke is one of 13 equity owners, Duke Energy said.

In such trades, also known as wash trades, an equal amount of electricity is bought and sold at the same price.

None of these transactions was in the western market and therefore did not surface during the company's earlier response to the Federal Energy Regulatory Commission inquiry into round-trip transactions in that market, Duke said.

Three brokerage firms downgraded Duke's stock on Monday, saying they were concerned about the federal investigations into the utility's energy trading practices and about lower prices for electricity.

The company also confirmed Monday it placed an unnamed senior manager in its trading division on paid administrative leave.

Duke's stock began dropping last Friday after the company said it had received subpoenas from federal authorities requesting information about its energy trading practices.

El Paso, Duke Energy Pressure Group

CBS.MarketWatch.com – by Lisa Sanders– July 19, 2002

(7/18/02) - NEW YORK (CBS.MW) - Shares of El Paso and Duke, both of which have received subpoenas from federal agencies for information regarding round-trip trades, moved lower in Thursday trade.

The Commodities Futures Trading Commission also subpoenaed Duke. The two companies are the latest in a line of merchant energy firms targeted by federal officials. Despite its insistence that it never engaged in the sham trades, El Paso has been unable to avoid the taint.

El Paso continued its downward trend, shedding $1.30, or 7.6 percent, to $13.60, a new 52-week low. In an effort to distance itself from the round-trip trade scandal, El Paso reiterated Wednesday that it has no found no evidence of such transactions.

Meanwhile, Duke Energy retreated by $1.70, or 8.7 percent, to close at $20.72. The stock has yet to recover from Friday's fall, which started with the news that two federal agencies are looking into the company's trading practices. On Tuesday, Duke admitted that during a review of the trading business it found 23 round-trip trades.

Duke Energy 401(k) Class Action

Business Wire – Press Release – July 17, 2002

SOURCE: Keller Rohrback L.L.P.

SEATTLE--(BUSINESS WIRE)--July 17, 2002--Keller Rohrback L.L.P. has filed a 401(k) breach of fiduciary duty class action against Duke Energy Corporation (NYSE:DUK - News) on behalf of participants and beneficiaries of Duke Energy's 401(k) retirement plan from January 1, 2000 through the present (the "Class Period").

The complaint filed alleges that Duke Energy, and its plan administrators, breached their fiduciary duties of loyalty and prudence. The complaint continues that the breach occurred when material information was withheld or concealed from the 401(k) Plan participants and beneficiaries with respect to Duke Energy's business, financial results and operations, thereby encouraging current and former Duke employees to continue to make and maintain substantial investments in Duke stock in the Plan...

On May 17, 2002, Duke Energy issued a press release announcing that it had "analyzed its trades for the three-year period from 1999 through 2001 to identify those trades which may have some of the characteristics of sell/buy-back trades." These trades, known as "round-trip" or "wash" transactions, involve the simultaneous buying and trading of power in the same price and same amount. The Company had engaged in approximately $1 billion of "round-trip" energy trades, which provided no economic benefit for the Company...

Seattle's Keller Rohrback L.L.P. has successfully represented shareholders, retirees, employees and consumers in class action cases for over a decade. Its trial lawyers have obtained judgments and settlements on behalf of clients in excess of seven billion dollars. Keller Rohrback is currently serving as co-lead counsel for participants and beneficiaries of the Enron Corp. 401(k) Savings Plan in which similar issues are being litigated. Keller Rohrback also currently represents current and former employees who lost their retirement savings in the Lucent Technologies, Providian Financial, Global Crossing, Williams Companies, and Nortel Networks 401(k) plans.

Follow the link below to view the lawsuit:

Matthews v. Duke Energy

S&P Puts Duke on CreditWatch

Standard & Poor's – Press Release – July 17, 2002

NEW YORK, July 16 - Standard & Poor's today said it placed its ratings for Duke Energy Corp., Duke Capital Corp. and its subsidiaries on CreditWatch with negative implications. Duke Energy has $21.5 billion of debt outstanding.

The ratings for Duke Energy reflect the consolidated creditworthiness of regulated and unregulated businesses. Duke Energy Corp. is a vertically integrated electric utility in the U.S.; this franchised electric business is conducted in North Carolina and South Carolina. Through its wholly owned subsidiary, Duke Capital Corp., Duke Energy engages in U.S. and international ventures which are both regulated and unregulated, including an extensive U.S. and Canadian pipeline network. "These actions reflect additional concern regarding Duke Capital's unregulated businesses, specifically its trading subsidiary, Duke Energy Trading and Marketing (A-/watch neg/--),"" said Standard & Poor's credit analyst Cheryl Richer. Today, Duke Energy provided an interim response to the Securities and Exchange Commission in response to its May 31, 2002 informal request for information about 'round-trip' energy transactions. The magnitude of round-trip trades, discovered in non-Western markets, is negligible. "However, more disturbing is the continuing effort to gather information to complete the analysis of about 3,000 of the total 750,000 trades reviewed," Richer added.

The creditworthiness of Duke Energy's unregulated activities, which are projected to contribute roughly 30% of future cash flows, impacts Duke Energy's consolidated creditworthiness. On June 11, 2002, Standard & Poor's updated its rating methodology for energy traders. Standard & Poor's will be using the capital adequacy model to determine an amount of capital required by the trading and marketing business that will be reflected as a debt equivalent for Duke Energy. Imputed debt will affect measures of bondholder protection, such as funds from operations interest coverage, funds from operations to debt and debt to total capital.

Standard & Poor's is also analyzing expected revenues from generation portfolio Duke Energy North America, as determined by the net revenue analysis applied to merchant generation companies. Projected revenues from the net revenue analysis could be lower than forecasts provided by the company.

Duke Energy plans to issue $1 billion of equity or equity-linked securities in 2002 to pay down the bridge financing for the Westcoast Energy acquisition. Standard & Poor's considers this commitment, as well as continued access to capital markets, important components in maintenance of current ratings. Duke Energy's rating continues to be supported by regulated businesses (roughly 70% of expected future cash flows). Standard & Poor's will conclude its review of Duke Energy within several weeks.

Duke Energy Suspends Senior Official

FT.com – by Sheila McNulty – July 17, 2002

(7/16/02) - Duke Energy has put on leave a senior official amid an investigation into its energy trading business by federal officials.

The North Carolina-based company, which is unusual among energy traders in that it has an A credit rating, said yesterday that it had put the unnamed official on paid administrative leave in order to facilitate an "objective investigation".

Duke began an internal probe as federal officials questioned the company's possible use of "round-trip" trades, which involve counter-parties trading the same volumes of a given commodity at the same price, in order to boost volumes and revenues.

The company said yesterday that it stood by its past statements that it had not conducted any trading without legitimate business purposes.

Despite those assertions, Duke announced on Friday that it had received subpoenas from the US Attorney, regarding a grand jury investigation, and from the Commodity Futures Trading Commission into "round-trip" trades.

The company said it had begun its internal investigation as a proactive measure. It is also helping federal officials investigate by sifting through "voluminous" documents to deliver trading documents from 1999-2001 sought by the subpoenas.

Duke's shares had fallen 11 per cent on Friday on news of the subpoenas. The stock continued to fall yesterday on news of the official's suspension and analyst downgrades. On Wall Street, Duke's shares ended the day down more than 4 per cent to $23.71.

Goldman Sachs and Morgan Stanley both lowered their ratings on Duke, following a trend started last week by Carol Coale, an analyst at Prudential Financial. Ms Coale had downgraded Duke from "buy" to "hold", before news of the investigations emerged, citing concerns that the company could not escape deteriorating industry fundamentals.

She said yesterday that news of the subpoenas supported her decision, underpinning her charge of "increased risk surrounding the energy traders"…

Three Firms Downgrade Duke

Associated Press – July 17, 2002

CHARLOTTE, N.C. (AP) - Usually considered a safe haven for investors in rocky financial times, Duke Energy's stock is taking a beating.

The Charlotte energy company's shares continued to fall Monday as three brokerage firms downgraded its stock, saying they were concerned about federal investigations into the utility's energy trading practices. The company also said it placed an unnamed senior manager in its trading division on paid administrative leave.

After falling below $20 Monday morning, Duke's shares regained considerable ground to close at $23.70, down $1.05, or 4 percent. The company's stock price fell 11 percent on Friday and is down 24 percent since the beginning of July.

Duke Energy said Friday that it had received subpoenas from federal authorities and was responding to the requests for information about its energy trading practices.

On Monday, Salomon Smith Barney analyst Ray Niles cited the subpoenas in a note that accompanied his 2002 and 2003 earnings estimates, which were lowered to $2.55 and $2.70, down from previous estimates of $2.60 and $2.85.

Niles said the subpoenas from the Commodities Futures Trading Commission and the U.S. Attorney's office in Houston "on wash trades continue to heighten regulatory risk concerns for Duke and the industry." Similarly, brokerage firm Goldman Sachs on Monday cut its stock rating for Duke Energy to "market perform" from "recommended." It also lowered its 2002 earnings per share estimate to $2.50 from $2.75 and cut its 2003 outlook to $2.65 from $3.

Morgan Stanley also lowered its rating on Duke Energy to "equal-weight" from "overweight," saying it expects Duke's 2002 earnings forecast to be near the bottom of its $2.54 per share to $2.77 per share range. Meanwhile, Duke Energy spokesman Terry Francisco said Monday that a senior manager in Duke's Houston-based energy trading operations had been put on paid administrative leave while the investigators look into the company's trading practices.

Francisco said the move was necessary "in order to provide the access we needed to do an objective investigation." The Charlotte-based company would not release the manager's name, Francisco said. Duke Energy has said it is fully cooperating with the investigations, as it has with other government organizations inquiring into the same issues.

Federal regulators are investigating energy companies for round trip trades, or wash trades, in which electricity is bought and sold at the same quantity and price to inflate revenue and trading volume. Last month, a federal securities regulator asked Duke to voluntarily turn over information on the wash trades. The company said it would comply.

On Friday, natural gas and power giant El Paso Corp. said it received a similar subpoena that requests information on trading activities. The Houston firm has already told federal regulators it engaged in no such activities. El Paso's shares dropped 45 cents to $17.30 on the NYSE.

Sham Energy Dealing Probe

Wall Street Journal – July 17, 2002

(7/15/02) - The Federal investigators appear to be ratcheting up a wide-ranging probe into sham energy dealing, as two more companies said late last week that they had been slapped with subpoenas in a criminal grand jury investigation.

Duke Energy Corp., a Charlotte, N.C., company that had been working to burnish its reputation as a well-run, diversified energy company, said it received a subpoena late Thursday from the U.S. attorney's office in Houston requesting documents and information about so-called round-trip trading in wholesale energy markets. Houston-based El Paso Corp. said it received a similar subpoena Friday.

The developments were the latest in the probe by the U.S. attorney's office, which in recent months had tagged a number of other energy traders with similar subpoenas, including Dynegy Inc., CMS Energy Corp. and Reliant Resources Inc.

The type of trades being investigated, called round-trip or wash trades, are essentially mirror-image swaps between two trading companies of the same amount of energy for the same price. The trades can inflate a company's revenue and trading volumes but appear to serve no other economic purpose. Traders and analysts say the practice also can be used to manipulate energy markets by setting up bogus benchmark prices or creating artificial market liquidity for sometimes-lightly traded energy contracts. Some companies that have engaged in these trades say they serve legitimate business purposes including verifying current market prices.

In addition to the federal grand jury investigation, the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Commodity Futures Trading Commission are also investigating the practice. Duke said Friday it also had received a subpoena from the CFTC. The specific focus of the federal grand jury isn't clear. U.S. Attorney Michael T. Shelby in Houston declined to comment on the investigation into the energy trades. One avenue the Justice Department may be pursuing is antitrust issues that could arise if traders from different companies acted together to influence prices.

SEC officials won't comment about the agency's civil investigation, but a person familiar with that probe said the SEC is focusing on what appears to be false or inadequate disclosures from a number of companies about how the round-trip trades affected their trading volumes and revenue. This person said the SEC is still in the early stages of its investigation.

The round-trip trades disclosed so far have occurred in largely unregulated, wholesale energy markets. Still, a company's failure to appropriately disclose and account for the trades could constitute fraud, people familiar with two of the investigations said.

Duke said in a terse, three-paragraph release last week that the two subpoenas it received "request documents and information related to trading activities." El Paso said the subpoena it received seeks information about trading in the wholesale natural-gas market. An El Paso spokeswoman said late Friday that El Paso hadn't received subpoenas from other agencies. Both companies said they would cooperate fully with the investigations.

FERC's investigation has focused on energy trading in Western markets, following that region's energy crisis in 2000 and 2001. El Paso and Duke have both denied in sworn statements to FERC that they engaged in round-trip trading in Western markets.

But both companies have also said they identified small numbers of trades that shared characteristics of the practice. Duke spokesman Terry Francisco said these trades represented about $1 billion in revenue from 1999 to 2001 -- or less than 1% of the company's total $107.4 billion of energy trading and marketing revenue for that period. "We feel it's a de minimus amount," Mr. Francisco said.

El Paso said last month that after reviewing natural-gas trades in Western markets last year and in 2000, it had found about 100 sets of trades that involved the same amount of energy at the same price on the same day. The company said it conducted more than 168,000 natural-gas trades in the time period.

Duke's announcement it had received subpoenas sent the company's stock tumbling 11%, or $3.20 a share, to $24.75, in 4 p.m. composite trading Friday on the New York Stock Exchange. El Paso's announcement came after the markets had closed. In late trading Friday, El Paso was down 35 cents to $17.75.

Duke - Page 8 - 2002