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Duke - Page 1 - 2003
Pipeline BattleWinston-Salem Journal – by Michael Biesecker – January 20, 2003
(11/17/02) - AUSTINVILLE, Va. - Olen Gallimore stands near the humped peak of Poplar Camp Mountain, squinting as he looks out over the expansive green valley below. "I used to bring my wife up here, back when we were courting," he says, admiring the view before gesturing with a callused hand. "Right up the side here is where the pipeline would go. And down there, to the left of that electric substation, right by the river and the state park, that's where they want to put the power plant."
Gallimore, 48, is not a man one would tag as an environmentalist.
He owns a small timber company and subscribes to the live-and-let-live philosophy common in the rugged hills of southwestern Virginia. In these parts, a broken-down car or a rusted-out washing machine is as likely to end up in a cow pasture as a junkyard, and what somebody does with his land is generally regarded as his business.
So when Gallimore got the polite but forceful letter from a subsidiary of Duke Energy informing him that the corporation plans to build a 24-inch-diameter gas pipeline through his property, he became a leader in the Carroll County Blue Ridge Coalition, a grass-roots organization trying to stop the project.
Duke's $289 million Patriot Extension would transmit natural gas from an existing pipeline in Tennessee across the backbone of the Blue Ridge down to Martinsville, Va. It would then turn south into North Carolina near Eden, where it would tie in to a competitor's pipeline.
People who, like Gallimore, live in the pipeline's path face the prospect of either selling right-of-way to Duke or having their land taken through eminent domain. Time is not on the opponents' side. The project could receive final federal regulatory approval by the end of the month, and Duke hopes to break ground soon after that.
The pipeline's supporters say that it will be an economic engine for a geographically isolated and sparsely populated corner of Virginia, bringing new industry and sorely needed jobs.
Opponents say that the pipeline would make money for Duke at the expense of local landowners, the environment and public safety. It would transmit natural gas from Tennessee to markets in North Carolina, they say, with little benefit to those along the way.
The debate has in some cases pitted neighbor against neighbor - commissioners in Wythe and Carroll counties support the project; boards in Henry and Patrick are opposed.
Washington heavyweights such as Sen. Jesse Helms, Sen. John Edwards and Rep. Richard Burr, the vice-chairman of the House Energy and Commerce Committee, have written federal regulators urging Patriot's speedy approval. North Carolina Gov. Mike Easley also supports the project.
Duke, like many energy companies, is a generous political contributor. Among the industry's powerful friends is President Bush, a former oil man himself.
But lining the snaking back roads along Patriot's proposed route are dozens of yard signs reading "No Pipeline," the words enclosed in a red circle and crossed with a thick slash.
"There's nothing patriotic about stealing people's land," says Gallimore, who owns about 170 acres near Poplar Camp, land that surrounds the rustic home built with timber he cut himself. "I've worked 30 years to get what I've got. When somebody tries to take what's yours, you have to fight."
The pipeline's path
Over its 93 miles, the Patriot Extension would cut across the Blue Ridge Parkway, Jefferson National Forest and New River Trail State Park in a 50-foot-wide swath cleared of trees, using a total of more than 1,320 acres. It would burrow beneath a state-owned campground and the New River, as well as nearly 400 other bodies of water.
The pipeline would be laid within 25 feet of 202 houses and within 50 feet of 80 others. The average depth of the pipe would be about 3 feet, but it would go much deeper in some sections.
Along the route, less than a quarter of a mile from the state park, Duke has bought an option on a 715-acre farm where the company plans to build a $275 million gas-fired power generating plant with twin 161-foot smokestacks.
The plant's steam turbines would use as much as 8 million gallons of water each day piped in from an abandoned lead and zinc mine. The water in the flooded Austinville mine is so polluted that the site is on the U.S. Environmental Protection Agency's Superfund list, and some local residents worry that exhaust from the power plant's stacks will shower the surrounding countryside with toxic minerals. Another concern is the noise that would be generated by the plant 24 hours a day.
Duke says it will treat the water before it is converted to steam and that at 2,000 feet away the noise level of the plant will be about 60 decibels, the equivalent of a normal conversation.
"These plants are very clean, and they are surprisingly quiet," said Kay Perez, a spokeswoman for Duke. But there are plenty of people who question the wisdom of building a power plant and pipeline so close to a public recreation area.
Virginia's Department of Environmental Quality and the state's Department of Conservation and Recreation have expressed serious concerns about the location of the power plant and the proposed path of the pipeline, as has the EPA.
The agencies say that the New River Trail State Park, which has more than a million visitors a year and contributes $17 million annually to the local economy, would be "degraded" and "severely impacted" by the pipeline crossing and a neighboring power plant. They have suggested that the project be rerouted. The environmental regulators also said they fear that water quality will be harmed, that there is potential for air pollution and that dozens of endangered species could be affected.
The nonprofit National Committee for the New River is also actively opposing the project.
However, a 5-inch-thick environmental study issued in September by the Federal Energy Regulatory Commission, the agency in the U.S. Department of Energy that considers new pipelines, concluded that Patriot would cause little harm and that construction of the project would be "in the public convenience and necessity."
The Federal Energy Regulatory Commission, known by the acronym FERC, has long been criticized by environmental groups as a rubber stamp for the energy industry.
Released in September, FERC's final environmental statement, which was compiled using information provided by Duke, is the last regulatory step before the agency's board would issue final approval for the project.
Though the state of Virginia and the EPA have sent letters to FERC saying the environmental study is incomplete, and that some of its information is inaccurate, the commission will consider approving Patriot at its meeting Wednesday.
Shortly after taking office, the Bush administration began overhauling the various federal bureaucracies that regulate the nation's energy industry. FERC was no exception, and in September 2001 the agency unveiled a new strategic plan titled "Making Markets Work."
Patrick Wood III, the man appointed by Bush in 2001 to oversee FERC, is a Texas lawyer who used to work as an engineer for the oil and gas company Arco.
Nora Mead Brownell, the other Bush appointee to the commission, was a central player in the deregulation of electric utilities in Pennsylvania. She is a former board member of Keystone Energy Services, an oil and gas company.
Critics say that the two Clinton appointees on the commission, whose terms expire in the next year, also favor the industry.
"FERC sees its role as expanding and promoting natural-gas service, not protecting the environment," said Bob Rackleff, the president of the National Pipeline Reform Coalition, based in Florida. "The agency's environmental reviews are cursory. They just go through the motions because the regulations say they have to."
In the past five years, FERC has considered 1,316 applications for new pipelines or expansions and upgrades to existing pipelines. Of those, 1,250 applications were approved, 29 were rejected and 37 were withdrawn by the petitioner - an approval rate of nearly 98 percent.
Mark Robinson, the director of FERC's Office of Energy Projects, said that the approval rate is high because a company doesn't apply for a new pipeline unless it can show a need in the marketplace for the service. The important thing, he said, is that FERC uses its authority to tweak those projects to minimize the effect on landowners and the environment.
"It is rare when we look at an application and we wouldn't see a need for that gas," Robinson said. "But there is almost no pipeline that gets approved as it comes in."
Over the past year, the agency has worked to simplify and streamline the approval process so that pipelines can come online more quickly. The company filed its application for the Patriot Project on July 26, 2001.
Duke intends to have the Patriot Extension operational by May 2003 by laying about a mile of pipe a day. That has left little time for opponents to organize. Virginia environmental officials have requested that FERC delay approval of the project until the effect of another planned pipeline can be considered.
The $497 million Greenbrier pipeline, to be built by a partnership of Piedmont Natural Gas in Charlotte and the Dominion Resources of Richmond, would serve about the same service area as the Patriot Extension.
FERC, which stresses the need for increased energy competition, addresses the issue in a single paragraph of its more than 1,500-page environmental impact statement.
"The existence of the proposed Greenbrier project has no effect on the purpose or need for the Patriot Project," the report says.
If Patriot is approved by FERC, Duke will still have to get permits from various state agencies before it can begin construction. Virginia officials said that the state can negotiate with Duke to make adjustments to the route but does not have the authority to deny the pipeline.
"This project is on the fast track," said Mike Murphy, a division director in the Virginia Department of Environmental Quality. "But if Duke gets its federal license to operate a pipeline, they will still have to deal with us for stream and road crossings. We're just waiting to see what FERC does, like everyone else."
The pipeline's opponents
Last year, shortly after plans for the project became public, FERC officials came down to tour the proposed pipeline route. Concerned citizens were invited to tag along, if they provided their own transportation. Gallimore and others arrived early that morning in their pickup trucks, hoping to get to know the federal regulators. Within minutes a helicopter from Duke Energy landed, loaded up the men from Washington and left the locals in a swirl of dust.
Two main groups have organized to fight the Patriot Extension - the Blue Ridge Coalition, based in Henry County, and the Carroll County Blue Ridge Coalition. The two organizations have a combined membership of about 300 and hold joint meetings each month.
The fight has so consumed Gallimore that his wife, Jeanne, has accused him of becoming obsessed. The family's dining room table is covered with maps and thick stacks of government documents containing sentences so long and wordy it can be tough to tell where one stops and another begins.
"You read one page and you turn to the next one and it says something almost exactly the opposite," Gallimore. "It's like they don't want anyone to understand what they're saying."
Since word of the pipeline became public last year, Gallimore has become an anti-pipeline evangelist, preaching against the project at community rallies and chance street corner meetings. He also has traveled to Richmond and Washington to testify at public hearings.
Among the most criticized aspects of the proposed pipeline route is Duke's plan to bore under the New River and a state-park campground, as well as build the power plant about a half-mile away.
Duke says it will use a method called Horizontal Directional Drilling to bore down about 30 feet and then extend 1,555 feet under the river and campground without disturbing the surface. Duke's own contractor, however, says that the drilling proposition has a 70 percent chance of success. If the first attempt fails, Duke says it will just try again a few feet away.
"Our contractor has guaranteed that we will be successful," said Rick Smith, the project director for Duke Energy Gas Transmission.
If the directional drilling fails, however, the company will probably have to dig a deep trench across the river bottom. This part of Virginia is honeycombed with caverns, and critics are concerned about the fragile geology of the area. Earlier this year, park rangers were digging a shallow hole for a fence post and poked through the roof of a previously unknown cave.
One day in late summer, Gallimore visited the popular Foster Falls recreation area, near where the pipeline would cross the river.
He worked his way around to talk to the campers and sunbathers, shaking hands and spreading the word about the project. Most had not heard about Patriot or thought that it had already been approved. A fisherman in a mesh-backed Dale Earnhardt cap listened for a while before repeating what has become an all-too-familiar refrain for pipeline opponents.
"It's a done deal," he said. "They're going to do it if they want to do it. If they asked me to vote, I'd vote no. But it ain't going to come up to a vote."
After politely thanking the man for his time, Gallimore walked away, shaking his head.
"I wish I had a nickel for every time I've heard that," he said.
The pipeline's purpose
Operating a natural-gas pipeline is one of the most profitable enterprises in the United States.
According to the Oil & Gas Journal, an industry trade magazine, the average profit margin for a pipeline company in 2001 was 38.9 percent - a figure not out of line with profits over the past 20 years. By contrast, the average rate of return for a Fortune 500 company for the last 20 years was 3.3 percent.
Founded in 1904 by James B. Duke, a tobacco baron and university namesake, Duke Energy, based in Charlotte, has grown to become the 18th largest company in America with more than 25,000 employees worldwide and 2001 revenues in excess of $59 billion.
In recent years, Duke has diversified from its core electricity business by buying oil, gas and coal producers. The company is now the largest supplier of natural-gas liquids in the United States, with about 12,000 miles of gas-transmission pipeline in North America.
But none of the gas pipelines that Duke has acquired connects to the Carolinas, the home of its electrical-service area and gas-fired power plants, which must rely on competing companies for fuel.
According to FERC documents, more than 75percent of the gas transmitted by the Patriot Extension will go to fuel power plants.
Duke is already one of the nation's largest producers of surplus electricity, with the capacity to sell up to 15,000 megawatts to other utilities at any one time.
When Duke officials talk with people in southwestern Virginia, it stresses the pipeline's potential local benefits.
"The market is ripe for this pipeline," said Smith, Duke's project director. "There is no doubt it will help develop new opportunities for these communities."
How many jobs and how much money the pipeline will yield is unclear. A study paid for by the company says that the local economy will see an $11-million economic effect during the construction of the pipeline. Duke has agreed to install 20 taps along the Patriot Extension to supply natural gas to homes and factories if another company builds a local distribution network. Henry and Wythe counties already have natural-gas service, but Carroll and Patrick do not.
Officials in Carroll County say that the pipeline will bring new industry to Hillsville, a town where several textile plants closed in the 1990s.
"NAFTA killed us," said Ronald Newman, the county administrator. "In the past few years, we've lost out on several opportunities. Companies would look at us but then go somewhere else because we couldn't provide natural gas. We look at the pipeline as an economic tool."
So far, the only concrete plan for new industry to use gas from the pipeline is Duke's $275 million generating plant in Wythe County, which will employ 20 to 25 permanent workers.
Another Charlotte company, Cogentrix Corp., has plans to build a power plant in Henry County, but that project has been delayed until at least 2005 because of the slumping national economy.
Duke met with county boards in closed sessions to sell the Patriot Extension long before the news became public. Since then, the company has spent thousands on advertisements in area newspapers touting the financial benefits of the project to the local economy.
In bold blue letters, a recent full-page ad in The Gazette, a Galax newspaper, proclaimed "The Patriot Extension Means Business - Here's how to get your share."
Smaller text invited residents to attend one of five area "Opportunity Fairs," where Duke sought to contract with small businesses for millions of dollars in supplies needed during pipeline construction, such as portable toilet rentals, chain-link fencing, bales of straw and bags of ice.
A done deal?
Though routinely listed by Fortune magazine as one of the most admired utility companies in the country, Duke Energy has not been immune from the kind of problems that brought down its competitor, Enron.
In July, Duke was forced to admit to government investigators that some of its commodities brokers engaged in illegal round-trip trades - buying and selling gas to itself to inflate prices.
Such illegal trades were in part responsible for California's energy crisis of 2000. Duke's stock price fell 20 percent after the news broke, and the company fired the traders involved.
Last month, Duke settled a dispute with the state utility commissions in North Carolina and South Carolina by admitting that it made mistakes in accounting procedures that might have caused the company to understate its earnings and overcharge its customers.
The company agreed to repay $19 million, though the states had alleged that the true value of the errors was closer to $100 million.
On Nov. 8, Duke was subpoenaed by the U.S. Attorney's Office in San Francisco, which is investigating the company's activities during the California energy crisis.
Gallimore routinely scans the Internet for news about Duke. To him, the recent accusations confirm that the company is not to be trusted.
It is a message that he spreads to his neighbors as he drives the backroads in his bright blue Ford F-150, stopping to speak to anyone who happens to be outdoors. He knows just about everyone by name.
On a dirt drive lined with rhododendron, he stops to chat with Rush Griffin, who recounts a conversation that he had with a man from Duke who wanted to buy pipeline right-of-way.
"I got kind of hot with him," said Griffin, 73, as he leaned on an aluminum walker.
"I told him I wasn't interested. Those big shots down in Charlotte, smoking the big cigars and eating steaks, they don't think nothing about taking what you got, what you worked for. A year from now, they'll be 500 miles away swindling somebody else. They think they can just buy you like they buy the politicians."
Duke says that the majority of people in the four Virginia counties affected by the Patriot Extension support the pipeline.
The company has a list of elected officials and chambers of commerce that have endorsed the project, and says that 54 percent of the 379 landowners along the route have sold right-of-way for the pipeline.
Duke wouldn't disclose the specifics of its land deals, but Gallimore said that some unsophisticated property owners sold for far less than a fair- market value, as little as $300.
If Patriot is approved, he said, there will be plenty of folks willing to oppose the pipeline in court.
"We're just in the beginning of this," he vowed. "Duke has billions of dollars and probably has hundreds of lawyers, but we're not going to just roll over and let them build this thing. We're going to fight all the way."
Another Duke AuditThe Charlotte Observer – by Stan Choe – January 18, 2003
(1/17/03) - S.C. regulators are beginning to evaluate Duke Power's preventive maintenance and how vigorously it's working to prevent ice-storm related power outages.
About 1.4 million homes in Duke Power's service area -- from the S.C./Georgia border to Durham -- lost power after last month's ice storm, some for more than a week.
After hearing complaints from across the Upstate, S.C. officials agreed to hire an independent auditor to delve into Duke's preventive maintenance program.
The auditor will assess such programs as Duke's tree trimming, pole replacement and wire re-stringing.
"Because Duke is a monopoly ... the ratepayer cannot change vendors if they are dissatisfied with their service," said S.C. state Sen. David Thomas of Greenville, who requested the evaluation.
"(Ratepayers) must depend on elected officials and the political/regulatory process to delve into questions and expect serious responses."
Duke officials couldn't be reached for comment Thursday.
The S.C. Public Service Commission approved Thomas' request Tuesday, and the commission will in the next month ask for bids on the evaluation project
Commission Executive Director Gary Walsh couldn't say how long the process will take, as the auditing firm will have influence over the schedule.
Duke Power will pay for the evaluation, Walsh said.
North Carolina is conducting its own investigation, which Gov. Mike Easley ordered soon after the blackouts began last month.
N.C. regulators have held public meetings across the state and are wading through stacks of documents from utilities about their performance. The governor's task force expects to submit a preliminary report by the month's end.
Bill Coley is RetiringEmployee Advocate – DukeEmployees.com – January 15, 2003
Duke Energy announced that Duke Power President William A. Coley will retire at the end of February. Bill Coley has the distinction of being the only Duke executive to openly indicate any remorse for the way the employee benefits were raided.
The pension promises evaporated for most employees on January 1, 1997, with the cash balance conversion. In 1998 Mr. Coley alluded to the fact that the employee’s “goodwill bank account” had been overdrawn. He evidently felt that Duke needed to make amends to employees for the lost benefits. Mr. Coley declared that 1998 would be the “Year of the Employee.”
We do not question Mr. Coley’s good intentions, but things just did not work out that way. You see, what the employees actually received in 1998 was notice that even more benefits would be taken away in 1999!
Duke announced that future retirees would lose all promised health care. This was very similar to the cash balance routine that Duke pulled on employees. The pension and paid retirement health care were the main benefits that the company offered. These benefits were the very reason many workers stayed with Duke over the years. And, many employees had already earned these benefits. The benefits were not given for free. The price was 30 years of labor to receive the full benefits.
Each year of service was supposed to entitle the employees to a greater share of the benefits. Duke could easily afford to do this, since salaries were adjusted downward to fund the benefits. Many employees had put in the years of labor to earn the benefits and Duke had enjoyed the tax benefits for the programs.
In return for the promised benefits, Duke enjoyed:
Just as the promised, earned benefits were almost within grasp for many employees, Duke changed the game. Much pension money vanished and all retirement health care disappeared. (The employees already retired see their promised health care erode more each year.)
These two benefit losses wrecked the retirement futures for many employees. But there were more benefit losses announced in 1998. The other losses were more of the “adding insult to injury” type. When Duke took away our promised pension, they gave a couple of trivial benefits to distract the employees from the real agenda. Employees would be given an extra week of vacation after 30 years of service. That was not a bad deal for Duke. Duke took a big chunk of the employee’s pension and promised an extra week of vacation after 30 years!
The other “distraction benefit” was that employees would be allowed to carry their earned vacation time into the future in unlimited amounts. Wow! What a benefit! Never mind that your promised pension is not there – you can now carry vacation time into the future!
Evidently, Duke executives were unable to sleep since promising these two benefits. Duke took the pension plan and retiree health care and gave two skimpy benefits in return. Duke executives could not sleep, because they wanted it all. It evidently was eating them alive because they gave employees the two near worthless benefits and took two valuable benefits.
So, in true Duke Energy fashion, they took the two weak benefits back! This is too good to make up; it actually happened.
In actuality, 1998 turned out to be the “Year of Rick Priory.” 1997 was also the “Year of Rick Priory,” as was 1999, 2000, 2001, and 2002! While the employees “total compensation” fell out the bottom, Rick Priory’s total compensation went through the roof.
No malice is held toward Mr. Coley. He probably sincerely wanted to make amends to employees, but could not prevail against the army of bean counters – especially the major-domo of all bean counters!
Pre 1997, The Charlotte Observer ran an article that speculated who the new Duke CEO would be. The article listed Rick Priory and Bill Coley as contenders. We can never know how things would have been different if Bill Coley had been the Duke Energy CEO for the past six years. One thing is certain, things could not possibly be any worse!
Bill Coley is not part of the wheeling-dealing, day trading crowd. He helped build the company for 37 years. Duke has only been torn down in the last six years.
Here is an interesting item: Mr. Coley was over the non-regulated businesses prior to Duke Power's merger with PanEnergy in 1997 and the formation of Duke Energy. Do you recall lawsuits and allegations of shady dealing when Mr. Coley was in charge of the operations? The downhill slide began in 1997; it was just like walking off a cliff. The world is now waiting for the big splattering sound.
We wish Bill Coley the best of luck and hope he enjoys his retirement.
Duke Stock Drops Like a RockReuters – by David Brinkerhoff – January 14, 2003
NEW YORK. (Reuters) - Utility Duke Energy Corp. on Monday said 2002 earnings will fall short of an earlier forecast following a slump in power prices and warned that this year's profit will also suffer.
The warnings sent Duke stock down as much as 15 percent on the New York Stock Exchange trade, where it was a top percentage loser.
Like its peers, the company is suffering after the collapse of energy trading giant Enron Corp. in 2001. Duke has since faced falling power prices and trade volumes, credit problems and increased government scrutiny.
To cope with the downturn in merchant energy, the company also said it will cut its capital spending to $3.2 billion this year, less than half the amount planned earlier.
Despite the profit warning, Wall Street remained uncertain about Duke's future earnings since the Charlotte-based utility does not disclose prices or amounts of future electricity sales.
"I think a lot of questions are still unanswered," said Paul Patterson, analyst with Glenrock Associates in New York. "The big question is what are the prices of their current output. Until we get that disclosure, it's difficult to tell what the ongoing profitability of the company will be."
For 2003, the company forecast earnings of $1.35 to $1.60 a share before an accounting change. Wall Street's consensus estimate was $1.84, according to Thomson First Call.
That followed an October forecast where Duke said 2003 earnings would be little changed from the year before.
"We're taking a fairly pessimistic view of 2003," Richard Priory, Duke's chief executive, said in a conference call following the earnings warning. "We don't want to be on the side of optimism in view of what's happened to us in the last year."
Earlier, the company said the merchant energy sector remains challenged.
"The signals we watch -- macro and industry specific -- are running counter to any near-term ... rebound," Priory said earlier in a statement.
Merchant energy companies generate and sell power to utilities and other companies. About 40 percent of Duke's power generation is part of that business.
Duke, which also owns regulated utilities in the Carolinas, also expects 2002 earnings to miss earlier guidance. Before items, earnings per share are now expected to come in at $1.85 to $1.95, about 10 cents below earlier outlook.
Wall Street analysts on average were expecting a profit of $1.91 for 2002, according Thomson First Call.
The news prompted at least one big Wall Street broker, Merrill Lynch, to cut Duke's rating to sell from neutral.
Duke said 2002 net income should come in at about $1.20 to $1.30 a share, including charges from storm damage and planned job cuts during third and fourth quarters. Those charges amounted to about 65 cents a share for the year.
During its conference call, Duke said it planned to maintain its dividend.
The company's shares were down $3.13, or 15 percent, at $17.87.
Wheeling Dealing DukeDow Jones – by Mark Golden – January 14, 2003
(1/10/03) - NEW YORK (Dow Jones) -- Duke Energy Corp.'s wholesale operations seem to be in serious trouble. Though getting a handle on the nature and extent of the problems is tough, it seems that the company may be getting run over by gas-market bulls.
Like other builders of independent power plants, Duke's unregulated division is suffering from low wholesale electricity prices. That resulted in Moody's Investors Service dropping Duke Energy's credit ratings two notches a couple weeks ago, and Wall Street analysts consistently expect Duke to lower 2003 earnings guidance soon.
"We are expecting downward revision of earnings guidance in 2003," Prudential Securities' analyst Carol Coale wrote in a note last week. Other analysts concur.
For the most part, Wall Street analysts think the problem is simply low power prices. Company executives were telling analysts in late 2001 and early 2002 that low power prices were a temporary anomaly, which turned out to be largely untrue. Though power prices have risen since February last year, the prices mostly just reflect an increase in costs for burning natural gas, so the move hasn't helped generating companies much.
But Duke's problems go beyond the low electricity prices afflicting almost all energy merchants. The estimated long-term value of its merchant profits - mostly from power plants - fell $1.1 billion, to $5.3 billion, in the third quarter, when electricity prices rose.
In addition, Duke lost $126 million before taxes in the first nine months of this year on the value of its trading portfolio. That portfolio reflects activities that are generally separate from the normal course of selling output from merchant power plants and buying the natural gas to fuel them, and changes show up in current earnings.
Plus, most all of that $126 million is only Duke's 60% portion of Duke Energy Trading & Marketing LLC. Exxon Mobil Corp. owns the other 40% of the trading operation, so it took a hit as well.
The loss would have been greater if not for gains of $73 million recognized because the company changed the way it values its portfolio, said analyst Paul Patterson of Glen Rock Associates in New York.
Duke's troubles may have continued in the fourth quarter. In December, Duke said its top two executives on the unregulated part of the business left the company, which surprised some people. The head of North American unregulated operations, James Donnell, gave up control of trading to Nancy DeSchane last spring, and then resigned in December along with his boss, group president Harvey Padewer. "Generally, you don't fire someone simply because the cycle is down," Patterson said. "There's usually a larger management issue."
Both Padewer and Donnell, reached at their homes, declined to comment.
Wall Street isn't satisfied with Duke's explanation of the trading losses.
"They won't say how they lost the money," said Lasan Johong, electric utility analyst for investment bank Blaylock & Partners.
Some power and gas traders think they know what's going on. Duke was an extremely aggressive seller of forward electricity from early 2001 through last summer, especially for long-term western U.S. contracts, even at extremely low prices, several traders said. And while Duke was selling all that fixed-price power, it didn't seem to be equally aggressive in buying natural gas.
If so, that position was great in 2001, as electricity and gas prices fell. The value of Duke's trading portfolio rose $619 million before taxes that year.
But such a position would have been terrible last year. Gas prices soared, and electricity prices rose accordingly. Selling power and buying gas simultaneously would have balanced out. Unsold capacity from new, efficient power plants has risen slightly in value over the past six months.
Selling fixed-price power forward and not hedging the gas needed to generate that power would have been awful.
Duke said it backs up its power sales with gas purchases.
"We've always done hedges around our power plants, which of course makes us a seller of power in the market, which includes fixed-price power," company spokesman Terry Francisco said. "But we also secure gas for those sales at that point."
Nevertheless, a number of spot-gas traders have noticed Duke consistently buying gas lately, which isn't the side of the market one would want to be on given the high prices of the past six months.
Results Point To Gas Problem
Executives attributed the third quarter loss primarily to falling power prices and rising gas prices. When asked if Duke is substantially short natural gas, Duke spokesman Bryant Kinney declined to comment on the company's position in the market as a matter of policy.
For the first three quarters of last year, Duke's trading results moved in the opposite direction of the gas market, which supports the traders' view.
During the first quarter of this year, the New York Mercantile Exchange's front month contract moved to $3.28 per million British thermal units from $2.57. The value of Duke's trading portfolio fell $68 million in the period. In the second quarter, when gas futures finished almost unchanged, Duke made $103 million trading. In the third quarter, Duke lost $161 million, while prompt gas rose to $4.78 from $4.13.
If a pattern of selling power and not buying gas were applied to Duke's power plant management, that could explain why Duke cut its estimate of long-term profits from power plants by $1.1 billion in the third quarter. As Duke pointed out, power prices could start to rise and gas prices could fall, which would reverse the trend.
Unofficially, one Duke executive said the company is regularly confronted with rumors that it has taken a bad speculative position on energy prices, but that the rumors come from traders who only know half the story.
Analyst Patterson agreed: "You hear these things in the trading area all the time. It doesn't usually end up the way you think."
Johong said he would be very surprised if Duke sold a lot of power at fixed, long-term prices without buying gas to back that up, which he said would have been reckless.
Maybe Duke's wholesale division simply isn't making its numbers, as the profits from the huge investment Duke made in power plants are coming in much lower than expected. And maybe that's beginning to turn around.
"They just won two lawsuits, and they have something like 4,500 megawatts of power plants in the West, which is getting unbelievably bullish due to the lack of snow," Johong said. "If they don't screw around with marketing and trading too much and just let natural forces take shape, they could be okay." Duke investors better hope so. Gas futures have risen another 25% since the third quarter closed. Duke will report fourth quarter earnings on Jan. 28
Another Duke WatchdogTheCarolinaChannel.com – January 12, 2003
(12/18/02) - The Electric City is putting its power company on notice.
Anderson City Council has formed a committee to monitor the performance of Duke Power.
The city's complaints stem from tens of thousands of homes left in the dark by the recent ice storm.
Anderson Mayor Richard Shirley and City Council members said that the storm was not severe enough to leave so many people without power for so long.
"There's something wrong here and that's what our committee is going to investigate," Shirley said.
The committee's goals are to keep a similar mass power outage from happening again.
The group plans to ask Duke for its maintenance records.
"We don't think the right-of-ways are being maintained," Anderson Mayor Richard Shirley told News 4. "We think Duke has made a decision that it is cheaper to fix it after it breaks as opposed to maintaining." Shirley said that the committee will look closely at the city's 20-year franchise agreement with Duke Power that expires in 2007.
"Where we have the ability to ask Duke to perform better," Shirley said. "To disclose better, to share with us maintenance records to let us know what they're doing to keep or electrical system in top shape."
Shirley said that the city has had similar complaints about Duke in connection with the water system that the county ands city recently purchased from the company.
The company did not properly maintain the water lines in the system, Shirley said.
Duke Power spokesman John Geer said that the company welcomes the inquiry.
The company has spent $40 million clearing rights of way, he said.
"(We maintain) a 30-foot right of way -- 15 feet on either side," Geer told News 4. "But when trees are outside of that right of way large trees fall into us. we can't prevent that."
If the city believes that Duke Power's service has not improved by the time the franchise expires, Shirley said that the committee has several options.
The city could look for a new power provider, possiby Southern Company of Georgia or Florida Power and Light.
Or Anderson could join Upstate neighbors Seneca and Greenwood and operate its own electric power service.
Outage OutrageThe Charlotte Observer – by Stan Choe – January 11, 2003
(1/10/03) - Echoing a familiar refrain, a handful of Charlotte residents told Duke Power and N.C. regulators Thursday they are tired of blackouts and want more electric lines buried underground.
The residents were venting to the N.C. Utilities Commission, which was hosting its second-to-last public hearing across the state to assess the recovery after last month's ice storm.
The commissioners have already held meetings from Durham to Greensboro over the past month, and almost all speakers have echoed the same suggestions: more underground wires and more aggressive tree trimming.
The commissioners will use notes from the hearings in their report to Gov. Mike Easley, who ordered the review. The commission plans to submit a preliminary report by month's end.
Of the roughly 20 people who spoke, Duke employees and representatives of large institutions outnumbered residents at Thursday's hearing by a four to three margin.
They lauded Duke's performance, saying line workers worked as efficiently as ever after the storm and barely saw their families for a week.
Representatives from Carolinas HealthCare System and Charlotte-Mecklenburg Schools said Duke communicated well with them through the restoration.
But the only person to get a round of applause was Patricia Driscoll, who lost power for five days at her Cotswold home and wants more buried wires.
"There are areas in this city that never lose power, and they pay nothing extra for that surety," she said. "I would like a little bit of surety."
Thomas Templeton, another resident, said Duke shouldn't look only at its costs when considering burying lines.
He pointed to lost hours of work, motel bills people paid and spoiled food in refrigerators.
Duke has said a conservative estimate for burying all its lines would be about $52 billion, when the total value of its distribution system is about $4 billion.
Duke Misses the Mark AgainEmployee Advocate – DukeEmployees.com – January 9, 2003
Once again Duke Energy has failed to make the “Fortune 100 Best Companies to Work For” list. It is not surprising! Fortune put a premium on companies that did not rob employees of benefits or engage in mass layoffs.
Some of the winning companies actually increased benefits in difficult times. Duke took a slightly different approach: Duke reduced benefits in the best of times! Now that the good time are gone, Duke is lobbing off heads.
We like to make note of this each year, because Rick Priory, various executives, and Duke spokespeople are always touting each little favorable mention that they get in Money Magazine. Employees were even supposed to forget about the pension money taken from them, because of a favorable blurb in Money Magazine!
Report Cites Enronlike TradesHouston Chronicle – by Harvey Rice – January 8, 2003
(1/6/03) - A confidential report made public Monday indicates energy trading companies other than Enron Corp. may have used questionable strategies to earn profits during California's power crisis and that the practices may be continuing.
The report by the California Independent Systems Operator, which runs the state's power grid, showed, for example, that 21 energy companies and publicly owned utilities may have engaged in a trading practice known as Death Star, an Enron strategy that earns a profit without selling power.
The strategies are part of a grand jury investigation by the U.S. Attorney's Office in San Francisco into an alleged conspiracy to manipulate the California power market during the 2000-2001 energy crisis.
"The ISO has gone through and identified other market participants that engaged in these strategies and identified them by name," said Christian Schreiber, investigator for the California Senate select committee investigating power market manipulation.
"That's a significant breakthrough," Schreiber said. "They are engaged in Enronlike behavior."
California agencies, alleging market manipulation, are trying to convince the Federal Energy Regulatory Commission to force energy companies to return about $9 billion to California ratepayers.
The ISO report lists the energy companies that made trades that showed the same potential pattern as Death Star, Fat Boy and other questionable -- and possibly illegal -- strategies outlined in Enron memos made public in May. The report says, however, that ISO investigators were unable to determine with certainty when or if the strategies were actually used.
Companies mentioned on one of the charts showing possible Death Star activity included Duke Energy and Williams Cos.
"We have filed an affidavit with the FERC saying we have not engaged with these practices," Duke spokeswoman Cathy Roche said.
"We have not seen the California ISO report at this point but can certainly tell you we did not participate in these activities in California."
Pat Mullen, another Duke spokesman, said the ISO report showed that Duke earned only $215,651 on the trades questioned by the ISO over five years. All of it was earned through legitimate power trading, he said.
Williams Cos. had not seen the report and had no comment on the specific issues the documents raise.
The FERC last year asked 130 energy traders to file affidavits stating whether they had used questionable trading practices.
The report also indicated that the improper trading strategies could have been used through 2002, Schrieber said.
"That's why we were worried about removal of price caps," Schreiber said, referring to a FERC proposal to remove price caps imposed in April 2001 to discourage improper trading strategies.
"We don't think that the market has been fixed significantly enough to ensure the security of the markets."
Charts in the report show that the ISO identified patterns that could indicate that nearly all the strategies outlined in Enron memos continued to be used last year.
Absent from most of the lists is Houston-based Dynegy, which has come under increased scrutiny for trading by its Dynegy Power Marketing subsidiary.
ISO spokesman Gregg Fishman said that companies listed in the report may not necessarily have used the outlaw strategies.
"This report is one piece of forensic evidence in a very complex circumstance," Fishman said. "The problem is interpreting it correctly when combined with other bits of evidence. Is this indicative of bad behavior? Potentially so."
Welcome to 2003Employee Advocate – DukeEmployees.com – January 1, 2003
2002 was the year for exposing corruption. Corporations were exposed for their bookkeeping. Auditors were exposed for their rubberstamping. Wall Street firms were exposed for rigging the game. Politicians were exposed for being beholden to Enron. Things got so bad that politicians were actually giving money back! That’s when you know that something really rotten is being uncovered.
The corruption of cash balance pension conversions was exposed, as never before. The Bush administration’s attempt to legalize the age discrimination aspects of the plans set everything in motion. In the past most reporters did not seem to really understand the problems with cash balance plans. They tended to cite the sickening corporate script. Now many reporters have read and analyzed the proposed regulations offered by the Treasury Department. Now they see just how unjust these plans really are. They see that the longer a person has worked for a company, the more pension benefits he is likely to lose in a conversion.
Money is exactly what the plans were always about anyway. The conversions are an attempt to take pension money from long-term employees. Any other reason given is a smoke screen.
If there is any employee in the United States that has not heard about the injustices of cash balance plans, he must be comatose. 2003 is the year that employees can be effective in correcting the cash balance injustice. There are several things to be done. Nothing is more complicated than sending a letter or e-mail.
The above actions are laughably easy, but they could be worth hundreds of thousands of dollars to some employees. Do not throw this chance away. In 2003 resolve to do something to save your pension!
The press has had a field day with the energy companies in 2002. Management was accused of everything except being straight shooters. When inside players admit to the games that they were playing, it is difficult for management to refute the evidence. But refute it they did (in most cases). In some areas, such as round-trip trading, there was just too much evidence for management to wiggle out.
In 2001 Rick Priory clamed to be “completely exonerated” from any wrongdoing in California. But in 2002, the lawsuits and subpoenas kept rolling in. Saying that a thing is so, does not necessarily mean that it is so.
We reported on the 2002 shareholder meeting. Mr. Priory mentioned the employees several times during the meeting. This was very unusual, as employees are usually completely ignored. Of course, the mentioning, was all the employees received in 2002. The confiscated benefits did not return. Some employees did get downsized in 2002. Downsizing is the universal solution to management blunders.
Duke was forced to cut back on its outlandish claims and projections in the 2002 meeting. The 2003 meeting may be even more somber. A least one shareholder has said that he is going to confront Mr. Priory at the meeting and demand that he resign, because of all of his blunders. Retirees have attended meetings in the past to complain about no cost of living adjustments to pensions. The retirees are having it much worse now. Premiums for health coverage, that was promised to be free, keep on skyrocketing. What if retirees join the irate investors? The 2003 meeting could be lively!
Mr. Priory stated that Duke was not going to cut back on energy trading. It should be getting obvious that whatever he says means the opposite. Duke Energy is cutting back on energy trading at home and abroad.
Recently, the senior unsecured debt for Duke Capital fell to one notch above junk status. Mr. Priory has been known to point out TheStreet.com articles about Duke. So, following his example, here’s another one:
In 2002 Rick Priory made the “Dirty 30” list:
There was a senior management shakeup in 2002, but Rick Priory is still in charge. Duke just may have caught on to the fact that energy trading and deregulated markets are not were it is at.
A 401 (k) class action lawsuit was filed on the behalf of Duke Energy employees:
At one point in 2002, Rick Priory was having a “fun ride.”
Duke’s man on the San Diego Port board of commissioners resigned in 2002:
After a long investigation, an outside auditor confirmed that Duke Energy hid profits. Duke paid millions to settle the matter. Of course, they have yet to admit anything!
Happy New Year!